January 27, 2010
Apples To Apples (And Agent To Bank-Owned) For 200 Brannan #504
Purchased for $925,000 with 10 percent down in April 2005, the agent-owned 200 Brannan #504 returned to the market asking $1,150,000 in July 2006.
The top floor 200 Brannan one-bedroom with 1,123 square feet failed to find a buyer, however, and in December 2009 it became bank-owned with what appears to have been no bidders at $780,000.
It’s back on the market and listed for $649,900, 30 percent under its 2005 purchase price.
First Published: January 27, 2010 9:15 AM
Comments from "Plugged In" Readers
And it's still overpriced. Infinity units have been selling for under $500 / sq ft.
Posted by: Tom at January 27, 2010 9:51 AM
Oh my…950K for a one bedroom! (Albeit a large one in a nice building and great location.) Definitely a classic bubble transaction. Even at 650K this is really expensive. Approximately $2900 per month with 20% down, not including HOA and taxes. Yikes!
Posted by: Willow at January 27, 2010 9:52 AM
Oops I meant 925K. Still very very pricey...
Posted by: Willow at January 27, 2010 9:54 AM
After tax costs of 2600 per month (30% tax bracket) is only $100 per month above what this one bedroom would currently rent for.
However, if you rent this place, you won't have to pay a $35,000 "move out fee" in a couple of years to the realtors and for transfer taxes. So renting is still the far better buy on a 1 bedroom like this.
If you rented this place for $1200 above the market price each year, and with a $35,000 move out fee, your friends would think you were nuts. In contrast, the buyer of this place will no doubt think they got a "deal" at well under $600 psft.
Posted by: tipster at January 27, 2010 9:55 AM
"It’s back on the market and listed for $649,900, 30 percent under its 2005 purchase price."
Ha, see, all of you haters who predicted 40% price declines. Where are all those 40% off sales? You were WRONG. Bwahahahaha.
Posted by: anon at January 27, 2010 10:01 AM
tipster, I generally appreciate your attempts to disambiguate rental costs vs. buying costs, but I feel you could be more effective. There are numerous costs people don't consider when buying a house -- maintenance, insurance, taxes, etc. because they typically only consider the monthly payment and are vaguely aware that there are "tax benefits" to buying a house. Are you consistently considering those when making these calculations? It would be helpful if you broke out the costs.
You are right that people generally underestimate transaction costs (that's true across many markets, not just real estate).
Posted by: sfrenegade at January 27, 2010 10:04 AM
But tipster is just making a single point. Buying made no sense at all in the bubble years when it was 2x or 3x comparable rental price. Even now where, with low rates, you're getting closer to parity with rents for some places, buying still includes taking on a huge move-out cost in the commissions and transfer taxes. That future cost should properly be factored in, and I bet less than 1% of those doing a rent-vs-buy analysis would do so.
Posted by: anon at January 27, 2010 10:09 AM
I don't think we disagree anon@10:09. People don't typically consider closing costs either. Like I said, there are numerous things people don't consider when considering the overall costs of their actions.
It's sort of like the people who think, "my car gets 30 mpg, and I pay $3/gallon for gas, so running my car only costs me 10 cents/mile."
Posted by: sfrenegade at January 27, 2010 10:12 AM
"Ha, see, all of you haters who predicted 40% price declines. Where are all those 40% off sales? You were WRONG. Bwahahahaha."
I sense there is a heavy dose of sarcasm intended, but for those that thought he was serious, there are a number of 40% off transactions for Infinity Tower I versus Tower II.
Because this unit has just 1 bedroom it may have further to fall, despite being 1123 sf.
Posted by: huh? at January 27, 2010 10:20 AM
Sarcasm detected. Bitterness detected. Humor undetected, all "bwahahahhahahah"s notwithstanding.
Posted by: anonn at January 27, 2010 10:24 AM
Oh, my calculation methods are very simple:
Take the cost of an interest only mortgage at 5%, add property taxes of approximately 1% of the purchase price per month.
Multiply the result by 0.7 to take into account a 30% tax bracket. (BTW, the deductions will frequently reduce the tax bracket of the individual, but this is conservative).
Add the cost of the HOA. If there are no HOA, identify a typical one as a reasonable estimate.
For this place:
(649,000 * 0.05/12 + 649) * 0.7= 2347
HOA = 647 from the listing
Total is about 3000 (my mistake above, the costs are higher than I had eyeballed). Typical rent would be about $2500.
So here, you'll pay about 20% above the rent price, and you'll still need to pay what I call a "move out fee".
I realize that evictions do happen, but for about $1500, you can pay people to pack, move and unpack a one bedroom, without your lifting a finger. Rentals like this are plentiful, so it's not tough to find another one. So in the end, you avoid the occasional $1500 movers fee, by paying $6000 per year more AND get socked with a huge move out fee. And some owners don't even stay longer than a lot of renters, so they get stuck paying the movers anyways. Buying is still not a smart financial choice, even when the rent vs buy is at parity, which is not happening here at this price.
Posted by: tipster at January 27, 2010 10:27 AM
And tipster does not include any maintenance costs. When you own, you get to pay for your own roof, toilet, floor tiles, carpet cleaning, etc. when they need work instead of having your landlord cover it. He also omits insurance (may or may not be covered by HOA).
Posted by: anon at January 27, 2010 10:43 AM
Tim Lincecum used to live here!
Posted by: Paul Hwang at January 27, 2010 10:47 AM
"Tim Lincecum used to live here!"
Is that all the marketing juice that's left?
Posted by: anon at January 27, 2010 10:58 AM
Frank "Big Hurt" Thomas used to live in the building also!
Posted by: Bobby Rowell at January 27, 2010 11:01 AM
Paul, have they aired it out yet?
Posted by: Jeremy at January 27, 2010 11:05 AM
BTW, look at 5.5% interest, using $400 psft on this place
(450,000*0.055/12 + 450)*0.7 = 1758
Total monthly costs would be 2400. Your "move out costs" would run $25,000, spread over 5 years would run an additional $375 per month, so added to the 2400 above, your monthly costs will be $2775. And that doesn't include maintenance, loan origination costs, etc. Buying still won't make sense at $400 psft when rates go to 5.5%!!
$400 psft is where I see places like this headed in the next few years. Rents aren't going up by much if at all - unemployment is going to stay high for years. Of course, that will keep mortgage rates from heading too much higher than 5.5% as well.
So you can see that buying this place at $578 psft is just dumb, dumb, dumb. You really have to have a screw loose to buy anything right now. You just have to be really, really bad at math.
Posted by: tipster at January 27, 2010 11:06 AM
I would buy for $450k(but not $650k)!
It is important to remember transaction costs. Selling when you move is not mandatory though. Unless maybe this place gets rent controlled. Renting it out can be a very good alternative unless there is equity that you must tap into. This also assumes you only buy something that would positive cash flow.
Posted by: J at January 27, 2010 11:19 AM
I find your analyses of rent vs buy cost enlightening and they serve well to dissuade me from making potentially irrational decisions - so thanks first. one question i wouldn't mind having your input is, for people who have enough to go all (or mostly) cash and whose money would otherwise be in a CD or money market (2% return, taxable), do you see this as one factor in favoring the buy side of the equation? or should it not be relevant?
Posted by: condoshopper at January 27, 2010 11:20 AM
I also thoroughly enjoy reading tipster's posts.
But, as "anon" has pointed out, what was going on when the seller purchased this place was bubble-driven calculation, if any calculation was going on at all. The person who bought this place close to five years ago was expecting to realize a gross, nominal capital gain of $132,500 over the course of 15 months, which would have swallowed what tipster calls a "move out fee". Obviously, that didn't happen here and won't happen for the foreseeable future. Certainly someone who plans to only be in a place for a short number of years should rent, not buy.
But the thing is, I'm not understanding how you can compare renting this place to buying because a renter will never have the opportunity to realize any kind of capital gain, whereas a buyer would. You can't just look at the liabilities side of the ledger.
Posted by: Brahma (incensed renter) at January 27, 2010 11:34 AM
"a renter will never have the opportunity to realize any kind of capital gain, whereas a buyer would"
At which point, they usually take out a bigger loan on a more expensive property...until the next meltdown...
Posted by: J at January 27, 2010 11:39 AM
Agree with Brahma that BOTH upside and downside potential price moves should be factored in, as should the projected length of stay. Problem is that is very hard to do and extremely optimistic or pessimistic assumptions horribly skew the numbers. This was a huge cause of the bubble. People simply accepted as "fact" that the selling price would be higher 1, 3, 5, 10 etc. years out. So there was "no risk."
At the current asking price, I guess I'd put about a 90% likelihood that the price will be lower 5 years from now, by up to $250,000. And a 10% likelihood it will be higher, by up to $100,000. Leaving inflation (or deflation) out of it.
Posted by: anon at January 27, 2010 11:50 AM
@condo Yes, you should factor in the opportunity cost (What else you would be doing with the down payment money.
If you thought you'd be in a house for 5-years then the return on a 5-year Treasury would be a good choice for the return to use ( 2.36%, exempt from state taxes)
All else being equal, lower Treasury rates make housing more attractive and higher Treasury rates make housing less attractive.
Posted by: tcsf at January 27, 2010 11:56 AM
I was assuming nearly 100% financing and 0% opportunity costs. Obviously, if you feel that you will only earn 2% for the foreseeable future, you would take all of your savings and dump it into the condo, thereby reducing your cost of ownership. If you have $650K in savings, and you are only earning 2%, taxable to 1.6%, the cost of ownership is lower if you put it into the condo rather than taking out a 5% loan, tax deductible to 3.5%. It is a bit offset by the fact that you won't get the tax deduction, but it's still cheaper.
But is that really realistic? Sure the economy will take a while to heal and that will keep interest rates low, but governments everywhere are borrowing huge sums of money. Will that drive interest rates up? You bet. Will CD rates be back up to 5% or so in two years? Probably. So it's probably safer to ignore the 2% you are earning today as an anomaly in an era of interest rates being manipulated artificially low. CD rates will likely rise and make it a wash. Making a buy decision on 2% effectively locks in the 2% rate for a long time, and I doubt you'd want to do that in an artificially low interest rate environment.
As for Brahma's not realizing a capital gain, you also don't risk a capital loss. I think the world has changed, and it is a big risk to assume that an asset class will never go through a long period in which prices fall, as they have been doing in Japan for 20 years!
I think the time to even think about a capital gain is when rent vs buy is at parity. That isn't until we hit $400 psft, and that assumes rents don't fall. Stay tuned on that one!
Posted by: tipster at January 27, 2010 12:05 PM
Thanks tipster and tcsf,
That was just the type of info i needed in order to evaluate things more comprehensively. I'm looking in a much cheaper range than what is featured in this story (and not necessarily in SF proper), which makes this a possible scenario somewhere down the line, and if i don't become the next victim of this poor economy.
Posted by: condoshopper at January 27, 2010 12:22 PM
"Agree with Brahma that BOTH upside and downside potential price moves should be factored in, as should the projected length of stay."
Certainly, but this is a lot harder to do, and most people don't do it except during the bubble when it was as anon@11:50AM said ("no risk"). There are many factors, including historic increases + inflation and things of that sort.
Sometimes it's a little bit like thinking about the stock market. For many types of stocks, you probably have a higher likelihood of upside when the P/E is 7 vs. when it's 27. Does that mean you won't get upside when P/E is 27? No, but it's much less likely than when it's at 7. You also have a higher risk of downside when the P/E is at 27 vs. 7.
People also often don't understand how equity works, thinking it automagically creates wealth. You have to *sell* to actually gain equity. Extracting equity without selling just adds more debt, which doesn't work if you're trying to build wealth.
People also screw up the projected length of stay frequently. You can often get bogged down in carrying costs if you engage in what's usually given as typical, a 5-7 year stay, considering how little of your mortgage you've paid down 10 years into a 30-year loan.
Posted by: sfrenegade at January 27, 2010 12:23 PM
[So it's probably safer to ignore the 2% you are earning today as an anomaly in an era of interest rates being manipulated artificially low. CD rates will likely rise and make it a wash. Making a buy decision on 2% effectively locks in the 2% rate for a long time, and I doubt you'd want to do that in an artificially low interest rate environment.]
In fact locking in a rate for a long time is worse then being not locked in, so you should get compensated for this. For bonds, how much you get compensated for this is indicated by the yield curve.
If you really want to do an "apples to apples" comparison of an investment which locks you in for some period of time you can go to some site like Yahoo finance: http://finance.yahoo.com/bonds
Pick how long you plan to be locked into a house (or any other investment) and look on the yield curve for what you can use for your risk free rate of return.
This really is a good way to calculate the true cost of ownership. Once you have this cost, you can then look at whether this cost is worth any future capital gains or losses.
You most definitely want to consider the strong possibility of a capital loss particularly if your true cost of ownership is more then renting. Losing money every month only to then suffer a large capital loss at the end is not an attractive proposition.
Posted by: tcsf at January 27, 2010 12:41 PM
"...because a renter will never have the opportunity to realize any kind of capital gain, whereas a buyer would."
Brahma: It's all about timing. This is a noteworthy point in 2002. 2010, not so much.
Posted by: Willow at January 27, 2010 1:29 PM
uh, to get back to the listing. does anyone know if this is loft style? I have friends who want to move to the neighborhood, but cannot manage stairs. if this is only on one floor, this might be a good listing for them.
Posted by: tharpo at January 27, 2010 2:06 PM
Agree with Willow 1:29 PM 100%. Timing IS everything.
A first hand experience illustrates the timing issue: 1200 sf 2/2 with great view in Pacific Heights was purchased in 1974 for 90K. HOA was $250/month. Price went up to almost 200k in 1978-79 (inflation at 16%) then dropped to 140K during the tough early Reagan ('80-81) inflation fighting years when prime was over 20%. I took out an adjustable loan to buy my home outside SF from Bank of America at 12% with an amazing 50% cap ! Price of said unit was close to 300K in '87-88 but was sold in a very poor market during the 1991 recession for 237K minus 14K commission. HOA then was $445. Similar unit in 2006 was asking for 1.3 million and HOA was well over $1000. Last look - similar unit probably worth 850k with an even higher HOA. The data points are not exact and incomplete but enough to show historic example of points in time you can make big money in real estate and points in time you can get killed. They were there even back 20-30 years. Making money in real estate investment at today's much higher prices is difficult at best where the return percentage-wise is smaller and the loss risk far greater. Higher HOA obviously tips the equation even more to the risk side.
So buying a home in San Francisco, particularly a condo, really should never be considered an "investment." It is a life style choice and it has a cost.
Posted by: Outsider at January 27, 2010 2:35 PM
@tharpo I saw the Unit yesterday. It's a single floor unit as are all the penthouse units at 200 Brannan.
Posted by: loftlover at January 27, 2010 4:11 PM
I think we're going to see, and soon, an avalanche of owners in buildings like this just walking away. Hey, if Morgan Stanley can do it, then so can the little guy.
Posted by: deshard at January 27, 2010 5:37 PM
Brahma: It's all about timing. This is a noteworthy point in 2002. 2010, not so much.
We're in agreement on that. I thought I made it clear that I also agreed with tipster's main point that now is not the time to buy, either in general or this condo in particular. And since I'm at it, I'll also amplify the point I thought I conceded, which you pointed out at 9:52 AM, that the real estate agent who purchased this place in April 2005 had to have been betting that the bubble would continue apace in order to justify asking for 24% more on the place after a hold of 15 months.
Now, a slight tangent on timing. Tipster wrote that the time to look at buying a place like this is when rent vs buy is at parity. I tend to agree with that because it's a fundamentals-based approach, but there are other approaches, too.
For example (and playing a bit of the Devil's advocate here), a slightly different approach is analyzing when the spread between what you'd spend on renting and what you'd pay each month for a mortgage is at a historically narrow point. This is what Forbes magazine did when they put together that list of "10 Cities To Go From Renting To Buying" last week:
In Portland, San Francisco, Minneapolis and Washington, D.C., the premium to buy—the spread between what you'd spend on renting and what you'd pay each month for a mortgage—is far narrower now than its 15-year average. And economists predict a significant home-price hike in five years…and home buyers are likely to get a good return on their investment…Note that buying isn't necessarily cheaper than renting in these metro areas.…Take San Francisco. To live here has always required a hefty bump in monthly costs from renting; it's normally an incredible 296% more expensive to buy than lease a home, and the city's residents know this. That's why 42% of them stick to renting. Even though in the third quarter of 2009 the premium was still in the triple digits—233%—it had shrunk by 63 percentage points from the above 15-year average.
Essentially, the Forbes magazine approach takes into account that the market might never return to what the fundamentals imply price levels should be, and says that you should take the plunge when the market is least irrational in a reasonable time horizon. Anyway, like I said, I'm not putting that out there because I buy it (I certainly don't think that significant price appreciation is in the cards over the next five years), but it's at least worth considering.
Posted by: Brahma (incensed renter) at January 27, 2010 7:49 PM
Forbes is complete garbage. They will do anything to come up with a top 10 list.
If the SF market never returns to fundamentals(rent v. own), that is all the better for us renters. It means landlords will continue to subsidize our housing costs out of the hope for future appreciation. We will save money by not buying, keep our assets liquid, and have complete mobility.
I think fundamentals will rear their head over the next 2 years though...even in the face of declining rents...
Posted by: J at January 27, 2010 8:17 PM
Brahma: Fair enough. I agree that not everyone buys property through the rational prism of "rent versus buy" that Tipster presented in this thread. For comparison purposes he/she correctly used I/O financing in his/her hypothetical transaction although I think most banks are not evening offering this product any more. (Or are offering it at a significant premium over the tradition 30 year P&I.)
I agree with J on Forbes. Incomes are nowhere near the level they need to be to support the 04-08 run up in prices. I will make a distinction however between SFH and the wider SOMA condo market. The supply of entry level homes, particurlarly in B grade hoods that are transit friendly like Bernal Heights, Glen Park and Valencia Corridor is relatively limited so I do see less of a fall in value for properties that fit this profile. SOMA however I think is going to continue to get mauled for many of the reasons that have been brought up in this and previous threads.
Posted by: Willow at January 28, 2010 11:47 AM
FWIW, here's an apple within the building. The condo at 200 Brannan #309 was originally purchased for $861k in Oct. 2004; it recently sold (2/17/10) for $875k.
Posted by: EBGuy at March 3, 2010 3:18 PM
Wow. They were advertising #309 as more than 1500 square feet! That's BELOW $575 psft. For the Brannan?! That's one of the nicest complexes in the area. Are you sure, EBGuy?!
Posted by: tipster at March 3, 2010 4:02 PM
^My mistake. That's not THE Brannan.
Posted by: tipster at March 3, 2010 4:04 PM
$861K in 2004 is $988K in 2010. A sale at $875K is an 11% real loss. The 2009 tax value was $932K -- wonder why they didn't appeal it.
(use usinflationcalculator.com, standard quirks about CPI)
I'm sort of unclear on why #309 was listed as a 2/2, when it's a 1/2 with 2 "flex spaces" according to the listing:
Posted by: Anon E. Mouse at March 3, 2010 6:45 PM
I think the inflation adjusted price is kind of lame..
If you had put that $864k into the DJIA you'd have ended up with $900k.. Sure, nobody would actually do that, but to imply that somehow they lost 11% is kind of misleading, very very few people's investments have actually kept up with inflation over the last couple of years.
Posted by: R at March 4, 2010 9:18 AM
@R: I agree, especially in the short timeframe that this would be considered.
I will assume that a person in the market to purchase the property would have had the cash for down payment in a relatively liquid asset, which would not have kept up with inflation.
Posted by: SFRE at March 4, 2010 9:35 AM
"I think the inflation adjusted price is kind of lame.."
Regardless of whether or not it is "lame," it is the true way to value these things. Whenever someone tells you housing is a good "investment" (which makes me cringe), you need to look at real returns when including ALL costs of ownership (including property tax, insurance, maintenance, HOA, leverage, etc.). This includes inflation, especially since we often see nominally flat prices in housing busts (as for this place), indicating real losses.
Posted by: Anon E. Mouse at March 4, 2010 10:14 AM
@Anon E Mouse: I think its probably more valid to look at the opportunity costs of other investments (i.e. CD rates, Savings rates, DJIA growth, etc.), than the CPI. Since the cash that you had for the down payment would probably be in one of those instruments.
Posted by: SFRE at March 4, 2010 10:21 AM
SFRE -- obscuring the true cost of ownership helps no one. You also don't seem to understand the relationship between inflation and interest rates/stocks. In order to determine a true rate of return, you always have to exclude inflation. Ever heard of TIPS?
Furthermore, are you really that impressed with a 0.27% annual rate of increase between 2004 and 2010, when you haven't even included costs of financing or inflation? Even in these times, one can easily make 2% on savings.
Posted by: Anon E. Mouse at March 4, 2010 10:29 AM
My point is this:
If the owner had taken all their downpayment and monthly payments and invested in the DJIA (assuming $11k in taxes, $2k in insurance, and $500 a month HOA, 5% interest rate, minus what they would have paid for rent ~$3000)..
They would have spent ~$256k. And would now have $251k to show for it. The ~$256k inflation adjusted would be ~$275k now. So a 'real' loss of ~10%.
That's why I say this is not the best way to look at it.. You need to look at what the money would have done if you weren't spending it on real estate.
Caveat: My conference call wasn't long enough, so I didn't calculate the inflation adjustment for each month of the money paid in.. And who knows, my numbers could be wrong.
Posted by: R at March 4, 2010 10:54 AM
@Anon E Mouse: I definitely understand the relationship between inflation and interest rates/stocks. I'm just saying if people had cash to put down, and they didn't buy the place, where would they have put that money? I guess you can put it in TIPS, but then you are locked out of your money for at least 5 years.
And I'm not saying that it was a good investment, just that I would rather measure it against opportunity cost vs. inflation. For me I would rather look at opportunity cost of DJIA or Money Market rates vs the CPI (including costs of selling, etc.)
PS: Where can you make 2% on savings that is not a longer range CD?
Posted by: SFRE at March 4, 2010 10:54 AM
Try Alliant Credit Union for the 2% on savings. No gimmicks. They have a 1.75% checking account too.
I'm sort of unclear why we are comparing to the DJIA, although I suspect it is an attempt to call housing an investment. That's a false comparison regardless of the reason.
If people are saving down payment money, it'd be odd to put it in the Dow. You'd do best to put it in something safe, or maybe even something that mimics real estate costs (although you'd have to figure out what that is). Even in the lowest rate environment we've had in recent times, your return on safe savings was better than this place.
And you can invest in TIPS without buying TIPS directly, but my point was more that people need to consider inflation than suggesting that someone should buy TIPS with down payment money.
Posted by: Anon E. Mouse at March 4, 2010 11:07 AM
I agree, putting your money in savings would have been better than buying this place.
I mentioned the DJIA as a barometer, and being that it was rising during that time period, we know people were putting money in there, not everyone was a conservative as people who do their homework.
Posted by: SFRE at March 4, 2010 11:13 AM
No attempts to call housing an investment. And not saying this condo was a good investment.
All I'm saying is that saying this person had a 'real' loss because they didn't keep up with inflation is not the best way represent what happened here.
And I used DJIA simply because it's a standard for investments used worldwide (unlike say, Alliant Credit Union). And theoritically, if one wasn't paying to own this condo, one would have invested that money. Sure, could they have done better 20/20 hindsight putting the money in a CD, yes. But they still would have lost out to inflation.
Posted by: R at March 4, 2010 11:21 AM
"Sure, could they have done better 20/20 hindsight putting the money in a CD, yes. But they still would have lost out to inflation."
No, they wouldn't have lost out to inflation if they used savings instruments correctly with down payment money. That's the point. You haven't really explained why inflation isn't relevant here in figuring out the true cost of buying this condo (no one said it's the "best way" to represent anything). Lots of people are happy to say "oh well, at least they made $14K," because they don't calculate true costs, so we can agree to disagree.
But as I mentioned, this is how housing busts often work when you're past the initial drop -- somewhat flat nominally with increasing real losses as time goes on. Just look at the 90s bust.
Posted by: Anon E. Mouse at March 4, 2010 11:33 AM
I live at 200 Brannan, I am one of the original owners there and it has been an extraordinarily negative experience. I most likely know more about the 200 Brannan property than most anyone else, certainly anyone that is willing to tell it like it is. Presently, I'm stuck there, but will be moving on when it is reasonable for me to do so. For more about it, check out my blog at:
Posted by: Mr. Allison Barton Ricce at August 20, 2011 12:10 AM