S&P/Case-Shiller Index Change: June 2009 (www.SocketSite.com)

According to the June 2009 S&P/Case-Shiller Home Price Index (pdf), single-family home prices in the San Francisco MSA gained 3.8% from May ’09 to June ’09, down 22.0% year-over-year and down 42.9% from a peak in May 2006, but up from a 46.1% fall from peak as recorded in March 2009.

For the broader 10-City composite (CSXR), home values gained 1.5% from May to June but remain down 32.3% from a peak in June 2006 (down 15.1% year-over-year).

While not alone, Las Vegas and Detroit continue to be two markets that are struggling severely. These are the only two markets that fell in June and saw deterioration in their annual rates of return. Since their relative peaks they have fallen 54.3% and 45.3%, respectively.

On a month-over-month basis San Francisco MSA single-family home prices rose across all three price tiers for the first time since May 2006.

S&P/Case-Shiller Index San Francisco Price Tiers: June 2009 (www.SocketSite.com)

The bottom third (under $276,283 at the time of acquisition) gained 0.8% from May to June (down 30.7% YOY); the middle third gained 2.8% from May to June (down 15.5% YOY); and the top third (over $507,504 at the time of acquisition) gained 2.4% from May to June (down 16.6% YOY).

According to the Index, single-family home values for the bottom third of the market in the San Francisco MSA are hovering around April 2000 levels having fallen 62% from a peak in August 2006, the middle third is hovering around April 2002 levels having fallen 40% from a peak in May 2006, and the top third is back to January 2004 levels having fallen 26% from a peak in August 2007.

Condo values in the San Francisco MSA gained 2.8% from May ’09 to June ’09, down 21.6% on a year-over-year basis and down 29.0% from an October 2005 high.

S&P/Case-Shiller Condo Price Changes: June 2009 (www.SocketSite.com)

The standard SocketSite S&P/Case-Shiller footnote: The S&P/Case-Shiller home price indices include San Francisco, San Mateo, Marin, Contra Costa, and Alameda in the “San Francisco” index (i.e., greater MSA) and are imperfect in factoring out changes in property values due to improvements versus appreciation (although they try their best).

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Comments from “Plugged-In” Readers

  1. Posted by tipster

    This is proof that the market can and will overshoot when it finally hits bottom in the next year or two or three.
    The cure rates of people defaulting on loans (I.e. who later get back on payment track)has dropped to nearly zero from nearly half, so it’s about to get ugly out there.

  2. Posted by NewBuyer

    @ Tipster,
    Come on man.
    Three straight months of growth. Huge improvement nationally. Consumer confidence up. Stock market way way above the trough.
    I’m not saying that we aren’t going to plateau and bounce around the bottom for another year or two here. But we ain’t having any more freefalls, and it’s now very possible that we won’t go below the 110-115 threshold ever.
    Locally, I think that it will be another year before we start to FEEL some improvement in terms of prices and rents, given that the SF employment market stinks… but whatever… I’m happily employed and enjoy living in my home, so I will tough it out.

  3. Posted by REpornaddict

    Upward pointing graph
    A warm seasonal breeze
    or maybe deeper roots

  4. Posted by SanMatean

    The seasonally adjusted data seems to point to an uptick as well, with the lower tier unchanged, the middle tier up 2.0%, and the upper tier up 2.1% month-over-month.
    Should any of this be surprising given current low interest rates and tax incentives for first-time buyers? What happens when the tax credits dry up and interest rates tick up a point?
    We probably won’t see either of these things happen before the 2010 elections, but all bets are off in 2011…

  5. Posted by Snark17

    Bottom (in April)!

  6. Posted by sanfrantim

    The Case-Shiller hath spoken. Long live the Case-Shiller!

  7. Posted by Trip

    Yes, whodathunk that by legislatively drying up foreclosures for a while, giving people $8000 if they buy a home (which they can use for the 3.5% down indirectly), and injecting trillions of dollars to create record low interest rates, you would provide price support? What is stunning is that we still have an SF MSA 22% decline YOY and even a decline from the beginning of 2009. And, of course, these efforts aren’t having much, if any, impact at the $1M-plus level, which is why you continue to see big declines there.
    Hey, it worked, somewhat. Declines were less than they otherwise would have been. Of course, as SanMatean notes, these supports will go away — sooner rather than later imho as the govt declares victory — and the process will again pick up steam. You already have the foreclosure pipeline filling substantially.
    I used to think LMRiM — or was it Satchel ;) — was too cynical when he posited that all these efforts were simply an effort to get people to pony up real money to take some of the losses off the banks’ hands. But I’m convinced he was right, and the plan has worked!

  8. Posted by San FronziScheme

    I think that it will be another year before we start to FEEL some improvement in terms of prices and rents
    It all depends on your definition of improvement.
    High rent is an improvement?
    High purchase price is an improvement?
    Having to delay life plans, push back retirement, send your kids to a lesser school, eat less healthy food due to overpriced housing is not called an improvement to many.
    Anyways, enjoy the small bounce. The roller-coaster is not stopping anytime soon though.

  9. Posted by tipster

    Three straight months of growth. Huge improvement nationally. Consumer confidence up. Stock market way way above the trough.
    Back to school was a disaster. If Christmas is as bad, come February, you’ll start to see another free fall. If the drops haven’t started up again by February, you can count me in as a believer.
    The government spent billions. It was bound to have an effect.
    I don’t think the underlying problems are over, though signs like this are positive: a Mexican company setting up operations in Stockton because housing prices have fallen sufficiently there to allow them to pay a competitive wage. (Ignore the lead commenter “tipster” at the bottom of this page). When it happens more and more, THAT will be the bottom.
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/08/24/BU6C19D3K7.DTL
    Watch jobs, not a lot of smoke and mirrors and billions of dollars of distortions. Watch manufacturing jobs in particular. No economy can survive for long where people are employed just inflating assets to one another without ever producing anything.

  10. Posted by rabbits

    Sadly, Trip, I don’t think this bounce is due to people putting up their own money. $8,000 gets you 3.5% down to $228K, and if you’ve got $10K in your pockets you are on your way to a $500,000 home. The losses have not been shifted to those with money, just the taxpayers, as ALL of this action is in gov’t guaranteed mortgages.
    Imagine having a net worth of sub-$20,000, but thinking you should be in a half million dollar home. The American Dream lives!

  11. Posted by Mud

    @ tipster –
    Your point re: Xmas is a good one. My retail amigos are planning for an awful one – on par with last year or worse (with last year being one of the worst in 50 years).
    Big guys have already cut inventories hard, and should be some economy bounce from restocking – but at much lower than previous levels.
    Noone of the guys I talk to regularly is planning for less than 2-3 more years of flat at best

  12. Posted by Louis

    It is either a RE bottom 2nd quarter 2009, with up trend now, or a DD recession is coming.
    Looks like bottom to me.

  13. Posted by Jeff

    As it was said above, employment is the biggie. And it has gotten a LOT worse over 1HCY09 in the valley (close to 12%).

  14. Posted by marco

    What about “investors” coming in at these levels? Won’t that provide some price support too? A number of Chinese firms, flush with capital, are getting interested in US commercial and residential real estate. It makes sense.
    It seems for all the good reasons prices could go down more, there are also good reasons they won’t.
    I also wouldn’t discount the fact that a lot of people in the Bay Area have tech jobs and AAPL, HPQ, CSCO, INTC, et al are doing just fine. Given the huge purges that have already taken place, the days of mass layoffs are likely behind us. So tech workers, at least, are less worried about job loss now. Furthermore, the people who work downtown at mutual funds and asset managers are back to the days of huge bonuses – seriously. Confidence is way up, at least among certain local populations.
    People want to buy homes in San Francisco and they’re feeling much, much better now. They don’t analyze valuation like a lot of people here do. They decide they want something, check how they feel about it, and then act accordingly.

  15. Posted by Zap Brannigan

    If this is the bottom…then I don’t want to buy a house in SF ever. I’d rather just rent and use our savings to travel.
    Seriously…what’s the benefit to owning a home? So you can paint the walls any color you like? I’ve always wanted my own Japanese tea garden in my backyard…but at these prices, I’d just rather rent next to GG park and visit the tea garden on the weekends and fly to Japan to see the imperial one. At these prices, owning a home, to me, seems like an impact to quality of life.

  16. Posted by NewBuyer

    @Zap
    Thank you for enumerating your bundle of preferences. If you want to spend so much time outside of your home, then it probably makes sense for you not to own one.
    You may think that ‘painting the walls’ is trivial. In my opinion, the right to do as I like with my living space is important. I recently did paint the walls and redo the lighting, and both of those things had a surprisingly positive impact on my mood.

  17. Posted by tipster

    Losing your downpayment has a surprisingly negative impact on your mood.
    For the amount of money every homeowner has just lost in the last year, you could hire painters to paint, hire painters to restore the paint, and just leave the new light fixtures. A renter would still be ahead.

  18. Posted by chuckie

    NewBuyer, IIRC you bought at peak. You do seem to be in remarkably good mood. I am curious how the purchase has worked out financially on a mark to market basis. Maybe you can write a haiku to update us “plugged in” busybodies. Of course, a spreadsheet is welcome too :)

  19. Posted by Mud

    The net learning, as usual, is people are idiots.

  20. Posted by EBGuy

    If we didn’t have an uptick in the summer (as we did every year in the last downturn), I’d be really worried. I think this is gonna leave a mark in the coming year (yep, its different here, all right):
    These figures forecast the percentage of homeowners who are expected to be at least 60 days behind on their mortgages in the fourth quarter of 2009.
    U.S.: 6.93 percent
    Bay Area*: 9.45 percent
    California: 14.16 percent
    Source: TransUnion

  21. Posted by NewBuyer

    @Chuckle,
    I bought a sub-million TIC in Russian Hill during August of ’08.
    The 25% downpayment was sitting in stocks/bonds at the time of the transaction.
    Since then, the stocks/bonds have lost about 35% of their value — or about $70k.
    Based on reasonable neighborhood comps, my home has lost perhaps 5% of its value — or about $40k.
    I’ve also regained about $8k, in the form of equity that would have been flushed down the toilet if I paid rent.
    I will not factor in my tax rebates, just as I wont factor in my property tax or HOA…
    All in, this economy WOULD have cost me about $70k. Buying the home cost me $32k…
    … and, oh, I frickin love living here in the city, love my home, love the DIY/home improvement hobby…
    Was it the BEST financial decision I ever made? No, but it was better than the likely alternative option (leaving my money in stocks and bonds).

  22. Posted by Troy

    Seriously…what’s the benefit to owning a home?
    When doing the rent vs. buy calculation only look at after-tax interest payments, not the principal repayments since that is a form of forced savings.
    The central benefit of owning a home, especially with Props 13 and 58, is being able to own property at ~1% of the purchase price per year (+ maintenance) forever.
    I stand to inherit my Mom’s place that’s now paid off and so I’m happy renting now, but only having to pay $100/month for housing is going to rock.
    Buying now is tricky though. Interest rates moving up to 7%, the $8000 subsidy going, continued job losses and decreasing rents, increased taxes on the middle class are all downward gradients on prices, and I don’t see any upward gradients (except foreign capital looking to put their dollars into something safer than treasuries).

  23. Posted by NewBuyer

    And if ONE person tells me, “well, leaving your money in stocks and bonds was equally stupid vis-a-vis real estate”…
    … then fine… pat yourselves on the back.
    Most reasonable investors, even the ones who were immune to irrational exuberance, kept their money in stocks and bonds.
    A portfolio containing gold, hedge funds that shorted real estate, and cash deposits, was not par for the course in my eyes. Hope all you guys are getting a good laugh in at my expense. Make sure they write that one on your tombstone one day. You were right. The sky was falling.

  24. Posted by Troy

    No, but it was better than the likely alternative option (leaving my money in stocks and bonds).
    LOL. Comparing buying at the peak vs. holding through the second coming of the 1929 crash is apples & apples there, Lou.
    Your third option was going to cash and renting like all the smart bears were doing. That would have saved you $$$.

  25. Posted by REpornaddict

    Couple of things,
    my pet hate has resurfaced again this month, the overall change does not look consistent with the tiers, how can they improve 0.8, 2.4, 2.8 but have an overall increase of 3.8%? This happened alot when prices were falling, too. Oh well.
    secondly, does anyone know how the recent rise in CS has affected the future markets in this that I think are traded. would be interesting to compare these to say, 6 months ago, but not sure where I would look for this.
    Thirdly, if the 1m plus market is really in such decline, then given the sudden and sharp uptick in the upper tier here, the 500k-1m range must be on fire.

  26. Posted by Troy

    You were right. The sky was falling.
    Thing is, it was obvious the economy was running rich on home equity drawdowns 2004-2006. It was a classic bubble economy. I didn’t expect the March low but I certainly expected the S&P to be at 1050 by the Dec 2008, and planned accordingly.
    Prices were driven up by unsustainable lending practices, 2004-2008, and rents were driven up by the echo dotcom bubble, 2004-2007. These have largely been taken out of the equation and prices are finding their new equilibrium, which is DOWN from here.

  27. Posted by Chad

    @Troy. I am in similar (but slightly better situation). I inherited a small house (amongst other things) from Grandma, that I want to sell and then add some ca$h to get a nice victorian for me-self :)
    Still sitting on the sidelines and watching what is going on. I was going to drop all ca$h if the right deal came up, but after spending a few days (weeks ?) on SS, I know better :)
    It is turning out to be more of a “wait and watch” game than I imagined. I saw myself in my victorian in fall 09, but it seems to be suicide to buy something now….

  28. Posted by curmudgeon

    Troy,
    I don’t blame you for taking advantage of your inheritance, after all it’s the law. But it’s the dumbest, most inequitable part of a very bad California tax code. Bragging about it is more than a little tacky.

  29. Posted by Troy

    Bragging about it is more than a little tacky.
    You’re speaking to a Georgist so I agree that’s it’s bad law.
    But it is a reason why home prices are so high vs. rents in this state; being able to lock in that 1% in the face of future inflation is worth an entry premium that must be factored in into the buying decision.
    It’s nearly 2010 now. What do you expect rents to be like in 2040? If history is any guide they will be triple what they are now, though that of course assume wage inflation which may or may not be a thing of the past.

  30. Posted by Zap Brannigan

    @NewBuyer
    Yes, I understand it’s all personal and I was just stating a personal preference to show as an example. I’m glad you enjoy painting and housework. Personally, I don’t…I’m remodeling my folks’ bathroom right now and I don’t find it all that much fun.
    But I also don’t understand your calculations. First off, if you’re not buying, why do you have to have your money in stocks and bonds? Secondly, you didn’t account for your tax rebate because it basically offsets property tax and HOA (iffy math, but I’m on board). However, how come you didn’t include the money lost to the bank on interest?
    I don’t know how much your home cost you, but going with low prices on redfin for a 3BR TIC in Russian Hill is $900K (I’m just going off MLS…dont’ know what you paid)…with a 25% down like you had and a $675K balance at 5% rate (generous estimate…TIC loans are usually in the 7% range, right?), you will have “lost” $33,500 in interest to the bank, with only $10K going into your principal.
    So $33,500 lost to the bank
    vs.
    $8K lost to rent.
    Plus your down payment has now been converted to a share in a house which the bank and other people own. Remember, you don’t own this house, you’re only a very minority owner.
    I’m really glad you enjoy painting.

  31. Posted by Mole Man

    History, a common enemy:
    When the Great Depression hit austerity measures were the order of the day, resulting massively deleterious effects. This time economics is all different such that austerity measures would give super power to our inevitable economic recovery!
    The last time there was a big downturn in property markets from 1989 to 1997 the magnitude of the correction was much smaller, yet there was no real recovery for at least seven years. Much of the correction came as a result of prices stagnating while inflation worked its magic. This time we can expect markets to be recovering just fine after only a couple of years of correction.
    Government, government, government! This correction is wiping out somewhere in excess of six trillion dollars of conjured wealth, yet somehow a few hundred billion from the government must be expected to completely change everything.

  32. Posted by Troy

    So $33,500 lost to the bank vs. $8K lost to rent.
    I’ve got a buy-vs-rent spreadsheet and going with $900K/25% down/6.5% interest I’m getting a carrying cost of $3900 per month.
    Assuming the mortgage is paid off in 20 years this will fall to a carrying cost of ~$1000/mo in 2030.
    Trying to “time” the market is pretty tough so I think as long as Mr NewBuyer continues to pay down the mortgage balance he’ll be OK sooner or later.
    Depends on which way rents go in the future, and nobody knows that since there are too many moving parts involved in the calculation.

  33. Posted by Po Hill Jeff

    NewBuyer, I think you’ve left out an important factor: the money you “threw away” on interest amounts to $30K itself (assuming 5%) versus the $8K you “threw away” on rent. Also, from 8/27/08 to today the S&P declined a cumulative 21%, and produced about 3% in dividends. You say you would have been invested in “stocks AND bonds”, so I assume that the all-stock S&P is a conservative replacement to estimate your losses.
    Looking at your numbers (and accepting that taxes+HOA = interest deduction) I come up with something like this – positive numbers indicate advantages from buying:
    +8000 saved on rent
    +36000 loss avoidance on investments
    -40000 decline in home value
    -30000 interest
    So it seems like you lost about $26K vs. continuing to rent another year. Am I missing something?

  34. Posted by Troy

    this will fall to a carrying cost of ~$1000/mo in 2030.
    Ack, I see a flaw in my spreadsheet; it only factors in opportunity cost of the down payment, not the total principal repaid.
    So at 4% interest the opportunity cost of $900,000 is actually $3000/mo, bringing the TCO of the TIC to $4000/mo again.
    Will rents be $6000/mo in 2030 or will they be what they are today? If Tokyo is any guide, rents are lower there now than they were in 1992, but Tokyo builds up a lot more new housing stock than here, so there’s that.

  35. Posted by salarywoman

    Chad,
    One thing you might keep in mind is that you are after a good deal for yourself. Yes, that might be more likely to happen when prices are, in general, at their lowest, but that isn’t necessarily the case.
    Given that you’ve decided to buy, if I were you I’d be actively looking right now, not sitting on the sidelines waiting. For any property that really interested me I’d ignore the asking price, figure out what the “right” price should be and make an offer. I’d also educate myself about buying foreclosed properties and regularly review published foreclosure notices.

  36. Posted by corntrollio

    Interesting that the peak buying season resulted in increasing housing prices (as I said it would last month and the one before, I believe). We’ll see how things in the next 6 months though — hard to call bottom in the summer.
    It’s pretty clear from the DataQuick data that the mix of houses being sold had a big effect. I think we should expect to see some medians go up as more expensive houses keep dropping in value.
    Also, expect a drop in value as mortgage rates go up, as they inevitably will. They can’t stay at this ridiculously low subsidized rate forever, especially if the Fed slows down or stops its liquidity injections.

  37. Posted by tipster

    The above exchange illustrates the Beardstown Ladies effect of real estate.
    The Beardstown Ladies were a group of very ordinary investors who made outsized gains in the stock market for many years. So proud of their methods, they published a book, that in essence said “We’re idiots. We’ve beat the market consistently. Therefore, anyone can beat the market consistently if you just do what we do.”
    The only problem was that people didn’t stop at the first sentence. One wise person did so, and discovered that they hadn’t been beating the market, they had miscalculated their returns. When calculated properly, they were behind the market returns they could have achieved by investing in index funds.
    Every accountant I’ve spoken with on the subject has told me the same thing: if people properly accounted for the total cost of home ownership, most would realize that they haven’t made a penny. The problem with real estate investing is that anyone can do it, even idiots. Those people think they have made a fortune!
    Here’s the wikipedia entry for beardstown ladies: as short as it is hilarious:
    http://en.wikipedia.org/wiki/Beardstown_Ladies

  38. Posted by Outsider

    Zap B: The reason why you didn’t enjoy the bathroom remodel job is simple – It DIDN’T belong to you. I redid the house I have owned since the ’80s room by room and I enjoy every second I spent in my house, especially the newly finished master bath. It is like how pleased and proud I am next to my newly waxed mint red ’71 BMW 2002 tii. I can understand I probably won’t share the same sentiment next to a rental or leased car. The rental, I am sure, functions just fine and may be cheaper to drive, but it belongs to someone else. There is something to be said about pride of ownership. As long as your primary goal for owning your home is not to generate a boatload of profit in a hurry, a little up and down is how it had been the last four decades. On the other hand, if you are in to make a quick buck, than home ownership is no difference from owning 2000 shares of Google purchased on margin.

  39. Posted by chuckie

    Newbuyer, so just about a year of being a home owner. I have a feeling that the declines will continue for some time but for you it’s all academic as long as you’re going to stay put. Enjoy and keep the good mood.

  40. Posted by Outsider

    By the way, for those of you interested – read excerpt from Tom Sugrue’s new book on August 15-16 WSJ titled THE NEW AMERICAN DREAM: RENTING.
    There is also an interesting essay on the 8/24/09 WSJ by David Kansas titled A TOE IN THE WATER – anecdotal stories on some financially stable folks edging back into real estate and why.
    Sorry to lazy to put up a link…

  41. Posted by Trip

    A little historical context is also illuminating. In the last, much smaller boom/bust wave, SF CSI peaked at 75.15 in June 1991. It would not reach that level against until October 1997. But there were upticks — followed by further declines — in April-Sept 1991, June 1992, April-June 1993, June-Aug 1994 and 1995, then a bottom in March 1996 before the sustained upward trend began again. Heck, May 2008 even saw a slight bump in the SF top tier.
    The long steep drop starting in mid-2006 was an epic event, and the declines could not maintain that rate unless we went into negative home values. But we’re just seeing seasonality plus the effects of the trillions of dollars of market-pumping right now. Look for the downward trend to become obvious again in the fall. In higher-end homes, the drop continues to be pretty steep (but we just have to argue that point as CSI’s top tier is now little more than a condemned tear-down in SF).

  42. Posted by anonn

    The long steep drop starting in mid-2006 was an epic event
    Dotcom echo bubble 2004-2007? Falloff halfway through 2006?

  43. Posted by anon

    anonn, you’re back to that ol’ argument that “the internet” caused prices to rise in SF during this last bubble? Puh-leeze! Notice how the CSI SF line moves right along with the line for the rest of the country? “The internet” caused the bubble everywhere! It wasn’t no-down-payment easy money at all!

  44. Posted by Average Joe

    Here’s a question for you financially-minded people that’s been in the back of my mind for some time. We all know that with Prop 13 it’s not unusual to see homes in SF with a ridiculously low tax basis for properties that have been held by the same owner for a couple of decades. And when I see those properties, the 20% difference between a $20,000 basis and a $25,000 basis seems ridiculously insignificant.
    So, if I intend to hold a property for 20 years or more (and Prop 13 remains for the duration), does it really matter if I buy for $1.4M at the peak or $1.12M at the trough?
    I’m not trying to be ignorant here, and yes $280,000 is a lot of money to me. But is it really valuable in terms of the personal opportunity cost of time spent trying to time the market, staying involved in pursuing different properties, etc — only to see the relative difference in cost basis shrink to marginal over the years? How do others view this?

  45. Posted by Zap Brannigan

    @Outsider
    Well, it will be mine…when my parents croak! I keed, I keed.
    But that gets to my fundamental question, in a way. I do understand pride of ownership. I own my car, motorcycle, and tiny sailboat outright and I certainly do enjoy them. But in the case of the car and the motorcycle, the cost to own is far lower than the cost to rent/lease those items. And I can’t even rent a sailboat, most of the time.
    But when it comes to the house. First, after I buy it, I don’t even own it. The bank does. Even if I’ve paid 90% of the mortgage, the bank still owns it. Where’s the pride in that? Secondly, when the cost to own is so much higher than the cost to rent, the “pride of ownership” is diminished somewhat by the “lack of money”.

  46. Posted by Henny Penny

    The sky is falling, the sky is falling!! All hail those who rent!
    Mean ugly greedy owners! What were you thinking spending money!
    Rent and let the landlord clean up and smell your stinky asses after you leave, trash the place, leave all my unwanted shit on the street for the city to pick up (you don’t pay taxes, so what the hell), and leave your designer beer bottles on the street (after a street fair)…yeah, let’s blame the day laborers too!!!!
    What a shitty class of people…whiners! And I voted for Obama…hmmmm….

  47. Posted by Legacy Dude

    Landlording really seems to bring out the best in people.

  48. Posted by NJ

    @AverageJoe:
    I think you have to consider also the chances that Prop 13 will exist in 20 years’ time.
    While there presently may be very little popular desire to overturn Prop 13 with respect to owner-occupied, residential property, I can’t help but wonder if, one day, when property tax disparities are far greater than they are even today — note that Prop 13 caps tax increases at below the historic rate of inflation — people will finally be fed up and overturn it.

  49. Posted by anon

    Funny how these threads turn in to “justify my existence” pleas.
    Back on topic, no one can deny that the economic winds are changing direction. I’m not denying that RE faces many challenges but there have been so many significant positive signs in the last few months…and in a year from now global economic conditions will be better still.

  50. Posted by asiagoSF

    av joe,
    I don’t even remotely belong to the financially-minded crowd, but I’ll bite:
    a difference in house price of $280K means almost $2k/month in additional mortgage payment (assume it’s a wash-out among tax savings, prop tax, maintenance, higher HOA, what not) and if that doesn’t move the needle to your buying decision process, more power to you
    however…
    1. you may not be personally price sensitive but $2k/month is a lot of money to a lot of folks; think of all the things you can do with that extra money (saving for your offspring, buying a heck of a nicer car, paying for school or college, rainy-day funds, charity, etc.)
    2. $280K less in house price could be the difference between qualifying or not qualifying for the necessary mortgage
    3. I’m sure you have all the intention to stay put 20 years, but so did so many of the folks who bought at 100 and had to sell at 85 four years later, with a total wipe-out of their down payment, or -worse yet- having to bring a check to closing
    I am sure the F-M people can come up with more and better reasons as well

  51. Posted by Outsider

    Zap B: I hope your folks don’t browse Socketsite. The house otherwise may be left to the cat – just kidding.
    I do beg to differ on your point – almost everyone knows the cost of owning a new car by percentage of value retention is worse than just about anything tangible except may be owning a boat…If losing 30% of your home value is horrible, your new car loses that much the minutes it leaves the lot – during the good years! And what do they say about the two happiest days of a boat owner ?? Yes the bank still holds the first on my house ( hopefully not for long ) but they are also holding your cash. If the bank folds, I still have the house but you are at the mercy of the shaky FDIC to get back your cash.

  52. Posted by Robert

    my pet hate has resurfaced again this month, the overall change does not look consistent with the tiers, how can they improve 0.8, 2.4, 2.8 but have an overall increase of 3.8%? This happened alot when prices were falling, too.
    Even though Case-Shiller only considers qualified apples (arms-length SFH re-sales with a hold period longer than 6 months) it is still distorted by mix effects because not all regions contribute the same number of apples, and price changes can differ by region. Moreover, changes in apple-contribution rates can cause shifts in the index. Those effects are exacerbated because it is a price-weighted index (so it measures the “average” apple price, not the median price).
    Here is a simple example:
    Suppose our MSA consists of The City and The Burbs. At the peak, prices in the City were 1.2 million, and prices in The Burbs were 350K, and each area provided an equal number of apples, for an average apple price of 775K. Assume this corresponds to an index value of 100.
    In what follows, all apples are assumed to be bought at the peak and sold in the month that the index is published:
    In January ’09, the burbs have many forced sales and the city market is frozen:
    80% of apples come from The Burbs, in which prices were 60% down from peak at 140K
    20% of apples come from The City, in which prices were down 15% from peak at 1,002K.
    Then, the average apple is = .8(140K) + .2(1002K) = 316K, giving an index value of 41 (normalize by dividing by 775K).
    Now, suppose by June ’09, the city market thaws a bit, and foreclosures in the burbs subside, so volume becomes a bit more even:
    60% of apples come from The Burbs, in which prices are down 65% from peak, at 122.5K
    40% of apples come from from The City, in which prices are down 25% from peak, at 900K.
    The index is at 56! So the index shoots up solely because of mix effects, even though prices in all areas continue to fall.
    Next, let’s look at the “top half” and “bottom half” in June ’09:
    The top half of apples in June ’09 is 4/5 city apples and 1/5 burb apples. The average price of the top half is 745K, for an index value of 96. In June, those apples had an average price of (4/5)*1002K + (1/5)*140K = 844K, for an index value of 109.
    The bottom half consists entirely of burb apples, which decreased from an index value of 18 to a value of 16.
    So even though the total index increased, both the top half and the bottom half decreased.
    You can imagine the craziness that ensues in an area with 5 counties and wide price-disparities/shifting sales volumes. Of course, over time, things settle down, but we have been experiencing some market dislocations and forced sales, etc, so this can result in some C-S instability. Evidence of this is how the various tiers split apart, and how price action within each tier is not consistent with the overall index.

  53. Posted by Trip

    Ah, Robert…that all makes great sense (you had me scratching my head over the math before your fix). Excellent explanation! S&P has fuzzy language about weighing mix factors to account for things like this, but it’s pretty easy to see how there could be a lot of noise in any short term period.
    So while we’re at it — do you have any understanding of how the tiers can be charted over time when the pricepoints of the tiers have changed so dramatically? A mid-2007 lowest tier sale would be at a price that is now in the highest tier — but S&P does not go back and true up all past numbers to reflect the changing tier breakpoints.

  54. Posted by Legacy Dude

    You guys are doing it again. You’re letting facts get in the way of a good story.
    Whatever happened to Innovation Mecca and proximity to wine country/ski country? Are Messieurs Case and Shiller even aware that Noe Valley is a World Class City?

  55. Posted by kthnxybe

    So, let’s say you think you want buy a home. You want to be able to stay in one place rather than move when you want to update your kitchen, you want a home to pass on to your children – whatever. At any rate, your household is crowded and there’s no washer dryer hookup and you can’t take going to the laundromat anymore.
    Do you honestly look for a more expensive rental, or do you go ahead and buy? And if you do buy, when? Now? Six months from now? Is it already too late?
    Just curious.

  56. Posted by Outsider

    Check out the two WSJ excerpt and essay I listed at 1:11pm on THE NEW AMERICAN DREAM: RENTING by Tom Sugrue, professor of history & sociology at Penn (8/15/09) as well as A TOE IN THE WATER by David Kansas (8/24/09). Answers part of the question.

  57. Posted by Jimmy (No Longer Bitter)

    Ok folks, off topic but germane to my situation right now — who knows what a YSP (Yield Spread Premium) is and how do I get that money paid to myself when re-financing? (Or at least as a credit towards closing costs).
    Just another scam by banks and mortgage brokers …

  58. Posted by anonn

    anonn, you’re back to that ol’ argument that “the internet” caused prices to rise in SF during this last bubble? Puh-leeze
    No? I was just wondering why two posters picked such funny years. What tech bubble was in 2004? What falloff was in 2006? That’s all. Go jump down someone else’s throat. I’m not interested.

  59. Posted by chuckie

    “…how do I get that money paid to myself when re-financing?”
    By ruthlessly shopping for the best deal. And then shopping some more. IMO.

  60. Posted by anonn

    Whatever happened to Innovation Mecca and proximity to wine country/ski country? Are Messieurs Case and Shiller even aware that Noe Valley is a World Class City
    Somebody is “doing it again,” that’s for sure. Yawn.

  61. Posted by Robert

    S&P has fuzzy language about weighing mix factors to account for things like this, but it’s pretty easy to see how there could be a lot of noise in any short term period.
    From my reading of the methodology, S&P only has geographic weighings for their national indices (e.g. the composite 10 and the composite 20), in which the contribution of each MSA’s index is weighted by the aggregate value of the housing stock in that MSA, where the latter is obtained from census data and rebalanced every 10 years.
    But the MSA is the lowest level of granularity that the repeat-sales methodology can see. There is no notion of a neighborhood within an MSA, or attempt to control for that. If you think about it, you’ll see why — you need tons of apples to do a repeat sales index. The only reason that OFHEO is able to get away with a smaller MSA is that they include re-financing, which adds lots of apples (but decreases overall accuracy, IMO).
    C-S does weigh by hold times, with longer hold times discounted over shorter holds. No hold less than 6 months is allowed. They also weigh by large price changes, discounting changes that are much greater than the average change, as those are assumed to be improved or degraded units. Those are the only weighings. They do, however, reject all sorts of data points, for example sales between family members. New home sales are excluded entirely.
    do you have any understanding of how the tiers can be charted over time when the pricepoints of the tiers have changed so dramatically?
    About the tiers, I didn’t get into this, but there is a rolling period, which is the last 3 months (for the monthly releases). Say you are preparing the June ’09 data. Then the current period is (April, May, June). Moreover, you divide all the previous months into 3 month buckets this way, so the second youngest period is now (Jan/Feb/March), on up to 1987, or whatever the first date is for which they have data.
    Your apple basket consists of all qualified re-sales which were last sold in the current period and whose prior sale is in some other period. Next, rank-order each apple by the position of the first sale price in its period. So, for example, one apple may have been bought in April of 1990 and re-sold in May ’09. In whatever period April of 1990 falls into, the property was in the top 3.21% of all sales prices in that 3 month window. So, you would assign a value of 3.21 to that apple in your current basket.
    Then, take the top 1/3 of these rankings as your new apple basket, and compute the index again for this smaller universe.
    So while the composition of apples in the “top tier” changes over time, the use of rolling 3 month look-back helps smooth things out.
    Also for the original index calculation, only re-sales that occurred in the last 3 months are in the apple-basket. With a large enough MSA, you don’t get large breaks in the monthly index values.

  62. Posted by Troy

    who knows what a YSP (Yield Spread Premium) is
    YSP is the spiff to the broker from the originator, paid because you are getting screwed. Run away.

  63. Posted by kthnxybe

    Thanks, Outsider. The Toe in the Water story describes us perfectly.
    I don’t want to get rich quick, I just want a cat.

  64. Posted by San FronziScheme

    Is it already too late?
    Why would it be too late? It’s not like anyone is going to be priced out if they could afford summer prices! That’s soooo 2005! Loans don’t grow on trees anymore and a 150K salary only allows a 700K purchase tops. No more liar loans. No more Negative equity. No more loans made with the next 15%/Y appreciation priced into the risk. Sure demand is still there. But it’s smarter and no need to panic, overpay and be the next “winner” to lose his shirt 3 years from now.
    Furthermore summer is the peak of the season statistically and there should be better deals in the fall or winter, imho. Of course what you find in the fall can be different than the “prime” offerings from spring and summer, therefore do your due diligence. Plus the flow of foreclosures is not really abating. There’s no hurry…

  65. Posted by rip van twinkle

    What happened to the housing boom?
    I fell asleep for two years…I pulled over a million out of my account with Bernie Madoff (former NASDAQ chairman) and had intended to buy a sweet one bedroom condo….
    Help! am i priced out?

  66. Posted by Robert

    Do you honestly look for a more expensive rental, or do you go ahead and buy?
    A decision to purchase is always a blend of investment and consumption, and the prospects for each are often at odds. So ask yourself:
    Am I OK if this declines in value by 40%?
    If the honest answer is yes, then consume away. Maybe you are sure you will never move, and don’t care about the opportunity costs. But if not losing money is very important to you, then you should only buy when it makes sense from an investment point of view.
    The flipside is also true: maybe there is a property that is great from a rent vs. buy comparison, but not so great from a living-there perspective. The east bay isn’t so far away, after all.
    You only live once, so make whatever trade-offs you want regarding money and enjoyment, but go into it with open eyes. There’s too much of this “you can have it all” deception in which people become convinced that a property that they really want to live in has to also be a good investment.

  67. Posted by Outsider

    kthnxybe: You are welcome. It also fits our situation exactly and we took the plunge after holding back during the bubble years. For us, it matters little if prices go up or down as we don’t plan to go anywhere. We are very pleased we did it.

  68. Posted by tipster

    Who are you trying to convince, outsider? Us or you?
    I always love that “I’m not going anywhere so it doesn’t make a difference” argument. Yes it does. If you buy when prices are higher, you pay more in interest every month, and you make less or lose more when you sell. So paying a higher price only hits you EVERY DAY, and kicks you in the ass on your way out the door!
    kthnxybe, your problems are solved with a very high credit score. I’ve never had anyone turn me down for a pet, including longtime owners who never allowed a pet, ever. You show up with a perfect credit score and they take the pet tiger, snake and elephant. And paint? They never care. That’s why the “I can paint my own home” argument never makes sense to me: so can I.

  69. Posted by Fish

    People are too much willing to pay too much premium for the privilege of painting walls or updating the kitchen. You can do those even if you buy 1 year at a time. And chances are that you’ll still come out ahead compared to leasing 30 years at a time. At current price, I’d buy only if I’m expecting another bubble.

  70. Posted by jaja

    i never understand the paint argument as well. i painted my walls. I changed out the light fixtures. I figure I’ll just paint it back when i leave and change the light fixture back. No big deal. I’ve seen apartments where renters remodel the apt on their own dime if they decide that they will stay there for awhile. Most of the landlords are more than happy to oblige as long as they can see and approve the remodel before hand. Sometimes renting + remodeling the unit you are renting still beat out buying here in SF. Crazy but true.

  71. Posted by San FronziScheme

    It DOES matter to pay less. If you overpay by 20%, with a regular 20% down schema you’re actually paying 33% more in mortgage than you should (80/60=1.33).
    If your neighbor bought at bottom price, say he pays $3K/m when you pay $4K/m. This $1K/m means your neighbor can afford a brand new MBZ while you’ll be stuck with your old Camry. And he can afford a few smaller perks too with the savings in property taxes.
    Put it this way: same house, different lifestyle.
    The new Joneses are not the people outspending the others, they are now getting more for less!

  72. Posted by viewlover

    I’m curious as to what drives those that do not believe in home ownership to a site about real estate.

  73. Posted by hiyou

    prop thirteen repeal
    hard road spring grandfather clause
    makes birdies sing high

  74. Posted by Robert

    I’m curious as to what drives those that do not believe in home ownership to a site about real estate.
    Real estate is a fascinating topic. And proper valuation is at the heart of that, although not all of it by any means. You have a nexus of design, social pressures, city politics, small business, inter-generational wealth transfers, tax policy, urban planning, schools, mobility, mortgage bond rates, and pet-ownership — where else can you tie all these things together in a way that is specific and important to so many people?
    But I would hope that by 2009, we would have abandoned platitudes about “believing in home ownership” — the days of faith-based real-estate purchases ended with the Bush administration.

  75. Posted by Zap Brannigan

    @viewlover
    I think most here do believe in home ownership….at the right price. So the debate may not be on whether or not you should own a home, but whether you’re sacrificing your finances to own a home at these prices.

  76. Posted by repornaddict

    Yeah we just allowed our tenants to paint as well.
    of course, the other argument on the does if matter if prices fall when I don;t intend to move is this” if you waited you could actually have bought a bigger/better place.
    equivalent in some ways to paying less each month on the same place if you waited, but a slightly different angle…

  77. Posted by viewlover

    I would hope that by 2009, those that manage to own a home would be able to do so without being the subject of ridicule from those that havent.

  78. Posted by hiyou

    ebb tide seems forever
    receding darkness
    invites spring sunshine

  79. Posted by ex SF-er

    I’m curious as to what drives those that do not believe in home ownership to a site about real estate
    remember: a lot of us that counsel against buying a home today are homeowners. (like me). And FWIW: I just dropped about $70k on my house this summer, so I’m not opposed to paying large sums of money on my abode either. I believe in home ownership. I don’t believe in homeownership at any cost. Will I recover every penny that I’ve sunk into my home? Probably not. Does it matter in my case? No, because my house cost so much less than anything out there in SF even with the improvements I’ve made, and my house STILL costs less to own than to rent even if one factors in everything (taxes, opportunity cost, you name it)
    as for the data: as I’ve said many times before (including when Re was falling last winter) RE is seasonal, so one expects that sales volumes and prices will rise in summer, and fall in winter.
    Thus, the latest summer months are somewhat positive because at least the season fell into line with historical trend patterns. (in other words, things weren’t so bad that prices/volumes fell despite summer).
    Not sure I’d call bottom at this point, since YOY data is still down significantly.
    blending MOM and YOY data would maybe lead to the conclusion that things are still worsening, but worsening at a slower rate than they were in the past. I’d have a hard time calling this “the bottom” although it is possible in theory.
    now we’ll just have to see what this winter and next summer show. And a lot of stuff happens between now and then. Most important is what our government does… it’s hard to analyze markets because so much of the market depends on what a very few number of people say and do. (bernanke, geithner, obama, Bank of China and Bank of Japan officials).
    yep… the process is long and boring. I’ve said this 100 times but, it’s like watching the paint dry on a painting of grass growing.

  80. Posted by tipster

    The country didn’t get any wealthier in the last few months, it gets poorer every day. But my sense is that the feeling of doom has dissipated, and so that gives people more confidence. That’s what we’re seeing in this data.
    Although the income isn’t really there to support any increase in prices, artificially low interest rates coupled with artificially low downpayment FHA loans that no investor would touch without government backing, coupled with an artificial tax credit for first time buyers, and an artificial foreclosure moratorium, can all work together to produce a bounce. I suspect things will continue to be up for the next couple of months.
    If the government was trying to produce an increase, rather than slow the decrease, they’ll continue all of those artificial things, but those things all have negative effects. If the government was only trying to slow the decrease, but overshot, you’ll start to see interest in those programs wane.

  81. Posted by NewBuyer

    @Zap,
    I’m not sure what you mean when you say “So $33,500 lost to the bank vs. $8K lost to rent…” in your financial model.
    The amount lost to rent for a nice 2BR w parking in Russian Hill would be about $3,500/month. Given the better rental environment, it would now be about $3,200/month…
    The interest portion of my mortgage really is less than my rental fees would be. Albeit, I had an above-average downpayment, so that’s part of the explanation.

  82. Posted by Fish

    Speaking of faith-based, there is something primeval about home ownership. The longing for home appears ingrained in all living beings by the evolution. You see this in people who lost their homes to a natural disaster, how they get devastated as if they lost a loved one. (“This is my home. I have nowhere to go!”). This longing for home fuels desire to own home, which makes people willing to shell out huge premium for the ownership. Renting, on the other hand, is totally utilitarian. It’s just a cold economic calculation.
    BTW, viewlover, real estate is not just about owning. It’s about the roof and owning is just one method.

  83. Posted by NewBuyer

    @ Fish,
    Renters are just a lower caste of people. Deal with it.
    In a better time, they were not allowed to vote at all.
    Oh, and, I agree that they are the more utilitarian and economically-minded types… in the same way that ants and snails are very practical when it comes to allocating their crumbs, leaves, and other assorted resources.

  84. Posted by The Milkshake of Despair

    “You see this in people who lost their homes to a natural disaster, how they get devastated as if they lost a loved one.”
    I think the only people who could feel that way are those who have never actually lost someone they loved. Homes are replaceable.

  85. Posted by viewlover

    It’s also more than a can of paint and light fixtures.

  86. Posted by San FronziScheme

    NewBuyer,
    If you has a large downpayment, you have to take the opportunity cost of this downpayment into account. For instance 320K on a 800K purchase (a huge 40% down) is 320K stuck and not producing any interest. From the past 5 years’s CD rates, that’s everything between $500 and $1200 / month.
    In addition, you have a ~1% cost to keep these 320K in good shape, plus the same cost on the 480K you borrowed!!! You are paying the bank interest, and you are paying the bank’s share of the maintenance to have the property retain its value! The same applies to the taxes and insurance. Sucker!
    Also, as a buyer you have an instant 6%+ expense (closing fees + commission), some of it cash, some of it lost equity. If you amortize it over the first 5 years, that’s 1.2% of the purchase per year. The same as property taxes.
    As I always said, there should be a discount to be a homeowner. You’re maintaining it and you are usually not the real owner! But marketers and salesmen have done a nice job with lobotomizing the masses into renting from the bank AND overpaying for it.
    But I agree the nice thing about being a homeowner is you can chose the color of the water heater when it breaks down! I take solace in the fact that my bank account is growing month after month out from all the savings on NOT overpaying for a house. I could afford a few ones all cash but I have better things to do with my money (like watching it grow and enjoying hassle free week-ends).

  87. Posted by REpornaddict

    not if the downplayment was';t in a CD
    if it was in stocks, for example, then take the performance of these stocks into account.

  88. Posted by bernal

    here’s a kind of round number story of 30 year property hold in SF:
    bought building between 100-150k about 1980
    sold building 2009 for about 1m.
    refi a few time, extracted some equity and mainly used to fix house. condition poor upon buying, pretty good when sold. ended up with about 400k mortgage, netted about 600k, leaving aside any capital gains taxes.
    will you buy for 1m in 2010 and sell for 10m in 2040?
    i don’t think the monthly payments over the years were out of line with an equivalent rental

  89. Posted by anon

    Fine, but then you also have to include the 20%+ decline sine 2007 in the value, so far, of a “Real SF” home as a cost. Even a bigger loss if you have a condo, and much bigger if you have a TIC or a home in the less desirable parts of town.

  90. Posted by Robert

    will you buy for 1m in 2010 and sell for 10m in 2040?
    Absolutely not, since by that logic, I would hold on and sell for
    $100m in 2070, or better yet
    $1 billion 2100
    Alternately,
    houses must have cost
    $10,000 in 1950
    $1,000 in 1920
    $1 in 1830
    Maybe, the period 1980-2007 was anomalous?

  91. Posted by San FronziScheme

    REpornaddict,
    Sure. Depends on your risk tolerance level. I moved out of stocks in 2006 at the same time I sold my RE. I switched to bear mode as the permabulls went all the way in.
    bernal,
    1980 is a turning point in American capitalism. The dollar more than doubled in a few years compared to most currencies. High inflation happened. Reagan happened. “Deficits don’t matter” happened. Less taxes for the top tranche happened. The war on the Middle Class happened. 2 RE bubbles happened. Globalization happened. Dis-industrialization happened. A very different context of one-off events.
    I don’t think we will see as much change in the next 30 years as in the last 30. Globalization and wage arbitrage is here to stay. The economical core principles are pretty much cast into stone, with 2% inflation as a very strong guideline for the Fed. Deficits are a big unknown of course.
    I could give you another timeline: 20 years of Japan 1989-2009. The miracle of inflation didn’t bail them out there. I think it’s a more viable model than the 1980-2009 timeline.

  92. Posted by bernal

    this particular property went from about 40-50k to about 125k between 1970-1980. so we were part of the early panic to buy sf.
    big inflation years those, tremendous interest rates in the early eighties.

  93. Posted by REpornaddict

    SFS, yes we are all aware you and 99.9% of the people on this site moved out of stocks and RE and into risk free CDs in 2006 (how could we not be!!!), but that’s not the point.
    we are talking about someone who used a downpayment to buy a house in the last year or two. therefore I don’t think, generally, the typical downpayment for these purchases was in risk free CDs.
    It would therefore be wrong to automatically value the opportunity cost using the return from these. But that gives the result people want to see, so it gets done here of course. All the time.

  94. Posted by Fish

    “I think the only people who could feel that way are those who have never actually lost someone they loved. Homes are replaceable.”
    Well, I have lost both before, and I can say that the trauma is not that different: it eventually fades and new home/people come into your life, but you end up longing for years. Apparently, I’m not the only one. There was an article in NYT a few months ago about how some people got so traumatized after selling their homes, they repurchased.

  95. Posted by Fish

    “Renters are just a lower caste of people. Deal with it. ”
    That too. Pretentiousness is of such value, some people are willing to pay huge premium for it. Millennium comes to mind.

  96. Posted by EBGuy

    A moment of silence please; another million dollar Noe home is hitting the auction block today. The 3bed/2bath (1612 sq.ft.) house at 2350 Castro has an unpaid balance of $981474.

  97. Posted by San FronziScheme

    But that gives the result people want to see, so it gets done here of course. All the time.
    A very fluj-esque comment. Why hang out on SS if you don’t like the company? I suppose you are fighting the good fight against all the negativity, right? If everything could be that easy, comic-book-easy with good guys and bad guys…
    And not 99.9% here did that. I am just pointing out that by looking at basic fundamentals you can figure out a good chunk of what is likely to happen.
    – Buy a decent place for 600K and rent it out for 1800? Not a good idea. 200K? Probably a good idea. $300K? Maybe.
    – Think inflation will always be there to bail out your a$$? Not guaranteed (look at Japan).
    Nothing is certain in this world. And purchasing an overpriced home you cannot really afford from day 1 with the “hope” everything will go your way is the reason everything collapsed under its own weight. Too many wishful thinkers saying the same thing. Too many people betting on the same horse expecting a 20% return. Now we have reached some sort of plateau and the cheers are back with their “you can’t lose at this price” chants. Not buying it.

  98. Posted by Troy

    I’m curious as to what drives those that do not believe in home ownership to a site about real estate.
    This is a good site for learning the facts of SF real estate.
    “home ownership” is a glittering generality and not really useful to believe in one way or another.

  99. Posted by viewlover

    the reason I posed the statement the way I did is because I found it odd that so many posters think it is stupid to buy a home in SF. If the argument is always that it’s not worth it, then just move on. I never looked at real estate, had not interest until I was ready to buy a house. I never made fun of people that did, regardless of whether they made money or lost their shirts.
    This site has lost it’s usefullness regarding to facts. It’s turned into a bear site and if anyone has a different opinion, ie, I like my house, they are torn to bits by the so called advisors. Where’s the usefullness in that and what have you learned and to what end if not home ownership?

  100. Posted by Fishchum

    jaja – regarding your comment about renting, making improvements and still coming out ahead over those who have bought – it’s even more possible when you factor in rent control. My wife and I are looking more and more like lifers in our rent-controlled 1BDR in the Marina. While we’d love to have a bigger space and maybe a backyard, it’s just simply not worth the money to jump from what we’re paying now to about $4K a month for the “pride of ownership”.

  101. Posted by Outsider

    viewlover: bears dominate this site when there is a bear housing market and bulls run wild when there is a bull housing market because the current events appear to justify their arguement. I guess one just have to find the pearls in the pile of relatively useless posts as there are many genuinely smart and informed individuals on Socketsite. I do have to say Socketsite may have contributed in a small way to the state of our economy as the collective productivity loss by the posters and readers must be substantial – unless everyone on SS is unemployed…

  102. Posted by Robert

    That’s a bit idiosyncratic, Fish, because people are quick to unload their houses and move often. It’s usually a positive experience, although it can be disconcerting. Not sure about longing.
    Maybe they do that to loved ones, too, but I think the pain you talk about only refers to involuntarily giving up the house, whereas the loss of a loved one is pretty horrific even if it is voluntary on your part. The difference being in ego.
    I do get the sense that some people have their ego/sense of self-worth so invested in housing that it borders on mental illness — not a specific comment comment about you, Fish, but a general sense from the way people approach this topic.
    There are, after all, many achievements to be had in life, and owning a house is fairly common and easy to do — much more common than attaining an associates degree, for example. I hope this level of ownership fetishism is rare.

  103. Posted by OneEyedMan

    When I was in LA it was such a car-centric city that the joke was “You are what you drive” Here in SF it seems to be You are where you live.

  104. Posted by priced_out_with_envy

    “ownership fetishism” LOL I love it!
    …I love opening her beautiful french doors in the morning and massage those plump round tomatoes in earliest of morning. then slowly I exercise my ancient pruning techniques on climbing plants crawling up her sweet pergola. In the afternoons, I love to passionately use my plunger in her toilet,
    in and out, in and out, to clean out my pipes for
    the next watery flush…

  105. Posted by The Milkshake of Despair

    “I found it odd that so many posters think it is stupid to buy a home in SF”
    viewlover – is there any poster here who is dead set against ownership ? What I do hear over and over is that RE is overpriced. At the right price, even the hairiest smelliest bear will become an owner.
    Fish – maybe I’m more sentimental than most, but I’d give everything that I have, houses, cash, stocks, cars : everything but the clothes that I have one to bring someone I care deeply about back from the grave, even for just one day. I can always make more money and repurchase the stuff that I forfeited. But people are irreplaceable.

  106. Posted by anonn

    Yeah, you started off all right. But plunger and toilet, really? Cleaning out pipes? Ouch.

  107. Posted by NoeValleyJim

    Absolutely not, since by that logic, I would hold on and sell for
    $100m in 2070, or better yet
    $1 billion 2100
    Alternately,
    houses must have cost
    $10,000 in 1950
    $1,000 in 1920
    $1 in 1830
    Maybe, the period 1980-2007 was anomalous?

    Up 10X in 30 years only requires a 8% compound gain, so while this is a bit high, it is not really unreasonable. Look at how stock market investments have done over time.
    I think we agree that home prices should more or less follow nominal salary gains and the US economy over the long run has had a 2.5%/yr real per capita GDP gain. For various reasons, this has not gone into salary increases for most people, the biggest of these being the increased cost of health care. Obamacare should help hold down the line in these outsized costs, which will allow real incomes to grow at 2.5% (or perhaps even more) long term. Add into that the long term inflation rate of 3.5% and you are at 6%, which is what CA real estate in general has done since WWII.
    I have explained before how it is a fundamental axiom of city planning that real estate in the core area of a growing metropolis will tend to increase in value, hopefully this is not something I have to prove, though the uber-bears on Socketsite often seem to think that up is down and visa versa. Note their premature celebration that they have been *proven* right in their claims that SF real estate is going to drop 50% in value in the next year or two. Somehow a CS graph showing a clear uptick in regional home prices is seized upon as further evidence of their point of view, making me wonder if they have finally and truly taken leave of their senses.
    But I think an additional 1% a year in value due to increased land value is not exceptional, especially considering the tight land use policies we are seeing and the likely increase in transportation costs of suburban alternatives.
    So I think that 7% as a long term prediction for nominal real estate prices gains in SF is not unreasonable. I tend to error a bit on the side of caution, so I use 6% in my own calculations.
    So it should look more like this:
    $1M in 2010
    $10M in 2050
    $180M in 2100
    There are people here who with only a very passing understanding of economics, who really have no clue why the US has experienced inflation in the past, think that that US is going to enter a prolonged deflationary period. I think that the political and economic forces that prefer inflation will easily rule the day. Remember these same deflation proponents told us back in September that the American banking system was sure to collapse, that it was time to load up on gold and ammo and run for the hills and that the cities would run red with blood by now.
    None of these things have happened, though I am sure if we wait a millenium or longer, civilization is sure to collapse. I doubt that any of will be around to see it though.
    [Editor’s Note: While seven percent might not be an unreasonable expectation for long-term real estate gains in San Francisco, history and analysis suggests it’s been closer to four. And as such, six might not be so cautious.]

  108. Posted by San FronziScheme


    I have explained before how it is a fundamental axiom of city planning that real estate in the core area of a growing metropolis will tend to increase in value, hopefully this is not something I have to prove, though the uber-bears on Socketsite often seem to think that up is down and visa versa. Note their premature celebration that they have been *proven* right in their claims that SF real estate is going to drop 50% in value in the next year or two.

    Was SF less special in 1998? Nope. Was SF less a metropolis at that time? Nope. was unemployment at 10%? Nope. But houses in your nabe often sold for 1/2 Mil and not ~$1M+ like today. The difference with today? Bubble money. This blip will iron out over the long term but to do that it needs to correct.
    Somehow a CS graph showing a clear uptick in regional home prices is seized upon as further evidence of their point of view, making me wonder if they have finally and truly taken leave of their senses.
    It took a year for the bulls to admit prices were down. Now 2 month of back to back increases are it’s all “bears are in denial”? Puhleaze…
    There are people here who with only a very passing understanding of economics, who really have no clue why the US has experienced inflation in the past, think that that US is going to enter a prolonged deflationary period. I think that the political and economic forces that prefer inflation will easily rule the day. Remember these same deflation proponents told us back in September that the American banking system was sure to collapse, that it was time to load up on gold and ammo and run for the hills and that the cities would run red with blood by now.
    I never subscribed to these apocalyptic predictions. Simply that’s it was the biggest RE-based bubble in history and that its popping had to be massive, otherwise the next bubble would be even more massive and who knows what’s next.
    Take the dot-com popping. Not much job loss, a bit of wealth destroyed, but no big collapse. We solved the problem by lowering all standards even more and moving on to the next bubble. Now it seems as if we have dodged another one (not so sure we’re done yet), markets are coming right up because they know another bubble will come and that the Feds will encourage it. And they know too that when the next correction inevitably comes the Feds will bail their a$$es just like 2003 and 2009.
    All these speculations on stats are very interesting and as valid as most bears’ speculations. If I had a lot of skin in the game I’d be probably in the “containment team”. But I don’t, and I can just say what I think. Ultimately we have to do a reality check. Who was claiming prices wouldn’t go down last year? Who is claiming prices have stopped going down for good today? Same people. Same motives.

  109. Posted by REpornaddict

    “But that gives the result people want to see, so it gets done here of course. All the time.
    A very fluj-esque comment. Why hang out on SS if you don’t like the company? I suppose you are fighting the good fight against all the negativity, right? If everything could be that easy, comic-book-easy with good guys and bad guys…”
    where did I say I didn’t enjoy the company? I think theres lots of interesting opinions on here.
    I just often interpret the data differently to the majority here, that’s all.
    I think its a very herd like mentality to only ‘hang out’ where everyone has the same opinion as yourself.
    Its that what then creates the comic-book-easy good guy/bad guy black and white world that you accuse me of living in.

  110. Posted by NoeValleyJim

    I know, most of the regulars were more restrained in their predictions of disaster.
    Was SF less a metropolis at that time?
    It was less, by the fact that the Bay Area and San Francisco had a smaller population. San Jose is certainly much more of a metropolis now than it was in 1998.
    Hey, Robert did you see the latest BLS info on high tech incomes?
    http://www.svdaily.com/techjobrates.html
    If you really believe that Noe Valley is a commuter suburb of Silicon Valley, you might have to adjust your income model upward, as the average high tech salary is now $144k.
    The BLS report is at:
    http://www.bls.gov/opub/regional_reports/200908_silicon_valley_high_tech.pdf
    Average software publisher salaries are now $164k(!)

  111. Posted by anonn

    It took a year for the bulls to admit prices were down
    Actually, most of the bulls on this website pretty much agreed that it happened pretty quickly for SF, last September.

  112. Posted by Trip

    On the broad topic of housing price indices, First Republic put out its “Prestige Index” today:
    http://www.firstrepublic.com/lend/residential/prestigeindex/sanfrancisco.html
    Who knows what their methodology is (so, no, I’m not representing it as gospel), and it is not SF-specific, but the general trend seems to be in line with “apples” and other indicators in SF. Prices in the higher-end peaked in mid-’07 then started to fall, then really started to come down in late ’08. As I’ve noted many times, the market-juicing efforts out there are not affecting this price range much, although the low rates are providing some support for those who have the down payment and income to qualify. The downward trend is pretty steep, and there is no reason to conclude that it will simply turn in the other direction any time soon if the trillions of dollars being dumped into the system are not doing it.
    Note also that the biggest bubble here was from ’97 to ’01, which is why I’ve been saying that we’re working back through two bubbles in this range and I think the higher-end will ultimately fall the farthest.
    Lastly, I don’t think anyone is pointing to the uptick in the CSI numbers as evidence of price declines — except, of course, the obvious point of the 22% YOY decline! I and others — most eloquently, Robert — are simply noting the problems with drawing any broad conclusions as much of the media is doing from such a limited dataset. Take a look at some web sites from other bubble areas that popped earlier than SF — Sacramento, Vegas, San Diego, Miami. You’ll find plenty of stories of people who bought 12-18 months ago at “bargain” 30% discounts off peak only to now find themselves 20% underwater. I fear today’s SF “bargain” buyers will experience the same thing.

  113. Posted by anonn

    A very fluj-esque comment. Why hang out on SS if you don’t like the company
    Can you not name drop/flame, and instead stick to the paraphrasing you so enjoy?

  114. Posted by Troy

    as the average high tech salary is now $144k.
    That’s one guy making $144K managing 8 guys in India making ~$100K collectively, instead of 9 guys making $500K like it was back in the mid-90s.
    “Vacancies in the market that includes Palo Alto, Santa Clara, San Jose, Sunnyvale and Mountain View climbed to 20 percent from 11.7 percent a year earlier, Studley said Tuesday in a report.”

  115. Posted by The Milkshake of Despair

    “…8 guys in India making ~$100K collectively…”
    more like 8 guys/gals making ~180-250K collectively. The US/IN multiplier stands at about 4-5 these days. GWA is creating boomtowns in the developing markets.

  116. Posted by kthnxybe

    This thread’s actually been very helpful in thinking about what variables to consider when making a decision.
    Thanks, socketsiters!
    A decision to purchase is always a blend of investment and consumption, and the prospects for each are often at odds.
    Exactly, Robert. I am somewhat tempted to get a more expensive rental for a while as a way to make sure that the emotional desire for a nicer home is taken out of our home-buying decision equation. We have been in a rent controlled flat for 17 years, so the difference would be quite a bit, but it may be money well spent in the long run if it keeps me sane enough to keep my eyes open, hehe.
    And Tipster, do you think 796 is high enough to rate a pet?
    ;-)

  117. Posted by rentvsbuy

    Here is good one re: rent vs buy
    http://www.redfin.com/CA/San-Francisco/70-22nd-Ave-94121/home/991286
    http://sfbay.craigslist.org/sfc/apa/1343763638.html
    how to justify buying? don’t get it. I plugged in the following numbers: 20% down, 4% appreciation, 2% rent control, 5% return of investments, mortagage rate 6.5%, property tax 1.25%.

  118. Posted by Shza

    rentvsbuy, the NYTimes rent v. buy gadget says that, plugging in your numbers (and 33% tax rate), buying is (marginally) better than renting after 9 years for that place.
    Though personally, I’ve never had rent raised in any apartment I’ve ever lived in, here in SF or on the east coast. And if you put the rent control down to 0% increases it never makes sense to buy that place instead of renting it.

  119. Posted by Shza

    . . . as the average high tech salary is now $144k.
    That’s one guy making $144K managing 8 guys in India making ~$100K collectively, instead of 9 guys making $500K like it was back in the mid-90s.

    Either way, a $144k earner (or even a dual-income family with the earners making $144k each) can’t even come close to affording the average tiny piece of crap that still gets listed for $1M in Noe. Unless the idea is that the spread is big and there are just a ton of tech workers pulling $400k/year, which seems dubious.

  120. Posted by joh

    how to justify buying? don’t get it. I plugged in the following numbers: 20% down, 4% appreciation, 2% rent control, 5% return of investments, mortagage rate 6.5%, property tax 1.25%.
    Once you insert the value of being able to paint your own walls and install your own lighting fixtures, it’ll all make sense.
    Bottom? Yes, the bottom of a “W.”

  121. Posted by sparky-b

    Shza,
    Why can’t a couple making $288K afford a $5k/month mortgage?

  122. Posted by Trip

    A couple making $288K could afford a $5k/month mortgage (and taxes/insurance) if they had no kids, had no significant student loan or other debt, did not need to save much for retirement, were willing to forgo a lot of other spending such as on vacations, and somehow managed to put together the $200,000+ down payment on that income (likely a gift).
    Of course, the easy loans of the bubble years permitted lots of people to “afford” places like this even if they don’t fit those criteria, at least for a little while until reality catches up.

  123. Posted by sparky-b

    That’s a lot of foregoing with what left of a nice size paycheck, don’t you think?

  124. Posted by Trip

    Not a lot of forgoing at all. Once taxes are taken out of that 288k and assuming the max 401(k) contribution — which is not nearly sufficient if that is all you are saving for retirement — with that size mortgage you’re not looking at living high off the hog in SF. One still (generally) needs a car, food, clothes, life, health, and auto insurance, etc. All costs a lot in SF. If you’re going to spend that much on your housing, you have to cut somewhere else.

  125. Posted by sparky-b

    Not going to waste my time on the tally, but I bet those costs still leave a few K a month discretionary.

  126. Posted by San FronziScheme

    With a 288K salary, you’re left with roughly 7K/month after taxes, mortgage, property taxes, maintenance and 401(k) contributions. You have 2 cars, therefore 1000+/Month. If you have 2 kids that’s a bit tight and there’s not much savings you can do. But living the grand life? Nope. More than 1/2 of your pay goes to the govt and the bank. They are the ones living this grand life you work for.
    Nothing we can do with taxes. We need cops, firemen, schools, roads and such. But paying the banks? Why feed this hog with your hard earned cash? They are not the ones working 80 hours a day for you.
    Borrow as little as you can, don’t overpay for Real Estate, and you’ll be much better off.

  127. Posted by NJ

    sparky-b:
    Student loan debt and having kids can add up quickly:
    In our case, we pay more than $4500 per month for two items alone: student loan repayments and child care for our one child.

  128. Posted by anonn

    Let’s see. Haven’t had one of these in a while. Student loans = every single person who ever considered purchaseing property in San Francisco (funny, don’t we live in California, home of the UC system?), cars (plural) = 1000 dollars, 7K left over = nothing, certainly no vacations or enough for childcare, and blah blah blah. Stop it. 288K easily affords a 5K mortgage despite any amount of pretzels, pretzel logic and/or $2543 a year spent on the mustard said pretzels require.

  129. Posted by sparky-b

    Well,
    NJ I will gladly have my wife watch your child for $4000 a month. That should help you out.

  130. Posted by anon

    Stop it. 288K easily affords a 5K mortgage despite any amount of pretzels, pretzel logic and/or $2543 a year spent on the mustard said pretzels require.
    Spoken like a true realtor. “Yeah, sure, you can easily afford it. Trust me. I don’t need to provide you with any actual numbers. I can just say ‘blah, blah, blah’ to anyone who says it’s too expensive for you.”
    So. Mr. accountable-for-the-stuff-one-writes, give us your hypothetical budget illustrating how “easily” this can be done. Assume 1 child, 1 car, both parents work and earn 288k gross between them. Let’s see who is relying on “pretzel logic.”

  131. Posted by Robert

    Of course the average salary isn’t 144K for tech, at least in the sense that people mean here — first that figure is from 2006, the 2008 data is 132K, but there is some region mismatch in the report and the press release. I don’t have the equivalent of the 144 figure for 2007 on hand.
    Next, “wages” counts total compensation, including employer health care contributions, FICA matches, 401K matches, disability payments, etc. That’s not something you can use to justify a purchase price, so that 132K figure is closer to 110K or so, depending on your employer’s contributions.
    Next those are average, not median wages. Roughly, the data is from the amount that employers in each industry report as spending on labor, together with aggregate tax data, and you divide by the number of people in the same industry. So you have the Bill Gates effect there as well. Median tech salaries are well short of 110K.
    But more importantly, that figure also includes stock option sales, which gooses the data. So in the crash from 2000 to 2001, “wages” fell by 15%, although that was not coming from employees being called into the head office and having their salaries reduced, it was from the previous stock sales goosings dissappearing. It’s a big mistake to assume that income from windfalls is part of a trend, certainly if you are signing up for a 30 year mortgage. Times change and those fantastic profit rates may turn out to be ephemeral.
    That’s why the 2008 data showed a 1.5% fall from 2007, but this is very preliminary data. The stock market crash in late ’08 will be reflected in the 2009 income data, which will show a bigger drop.
    Moreover, if you read the BLS report, it shows substantial employment declines in the 2001-2008 period. In other words, tech still hasn’t recovered to the employment levels of the last peak, on a peak-to-peak basis, and again, the 2009 data will show an increasing contraction.
    About the general bear-baiting rant, NVJ, you seem to think that employer health-care contributions are suppressing median incomes, which is a bit like saying that my salary would be higher if I don’t spend so much on clothes. That’s just on example, no need to get into the confusion about inflation, wages, and ignorance of the fact that markets are discounting mechanisms. It must be a magical dream-like world you envision, with both elevated inflation and elevated asset prices, high nominal wage growth in a period of historically low bond yields, and appreciating house prices in an environment where price to income multiples are double the historical norm. All flowing from the magical “city center” that is Noe Valley, a warm glowing orb that can turn math on its head, and every contrary fact can be knocked down with the ease of a strawman.

  132. Posted by RenterAgain

    > Borrow as little as you can, don’t overpay for Real Estate, and you’ll be much better off.
    I completely agree. But when I see people’s assumptions about expenses, I feel like the last cheap-o in San Francisco. We are right at this HH income. One car suffices, and the car is over 10 years old, so no car payments. Student loans paid off long ago. (It helps to stick to student habits/budget until the loans are paid off.) No kids, which I know changes the picture entirely.
    We could afford the $1M tiny Noe Valley home, but why? Life will be less stressful if we renting and wait until the market calms down.
    And viewlover and newbuyer, I’ve been an owner before, so no hate for people who own––some of my best friends own houses :) But if you are happy with your purchase, and plan to stay put, then why hang out in this blog? Once I buy, I’m going to haunt neighborhood blogs and home improvement blogs instead of this site.

  133. Posted by anonn

    Spoken like a true realtor. “Yeah, sure, you can easily afford it. Trust me. I don’t need to provide you with any actual numbers. I can just say ‘blah, blah, blah’ to anyone who says it’s too expensive for you.”
    So. Mr. accountable-for-the-stuff-one-writes, give us your hypothetical budget illustrating how “easily” this can be done. Assume 1 child, 1 car, both parents work and earn 288k gross between them. Let’s see who is relying on “pretzel logic.”

    See? You’re so full of it. Everyone has mega-bucks student loans. Everyone spends a thousand plus on two cars. Everyone has crazy child care expenses. Everyone can’t do diddly squat with 7K a month left over.
    These things you don’t object to. No, you object to me objecting to them. And you go “Typical realtor this” on me.
    Please. I’ve asked you before. This forum could probably stand another actual opinion occasionally. What you deliver is rote anonymous hate, and it’s precisely nothing.

  134. Posted by NJ

    sparky-b,
    Not interested in paying $4000 for child care, as $4500 was the total for student loans and child care. Sorry if that wasn’t clear.
    The point seems to stand that $288K dual-income with kids and student loans does not leave much left over.

  135. Posted by San FronziScheme

    anonn,
    288K is a nice income and allows you a decent life. But let’s do a bit of math here.
    288K will leave you with ~ 170K after tax/SS deuctions and such and 16K 401(k) contribution. Deduct 60K for mortgage, 20K for property taxes and maintenance. That’s ~90K/Y left or around 7500/month.
    Kids? 1500 each for daycare or school averaged over 18 years.
    1000/month for 2 cars is pretty cheap.
    Food for 4 = 1200/month.
    You’re left with something in the range of 3K/month. That’s enough to have a vacation, some entertainment and stuff. But that’s not the grand life this salary used to buy before the RE bubble. Furthermore, you still have to save for college and making up for the 401(k) minuscule limit in retirement planning.
    Now the biggest thing you can act on is this overbloated mortgage payment. 80% is going to the bank hogs in interest. $4K that produce nothing when you already put 200K in hard earned savings.
    Buying a 500K house instead of a 1M one will save you a bundle: 1/2 the property taxes (500/month), you’ll borrow 300K instead of 800K (assuming same 200K down). That’s at least 2500 in interest saved.
    Basically, you’re adding 3K to your discretionary income.

  136. Posted by NJ

    anonn: I suspect the couples making $288K with a kid in paid child care, ~$30K/yr in maxed-out 401(k), two cars, “mega-bucks” student loans, and a $5K mortgage has not much left over to spend for fun. In fact, I’d say these are many of the Bay Area’s “house poor” that we hear so much about.

  137. Posted by anonn

    OK Fronzi,
    First off, this one: “Kids? 1500 each for daycare or school averaged over 18 years.”
    I can’t say. I have friends who pay a fraction of that, and some who probably pay twice it.
    I myself pay about 300 per month for my car, and it is a nice enough car IMO.
    Food for 4 1200? OK.
    So my off the cuff evaluation creates 400 more per month for auto, and I’ll say 600 more per month for kids. THat’s an extra grand. So by your metric that leaves 4K a month discretionary.
    I never said anything about “living the grand life.” I said “easily affords.”
    And “anon” jumped on my neck. Why?
    Say something, “anon.” Just once or twice every now and then. Too scared? Some of us were being cynical on the Internet when it first started. It’s pretty easy to do.

  138. Posted by Hypothetical DINK budget

    Amount
    Expense
    ?
    Mortgage
    ?
    Property Tax
    150
    Home Insurance
    1000
    Car Payment
    175
    Car Insurance
    100
    Car registration
    150
    Gas/Tolls
    150
    PG&E
    25
    Water
    30
    Garbage
    500
    Entertainment
    500
    Groceries
    100
    Cell Phones
    100
    DirectTV
    50
    DSL
    >
    50
    Home Security System>
    1666
    401k contributions ($30k/yr – $10k tax savings
    4746
    Total

  139. Posted by Hypothetical DINK budget

    It looked so nice and chart-like on the HTML “Try it Yourself” tutorial. Ugh.

  140. Posted by San FronziScheme

    anonn,
    Well, a family who bought a 500K house in Noe in 1998 can barely find a similar house today for 1.2M with very little inflation or wage increase.
    Even if they went to a lesser neighborhood for 1M the discretionary income has been divided by 2.
    I know people in Noe who bought at that time and are in this price range/salary range with 2 kids. They are pretty OK, their kids can do whatever activity they like and there’s no arbitrage between one expense or another.
    Expensive RE only feeds the hogs for no benefit to the owner. Never overpay for a home.

  141. Posted by San FronziScheme

    Oops, my math is wrong. 401(k) contribution would be 32K and not 16K for 2 wage earners. That’s 1333 less for discretionary spending.
    I guess they just have to refi the house to unlock equity.

  142. Posted by anon

    Well, anonn, you’ve now re-defined your “easily afford” to mean: barely afford if you don’t save anything for college, and if you don’t save anything for retirement beyond the paltry 401(k) contribution, and if you don’t incur any significant home repair costs or medical costs, and if someone gives you the down payment, and if you have no substantial student loans, and if you don’t want the option of sending your kid to private school, and if you only have one cheap car that never needs maintenance, and if you discount to zero the risk that one or both incomes will ever be significantly reduced even for a short period.
    In other words, Shza had it exactly right. You can’t afford a $1 million home purchase on 2 X $144k salaries.

  143. Posted by anonn

    Yeah well what you said was not what I said. I said 4K left over after 401K, two nice enough cars, student loans that aren’t astronomical. I also pointed out that we live in California, and the UC system is not as costly as many other areas — this affects both student loans and college tuition saving.
    Your conclusion is your own and you are welcome to it. But “In other words, Shza had it exactly right” ?
    Nope. The answer is actually “different strokes for different strokes” not “pedantic paraphrase exactitude.”

  144. Posted by San FronziScheme

    True that total cost of ownership on one car is more like $800+. You can lower that to around $400 if you buy a cheap second hand. Say 5K purchase and 3 years of life left or $140/month distributed over 36 months. 80/month in insurance, 100 in gas, 60 in repairs and maintenance (if nothing beaks down). You’ll be driving a beater and will have to unload it after 3 years. 300 can only be done when you fully own the car and don’t care about depreciation.

  145. Posted by anonn

    Pretzel logic. You claim that I “discount” the “risk” that someone can lose a job for a period of time?
    Why? Why when the perameters given were 144K X 2?
    I also discounted the risk that a Bernal Heights coyote could eat one of the children, and therefore actually decrease child care costs.
    This is an exercise, buddy. Stop reaching so much in order to criticize me. You are really showing your true colors when you do that. And from here they look like orange shorts with red socks and bright white shoes with blue stripes. Perhaps a white Ronald Reagan t-shirt, as you stroll along Fisherman’s Wharf. Not a good look.
    How about how nearly every bear on here discounts THE FACT that many who buy homes in SF have some amount of non-income based capital? Factor it in to every aspect of the expense model. It’s real.

  146. Posted by anon

    fluj logic: reasonable cushion to protect against job or income loss in the midst of biggest recession in 70 years = “risk that a Bernal Heights coyote could eat one of the children.”
    I’ll take “pretzel logic” over fluj logic anytime.

  147. Posted by anonn

    Nope. Not what I said. I said this was a hypothetical exercise with given figures. Yet somehow you decided to subtract the income of one of those hypothetical figures. Hey, no arguing with that!
    I made a joke to make light of your arbitrary tinkering with a hypothetical. Sorry you didn’t get it. Again, I see your true colors.
    But let’s back up to the 288K gross 170K net thing first, “anon” guy. Explain that. I think those folks are in the 33%, and netting more than 170K. So explain why they are not, OK?
    So again, rotely arguing with me is not doing you any favors. How about you figure out what you are agreeing with first?

  148. Posted by anonn

    Here’s a fun tool for you, “anon”:
    http://www.moneychimp.com/features/tax_brackets.htm
    Plug in 288K, married filing jointly, and see what it do. Sure doesn’t look like 170K! Especially when you factor in interest deductions.
    Some of you need to knock it off with the fake numbers b.s., and some of you definitely need to do some of your own thinking before you criticize others.

  149. Posted by anon

    Anonn, you’re now arguing with me over an assumption that Fronzi posted? Well, let’s see what he wrote: “288K will leave you with ~ 170K after tax/SS deductions and such and 16K 401(k) contribution.”
    Let’s assume your 33% and a 5% state tax.
    So 288k less 2(16k) for 401(k) less $17k for OASDI/Medicare leaves $239k. Less 38% taxes = $148k. But then add back in the interest deduction and, voila, you’re right back at ~$170K! Maybe a bit more, maybe a bit less. Of course, there are lots of other significant life expenses nobody has even mentioned. Health insurance and other medical costs being a big one. Life and disability insurance. I suppose you could just skip all that and hope everything works out.
    And note that ALL these estimates presume that someone simply gave the buyer the $200,000 down payment.
    Fronzi is pretty smart, you know. And I’m no slouch. Rotely arguing with him, or me for that matter, is not doing you any favor.

  150. Posted by San FronziScheme

    Everyone takes a deep breath.
    I threw the 170K earlier. I’ll show why it sticks. Here is my original quote.
    288K will leave you with ~ 170K after tax/SS deuctions and such and 16K 401(k) contribution.
    Tax, meaning Federal AND State.
    Plus SS contribution
    Plus 401(k) contributions (32 or 33K)
    Taxes(F+S), SS, that’s at least 35% or more than 100K. Obviously, someone never got to that pay grade otherwise he’d know about the 2-week bleeding us wage earners are going through.
    With 401(k) pre tax, we’re down to around 160K.
    Therefore, that was 160K left as a bottom line on your paycheck. Not 170K as previously stated. I rest my case.

  151. Posted by anonn

    Oh, so we’re taking out 32K a year in 401K contributions? And somehow that’s equivalent to “no planning for the future/college/retirement/savings” ?

  152. Posted by San FronziScheme

    1 – 401(k) is not for college. That’s a 529 plan and I advise anyone with kids to start one whenever they can. If you draw into your 401(k) to pay for your kid’s college, you’re not doing necessarily the smartest thing. Plus it shows you’re bad at budgeting, otherwise why dip into your nestegg?
    2 – 32K is about right for a family making 150K, but that’s far from sufficient for anyone in a higher bracket. Mark my words, the odds are against the post-boomer generation when it comes to retirement and Social Security. I worked in retirement planning/liife insurance in a former life. Less rich educated kids + more poor uneducated kids = no-one to fund your lifestyle in 2030.

  153. Posted by RenterAgain

    Wow, this is getting kind of silly.
    Anonn, I hope that a couple who makes $288K is fully investing in their 401K (or putting aside money pre-tax in some other way). And state tax rate in CA at that income is 9.3%, plus AMT.
    Anon, I’d hope DINKS with that income could save up the down payment over time (perhaps by paying cheap rent). But of course it helps to have had a windfall–– a bonus, a parental gift, stock options, or perhaps the profit from selling a previous home.
    Anyhow, several people have made it clear that with their monthly expenses, a $288K salary wouldn’t support buying a $1M house. For me, it’s more the expectation that housing prices will continue to decline, and the worry that our hh income will stagnate or decline in the next few years.
    It just doesn’t make sense to stretch to buy a house right now. The houses that are selling for $1M right now are not worth $1M to me.

  154. Posted by sparky-b

    Well, I still think that the $1M house is very affordable to people making 288K. You can add the numbers up however you want to but there is still 30K left over every year. Speculate all you want but I have had an 800K mortgage, am married filing jointly, 2 kids, went to an expensive school, have 2 cars (more until recently), have health/life/etc. insurance, comcast, 401, 529, took the kids to disneyland, went to see grandma, went on a family vacation, went away with the wife, have the kids in gymnastic/violin/ballet/swim lessons/soccer. We still have some money in the bank.

  155. Posted by San FronziScheme

    You’d have more if you were a renter!

  156. Posted by anonn

    Also, curious why you took your “absolutely doesn’t count as savings or income 32K 401K allotment” and other sundry fees, got 148K, and then tacked a paltry 22K back on in order to get 170? Do the math for a 1M mortgage deduction, OK? At 5.5%? It begins at 55K and since each earner is only 44K over 100K, it is rather more than 22K. Secondly, there’s a standard $7200 joint filing deduction. Third, there’s the property tax deduction. Do you have a home office that you ever use? (Most people do these days.) There’s a fourth one.
    Come on. Since you guys are bending over backwards to find every trumped up number, at least take the actual deductions into account. You used to work in retirement/life planning in a former life? Really? I highly doubt it. If that is true, then why are you skipping some relevant deduction facts? I’m calling b.s. on that one.
    http://www.nolo.com/legal-encyclopedia/article-29693.html

  157. Posted by anon

    Anonn, let me explain something to you about tax deductions using your numbers. If you are able to deduct $55,000 in mortgage interest, that does not mean you pay $55,000 less in taxes. You have to apply the amount deducted to your marginal tax rate. Hence the $20,000 figure. You’re confusing tax deduction with tax credit.

  158. Posted by anonn

    I understand that, and that is why I said, “It begins at 55K and since each earner … it is rather more thant 22K.” After 100K earnings the number the marginal tax rate is factored in. However each earner is only 44K over that 100K. It’s more than 22K, and then factor in the — very standard — other deductions I submitted.
    So I see you again not even bothering to really read and digest what is said. Explain something to me? That will be the day.

  159. Posted by anon

    “After 100K earnings the number the marginal tax rate is factored in. However each earner is only 44K over that 100K. It’s more than 22K, and then factor in the — very standard — other deductions I submitted.”
    Brilliant clarity there!

  160. Posted by San FronziScheme

    anonn, you’re confusing my back of the envelope calculation with anon’s.
    And yes, I used to work in Life Insurance for a British company called Commercial Union that became Aviva a few years ago. I did a bit of investment software, tax optimization and such. Believe me if you can.
    You’re calling BS all the time for no reason. Think again: I did my RE investments precisely when I was working for this company later bought by C.U. The numbers were there: all the smart money was looking for the best way to prepare for what’s next. Some of the clients we had were worth millions in net worth but only paying minimal taxes. A few were actual “rentiers” sipping expressos on the Champs when the rest of us were toiling our 9-to-8 day in day out. There was old money and new money. RE, traders, commerce professionals.
    I was in a group of 3 guys talking about how to get from here to there but it was time to act. It was 1994 and we figured Real Estate would be a good way to start for us mere mortals. We crunched some numbers and were thrilled to see a price/annual rent around 10 in that market. That was a pretty good start even with 20% down mandatory and 8.4%/15Y mortgages! Each of us bought one place each that year. One at an auction and the two others (including moi) in the open market. That was the beginning of my RE phase. I was the only one to go on buying as the others were stuck into a new marriage and a divorce. I went on buying one or two places a year after a boost in my income in 1997 and a major second RE local dip. With time, my bargain-picking skills got better.
    And my Realtor-BS-o-meter became next to none.
    I’ve said way more than necessary. Believe me if you want.

  161. Posted by NoeValleyJim

    [Editor’s Note: While seven percent might not be an unreasonable expectation for long-term real estate gains in San Francisco, history and analysis suggests it’s been closer to four. And as such, six might not be so cautious.]
    Is this real or nominal 4.2%? I am guessing that this must be real. 1.042^57 = 10.4, so by if was a nominal number, then homes today would about 10X what they cost in 1949. And they are much more than that. Add in inflation of 2.5 percent and you get 7.7 percent, which is about what I stated. 6 percent nominal is pretty conservative.
    . All flowing from the magical “city center” that is Noe Valley, a warm glowing orb that can turn math on its head, and every contrary fact can be knocked down with the ease of a strawman.
    Talk about your straw men!

  162. Posted by sparky-b

    “You’d have more if you were a renter!”
    Here is a list of things I had more of as a renter;
    more owner move-in evictions
    more denial of lease because of dog size
    more rent increases
    more owner filling up the garage with his stuff
    more owner changing the lock to the laundry room
    more owner moving into basement room
    more upstair neighbors overflowing our drains
    more moving trucks
    more drafty windows
    more broken appliances
    more court

  163. Posted by anonn

    Brilliant clarity there
    Look it up. Then come back and talk. Or just go away and don’t come back until you have a point of your own. For once.

  164. Posted by anonn

    Fronzi,
    If your skills in financial planning are as you say, why the pointed avoidance of numerous typical homeowner deductions? (I haven’t even mentioned two dependents, another obvious one.) Why paint 401K as other than savings and/or income itself?

  165. Posted by San FronziScheme

    401(k) is savings, I never denied that. But they are necessary savings as the SSA will probably croak on us in our lifetime. Anyone who’s not maxing out his 401(k) up to whatever he can will maybe suffer the consequences one day, just like someone overpaying for RE is bound to pay the price sooner or later.
    Again, 32K for 288K of income is not enough savings for retirement. That’s the point.
    As for deductions, I omitted some on both sides of the equation. I also omitted a lot of other payroll deductions like unemployment, health, blah blah blah. I also omitted utility payments on a house, and garbage, and so on.
    If I had the time and if, a big IF I thought this was worth it I would kindly do it, but obviously I would only do it for you, therefore, not worth the time.
    I already gave you too much attention for today.

  166. Posted by Mud

    @ Marco –
    Looks like “days of mass layoffs are behind us” isn’t quite right…
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/08/27/BU6919EL3P.DTL&tsp=1
    4,500 layoffs for Fremont.

  167. Posted by anonn

    You omitted huge deductions, you called it 22K, and you gloated, saying “I rest my case.” Gee. Sorry that begged more than a few questions! (The deductions in this test case are probably twice that, easily.) But I’m tired of this one too.

  168. Posted by San FronziScheme

    more owner move-in evictions
    Not gonna happen. Landlord not interested in my unit.
    more denial of lease because of dog size
    No dog
    more rent increases
    Rent controlled, and landlord will keep my rent stable this year as is common this year…
    more owner filling up the garage with his stuff
    Nope. Don’t see that.
    more owner changing the lock to the laundry room
    Wow. That’s far fetched.
    more owner moving into basement room
    No livable basement
    more upstair neighbors overflowing our drains
    Different piping. Plus that would be the same thing with TICs or condos.
    more moving trucks
    Rent control = less moving trucks
    Flipping condos = more moving trucks + a remodel each and every time…
    more drafty windows
    Nope. Very good, tight windows.
    more broken appliances
    Nope. Landlord want his rent, therefore he fixes everything right away.
    more court
    ??? On the contrary, owners are much more likely to have legal issues, like complaints (the roots of your tree went into my pipes!). The owner next door has been struggling with a clogged pipe for weeks. Workers are there every week end and they’ll probably have to cut through the sidewalk. No renter will ever have to pay for that.

  169. Posted by San FronziScheme

    22K?
    Again, you are mistaking me with anon.

  170. Posted by sparky-b

    I wasn’t taking a stab at things that might happen to you, I was listing things that actually happened to me when I was renting.

  171. Posted by NoeValleyJim

    Don’t believe the boogiemen who claim that SS is going to croak on us. It is in very good shape, probably will not even require any adjustments in its present form whatsoever. Anyone with financial acumen who took a serious look at the various CBO reports would know that. In the very worst scenario, benefits would have to drop 15% from projected benefits, which are already expected to grow with income, not inflation (about a percent higher). So even in the worst case, retirees in 50 years can expect an inflation adjusted payout larger than what today’s retirees get.
    With even a modest adjustment, say to economic growth rates equal to the nations post-war rates, SS will not have to adjust benefits down or push out retirement rates.
    The real problem is soaring medical costs, which is going to bust medicare if nothing is done about it. That is why Obamacare is so important, it will help reign in costs. Admittedly, it is an insufficient step by itself, but the insurance companies are the biggest parasites in the system and need to be curbed first. We will have to find a way to slow soaring drug and hospital costs as well.
    So if you want gold-plated medical care in your retirement, you will need to save away. Normal people can save 16k/yr for life and have plenty.
    16k saved for 40 years at a 8% yearly nominal gain equals $6.9M nominal or $2M real. You should be able to spend 4% of your retirement amount down with no real risk of outliving your money, so that is $80k in income per person. $160k (in 2009 dollars) for a retired couple with their house paid off is quite a good life, much better than the one trying to live on $288k/yr with a mortgage and two kids.

  172. Posted by anonn

    Oh yeah. You called it 148 + 12 = 160, upon further inspection. THEN you rested your case. Well, that begged the same questions.

  173. Posted by San FronziScheme

    148? Where? You are mixing 2 different people.

  174. Posted by NoeValleyJim

    Does anyone know what average home prices in San Francisco were in 1949 or 1950? I can’t find it.
    http://www.census.gov/hhes/www/housing/census/historic/values.html
    This has inflation adjusted home prices by state. They have California homes going up by 370% from 1950 to 2000 in real values. This comes out to 2.7% a year.
    National values are up 270% in the same time, or 2.0% a year. This is quite close to the Money 2.0 quote of 2.3% and since home prices went up more from 2000-2007 than trend, the values quoted in the article are no doubt real gains.
    According to BLS the CPI-U inflation from 1949 to 2007 was 3.8%/yr, so you can add those to the real values and get nominal gains.
    Now there is the huge caveat that homes in 2000 are much bigger, probably twice as big, as 1950 homes. I don’t know how to adjust for that.
    So while the “average” home went up in value in CA in nominal dollars at about 6.5%/yr, it also grew in size at about 1%/yr.

  175. Posted by anonn

    Oh, OK. 160. You said it @ 1:29 p.m. Same difference.

  176. Posted by San FronziScheme

    NVJ,
    Great find! Interesting data about the long term evolution of SF prices. One issue: we’re talking median, not averages, right?
    I always found that $/sf were much more relevant than medians or averages for the same reason you quoted. Houses are different. Of course there’s footage and footage (tear down vs new for instance).
    SF is definitely rising in the long term compared to inflation. But that doesn’t explain an almost tripling in 10 years. Was it an overdue catch-up? Or was it an overbid situation where people have factored in many of the next 30 years gains?

  177. Posted by NoeValleyJim

    SFS, I agree on the tripling part, that is why I expect prices to increase at less than trend for a while, probably a long while in SF.

  178. Posted by San FronziScheme

    NVJ,
    Yup, that’s one option and it takes 12 years for a 6%/Y increase to reach 200%, assuming regular inflation will not be negative… Let’s also see how long recent owners can hold on without having to hit the “sell” button. High unemployment and less credit might point to option #2: ongoing correction to median and maybe overshoot if the economy doesn’t recover fast enough. So many unknowns, which makes the whole chebang really fascinating to watch.

  179. Posted by EBGuy

    National values are up 270% in the same time, or 2.0% a year.
    This contradicts the Shiller graph of national home prices I’ve been carrying around in my wallet for the past couple of years. At best, homes are an inflationary hedge with very slight real gains (much less than 1%). As they say, a picture is worth a thousand words. Where’s Robert? Maybe he can tell us why Shiller and the US Census Bureau got such different results.

  180. Posted by Robert

    EBGuy,
    The difference between census and C-S is exactly changes in quality and count.
    If you start out in a small dusty town where land is a dollar an acre, then a wooden shed appreciates a whole lot if that area urbanizes. Now, at some point the area becomes built up, and people move out to urbanize new areas. Here is a list of some of the fastest and slowest growing states, with the growth factor from 1940 to 2000. (In some cases, only 1950 data was available for the base):
    Fastest Appreciating States:
    New Mexico, 15.9
    Arizona, 8.3
    Colorado, 7.6
    Washington, 6.9
    Nevada, 6.9
    Alaska, 6.8
    Idaho, 6.4
    Oregon, 6.2
    Utah, 6.1
    Montana, 5.8
    Louisiana, 5.8
    California, 5.8
    North Carolina, 5.8
    Mississipi 5.8
    Georgia, 5.5
    Slowest Appreciating States:
    D.C, 2.0
    Pennsylvania, 2.9
    Ohio, 2.9
    West Virginia, 3.0
    Delaware, 3.0
    New York, 3.3
    Rhode Island, 3.3
    Wisconsin 3.3
    Connecticut, 3.5
    So the 13 colonies followed by the rust belt rest belt are at the bottom and the West followed by the South are at the top.
    As you would expect if you were a value investor, the outperformers tend to be the poorest and/or emptiest states in 1940. Not every cheap area will outperform, but if you are looking for a future outperformer, then you should pick the poor/empty state that has the best prospects for a lot of migration.
    The exact same thing is true for income growth rates. No amount of high productivity can overcome starting from a low base, in terms of appreciation, whereas mature, developed areas always slow down to at or below the national average, to be taken over by states where cost of living/land are cheaper.
    Going to the original point, it would be ludicrous to just extrapolate the growth of New Mexico or california forward — you need to understand the dynamics of growth before doing that. But, that is the topic of another post :)
    In any case, this is a great example of the types of aggregation issues that one encounters when you try to combine prices of different properties into a single index, be that a median or a C-S type study.

  181. Posted by San FronziScheme

    EBGuy,
    Robert again gives us much to think about. My humble 2-cents:
    In 1940 SF still had mucho land left to develop and there was a lot of value to create. The Sunset for instance. The $10 Carville “homes” were replaced with the mass individual housing that we now see.
    Another comment:
    If you look at NVJ’s link it starts in 1940. Looking at CS’s graph you’ll notice 1940 was in the range of the post-depression lows. Basically 1940-2000 looks a bit like comparing a trough to a peak but over a very long term. Overall the differences do iron out and the yearly increases are end up swinging around a trend. I haven’t done the math but overall the change in reference (1800s vs 1940) can change the math by a fraction of one percent.
    One last comment: building out of nowhere doesn’t always work. Think California City, this former LA wannabe created out of dust and rock 40+ years ago. It got some sort of froth during the housing bubble (entry point was pretty low), but now it’s back into the cr@pper with non-foreclosure houses starting from 50K or less than building cost. Which means land has gone negative!

  182. Posted by REpornaddict

    SFS,
    I worked to Aviva too..! I came in to it from theGeneral Accident side, when they merged wth CU – actuarial side – so was based in York,
    Then there was another merger with NU as I recall in 99 but I luckily made my escape just prior to that..

  183. Posted by San FronziScheme

    REpornaddict, plenty of smart people in actuariat.
    I was in a very profitable French company (Abeille Vie/AFER) in Paris bought by CU and merged with Epargne De France in 96-97.
    AV/AFER made a bundle even during the early 90s downturn, but Epargne was massively into REITs right into the French RE collapse of 1992-1997. The “fun” fact with Epargne de France product is that they were distributing an annuity whatever the price of the share (no risk as RE always goes up!!!). I think the clients received a minimum of 6 or 7% of the initial invested money which was pretty common at the time. I don’t recall the exact numbers, but that’s the order of magnitude. Any other profit over 7% was pure gravy and the late-80s model was around 10% appreciation + 3% property management proceeds. Say you invest 100EUR, EdF will give you 7EUR whether the share is worth 120EUR or 80EUR.
    Now came the RE collapse of Paris (50% local drops). This annuity model had a compounding effect during the downturn. Shares were losing 20, 30, 40% and annuities were still sucking out the 7EUR year after year. It went Kaboom in 1996-1997 and many investors lost most of their nesteggs. There were a lot of moms and pops investors, that was really sad.
    EdF was merged with AV/AFER mostly because of its great balance sheet and the fact that AFER was the gold standard in French annuity life insurance investment. Big volumes, big profits and a major player. Their losses + our profits made things balance out OK and helped CU’s French section cruise through the crisis.
    I took off to greener pastures in 97 (banking software). During my 5 years there I learned a few good lessons:
    1 – Do not look in the rear view mirror to see what will happen. Things always surprise you.
    2 – If your plan is designed to work even during reasonable downturns then you have found true value.
    3 – Stick to fundamentals. Things that are too complex often have many parameters out of your control.
    High leverage, low PE, funky financing, expected appreciation: high chance it will fail due to too many unknowns.

  184. Posted by anonn

    Cities are more relevant to this website than states.

  185. Posted by EBGuy

    And neighborhoods, let’s not forget those. NVJ, I hope you don’t live near the defaulting doctor at 111 Hoffman. He got suckered into buying August of 2005 for $2.1 million. Never fear, though, he managed to refi for $1.98 million (thank you WaMu) in 2007. I guess City living wasn’t all that it’s cracked up to be. Scheduled to hit the auction block Sept.16 with an unpaid balance of $2,122,952. Kudos to the doc for making the best of a bad situation…

  186. Posted by San FronziScheme

    Funny, 111 Hoffman is the same block as 815 Alvarado.
    Not good for the comps…

  187. Posted by anonn

    The Hoffman properti is on the auction block for more than the initial purchase price? That’s odd.

  188. Posted by anonn

    The Alvarado property has some issues. Have you viewed it? Do you ever view anything you comment on, Fronzi?
    “Not good for comps” — why?

  189. Posted by chuckie

    Foreclosures on the block surely couldn’t be good for comps.

  190. Posted by EBGuy

    That’s odd.
    I know, it’s very strange as no one in SF took out I/O or Option ARMs. Especially not doctors…
    FWIW, they also can add in late fees, penalty fees, foreclosure fees, and attorney’s fees to the unpaid balance amount.

  191. Posted by Trip

    Well, regardless if the loan type, he could simply have not made any payment and interest has thus accrued. Zero down and cash-out refis were commonplace. PropertyShark is filled with NTSs that show more owed on the outstanding loan than the purchase price.

  192. Posted by tipster

    Does anyone know what happened to LMRiM? He just suddenly stopped posting.
    I think we need to accept what many of us have suspected for a long time: LMRiM = Ted Kennedy.

  193. Posted by anonn

    That’s odd.
    I know, it’s very strange as no one in SF took out I/O or Option ARMs. Especially not doctors…
    FWIW, they also can add in late fees, penalty fees, foreclosure fees, and attorney’s fees to the unpaid balance amount.

    Sure man. Whatever you say. Foreclosure auctions for more than the price paid means the neighborhood is imploding.
    Ted Kennedy? Try Glenn Beck. He’s catching a little heat right now so he needs to lay low.

  194. Posted by EBGuy

    Hey, don’t shoot the messenger (even if he is cranky and sarcastic at times). For the record, the $1.98 million mortgage on 111 Hoffman shows up as “variable” on PropertyShark. Noe is showing 38 homes in some state of foreclosure (NODs, NOTS, bank owned) to 57 homes for sale. Still Real SF, but getting closer to the brink…

  195. Posted by San FronziScheme

    “Not good for comps” — why?
    Very good point. Foreclosures are in no way a sign of weakness. Just a one-off event that has no meaning whatsoever.
    Plus, it’s the asking price, not the final. Just like this Alvarado property.
    We’ll have to see if it sells for more or less than asking. 2 weeks. I can’t wait! Maybe the bank will cut the asking before the auction to attract more action (like the 23rd street property). Maybe there will be a bidding war and it will sell for close to 3M? Who knows…
    fwiw, I used to live on that block…

  196. Posted by anonn

    I’m not shooting anybody. I’m shooting from the hip, but without a particular target. Simply wondering why an auction for more than it sold for in the first place would create the typical socketsite “Oh boy this can’t be good for Noe” comments. Bad for comps, etc. Why? What part of more than 2005 is so hard to understand. LOL.

  197. Posted by San FronziScheme

    More than 2005?
    Asking price.
    There were many properties presented at auction these past 3 years that were priced at the loan balance amount > last sale. Most went back straight to the bank. LOL.

  198. Posted by anonn

    Yeah well it’s pretty much the opposite IMO. The guy paid 250K over asking during a peak year and apparently didn’t do anything to the property. Now you have THE BANK valuing it at 2.1 and change. And yet you’re trying to call it a bad sign for the neighborhood. LOL. What a reach.

  199. Posted by anonn

    And I’m quite sure you kept quite abreast of them all, Fronzi.

  200. Posted by chuckie

    Bank is just taking it for the amount owed… no valuing involved.

  201. Posted by anonn

    You’ve never been to a foreclosure auction, have you Fronzi? Why the pathological need to speak outside of your knowledge base? Still laughing about yesterday’s 160K for two homeowners making 144K each nonsense.

  202. Posted by anonn

    Yeah that’s what it looks like Chuckie, but that’s not the whole story always. Regardless, jumping the gun and calling this a bad comp for the ‘hood is totally disingenuous. As is it’s a positive apple. Dude doesn’t know what will occur. He’s full of crap as usual.

  203. Posted by Trip

    “LMRiM – Ted Kennedy”
    Hee hee.
    Remember when Chris Daly was posting on here under a pseudonym a few weeks back defending . . . Chris Daly? Unlike that moron, at least Ted had the smarts and wit to create a whole new, convincing persona as LMRiM (LMRiHyannis Port?). Man, he had me going. RIP, buddy, and don’t forget to post from The Great Beyond once in a while so I don’t have to go through total withdrawal.

  204. Posted by NoeValleyJim

    Again, 32K for 288K of income is not enough savings for retirement. That’s the point.
    32k a year invested for 40 years at a 5% real rate of return yields $4M, which is plenty for a family making $288k/yr to retire on, especially if their home is paid off. 5% is a pretty safe rate of return to expect to get, the stock market has been more like 7% over the long run.

  205. Posted by Robert

    32k a year invested for 40 years at a 5% real rate of return yields $4M
    32K*(1.05)^40 = 225K real dollars 40 years from now.
    But you’re not going to get a 5% real return for 40 years — not reliably, and 40 years is a long enough time to be caught in a few crashes. Warren Buffet had some very sharp and prescient words for pension funds that were assuming high yields.
    Now that the recession is/soon will be over, it might be useful to look at bond yields. The long bond is yielding 4.5%, which should indicate what the financial markets think about future inflation and growth rates, at least for the next 30 years :)

  206. Posted by NoeValleyJim

    I assume you know that I said “$32k a year” and not a one time $32k investment.
    Look at some other bond rates as well. CA GO Muni 30 year rates are 7% tax free. So if inflation is 3%, you can lock in a 4% rate of real return right there. If inflation is going to be lower, like you expect, this will be an even higher rate of return.
    I haven’t looked at high quality corporates in a while, but you can bet they are paying even better.
    40 years is long enough to be caught in a few crashes, as well as a few booms, that is the whole point. Somehow the US economy has grown pretty well over any 40 year period throughout its entire history. Now this is all going to come to a screeching halt?
    Probably not.

  207. Posted by NoeValleyJim

    Sorry, I had not looked at CA GO Munis in a while, and it looks like they are back down to a bit over 5%. It looks like the great deals are now over.
    General inflation expectations are way down as well. TIPS yields are priced so that they beat treasuries if inflation is greater than 1.78% over the next ten years. This seems like a good buy to me as well, but I have so far avoided TIPS.

  208. Posted by diemos

    One cent, deposited in an account with 5% interest 2000 years ago would be worth:
    .01*(1.05)^2000 = $23,910,000,000,000,000,000,000,000,000,000,000,000,000
    today, or if converted into gold at $1000/Oz, a sphere of gold 21 million kilometers in radius or about 30 times the size of the sun.
    You can only get exponential growth for brief periods until something (deflation, inflation, bank failure) resets the values back to a lower level in real terms.
    For the past hundred or so years we’ve had exponentially increasing fossil fuel consumption which means exponentially increasing numbers of e-slaves to create wealth for us. Exponential growth and the returns it generates have only worked because the resources were there to allow exponential growth. Once they top out the economic model of endless investment returns will end.

  209. Posted by Robert

    The U.S. economy has done well, NVJ, but numbers matter here, and 5% real return is too high, IMO.
    Perhaps the difference is in our definitions of what is a reasonable rate of return that the average investor can expect.
    My definition is that I don’t need to outsmart anyone else. In other words, I don’t need to worry about being in a minority or seeing things that others don’t. Of course, each of us thinks that we can do better than this, and that’s fine, but we all can’t, and so I take the maximum return I expect an average person to get to be the potential real GDP growth rate. It’s sort of like saying that we can’t all be above average — That’s why I think 5% is too high a real rate of return, under pretty much any assumption about inflation or GDP growth.
    And this potential, as estimated by the commerce department, has been falling, reliably, over the last 60 years. It is now hovering below 2.5% — the lowest rate of potential 10 year forward GDP growth ever estimated. This is why I am forecasting stagnant growth, and low inflation — that is the consensus of both the administration and the bond markets.
    Apart from smart trading, you cannot expect to get real returns greater than real potential output. For this reason, pension funds are going broke, because they are assuming nominal returns of 8% when there is no way that that could happen. That is 2% too high, even assuming 6% potential output. Those funds are the market and by trading against each other, they cannot assume that they will each get an above average slice of output — and neither should some random investor.

  210. Posted by Trip

    “32k a year invested for 40 years”
    Assuming a couple of 25-year-olds making that $288k — who would have 40 years to save — is a bit of a stretch. I agree that the 1/10 of 1% of 25-year-old couples making that sort of income can go ahead and buy that expensive house as there is a pretty good chance they will see income gains over time.
    The retirement numbers change considerably if you consider a more realistic 35- to 45-year old couple at that income level with 20-30 years to save for retirement. Incomes tend not to rise that significantly after that age, so one should certainly not assume it in retirement planning in most cases.
    Very few people in this country save sufficiently for retirement to maintain anything close to their current and expected lifestyle. $32k/year for a couple of $144k earners is not going to cut it without wildly optimistic assumptions.

  211. Posted by diemos

    “As is it’s a positive apple.”
    The one thing you can definitively conclude from a foreclosure is that no one is willing to pay more for it than what is owed. How much less someone is willing to pay will only be determined once the bank sells it.

  212. Posted by Chuckling Thousandaire Renter in the Castro

    “Never fear, though, he managed to refi for $1.98 million (thank you WaMu) in 2007.”
    In honor of our fallen comrade I guess I’ll have to be the one to say it.
    Hats off to this savvy investor who managed to stick the bank and the taxpayers with those losses. Everyone needs to be working the system for everything they can get.

  213. Posted by diemos

    “I feel like the last cheap-o in San Francisco.”
    When I arrived in SF for my first real job in 99 I said to myself, “Ok, I’m going to be working for 30 years and retired for 30 years so I’ll need to spend half of what I take home and save the other half.”
    It’s amazing how much money you need to save to retire if you don’t count on the miracle of compound interest to save you. On the other hand I do have ten years of living expenses lying around in various accounts.

  214. Posted by San FronziScheme

    THE BANK valuing it at 2.1 and change
    Actually, $2,122,952.
    With an estimate accurate to the dollar, they probably had their super-computers crunching numbers all month. These guys are THAT good at estimates just like they are good at risk assessment, ROTFLMAO.

  215. Posted by San FronziScheme

    NVJ,
    Robert took the words away from my mouth as always. We are subject to short and medium term fluctuations that can affect the outcome depending on where we are in life.
    Say 10 of your golden years are during a very depressed market, you’ll have to draw down cash out of a depleted nestegg for your living expenses (good dollars extracted from weak investments), compounding the problem and jeopardizing the potential recovery.
    I described earlier this phenomenon when talking about the Epargne de France 1996-1997 debacle that I saw firsthand (with ruined investors demonstrating in front of our windows in Levallois).
    The math was very easy. Any junior actuary with brains would have said this product was a bad idea, just like any guy with a 1/2 day training in Excel can realize SF RE is not a good rental investment. But greed is a powerful inhibitor.

  216. Posted by NoeValleyJim

    Have you read _Stocks_For_The_Long_Run_ by Siegel? He does a pretty thorough analysis of the data and shows that stocks have returned 6.5-7% real returns over a very long period, from 1871 to today and even over a 200 year period, with more fragmentary data.
    Now there have certainly been very long periods of under performance, similar to our own last decade.
    A simple economic model for stock market return should have stocks returning their dividend yield plus the growth of the overall economy. Right now that would be 2.7% + 2.5% = 5.2%. Note that this is quite a bit lower than over the last 200 years.
    I have thought quite a bit as to how this can come about. How can the value of the stock market grow faster than the overall economy? I think it is due to three factors:
    1) The tendency of economic growth and particularly profitability to move to larger corporations. A larger percentage of overall economic growth has moved out of the hand of privately held firms and into public companies.
    2) A diminishing share of profits has gone to labor, conversely capital has garnered a larger and larger share.
    3) The S&P 500 does not only reflect economic activity in the United States, most large companies are multinationals.
    I really don’t see any of these reversing themselves any time soon, though perhaps #1 and #2 will slow down, #3 should increase.
    US investors are not limited to only investing in the US economy either. If you are really concerned about slow growth in the US economy, you can choose to invest in faster growing economies overseas. This is what I am doing personally, with 1/2 of my retirement dollars overseas, mostly in emerging markets, and the 1/2 in the US in large dividend payers, who are themselves mostly multinationals.
    I have not read Buffet’s writings on retirement funds, can you point me to it? I am interested in what he has to say.

  217. Posted by Trip

    On the original topic of this thread, the NYT had a story this morning discussing the real (inflation-adjusted) return on RE in various MSAs since 2001 using CSI numbers:
    http://www.nytimes.com/2009/08/29/business/economy/29charts.html?_r=1&ref=business
    Yay, SF beat Detroit! Unfortunately, that’s all we beat. Yes, this is the MSA, and it is not fair to start at 2001 because SF was already at the near apex of the prior bubble that other areas did not experience to the same degree. But this illustrates how RE is not always the inflation hedge we assume. RE as a home may well make sense. As an investment, the calculus is quite different. SF prices are still based on wild assumptions of future gains, which is why I see no reason to think the current 2-plus-year decline will not continue.

  218. Posted by NoeValleyJim

    Our mythical $288k/yr couple actually has a bunch of expenses now that they will not in retirement:
    $60k/yr mortgage
    $30k/yr daycare or schooling
    $10k/yr student loans
    $32k/yr retirement savings.
    Now it is possible that they will have kids in college in their early retirement years, so this would have to be adjusted accordingly, but instead of needing $288k they should need much less, $288k – 90k pretax expenses = 188k * 2/3 taxable income rate = 122k – 40k post tax expense = 88k in post tax income, to maintain the same standard of living.
    So they don’t even need $4M, it is more like $3M.
    It is true that if you are 45 and have not yet saved a dime for retirement yet, that only $16k/yr won’t do. But I wanted to put the canard to bed that simply maxing out your 401k for your entire working life would not be enough.
    Of course if you assume all kinds of absurdly pessimistic assumptions, like the idea that you will never make any money investing and that the world will run out of fossil fuel and have an economic collapse, then it is pretty hard to save for retirement. Impossible, in fact.
    As you approach retirement, you should move into more conservative investments, which should ameliorate most of the risk of entering during an under performing period. This can all be modeled with a Monte Carlo simulator and that I what I will do as I get closer. Right now I am still in my early 40s, so don’t really need to do that just yet. If worst comes to worst you can just cut back on your lifestyle. That is what reasonable people do when their expenses outrun their income.
    So I am curious diemos, you are the biggest proponent of economic collapse, what are you doing with the 50% of your income that you save every year? You must have invested it in more than CDs to have grown it to 10X expenses.

  219. Posted by anonn

    With an estimate accurate to the dollar, they probably had their super-computers crunching numbers all month. These guys are THAT good at estimates just like they are good at risk assessment, ROTFLMAO
    Really? In light of “This bank valuation of the property is terrible for the neighborhood” ?
    No. That was nothing.
    Hey buddy, distrust away. But keep it to yourself unless it is something. You don’t always have to talk.

  220. Posted by NoeValleyJim

    As an aside, I am personally saving much more than $16k/yr, even though I have been maxing out my 401k since I graduated college 16 years ago.
    I am hoping to retire early though and I am keenly aware that the two ways to do that are:
    1) Save more, so that you have a bigger nest egg
    2) Spend less, so that your needs in retirement are low
    I think #2 is the more important of the two in fact.
    But we are very frugal, we saved over 1/3 of our take home pay in 2008. That was a very good year for us though income wise.

  221. Posted by NoeValleyJim

    How can the value of the stock market grow faster than the overall economy?
    I stated this poorly, I think I should clarify. The overall value of the stock market itself should grow more or less in proportion to the overall economy. But it does this, plus throws off a dividend, which is kind of peculiar. The value of an investment in the stock market grows faster than the overall economy. Why exactly is this?
    I have other thoughts about this, but I am reduced to quoting myself right now, so I will let others post for a while and go enjoy our rare hot day.

  222. Posted by diemos

    “what are you doing with the 50% of your income that you save every year?”
    So far it’s all been CDs, gold and in the 401K bonds. Only the gold has been a big win. Soon
    I will convert some of my cash into a modest dwelling, probably out in Livermore in 2010 or 11 to prepay some housing expenses. I’m still leaning towards building something myself that’s passively heated and cooled with some solar and rainwater catchment. And I need to start yelling at the 401K guys to give me a cash equivalent option before the bonds start getting their haircut. We’ll see how things go next year.
    I’ve always remembered the financial advice from Dickens:
    Income of pound 20, expenses of pound 19, joy!
    Income of pound 20, expenses of pound 21, disaster!

  223. Posted by Robert

    NVJ,
    When $X of dividends are paid, then on the ex-dividend date, the value of your shares is lowered by $X. It amounts to a forced sale of equity. So when you “re-invest” those $X (either in the same company, or a different asset) your portfolio didn’t increase by $X — you just re-balanced it.
    So anyone who adds historical long run dividend payments to historical long run share prices is double counting! In fact, they are multiplying by 2, because both of these growth rates should measure the same thing, which is long run profit growth.
    About money being directed towards capital and away from labor, you are absolutely right! But this is driving down returns, making profits scarce. This is exactly the chronic demand imbalances that I have been talking about. When bond yields are at all time lows, and dividends are at all time lows, what this means is that there is a scarcity of profits, and people are willing to pay more for the same profit stream than they did in the past. This is not a signal of high future returns, but of low future returns.

  224. Posted by tipster

    The market grows faster than the economy because the indices used to define the market get changed to include growing companies and exclude declining ones, even though both types of companies make up the economy.

  225. Posted by Robert

    …I should clarify that by scarcity of profits, I mean relative to the amount of investment capital chasing those profits (Bernanke’s “savings glut”), not in some absolute sense.
    And about global markets giving a greater return — perhaps they will give a greater return going forward, but I would be careful about extrapolating future long run GDP growth based on high growth that occurred during a development period. Particularly if your timeline is 40 years.
    Investors can invest anywhere, and so capital pours into countries that are expected to grow quickly, driving down the currency-adjusted yield in the target country to match the expected returns domestically. So you cannot assume to get “free” higher returns in foreign markets over domestic returns, unless you manage to outsmart the crowd.

  226. Posted by ex SF-er

    wow… this thread has become intriguing.
    I would like to just quickly state that there is no question that a couple making $288k/year can make the payments on a $1M home. That is a no brainer. The only part up for debate is how much that couple will have to sacrifice to do it. (no kids, kids in public school, buying used vs new cars, skimp on retirement, or whatever). But it can be done.
    But this is all missing the forest for the trees. The issue isn’t whether or not a couple making $288k/year can afford a million buck property… the issue is:
    1) will they be willing to buy a $1M property? Most people I know who make nearly $300k want a $1.5-2M property, not a $1M property.
    and more importantly
    2) very few San Franciscan households make $288k/year. May I remind you that LESS than 5% of SF households make more than that?
    This is the crux of San Francisco’s problem IMO. when you boil it all down, SF is an affluent area, but not as affluent as people seem to think. Even high income SFers have difficulty affording SF Real Estate.

  227. Posted by sfrenegade

    Wife and I have about $285K combined income. Take home is around $174K this year after deducting the customary deductions (all taxes, health insurance, less than full 401(k) contribution). We will owe maybe $3-5K in taxes in April 2010, so SanFronzi’s guess of $170K is about right if you have no house, no kids, etc, and your main itemized deduction is CA state tax. If we both made full 401(k) contributions of $32K, would definitely be lower.

  228. Posted by Robert

    FYI,
    The Buffet Comment about pension funds was in the 2007 letter to shareholders. All the letters are good reading! This one was especially prescient, coming before the crash.

  229. Posted by NoeValleyJim

    So I take it from your comments that you have not read Siegel’s book. You should read it.
    So anyone who adds historical long run dividend payments to historical long run share prices is double counting! In fact, they are multiplying by 2, because both of these growth rates should measure the same thing, which is long run profit growth
    No, that is not what has happened. If your model of the world is correct, then share prices should steadily go down over time. They do not. In aggregate market cap values grow at the nominal rate of growth of the economy plus they surrender a dividend. Companies are profitable enough that they can do both. If your model doesn’t explain that, but it is contradicted by 200 years of historical experience, then it is probably your model that is broken, not the real world.
    Your best estimate of a real return on investments should be 6.5 to 7 percent because that is what has happened historically. There is no assumption of anything free here, this is simple buy and hold investing in the US stock market. 5% is actually a conservative estimate and is taken by adding in bonds and other investments to reduce overall volatility.
    I think it if funny that some of you are arguing that American’s don’t save enough while others argue that there is a glut of capital. There was a glut of liquidity in 2007 due to too much lending going on, but I don’t think that there is any kind of “excess savings” going on. Perhaps slightly, due to high Chinese savings rates, but the Chinese economy is just too small to cause the massive global imbalance attributed to them.
    dividends are at all time lows
    Dividends are not at all times lows, not even close to them. The lowest the S&P 500 dividend yield hit was 1.14% in 1999. Since then it has trended upward, hitting 3.11% in 2008. It is now higher than it has been at any time since 1993.
    http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

  230. Posted by San FronziScheme

    But keep it to yourself unless it is something.
    Pot. Kettle. Black.

  231. Posted by Robert

    NVJ,
    If a company is worth X billion, and is sitting on 1 billion in surplus capital, and the very next day, it distributes that 1 billion to its shareholders, what is the company then worth? You are saying that it is still worth X billion, whereas I am saying that it is worth X-1 billion.
    The aggregate equity value of the shareholders decreased by 1 billion, but they now have 1 billion in cash to deploy elsewhere. So they will re-invest that somewhere. At the end of the day, all that’s happening is a rebalancing, nothing more.
    This is also not to say that certain dividend re-investment strategies don’t outperform. Many strategies outperform, until enough people start doing them. For example, if a lot of people starting re-investing dividends in the same company, then the shares of that company would rise, the dividend yield would fall, and this strategy would underperform.
    Any dividend payments are equal to a decline in equity, which the company must make up for by earning enough cash before the next dividend payment. You are right in that if they fail to earn enough cash the next time, they will need to lower the dividend payment, and if this keeps happening, then their share price will decline over time. In the same way, if a company earns more surplus capital, then they will announce a dividend increase, and this may cause the share price to rise over time.
    About the dividend yields falling, of course they have been falling, but the data is noisy. I was speaking in terms of historical trends. Here is a nice article with the graph that is I was thinking of when I said “record lows”.
    About the savings glut — I posted a discussion about this some time ago, but can’t find the link now. I am referring to savings in aggregate, not to an individual person. This is defined as money not spent on consumption or taxes. When money is concentrated in the hands of the wealthy, then they will tend to invest that money rather than spend it on consumption. No need to discuss taxes! Hence a glut of savings. You have a lot of money chasing investment opportunities, and at the same time, less money chasing consumption. There are some nice articles by Paul Krugman about how this is modeled with IS-LM diagrams. In any case, this leads to a situation in which yields are driven lower and the economy suffers from chronic demand shortages. As chronic as the cough I know have — that’s all from me tonight! I enjoyed these discussions.

  232. Posted by San FronziScheme

    NVJ,
    Wow, I’ll have to catch up on all those great posts one day.
    Being invested 1/2 in emerging markets is a good idea in the long term. After all this is the new frontier… Just be sure you’re not too vulnerable to short term hickups. These past 2 years the Shanghai Bourse has been behaving like a 5 year old on a sugar rampage. Faint of heart: you’ve been warned.
    Many Americans are saving. Actually many people I work with are still saving like crazy. But overall it was mostly a zero-sum when taking the US as a whole. There is the other side of the medal. Some people are still funding their grocery shopping with CC debt (3 years ago a few people were even buying groceries using unlocked equity, LMAO on that era). More disturbing, people refinancing their home to afford medical bills.
    sfrenegade,
    You are not too far from our theoretical 288K couple (and the 170K quick back-of-the-envelope calculation).
    An interesting tool at bankrate.com to have an idea of the change with kids:
    http://www.bankrate.com/brm/itax/news/taxguide/1040_tax_calculator.asp
    The kids would probably change the numbers a bit but apparently not by much.
    Can I ask you if you own and if so what range of property? Do you see a stigma in renting in your circle?

  233. Posted by anonn

    Pot. Kettle. Black
    Dream on, son.

  234. Posted by Tom

    On Stocks for the Long Run, there was interesting article about a month ago on the Big Picture linking to a WSJ article on the quality of the data:
    http://www.ritholtz.com/blog/2009/07/jeremy-siegel-is-not-having-a-good-year/
    http://online.wsj.com/article/SB124725925791924871.html
    * * *
    For those that don’t want to read the links (although they are short and interesting re the discussions here), here are the important quotes (the essential take away is that the data Seigel used may not be valid):
    Now, Stocks for the Long Run, Siegel’s well regarded book (now in its 4th printing), is under increased attack: Its assumptions have been shown to be false, its conclusion called into question, and now its methodology has been attacked as statistically invalid.
    Thus, Siegel’s basis for Stocks for the Long Run exclude 97% of all the stocks in the early history of the US market by cherry picking winners, ignoring survivorship bias, and engaging in data smoothing.
    Oops.
    What did this do to the results? As you would imagine, it juiced them significantly. The era of 1802-1870 ended up with a much bigger dividend yield then it should have had. Siegel originally started at 5.0%, but over ensuing versions, that crept up to 6.4%. The net impact was to raise the average annual real returns during the first half of the 19th century from 5.7% to 7.0%.

  235. Posted by Robert

    I have a fundamental problem with the “total return via dividend re-investment” argument, particularly as it’s modeled with long term time series.
    Specifically, what these lookback approaches do, is back-out the decline in equity as a result of dividend payments. For example:
    The day before the ex-dividend date, an investor owns $100 of equity in X, which yields 1% a quarter.
    On the payout date, the same investor owns $99 in equity in X, and $1 in cash.
    Just before the next payout date, the company earns enough profits so that the equity share climbs to $100, and it still can pay 1%. The investor now has
    $100 in X and $2 in cash, etc.
    So, while it’s true that if your time horizon is very short, you are talking about a specific person that did nothing with that dividend other than keep it as cash, then you have to define total return as change in share price + dividends received.
    But the problem is when you try to model this to a historical time series, because any attempts to back out the cash holdings force you to assume unrealistic yield scenarios.
    Here is the math that describes how the dividend adjustments are made for a historical time series:
    The day before the ex-dividend date, an investor owns $100 of equity in X, which yields 1% a quarter
    On the payout date, the same investor owns $101 of equity in X, which yields %1 a quarter.
    Notice the flaw? Somehow the company is managing to earn 4% a year on a market cap that is also growing at 4% a year, in addition to whatever the observed market cap growth was.
    This is the case if you are running this for an “average investor” — that is, for the whole market.
    A dividend is surplus capital — it’s returned to the owners precisely because the company is unable to re-invest it internally and maintain the required rate of return. Over long time periods, the effect of these spreadsheet adjustments it to balloon the returns of large dividend paying firms.
    The underlying assumption here is that if you keep growing market cap by the dividend yield in addition to the observed market cap growth rate, then the yield won’t fall. But if that was true, then the company wouldn’t be paying a dividend in the first place! It would just keep re-investing those profits.
    In the real world, as market cap grows, the company cannot continue to outperform at the same level — growth slows and it starts to pay dividends.
    This leads to the second flaw, which is that in the real world, the investor didn’t just sit on that $1 — but rolled at least some of it into other investments. In the process of doing this, the price of those assets were bid up. Therefore just looking at the actual historical price series already reflects the re-investments that were made, and correctly calculates the total returns on those investments.
    So the slight declines in the stock value of X on the dividend payout date actually translates into slight increases in the stock price of Y, as money was rolled over by the real investors from X into Y. And all of these re-investment decisions are captured in the final price of the time series. No need to inflate those returns!
    Perhaps you will argue that not all of the dividends were re-invested — but what makes you think that if they were, the result would be more profits, rather than bubble prices followed by a collapse?
    People choose to invest for reasons — they are optimizing the returns on that investment, and you cannot theoretically assume that those yields would not go down if more money was thrown at the market, because at the end of the day, profits only grow as fast as the GDP pie grows, while equity measures how much people are willing to pay for each slice of that pie.
    So the hundred year or two hundred year results are completely phony. They are nothing more than spreadsheet adjustments to returns that never happened, resulting in errors that compound over time.
    The actual returns, including the full effect of all the re-investments that were made are what the un-adulterated time series tell us, and those are always constrained by GDP growth, at least over the long run — 5.7% for the DOW from 1900 to 2000, while GDP grew by 6.3% in the same period.
    Those are nominal returns, so the real returns are closer to 2.7%. And you can calculate “what if” type returns that assume unbounded repurchase of shares with zero increase in purchase cost-basis until you are blue in the face, and it wont change the experience of actual investors — and it wont make the pension funds solvent, either.

  236. Posted by NoeValleyJim

    The actual returns, including the full effect of all the re-investments that were made are what the un-adulterated time series tell us, and those are always constrained by GDP growth, at least over the long run — 5.7% for the DOW from 1900 to 2000,
    This statement is wrong. The DOW was 67.34 in 1900 and 11723 at the start of 2000, for a gain of 5.3% per year for the century, compounded. This does not include any reinvested dividends and anyone who bought the DOW would have seen this return, plus they would have gotten a dividend check. You can verify this by looking at the data on this, which is all over the Net.
    I am ignoring the effect of taxes and trading fees on returns, but I assume you know that.
    It is important that you get this right. I am not going to discuss this anymore until you concede this point.
    Your mechanism for this is true might be right, but I think it is just the way capitalism is. Investors demand a return on their investment, which they should. Companies keep back enough profits to grow at the rate of the economy and return the excess profits as a dividend. We agree on the basics, but have a very important detail wrong and you will make all kinds of investment mistakes until you get this right.

  237. Posted by WP

    NVJ,
    I think I agree with you for the most point on this topic (I don’t buy Robert’s double counting argument for long term analysis because the evaluation of long term index trends are not taking into account dividends whether or not they are reinvested, but his logic is perfectly correct for short-term analysis). However when looking at indexes over 100 years as you are here you have to keep in mind there is a selectivity bias to the index such that the bad companies are removed and better companies replace them which skews the numbers over time.

  238. Posted by Robert

    My data is here:
    http://www.measuringworth.org/DJA/result.php
    Dow Jan 3, 1900 = 48.8
    Dow Jan 3, 2000 = 11357.51
    nominal CAGR = 5.6% –> sorry I was off by .1%…
    GDP, 1900 = 20.6 (billion)
    GDP, 2000 = 9951.5(billion)
    nominal CAGR = 6.375% —> also, off, should have rounded it up to 6.4% instead of 6.3%.
    Net effect is no difference in the analysis.
    So I’m not sure about what detailing you are referring to — care to clarify?
    In any case, you cannot alter the historical price series to assume that investors managed to re-invest dividends with no resulting increase in their cost-basis. That’s just a fictitious “what if” reading of history. Investors already reinvested dividends, to the degree that the returns justified their estimation, and the consequences of those re-investments is reflected in the actual price data — 5.6% CAGR.
    you will make all kinds of investment mistakes until you get this right.
    I couldn’t agree more! The pension funds are finding this out as we speak…

  239. Posted by NoeValleyJim

    Sure, this is called “survivorship bias” which is why if you wanted to do this, you would have to trade stocks as they were dropped and added from the index. Or these days, you could just buy an ETF which would do it for you.
    Tom is probably right too, in that the real rate of return in the first half of the 19th century is 5.7%, not 7.0%. The records are simply too thin from that era to make a definitive statement, imho, which is why I originally talked about the period from 1871. 5.7% is more than 5% in any case, and much larger than 2.7%.

  240. Posted by Robert

    Please show me your data for 5.7% real returns. I was referring to nominal returns. That’s a very important detail to get right NVJ — what is your source?
    Stock index time series are widely available, whereas hand-tweaking — that is adulteration tends to be proprietary. Show me this time series of an index going growing at 5.7% real CAGR over long time periods.
    I agree that 1900 data is scanty. You can use BEA data for the period 1929 on if you like. The effect is the same. I believe (although not exactly) that from 1931 to 2007, CAGR of both DJIA and GDP is about 7% and 7.1%, respectively. Also nominal. But again, let’s see your sources.

  241. Posted by NoeValleyJim

    You just stated that an investor received 5.6% CAGR without including dividends. They also got a dividend check which they could have done anything they wanted to, including reinvest. Their total gain is therefore 5.6% plus the dividend rate, which is about 4%. I don’t know the exact amount, but their total gain is 9-10% or an overall real gain of 6-7%.
    Do you agree?
    Somehow the company is managing to earn 4% a year on a market cap that is also growing at 4% a year, in addition to whatever the observed market cap growth was.
    There is no flaw here. Your example company grew at 4%/yr plus it throws off a dividend of 4%/yr which grows itself at 4%/yr. This would be a boring kind of company, like a utility, but I can’t point to a bunch of them that are exactly like this.

  242. Posted by NoeValleyJim

    Googling gives me this guy, which says that exact same thing as me:
    http://www.investorsfriend.com/return_versus_gdp.htm
    The math is simple, according to Warren Buffett and others, we can roughly forecast the long-term expected return from major large-capitalization stock market indexes as:
    Expected real GDP Growth + Expected Inflation + Expected Dividend Yield

  243. Posted by Robert

    Do you agree?
    No, that’s my post. If you are going to disagree with my post, then you should read it first, at least enough to know why I disagree. At that point, you can point out an error or flaw, rather than just restating the original assumption that I objected to.

  244. Posted by 45yo hipster

    robert- you have referred several times to GDP growth and profit growth as a limiter on ultimate/normalized investment returns. it’s a bit like a large cap company, which cannot possibly grow it revenues/profits at the same rate as a successful, high growth smaller firm can.
    but when we’re talking about national output (or global output), you have all companies in it, as well as gov, etc. in addition, we are on the verge of several huge new ‘industries’- the migration from fossil fuels, environmental/recycling of materials, continuation of information technologies, and the advent of all kinds of new services. in other words, i don’t see a shortage of new ideas, industries, services, improvements mankind will seek in the next 20-30 years. these will actually compliment the huge push in consumerism coming from the developing world. example- as more people in the developing world aspire to have a middle class life we will in tandem develop alternate fuel, much more efficient recycling, etc. so as not to kill the environment. and all of these will contribute to GDP.
    so if anything, i see global GDP growing at perhaps an above average historical clip. and i actually think it’s quote possible for the USA GDP to do the same, as alot of the advances will stem from here. our acute energy needs are a calling, and we are already well on our way to perfecting specialized services (as examples, just compare the # of therapists, landscape architects, and plastic surgeons today vs. say 1979.)
    it’s an interesting, somewhat circular question. if ‘the money’ is there, society will spend it on anything from therapy to replacing ones’ ‘clunker’ with a prius. (not all the spending is frivolous.) but is money based on growth, or is growth based on money (given that the gov ultimately controls the supply.) i also think the seemingly unending boom/bust cycles are almost a necessary evil, for w/o any distortions, i don’t think we know how to grow an economy (that is, w/o total centralized planning…and we saw where that went during the last century’s myraid of socio-economic ideological expirements.) food for thought vis-a-vis GDP growth and it’s relationship to investors profits.

  245. Posted by Robert

    The appeal to authority is not so effectively here, particularly as the footnote in the website you reference does not support the highlighted text, or the conclusions of the article as far as our topic is concerned.
    I think NVJ, that one way that this could be cleared up, is if you try to recreate this scenario for yourself, using a spreadsheet.
    Try to figure out some way that you can get a total return greater than the GDP growth rate — over long periods of time — without creating fictitious equity transactions. Then, try to understand what those fictitious transactions would do to the market price of the securities that you are “buying” in your simulation. That should be an eye-opener.
    Another way to emerge from this confusion would be to realize that the dividend growth rate and the equity growth rate measure the same thing, which is the total return to the investor — assuming no cash or bond holdings. Now, of course things get more complicated with cash/bonds, and that is a factor in real world scenarios, but cash/bond holdings don’t really increase total returns.
    Or, alternately, you can do what Buffet often advises, which is to image then when you buy stock, you are buying stock in the whole company — you are the “only” owner. Over time, you can choose to re-invest your dividends into increasing profits, or decide to channel those dividends elsewhere — say into buying other businesses. What you will realize if you do this, is that over time, your “total return” will be the total equity value — and nothing more. This again assumes that you are not diverting profits into a cash/bond account, but are always re-investing. Now, imagine this happening for the whole market, and ask yourself whether total returns can be greater than GDP. I would be happy to reply to specific points about any of my comments.

  246. Posted by Robert

    I do agree, hipster, with the general premise that GDP growth can really take off, and that there is no shortage of productive work to do or human ingenuity. In this specific, case, I was pointing out that over the long run, total returns cannot outgrow GDP. I say “long run” because if you time things right and sell at a peak, you can get really great returns — at the expense of someone else, of course.
    However, when I referenced the commerce department estimate of 10 year real output growth potential, I was hoping to bring a bit of sobriety into the conversation. I personally believe that political change would help unlock a lot of growth potential, worldwide, but right now there is firm political consensus in favor of things like wage arbitrage, and so I don’t have too much optimism about a GDP explosion going forward, at least for the U.S. However, I would be more than happy to be proved wrong! There are many things that we as a country could do to reduce uncome inequality, increase demand, and juice that GDP data, but I don’t think any of those things would be welcome by asset holders.

  247. Posted by NoeValleyJim

    Here is a Stanford researcher who says the same thing:
    www-siepr.stanford.edu/papers/pdf/99-16.pdf
    “Third the DJIA is not a total return index because it excludes dividend distributions. Dividends account for a considerable portion of returns to shareholders in the long run. If a stock index is used to gauge the return earned by market participants over long periods of time, a total return index would be far superior to a stock price index.”
    “The average dividend yield over the whole period was 4.87%. Ignoring this return leads to enormous understatements of the long run payoff to owning stocks. […] Over decades, the difference become enormous.”
    I am not sure what your error in reasoning is, so I cannot correct it. Do you think that that DJIA includes dividends in its daily quote? It does not.
    “Stock prices naturally fall when stocks go ex-dividend. Therefore, there are more than 100 ex-dividend days events each year and with each event the DJIA systematically understates the return of investors in the Dow stocks”

  248. Posted by NoeValleyJim

    Btw, most people just spend the dividend check they receive. Maybe your confusion is in the notion that most or all market participants reinvest all dividend checks. People come and go into the market all the time, most people invest for a while and then spend their investments in retirement.
    I already pointed you to Siegel, who is a Wharton School professor, if that is not enough authority to you, then nothing will be. You need to just work out the math yourself, I guess.

  249. Posted by Robert

    More appeals to authority! Did you actually read the paper? It is a model-building exercise that does not capture total returns, but total transactions. I am talking about real returns here that actual investors can get by buying and selling stocks.
    I don’t think the Dow includes dividends, no. But no index does. An index measures prices. It measures equity. It would be wrong for any index to include dividends, as they are captured in equity valuations.
    Listen, NVJ, here are two questions for you:
    1. Assume you open a business, and you re-invest those profits to grow your business. At some later point you sell your business for X. Do you think your “total” return was X plus the profits you made along the way?
    2. Assume you open a business, X, as above, but you don’t re-invest your profits, but instead you use your profits to buy shares of another business Y. All dividends are re-invested to buy shares of Y. Then, you sell your shares. What are your “total return”?
    3. Next, assume you are talking about the all the investors as a whole. They are busy buying and selling to each other, of course, but what is the total return of the entire market? Is it greater than GDP or not? In that case, what would be the return to the “average” investor, assuming that each started out with the same capital? Would that return grow faster than GDP?
    Now, agreed, you can always buy bonds instead of stocks, and you can always hold cash instead of re-investing. But as long as you are re-investing, the total average return per investor would be the market cap of equity divided by the number of investors. It is not a hard concept to understand. And that return would not grow faster than GDP.
    Now, it’s true that a price weighted index is not as good as market cap weighted index, but the time series is older for DJIA than for SPX. And, as the paper shows, there is not much difference.

  250. Posted by 45yo hipster

    the reason i bring it up is that your GDP/investment return thinking is similiar to your housing cost/income analysis. namely, your views tend toward the long term, and macro perspective. while i have less to argue about it wrt GDP, i do think you’re missing something wrt real estate.
    in the past you’ve acknowledged that some peoples bias towards SF has caused price distortion, which will eventually self correct. but in other discussions about the intangible value of home ownership (the one where someone who lost their home felt a similiar impact to loosing a loved one) you seemed unwilling or incapable of seeing the extend of this ‘bias’, or what i call a socially ingrained desire. now you may not prescribe to this (and that’s of course your right), the point is that most people, americans and otherwise (it’s corss cultural-i know form experience) heavily prescribe to this notion.
    now given that SF is mostly a destination city for anyone new moving in, as the global economy grows, the more financially successful will choose places like SF (and other destination/sought after places.) so certainly overall GDP is an important component. as well as concentration of leading tech industries and creative developments, which the bay area is well know for.
    and as these new people ‘make it’ in SF their attachemnt to their new ‘home’ will be deeply tied to their self worth/success as well. in comparison, i don’t see too many people aspiring to move to akron ohio (and the ones who do seem to migrate in/out as their economic opportunities dictate.) i am not sure if this can be easily quantifiable, but it is a psychological phenomena that cannot be ignored.
    i’m suggesting that this is part of the reason that SF RE inflation adjusted returns from the 40’s to y2000 is about 2% higher than the national average (per the info that NVJ, etc. referenced a few days ago here.) now taking the long term perspective, that 2% difference ads up to alot of dollars in 60 years’ time.

  251. Posted by Robert

    Well, there are a lot points in there, hipster:
    1. San Francisco is no more prominent or important now than in the early part of the 20th century. At that time, it towered over Los Angeles and was the biggest city west of the Mississippi. It was the western “capital” of the U.S, and an international trade, financial, and military center. As well as a great tourist destination and the gateway to the Pacific.
    2. Housing was no less desirable at that time, either.
    3. Incomes have been not growing faster in San Francisco than in the U.S. as a whole historically — up until about 1997. People confuse high incomes with high income growth rates, and at least from 1930 until 1997, incomes in S.F. were absolutely flat at about 1.5 times the national average. 100% of the income outperformance really occurred in the period from 1997-2000.
    That outperformance was juiced by asset prices, and I think a good deal of it will/already has unwound. We need to wait until the local data comes out, and there is a 2 year lag there. I think by 2010, we will be around 1998 levels, in terms of income as a percent of the U.S. — maybe around 160% or so. I guess this is the same problem I have with NVJ’s “total return” return scenario, in which he assumes that the “average investor” can get nominal returns of say 9%. In that case, the total value of equities held by all investors would grow by 9% — faster than GDP — and over time you would get P/E multiples of 400, etc. I mean, it only takes a little bit of thought to realize that’s not possible — not for the “average” investor. In the same way, if it was really the case that incomes in San Francisco outgrew incomes in the rest of the country by 2% a year, then in 1930 we would have to have been a poor city, with incomes of only 75% of the national level.
    4. In the same way, house prices in San Francisco, although boosted by Prop 13 and the historical trend of multiple expansion due to longer loan periods, have not been appreciating at 2% more than in the U.S. historically, although they have been more volatile. From 1930-1995, prices in SF appreciated at a rate of 0.6% faster than in the U.S. as a whole. 1995 was a bottom, as was 1930. Just shifting that time period to 1930-1990 gives an appreciation of 2%. In other words, almost all of that 2% growth was erased in the 5 year period from 1990-1995. So how you pick your end-point really matters, which should tell you that what you are really measuring is volatility, not a durable trend of 2%. People are confusing volatility with long term durable growth, just as they confuse high incomes with high income growth rates — but for those signing up for a 30 year loan, these things really matter, and you can’t extrapolate the period 1997-2007 forward, while ignoring the period 1930-1997.

  252. Posted by NoeValleyJim

    So, I think the only way I can convince you is through a bunch of Socratic questions. This is not a good medium for it, but here we go.
    Do you agree that an investment of $48.8 on Jan 3, 1900 would have sold for $11357.51 on Jan 3, 2000?
    This is the capital gain on the DOW purchased in 1900, and is 5.6% and no dividend payments are included in this gain.
    Do you agree with this statement?

  253. Posted by Robert

    Absolutely, but I would first like for you to answer my questions, in the socratic dialogue :)

  254. Posted by NoeValleyJim

    Do you agree that the investor who purchased the DOW for $48.80 in 1900 would have also received a dividend payment?
    That payment would have been (on average) 4.87% of $48.80 = $2.23 that first year. I am not going to look up the historical amount, though it is available.
    Is that correct?
    PS I will answer your questions later, after we have this straightened out.

  255. Posted by Robert

    I should clarify, yes, I agree with this statement.
    Moreover, if you are going where I think you are, I will complete the rationale for you:
    What-if scenario #1, assuming a passive hold strategy:
    ——————————————
    Year = 1900:
    equity account: 1 share of DJIA (assumed value = $48.8)
    cash account: 0
    Total Value of portfolio = 48.8 (pre-liquidation)
    Year = 2000
    equity account: 1 share of DJIA (assumed value of $11357.51)
    cash account (from distributions): $6400 (estimated)
    Total value of portfolio: $17755.28 (pre-liquidation)
    Total return: 6.07%
    Total GDP growth over period: 6.1%
    Now, perhaps you believe that if you had re-invested those you would have done better. Maybe — but explain to me how everyone can do that and not bid up the price of the shares? Note that in my scenario, no transactions occured — I was merely passively watching the historical record. As soon as you insert transactions into the historical price series, you run the risk of distorting that series if enough people were to follow your strategy.
    So are you advocating a minority strategy, that can only work if few people follow it, or are you trying to measure the expected return of the “average investor”? I guarantee you that the expected returns will be the GDP growth rate, unless you are assuming long run p/e multiple expansion.
    Are we agreed?

  256. Posted by Robert

    oops, please make that GDP growth figure 6.34%. Ugh, I have to get these tenths of a percent right..

  257. Posted by NoeValleyJim

    Whew! We finally got there. Thanks for skipping ahead and adding up all the dividend payments for me.
    Yes, I agree that if every or even most investors reinvested their dividend payments into the stock market, that the stock market would get flooded with too much money, pushing down returns. This is the whole point of returning the excess profits to the shareholders! The companies didn’t think that they could make a decent return on the money so they gave it back.
    It doesn’t really matter what shareholders decide to do with their extra money, most of it goes to taxes and consumption goods, but it counts as part of your total return.
    Now it is possible, even likely, that returns in the 21st century will be somewhat depressed to the 20th century, now that more people are investing in the stock market. But I don’t think it will be as severe as you seem to.
    Now I will answer your questions, but I am going to have to make some assumptions:
    1) Your return is X – initial investment. I don’t think you can include your capital gains plus reinvested profits in your total return rate, no.
    2) Your total return is (X – initial investment) plus Y*number of shares/total shares outstanding
    3) The total return to the average investor is their capital gain plus their dividend gain. To figure this right you need to add the yearly capital gain to the yearly dividend gain. Real world investors also pay transaction costs, management fees and taxes, depressing their return by 2-3% or maybe more. My main goal as an investor is to keep these costs down. Perhaps it is these taxes and management costs that keep the market from being flooded with too much money, I don’t really know.
    People who invest make more money than people who do not. If you just passively sit in your chair, your income should grow with GDP. Few people are willing to delay consumption so there is usually a general shortage of investment capital. To attract this capital, companies have to pay returns greater than those gotten by those who did nothing.
    Now it is entirely possible that the skewing of incomes up has changed these dynamics, but I would like to see this through a few business cycles before making such a bold claim.

  258. Posted by Robert

    And I would add that my own reasoning for using GDP as a limiting factor would be the following:
    GDP = Gross National Income = Income to Capital + Income to Labor + Taxes + Import/export Adjustment.
    Over time, the ratio of “Income to Capital” to GDP doesn’t change very much — (for data on this, take a look at the work of Emmanuel Saez. Actually, even if the ratios slide a bit, it’s not very important for the numbers, since GDP growth will swamp the shifting ratios.
    Therefore a ceiling for total investable profits is a (relatively) fixed proportion of GDP = Income to capital = call this P. If our universe includes things like government bonds and consumer debt, then we should really include all of GDP as a ceiling on profits. So, you need to be clear as to which asset classes you are willing to consider.
    Now assume that the total “assets” held by the public (both bonds as well as stocks) is some number, M.
    Then the total price/earnings of those assets is M/P
    If you assume that M grows faster than P, you are assuming multiple expansion — lower interest rates, higher P/E multiples for stocks.
    Unless you assume this, then long run growth of M = long run growth of P = long run growth of GDP.
    (In the real world, investors do get too enthusiastic and bid up equities to a level higher than long run GDP growth allows, and these periods are followed by crashes. In the same way, pouring too much money into bonds results in too much indebtedness and default — low real returns).
    But the long run growth of M is equal to what the “average” investor can expect to make.
    This is not to say that many wont outperform and an equal and balancing number wont underperform. And, by retroactively looking at historical time series, you can identify many strategies that would have made much more money — just sell at all peaks and buy at all bottoms!
    But the growth rate of GDP will be the expected returns of the market as a whole. Any attempts to do better are minority strategies that will fail if enough people follow them. The value of claims on output cannot sustainably grow faster than total output growth.

  259. Posted by El-D

    Robert, this is an interesting analysis, and an exposition that I’ve seen before. What does it mean, exactly, that the DJIA return is a bit less than GDP growth? Where is that delta going? Is it some form of friction in the system? A systematic transfer of wealth somewhere? What is it?

  260. Posted by Robert

    El-D,
    Well, the delta is going into
    1. index-loss: stocks removed from the index outperform the index (because the index consists of the big companies, which don’t grow as fast)
    2. dividends — as NVJ pointed out. .6% or so does consist of dividend returns.
    3. Volatility — The index always bounces around, so maybe if we picked other time frames, DJIA might have outperformed by a slight amount. So the multiples do change a bit.
    NVJ,
    If you agree with me that the total market, M, will only grow as fast as GDP, then how can pension funds and the like assume greater growth? Who will take the other side of that trade against these behemoths?
    How can you tell an “average” person, in good conscience, that they can outperform the market, particularly when they are trading against the pension funds and pros?
    How can various book peddlers advocate minority strategies that mislead the public into thinking that they can outperform GDP, without stating in big bold letters “By the time this book becomes popular, the strategies described herein will fail to deliver the expected returns”
    And do you still really believe that the “average” investor can expect real returns of 5%? Who will take the other side of his trade?

  261. Posted by NoeValleyJim

    Your analysis of the entire economy is correct, of course, since it is based on basic principals. What is going on here is that plenty of people with capital invest in safer asset classes, like CDs, which pay much less than GDP growth. Bonds have tended to pay about GDP growth and stocks more, which they have had to because of the extra risk.
    Right now the total market cap of the Wilshire 5000 is about $10T:
    http://www.wilshire.com/Indexes/Broad/Wilshire5000/Characteristics.html
    M2 is $9T for example:
    http://research.stlouisfed.org/fred2/series/M2

  262. Posted by NoeValleyJim

    El-D, Robert is wrong on his calculation, because he assumed that the guy who received a dividend payment in 1900 just stuck it into a safety deposit box and then removed it in 2000. This understates returns.
    The total return on the DJIA is the capital gain (5.6%) plus the average dividend yield (4.9%) which equals 10.5% nominal return.
    This is before taxes, trading fees and management fees, which bring down real life returns quite a bit.

  263. Posted by NoeValleyJim

    So I am kind of curious here Robert, since you have convinced yourself that the stock market is a terrible investment going forward and that housing is doomed, where are you putting your savings? How are you planning for retirement?

  264. Posted by El-D

    Robert is wrong on his calculation, because he assumed that the guy who received a dividend payment in 1900 just stuck it into a safety deposit box and then removed it in 2000. This understates returns.
    But I think that’s Robert’s point, that the extent to which the “typical” investor re-invested dividends is reflected in the value of the underlying equities in the index.
    I don’t see how the true “typical” nominal returns are 10%+. Where would that money (over and above GDP growth) come from to pay those investors? It can’t all be a transfer from overly-conservative CD owners.

  265. Posted by NoeValleyJim

    It can’t all be a transfer from overly-conservative CD owners.
    Why not? Some of it came from bond market investors as well. The aggregate bond market is much bigger than the equity markets. If you include government bonds, which you should in the identity equations, then the bond market pays a bit less than GDP growth.
    More risk == more reward, this is an axiom of investing. Those that have chosen to take the safe route are subsidizing the risk takers, why is that so surprising? Plenty of people who invest in the stock market lose it all though, so you have to approach it with a healthy respect.

  266. Posted by El-D

    Plenty of people who invest in the stock market lose it all though
    And hence don’t see those 10%+ annualized returns…
    I understand your point about the impact of underperforming (relative to GDP) assets, I just have to point out that if it were that simple, then nobody would invest in those assets.

  267. Posted by Robert

    I think your math is off NVJ, in terms of adding percentages. SP 500, which is a market cap weighted index, has not outgrown GDP either. You do know that GDP is about 14 trillion, right?
    I don’t think equities are a terrible investment — since when did thinking that claims on output GDP growth cannot grow faster than output translate into claims pn output = terrible?
    I am curious as to how you think the average investor can do better than GDP, if you agree with my analysis.
    In general, you should know that the historical rate of DJIA growth or sp 500 growth is the result of active management and people reinvesting. Each time someone reinvests, they bid up the price, and that is reflected on the time series. So let’s hear your secret formula for returns in excess of GDP, and let’s hear how you think the average investor can get those returns.
    FYI, I made a bundle shorting the market before the crash, based on first principles, and am currently all cash except for a nibble of Nestle. I am also renting, although I am looking at
    rental properties outside the bay area.
    I would say that there is a lot delusion, though. This is common for overachievers, who tend to have too rosy a view of the world and so they walk into crashes. You are smart, NVJ–join the realists! The world isn’t all roses here, but there are roses, and they have the advantage of being real! 6% nominal returns are not so bad after all, and housing prices equal to 4 times long run incomes are not bad, either.

  268. Posted by Robert

    But I think that’s Robert’s point, that the extent to which the “typical” investor re-invested dividends is reflected in the value of the underlying equities in the index.
    You’re right, El-D!
    Investors do re-invest and this does drive down yields to the degree that the market is willing to accept, which is why dividends thrown off by the entire index truly are surplus capital for the market as a whole.
    Now, trying to force-feed surplus capital back into the market can have nasty consequences. Maybe it works, but maybe it doesn’t. But if you do this, you are trying to outsmart the equity markets, by insisting that returns that the entire pool of investors — including pension funds — believe to be surplus are not in fact surplus.
    The same is true for the bond markets. An excess of low rates and debt can lead to write-offs and defaults. Again, nothing can grow faster than the economy as a whole. And so the debt bubble that we are now in will not result in returns that the bond market expects. There will be defaults, either via actual defaults, or via re-negotiation (my guess), or via inflation, or via a combination of these. Most likely we will have a bit of all of them, one after another, as we thrash about pretending that the debts can be repaid.
    One thing to keep in mind is that asset prices are first and foremost a process of valuation. It is not just a question of buying whenever you have cash to buy. You need to realize that you are buying slices of output, and you need to think carefully about how much you are willing to pay for those slices. It is better to keep the dollar in the bank than to pay $1 for 70 cents of output. So each person needs to be able to correctly value a slice of output if they are going to play this game.
    A strategy to buy whenever you have cash regardless of prices is pretty stupid, and only leads to crashes if enough people are naive enough to follow it. For most people, the market can’t be beat, and when it throws off surplus capital — it is really surplus! It simply isn’t available to be used for investment, unless you plan on destroying your capital by overpaying for an asset that will decline in value later on.
    But some people are experts at that, and insist on doing it. To them, a dollar sitting in cash is a dollar wasted, and they would rather turn it into 70 cents after the crash rather than accept that the total M/P multiple has reached fair value, and that you are not going to get a positive return on your dollar.

  269. Posted by NoeValleyJim

    The S&P 500, which is a market cap weighted index, has grown proportionately with GDP. It has also returned to investors a yearly dividend, 3.8% in this case.
    http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500dividend/2,3,2,2,0,0,0,0,0,1,1,0,0,0,0,0.html
    “Historical Total Return
    From January 1926 through March 2009 the annualized total return for the S&P 500 was 9.51% per year vs. 9.69% for December 2008. The dividend component consists of 44.00% of the return vs. 43.27% for December 2008. The annualized return consists of both capital appreciation and dividends reinvested.”
    The easiest and best way for an “average” investor to capture these kinds of returns is to buy a total market ETF, like SPY and a total bond index with a low cost, like BND. The common rule of thumb is that you should buy a bond percentage equal to your age, this is probably close enough for most investors, especially those starting out.
    Once a year, probably on a pre-defined date, you should buy and sell appropriately to rebalance.
    And I disagree that you should try to time the market, this is where retail investors get themselves into big trouble. The actual “average” retail investor gets something like half the total market return by doing a poor job of market timing. The average retail investor buys into bubbles and sells at the bottom.
    http://www.slate.com/id/2099695/
    If you really pay attention to macro forces and are enough of a contrarian you might be able to beat the market consistently. If so, you should be running a fund though, not wasting your time posting on Socketsite.

  270. Posted by Robert

    “A total return index represents the total return
    earned in a portfolio that tracks the underlying price index and reinvests dividend income
    in the overall index
    , not in the specific stock paying the dividend. ”
    In other words, those “returns” just measure the real-time backtesting of a specific active management strategy: reinvest always.
    This strategy assumes that each investor is a price taker. So, all you are doing is restating your previous errors: you are confusing the backtesting of a specific minority strategy with measuring overall market cap growth.
    To measure overall overall market cap growth, you look at the overall growth of a market cap weighted index: SP 500. In reality, there is not much difference between that and a price weighted index such as DJIA. Total market cap growth, which reflects all strategies actually employed, is 7% from 1950 (the start of the index) to 2008. GDP growth over the period is about 7.1%.
    So again, you are confusing the back-testing of a specific minority strategy with the growth of the market as a whole, and you seem to take the results of this back-testing to imply that the average investor can also outgrow the market. Yet you are strangely silent as to how it’s possible that we can all be above average, and that if at the end of this process, you add up the total equity holdings of all investors, that they can each have their portfolio grow by 9% since 1900, whereas the overall market cap has only grown by 6% since 1900.

  271. Posted by EBGuy

    For review, I pointed out 111 Hoffman earlier in this thread. The defaulting doctor bought for $2.1 million in 2005. Now it’s official; according to SFGate, JPMorgan Chase took back the property for $1,533,000 on Sept. 16. Should make for an interesting comp when it hits the market; the Coalition of the Willing continues to grow.

  272. Posted by EBGuy

    The 3bed/2bath (1612 sq.ft.) house at 2350 Castro has an unpaid balance of $981474.
    Wanted to follow up on this home. Bought for $236k in 1989; refied many times, including Citimutual for $746k in 2003. Final refi by WaMu in 2006. Ultimately they took it back for $807.5k in Oct. 2009. It was sold by the bank for $1,068,500 at the end of January. Who said there are no happy endings? About a hundred more of those should make up for WaMu’s losses in Pacific Heights.

  273. Posted by Benjamin Blakeman

    I didn’t realize that SF is just like the U.S. composite, except exaggerated in every way.

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