May 24, 2011
"San Francisco" Prestige Index Drops 4.3% In First Quarter
The First Republic Prestige Home Index for "San Francisco" homes valued at more than $1 million dropped 4.3 percent from the fourth quarter of 2010 to the first quarter of 2011, down 1.9 percent on a year-over-year basis, down 19.2 percent from a third quarter 2007 peak, and back to between first and second quarter 2004 levels.
As always, keep in mind that the "San Francisco" index includes "a cross-section of luxury homes in Alamo, Atherton, Belvedere, Danville, Healdsburg, Hillsborough, Lafayette, Los Altos, Los Gatos, Mill Valley, Moraga, Orinda, Palo Alto, Piedmont, Portola Valley, Ross, St. Helena, San Francisco, Saratoga, Sonoma, Tiburon and Woodside."
∙ First Republic Prestige Home Index: San Francisco [firstrepublic.com]
∙ "San Francisco" Prestige Index Up 1.5% In Fourth Quarter [SocketSite]
First Published: May 24, 2011 7:00 AM
Comments from "Plugged In" Readers
Interesting to see the blip from 2009. Was it a technical rebound, an effect of QE 1+2, the result of the widespread belief the bottom had been reached?
In any case, it's a minor second dip for now. The next year will tell us what this is all about.
Posted by: lol at May 24, 2011 7:27 AM
Nice resumption of the slope. Long way to 1996.
Posted by: tipster at May 24, 2011 8:27 AM
It will slowly make its way back to Y2K and flat-line for years.
Posted by: dogboy at May 24, 2011 9:00 AM
Since I can't really even afford the 1996 price of a luxury home, I guess this is irrelevant.
Back in the real world, a tiny 3br house next to me just sold in a week for $800k (over asking!). I am trying to reconcile that outcome (i.e. reality) with the prediction that a luxury home (however that is defined) will someday be selling for $1M.
Posted by: Jimmy (No Longer Bitter) at May 24, 2011 9:25 AM
Properties are selling daily across much of the city for late 2004 to 2006 sort of prices. So the downward pressure of the changed lending market is mitigated block by block. The next big big step would be a rollback to early 2004.
Posted by: [anon.ed] at May 24, 2011 9:30 AM
"with the prediction that a luxury home (however that is defined) will someday be selling for $1M."
I'm not 100% clear what you're saying here. They presumably picked a selection of houses valued at over $1M at some point in time (i.e. either at a fixed date or at last sale or at second to last sale,...). If I make a house price index composed of houses over $1M it's no great prediction that some components of my index will be near $1M at some point in time!
Basically they are attempting to create something like a higher priced tier for the case shiller. Albeit with an odd geographic reach.
Posted by: tc_sf at May 24, 2011 9:47 AM
"It will slowly make its way back to Y2K and flat-line for years."
Actually, it has already made it back to 2000. If you adjust for inflation, the current index number is between Q1 and Q2 of 2000. $2,491,950 in 2011 is $1.908M in 2000 dollars. Q2 of 2000 was $1,942,700 and Q1 was $1,826,029.
For reference, the inflation-adjusted 2007 peak of $3.085M is $3.346M in 2011 dollars.
Posted by: sfrenegade at May 24, 2011 10:17 AM
does anyone know whether the methodology that first republic uses is as reliable as case-shiller?
[Editor’s Note The First Republic Index is based on Case-Shiller data.]
Posted by: observantneighbor at May 24, 2011 10:38 AM
Looking at this on an absolute basis can be a bit scary but it's not so much if you break it down by percentages. Roughly speaking the index 2x'd in 5 years from 85-89 where it dipped for a bit (8 years) till it got back to 2x in 97. Hard to argue the data there if you give this index any credit.
So it doubled again in 4 years from 89-01 and dipped a bit again before climbing another 30% over 6 years to the 08 peak. I don't think it so unrealistic to think that we're in another 6-8 years slight dip and recovery like we saw between 89-97. The question really is how far will we dip and how far will we recover? I could easily see this index bottoming around the 2003 levels and fighting its way back to some level higher over the next 4-6 years. Maybe get back to 06; not unrealistic. I think dropping back to 1996 is totally unrealistic not is it supported by the trends.
Sure we'd all like to go back and buy Apple stock in 1997, 2001, 2004, or Google, or ...... But we can't really do that since those companies have all grown and the fundamentals no longer support those lower valuations.
Posted by: eddy at May 24, 2011 10:43 AM
At least it isn't the dreaded "Bay Area" statitics which is completely devoud of any true meaning.
Posted by: kathleen at May 24, 2011 10:45 AM
Maybe someone can post an update to this chart that accounts for inflation (CPI, money supply, whatever). I think if you chart prices vs. money supply you will find we are already back to 1996! Smooth sailing ahead!
Posted by: Jimmy (No Longer Bitter) at May 24, 2011 11:19 AM
"I think if you chart prices vs. money supply you will find we are already back to 1996!"
Nope. Q3 of 1996 was $1.159M in 1996 dollars. That's only $1.661M in 2011 dollars. Prices would have to drop 34% to get back to that.
Posted by: sfrenegade at May 24, 2011 11:35 AM
@Jimmy, good point. Not sure we'd ever get full agreement from anyone though. I think the nominal view presented here works just fine. The bottom line is that no one wants to bring money to the table when they sell their home. The bears only use the argument to support their positions. I'm not discrediting the value of adjusted data as it it important in the macro sense, but its almost always used as a smoke screen when applied to a specific case.
Posted by: eddy at May 24, 2011 11:36 AM
I think eddy has it about right, although I don't see us hitting the bottom for at least another couple years. Of course, the 2003 level was also the 2000 level, and I'm guessing we continue downward a little further than that before starting the multi-year bounce on the bottom (while inflation brings the real bottom even lower).
I don't see us going back to nominal 1996 levels unless there is some catastrophic shock -- all-out war in major oil producing countries, or the tea-partiers win the presidency and crash the economy, or something.
Posted by: A.T. at May 24, 2011 11:44 AM
" but its almost always used as a smoke screen when applied to a specific case."
Consider though the story recently recounted in this thread:
A home purchased in 1952 for $17k sold in 1996 for $540k. A 31x increase in value far greater then the doublings mentioned above. But what kind of purchasing power does $540k get you?
Using a standard 4% withdrawal rate about $21k per year.
Even in 1996 this was not that much.
The entire reason to consider inflation is that while it may be small on a year to year basis it can add up over time and it is better to consider it as you go along then be shocked when the smoke clears many years later at the level of purchasing power afforded to you or your heirs.
While very important in the macro sense, if you or your heirs plan to consume anything denominated in dollars it would seem wise to consider inflation even in the individual case!
Posted by: tc_sf at May 24, 2011 11:53 AM
"I'm not discrediting the value of adjusted data as it it important in the macro sense, but its almost always used as a smoke screen when applied to a specific case. "
eddy, your comment is internally inconsistent. You say "the nominal view presented here works just fine," but that inflation should be considered in the macro case. What is The Prestige Index other than the macro case? Furthermore, how else do you compare 2000 to now?
For the individual case, we can debate the value of it, but the goal is to show the reality of home ownership because most everybody thinks of their home as a "good investment" (whether long-term or not). People rarely internalize costs well. When considering the cost of operating a car, people usually consider that it costs $4.30/gallon to drive 25 mpg, instead of considering insurance and maintenance in their costs.
Where's the smoke screen when showing reality? I'm certain we've seen posts regarding houses which sold for the same price in 2000 or 2001 as in 2008 or later. Should those people really be so happy with their decision? Maybe it's just perspective, but "I brought no money to closing" doesn't really cut it for me when considering a major financial decision with a large percentage of my portfolio.
Posted by: sfrenegade at May 24, 2011 12:14 PM
It comes down to whether you think now is a good time to buy a house. If you think we're headed back to 1996 nominal than it would be hard, if not impossible, to build a case where buying a home makes sense. If you think we're in a dip cycle and plan to hold for 5+ years, maybe it's not so bad. Make good decisions with good information and you'll be ok. See name link for such an example of a 5Y hold over the past few years that did not end in a financial disaster.
Posted by: eddy at May 24, 2011 12:26 PM
@sfrenegade: well according to the Federal Reserve, you're wrong.
M2 money supply in April 1996 was 3729 billion, while M2 money supply in April 2011 was $9033B, up 242% in 15 years.
Correcting today's price of $2.5M by a factor of 2.42 puts us back at $1.03M, or approximately where we were in the mid-1990s.
Now we can all start arguing about whether money supply or CPI inflation are truer measures of "real" inflation. I prefer to use money supply because it proves I'm right.
Posted by: Jimmy (No Longer Bitter) at May 24, 2011 12:28 PM
"If you think we're in a dip cycle and plan to hold for 5+ years, maybe it's not so bad. "
Something with flat pricing that generates cash flow would be very different from something with flat pricing and negative cash flow.
Posted by: tc_sf at May 24, 2011 12:34 PM
@eddy, is that the apple you submitted to SS last week?
It's certainly surprising that anything is selling around the same price that was purchased in 2006, although being in the upper tier, in a highly desirable neighborhood makes it less surprising. Although after trading & holding costs they still would have experienced a ~7-10% loss of, and depending on the amount of down payment, somewhere between 10% & 500% loss on their initial investment (equity). Assuming 20% down, they would have experienced a 40-50% loss on their initial down payment
Personally I think buying a home with the explicit plan of selling in 5 years is almost always a bad plan. You may luck out, but in a normal market costs will eat up whatever appreciation can be gained. Plan for 10 years, or longer, and you will probably be fine.
Plans don't always work out, but it's better to have a realistic plan with the understanding that things may go wrong, than an unrealistic plan that requires the 1 out of 100 event happening in order for it to work right.
Posted by: lyqwyd at May 24, 2011 12:40 PM
"Now we can all start arguing about whether money supply or CPI inflation are truer measures of "real" inflation. I prefer to use money supply because it proves I'm right."
I agree with the idea that real inflation has been higher than reported for decades. I don't know if M2 is the right number to use, or even if it is, if there's some sort of adjustment needed, I believe at least some sort of population adjustment would be needed as well (I believe a $100 M2 at 10 population would result in the same prices as $110 M2 with 11 people, but I could be completely wrong). I don't have a solid enough understanding of the issues so I'll let others debate that.
But I think either M2, M3, or inflation are much better to consider than just looking at nominal prices.
Posted by: lyqwyd at May 24, 2011 12:47 PM
" Plan for 10 years, or longer, and you will probably be fine."
Note though that if flat pricing for the last 5 years is an unexpectedly good result and even a bull like eddy considers flat pricing for the next 5 to be a good result, it could prove to be a poor 10 year period.
Posted by: tc_sf at May 24, 2011 12:47 PM
I was trying to see if I could say something funny about the shape of the graph: like it looked like a famous person's silhouette or something, when I realized that's it's a pretty good image of a traditional "head and shoulders" top. The head and shoulders top is often seen at the top of a market and portends a long and large decline. The right shoulder represents the last set of suckers who think things look cheap and wade in to buy before the whole thing collapses.
There is one significant problem, however. The right shoulder is much higher than the left. The left is around 2.1M in 2001 and the right is about 2.55M in 2009.
However, if you plug it into the inflation calculator the left and the right shoulders match up pretty perfectly. 2.1 in 2001 dollars is almost exactly 2.55 in 2009 dollars, not that the match is needed to be so exact.
Posted by: tipster at May 24, 2011 12:49 PM
Considering that a while back a poster here revealed that by their buy vs rent calcualtion they'd need to see 6% annual appreciation to come out ahead.
@ lyqwyd - It would be more common to scale money supply by amount of goods and services or sometimes assets then by population. More money chasing more goods is not inflationary.
Posted by: tc_sf at May 24, 2011 12:54 PM
I'm not saying 10 years guarantees success, only that from my perspective it's roughly the minimum time-frame for a reasonable plan when purchasing a property.
Just like 5 years could work out well if one is luck, ten years could work out poorly if one is unlucky, but I prefer the plan that tends toward success without having to rely on luck.
Posted by: lyqwyd at May 24, 2011 12:58 PM
"It would be more common to scale money supply by amount of goods and services or sometimes assets then by population."
that certainly makes more sense than population, thanks.
Posted by: lyqwyd at May 24, 2011 1:01 PM
"Now we can all start arguing about whether money supply or CPI inflation are truer measures of "real" inflation. I prefer to use money supply because it proves I'm right."
Only because you selected a rigged timeline. Look at M2 from 2004 to 2009. That doesn't match the housing market at all.
Posted by: sfrenegade at May 24, 2011 1:24 PM
@lyqwyd, yes that is the one. Assuming they had 7% selling costs they lost 90k ($50/day) to live there. I'm by no means a bull and I'm the first to state that this is not a great market to be faced with making a decision; but it's clear that certain participants want you to think the "rapture" in Sf real estate is still coming. I say it's largely come and now we're dealing with the lingering effects of the hangover. Still more losses to come for those that made bad decisions. But good decisions like the one I linked to above, 135 Locust, etc. prove (to me) that a savvy buyer can still take find adequate risk. And flippers / developers are still doing surprisingly well (i.e., 3362 Jackson).
Posted by: eddy at May 24, 2011 1:30 PM
"You may luck out, but in a normal market costs will eat up whatever appreciation can be gained. Plan for 10 years, or longer, and you will probably be fine."
Yeah, and even that might not be enough to be "long-term." For example, 1988-1998 for housing was on average not that lucrative. But that's the point - when you factor in all costs, it's not always as much as people think.
What it usually takes is some sort of external change to go beyond the trend line. It's possible the dotcom boom permanently changed things, but hard to tell when you consider other confounding factors, such as Prop 13 or land use restrictions.
Anyway, it's interesting that we're at inflation-adjusted 2000 now for very high end Bay Area properties, since a lot of people see that as the fundamental change here.
Posted by: sfrenegade at May 24, 2011 1:36 PM
$50 a day, $1,521 a month, $18,250 a year, $91,250 over the period of the hold. At the end of the day, if I lost $90,000 in five years I wouldn't be too happy with my investment. And that calculation is at about the lowest realistic trading cost, which doesn't factor in property taxes, maintenance (or mortgage, but we can more or less ignore that since they would have had to rent otherwise).
I don't consider your link above a good outcome, or a good decision. Sure, it's better outcome than those who's homes lost 50% of their value in the same timeframe, but it's still a real (and large) loss, and far worse than somebody who recognized the market was overvalued and rented the equivalent property over the same time.
I think today it makes more sense to buy, and agree that those who plan for a long time horizon (although I think 10+ years rather than 5) will probably be OK, but I also think the market will continue down for the rest of this year, and it will be a smarter move to wait until at least 2012.
Posted by: lyqwyd at May 24, 2011 2:29 PM
Didn't the capital gains exemption on residences go into effect in 1997? Giving people a tax free gain up to $250,000 (or $500,000 for couples)? http://www.irs.gov/faqs/faq/0,,id=199598,00.html That may have had some impact on the price going up.
Posted by: SFHawkguy at May 24, 2011 3:02 PM
"Didn't the capital gains exemption on residences go into effect in 1997? "
An interesting side note here is that one of the technical rationals for something like this is the relationship between inflation and capital gains. Specifically that you end up paying capital gains tax based on nominal changes in value so that your real tax rate can vary wildly based on inflation.
The worst case can happen during periods of stagflation where real growth stalls combined with high inflation. Imagine you buy stock at $100, hold it over a period of a 2x change in CPI. If there has been no real growth and you sell it at $200 your real return is zero yet you still pay tax on your $100 per share of "gains".
Regardless on your views regarding the appropriate rate of taxation on capital very few economists believe that this sort of arbitrary change in the CG rate is a desirable effect. Obviously this affects stocks, bonds and real estate and indexing the tax cost basis to inflation would fix this for all asset classes, but that solution has had very little political traction.
One can speculate as to the political process that yields partial "fixes" like the $250k exemption for primary residences, but as illustrated above long term homeownership has the ability to blind people to the short term consequences of inflation only to be hit with the accumulated impact at time of sale. This causes a more visible effect, but no more significant, then you'd get when buying and selling stocks every few years.
Posted by: tc_sf at May 24, 2011 3:34 PM
"Didn't the capital gains exemption on residences go into effect in 1997?"
It certainly encouraged amateurs to try to flip houses in 24 months, successfully for a few years at least.
The capital gains exemption probably had some effect, but I don't think it's a huge driver. In a normal market, it certainly helps mitigate transaction costs. The tax rate on long-term cap gains was higher in 1997, but is only 15% now, so the effect now is less than when it was enacted.
Posted by: sfrenegade at May 24, 2011 3:35 PM
The house you live in is NOT an investment. Compare rent versus own if you must, but the rest of these debates are non sequitur. Even rent versus own calculations must take in to account your own personal biases and expectations. For instance, I'm willing to pay a sizable premium to own just to just to not have to deal with a landlord. Also, most of the homes covered by the prestige index are difficult if not impossible, to rent. Housing in this sense is NOT a commodity and "prestige properties" are even further away from having any commodity traits. In SF proper I believe the $2M and up properties will outperform the rest of the market.
Posted by: Skirunman at May 24, 2011 3:46 PM
"The house you live in is NOT an investment."
"In SF proper I believe the $2M and up properties will outperform the rest of the market."
The first statement would be more persuasive if people were not constantly talking about housing using statements from the financial and investment world like the latter.
Additionally one could look at statistics of household net worth to see just how many families have a great deal of their future tied up in the financial performance of their house.
Posted by: tc_sf at May 24, 2011 4:08 PM
It is an investment, and for most people it's the largest investment they will make in their entire life, and will account for the vast majority of their net worth. But it is not ONLY an investment, so yes for some people there are other considerations. I agree with you regarding having a landlord, but on the other hand renting frees you from maintenance, risk in the property (your largest investment) being destroyed or seriously damage, and renting gives you much greater mobility.
Deciding to buy one's home should be evaluated from the investment (rent vs. buy, potential gains/losses vs. opportunity cost), as well from the perspective of the pros and cons from a quality of life perspective. Neither should be ignored, but most people don't put much thought in to either as society tends to look at home ownership as superior to being a renter, and most people don't seem to look any further than that.
Posted by: lyqwyd at May 24, 2011 4:13 PM
We've talked about this recent "prestige" apple:
$2,660,000 in April 2006. $2,100,000 in April 2011.
It did outperform the market in percentage terms - down "only" 21%. But it certainly did not outperform it in terms of dollars down the toilet - $560,000 (plus commissions, plus "owner's premium" etc.).
Hard to say how things will go in this upper, upper segment. On the one hand, the rich have done better than the rest in this downturn. On the other, as shown by this index, prices are falling quickly in this segment, and the wealthy tend not to be stupid, and the laws of supply and demand apply even here.
Posted by: A.T. at May 24, 2011 4:15 PM
"For instance, I'm willing to pay a sizable premium to own just to just to not have to deal with a landlord."
Yeah, although if you are renting decent places, you can usually find a decent landlord. I think when most people think of landlords, they think of the place they rented in college.
"Also, most of the homes covered by the prestige index are difficult if not impossible, to rent. "
Yes, I think in this category, it's a little harder to compare rent vs. buy because it's a luxury property. This category of housing might be more like consumption than investment, but people sometimes believe in the fallacy of it being a good long-term investment. It depends on the city, however, since someone may want to live in Palo Alto for the good schools. In that case, it's not as much pure consumption, as a house in this category in SF might be.
Posted by: sfrenegade at May 24, 2011 4:30 PM
"Neither should be ignored, but most people don't put much thought in to either as society tends to look at home ownership as superior to being a renter, and most people don't seem to look any further than that."
Yes, apparently you can piss away rent, but you can't piss away mortgage interest. There are advantages to each path.
"But it is not ONLY an investment, so yes for some people there are other considerations."
There often are other considerations, which is why things often blur the line into consumption.
Some people are very good at putting homeownership into the mix with their other life goals. Other people seem to focus so hard on homeownership that they comprise their other goals. If you do the latter while being informed about the costs of doing so, godspeed to you. However, many people misjudge the costs, and many more did so during the boom, without being informed, and that's a tragedy.
Posted by: sfrenegade at May 24, 2011 4:50 PM
"Also, most of the homes covered by the prestige index are difficult if not impossible, to rent. "
even that is an exaggeration, it's not that hard to find a house for $1-$4 million house to rent in SF, I just did a quick craigslist search of 3+ beds at $10,000 per month and over and there were about 40 listings (pacific heights, russian hill, hayes valley, marina, cow hollow, not hill were the locations of most).
It would probably be hard to find a $10+ million dollar place to rent.
Posted by: lyqwyd at May 24, 2011 4:53 PM
"Some people are very good at putting homeownership into the mix with their other life goals. Other people seem to focus so hard on homeownership that they comprise their other goals. If you do the latter while being informed about the costs of doing so, godspeed to you. However, many people misjudge the costs, and many more did so during the boom, without being informed, and that's a tragedy."
I agree 100%
Posted by: lyqwyd at May 24, 2011 5:07 PM
I never said this was some fairy tail outcome for the owners of Buelah, but $1500/mo to live in that home that would have cost north of $5k to rent per month; or more realistically, this place simply wouldn't rent since comparable homes do not come up at normal rent prices, is not a bad outcome when compared to the implied rental alternative. There is a real cost of living to "live" anywhere. So rather than spend 300k on rent over 5 years they got to live in their own home. I'm too lazy to do the math on taxes, etc... but basic b/e on the 91k selling costs versus the 300k on 5y rent leaves 41k per year for taxes, interest, maintenance. Given the fast close on the home in 2006 my guess is they were cash buyers so their interest expense is questionable. I'm willing to bet that these sellers feel pretty good about this outcome. And the new owners should feel pretty good too, IMO. It's still a very nice / appealing home that will sell well in almost any market. Lastly, simply focusing on the comp setting price; not a bad outcome. That said, hard to discount the gentrification of Cole Valley / Haight + Whole Foods as adding stability to the price versus just pure market appreciation.
I'd hesitate to user Prestige and Lower Pac Heights in the same sentence with regard to 1855 Laguna. This is an prime example of a bad purchase decision.
Posted by: eddy at May 24, 2011 5:15 PM
"but $1500/mo to live in that home that would have cost north of $5k to rent per month;"
The mortgage payment and/or opportunity cost on $1.6M would seem significant as well. b/e somewhere near $8500/month
The listing also mentions a remodeled kitchen and bath as well as the blog mentioning a newly landscaped garden.
Posted by: tc_sf at May 24, 2011 5:24 PM
The kitchen remodel was done prior to the 2006 sale and still qualifies as "newly". I'm sure it cost a ton to put down that sod. 5% on 1.6 = 6666/mo.
Posted by: eddy at May 24, 2011 5:30 PM
The baths were also remodeled prior to the 2006 buy. The expensive sod (/sarcasm), or virtually free grass seed was essentially the only change.
Posted by: eddy at May 24, 2011 5:33 PM
quote from my earlier post
"doesn't factor in property taxes, maintenance (or mortgage, but we can more or less ignore that since they would have had to rent otherwise)"
They did not live in the house for $1,500 a month, they lost $1,500 simply from the sale, or more accurately about $90,000 at the moment of sale, as those losses would only be paid on sale (trading costs). They also had to pay a mortgage, as well as property taxes, insurance, maintenance, and other miscellaneous ownership costs.
From tc_sf it sounds like it may not even have been an apple if the kitchen and bath were remodeled.
Posted by: lyqwyd at May 24, 2011 5:35 PM
"The kitchen remodel was done prior to the 2006 sale and still qualifies as "newly""
Possibly true, but this makes it less nefarious that this home was not selected as an apple. Unless there are building permits documenting the time frame someone could have a hidden agenda for alleging when the remodeling was done.
Posted by: tc_sf at May 24, 2011 5:50 PM
It's an apple sans the garden which I contend was an easy/obvious fix. Prior listing and pics in name link. Better photog this time around and some fresh paint but same place. Same kitchen and same baths.
There are 3 points I think this home makes. First, this comp proves that buying in sf in 2006 at damn near peak prices didn't always have to end in financial ruin. Second, on a purely comp basis this home sold above it's 2006 price over a 5 year hold; not terrible. Third, there are most likely homes that are selling today that will fare better than this home over a 5 year hold.
My point all along is that there are good / better buys out there for the well informed buyer. We've likely seen the worst of the declines and this makes the probability of getting a better outcome down the road.... that much better. 1996 is a long way away and I do not think its coming back en mass. Cheers!
Posted by: eddy at May 24, 2011 6:42 PM
good grief you are a troll.
Posted by: [anon.ed] at May 24, 2011 6:54 PM
The property being an apple is the best possible outcome in this situation, and given that the outcome is already poor, if it turns out it wasn't an apple that just means it was an even worse outcome.
regarding your points:
1) I'm not aware of anybody saying that every purchase that happened since 2006 resulted in financial ruin, so the point seems moot.
2) Failure to be a terrible outcome is not the same as it actually being a good outcome, as you previously said it was.
3) That's not much of a point. I think everybody recognizes now is a better time than it was in 2006, but that's not the same as saying it's a good time to buy. Things could drop as far, or further than they have since then. I agree that anybody buying today expecting to hold for 5 years has better odds than somebody who did so 5 years ago, but it's still not a good plan.
I think what the example really proves is that one of the absolute best outcomes in the last 5 years still resulted in a significant financial loss. It reinforces the fact that people should take a realistic look at the market and make informed decisions.
There's still millions of foreclosed houses out there that will need to be sold, millions more that are going to be foreclosed on. Prices continue to trend down, so there are many people that may not be underwater today, but will be tomorrow. Interest rates will have to rise, and yet the economy remains week and looks to continue that way for years. These will be putting downward pressure on housing prices for years to come, and personally I think it's more likely that housing prices will trend down.
Make informed decisions!
Posted by: lyqwyd at May 25, 2011 8:39 AM
Okay Eddy, since I can't stand someone being wrong on the internet I simply have to respond to your claim that your apple was a somewhat good result (you're backpedaling now so I guess your line is it's not financial ruin--although it could be).
You're way off on the math--this was a terrible result for these owners.
Here's the monthly cost of ownership assuming a standard purchase*: $7,825 cost of ownership per month. Subtracting the transaction costs from the small gain give us further loss of 91,250, or $1,521 a month. so the grand total to live here over the 5 years cost them $9,346 a month.
Even assuming your $5,000 a month figure, which seems high to me, these people paid an extra $312,912 to live here over 5 years. Or almost twice what they would have paid by renting (and if the rental was really closer to $4,000 then they really got hosed).
Maybe this wasn't a "financial disaster", because presumably a person that can afford almost $10,000 a month for housing makes at least $400,000 a year so they can bounce back. But still, that's a lot of money to lose. Certainly not worth being able to say one is an owner rather than a renter.
*I assume 20% down, a 6.75% 30 yr mortgage (the prevailing rate in 2006--and probably more for jumbo), and $100 HOA(?). I also assume 4% opportunity cost on the down payment and a 30% tax savings.
Posted by: SFHawkguy at May 25, 2011 9:01 AM
I did some checking on eddy's apple.
The address doesn't appear in Propertyshark records.
The address doesn't appear in the SF assessor's online tax records.
The 2006 sale wasn't listed at sf.blockshopper.com
No mortgage was recorded at the time of the 2006 sale.
Thus, we know two things: there isn't any way to verify the recorded price, and the buyer had a lot of cash.
Some buyers with a lot of cash were doing a few things to try to lower their property tax bills. First, they would pay the commissions separately, and that wouldn't be recorded in the sale price. Second, we've seen examples of people with a lot of cash offering a low price for the home and an outrageous price for the furniture. So, the buyer shorts the offer on the home by $175K and offers $175K for furniture and artwork that is subsequently hauled to the trash.
It's possible the seller lost $250K on this home, but it was recorded as a profit, because the original sale price was recorded extra low to save on property taxes.
I don't of course know if any of that was done. But when you see someone claiming that someone made money on a 2006 buy, I'd say the chances that such a thing really occurred would be very, very, slim. Not impossible, but very, very slim.
Posted by: tipster at May 25, 2011 9:38 AM
Boy, it is pretty stunning that a $300,000 real loss is what one can find to tout as an excellent result! And I agree that the 2011 sale price was a very good deal for the seller, relatively speaking.
But what else are you going to blow that money on? Two kids' Ivy League educations? About $2000/mo income for life with an annuity at age 65? A charitable donation that would feed about 1000 starving people in the third world for a full year?
Posted by: A.T. at May 25, 2011 9:43 AM
And even if it was all cash, the buyer probably came out worse than if he rented.
Let's assume 4% opportunity cost: $63,600/year. Let's also assume $18,285 in property taxes (- $5485 for tax savings) and $5,000 in maintenance and $3,000 for insurance.
That's a cost of ownership of $84,400 for the year, or $7033/month. Add in the $91,000 loss from the transaction cost, and its $8533/month.
This is $3,533 a month more than the fmv of a comparable rental (according to Eddy).
So the all cash buyer paying $211,980 more to live here than if he would have rented.
p.s. A note about my previous numbers assuming a standard purchase: it's actually a $260,760 loss over 5 years and not the $300K number (mistakenly x by 72 instead of 60). Also, those numbers reflect a 3.5% opportunity cost assumption (which is the standard default on the calculator I use).
Posted by: SFHawkguy at May 25, 2011 10:03 AM
tipster said: I did some checking on eddy's apple.
It looks like Redfin got the address wrong; try 1370 Beulah St. (APN 1262-034)
Posted by: EBGuy at May 25, 2011 10:34 AM
Yeah well they had a 1.1M mortgage from First Capital. Nice round number, 1.1M. Kinda makes you think there was a specific, attractive program attached. Doesn't it?
Whatever tho. Keep crunching your fake numbers with overtalkers to follow. That's what interests you blog guys.
Posted by: [anon.ed] at May 25, 2011 10:44 AM
"Nice round number, 1.1M. Kinda makes you think there was a specific, attractive program attached. Doesn't it?"
So much for the rich, all-cash buyer presumption. Interest on $1.1mm is the cap for the tax deduction (and that requires stretching the truth). Whatever assumptions one wants to make re interest rates, real selling price, etc., this was a very costly "success" for the 2006 buyer. At least they avoided the half-million-plus losses we've seen on other purchases from this timeframe.
Posted by: A.T. at May 25, 2011 10:57 AM
Actually, as I indicated earlier, it was a very fast close in 2006 so why the surprise that an all cash offer was real. Also, there was a bid date and multiple competitive offers in 2006 and I don't think there is much chance that the over asking price in MLS was understated. The selling agent would have no reason to understate the sale price or play any other games to offset the situation given that it was competitive and the time frame so short.
Just as an aside, the whole off-sale commission is way more urban legend than reality. In this case you're suggesting that they paid another 90k over the recorded sale price which would be way out of line on an already over asking situation. And the marginal tax of that 90k just isn't worth it to anyone. I've heard it bandied about many times but never, ever seen it executed personally.
There are a lot of ways to look at this property, IMO. I still think its a good outcome and appreciate the the input / views. The overall point of using this home as a valid apple comp is to demonstrate that it is not out of the question to find a home that can hold its value even through the toughest of times.
I challenge anyone to find a comparable SFH for rent at 5k that has all the amenities, location and quality of this home. The fact is many people want to / need to buy a home. And in SF you sometimes have to pay a premium to do it.
I am shocked at how willing buyers are to make poor decisions on buying overvalued properties and holding for short periods of time; but there honestly doesn't seem to be a limit to the number of people who want to own in SF. Sure demand and prices are down; inventory is up off the extreme lows from a few years ago. But it feels like a more healthy market. And comps like the one we're discussing here are positive signs. As are 135 Locust, 2655 Scott, etc... Sure you're still going to have your 1855 Laguna's / Gough / Franklin / California catastrophe situations. Judgement day is at hand for many people. But I like what I'm seeing in the market and thought it would be interesting. I guess I flawed my point and opened myself to criticism in using the individual gain/loss as a metric (as any regular reader will vouch that I rarely give much credibility to individual +/-). The comp is mush more the point here, but I still do think the sellers feel pretty good about the sale.
I'm outta things to say on this one. Thanks again for all the discussion / points.
Posted by: eddy at May 25, 2011 11:07 AM
Okay, assuming 30% down ($492,000), and a $1,097,100 mortgage, that is still:
$7,646/mo cost of ownership. Adding in the $1,521 loss on the sale, that's:
$9,167/mo cost of ownership, $4,167 more a month than it would cost to rent.
Of course this is all subject to some adjustment based on the actual figures--maybe they spent more than the assumed .25% on maintenance/improvements, maybe they refinanced to a lower interest rate, maybe they had no HOA, maybe they realized greater than 30% tax savings on their mortgage interest and property taxes--or maybe the costs were all higher--but I think my estimate is a reasonable guess at the average cost of ownership for someone in that position.
Posted by: SFHawkguy at May 25, 2011 11:35 AM
FWIW, I found 137 Beulah on SF's records. It's hard to spell Beulah correctly.
Posted by: sfrenegade at May 25, 2011 12:11 PM
not hard if you were a Beulah fan.
Posted by: sparky-b at May 25, 2011 12:17 PM
sorry I somehow lost the plot here. Was the thread about 137 Beulah all along? I looked back and couldn't find Eddy's original link. I know that 137beulah sold recently-- curious if anyone has the stats on the last two sales for that property. Thought it might be in eddy's original post but maybe I'm just missing it- will look again Heard there was a lot of bidding vs where it was listed? Thanks.
[Editor's Note: It wasn't (the original topic), but hold those thoughts and questions, all will be answered soon. And now back to the Presige Index...]
Posted by: confused at May 26, 2011 9:49 AM
Haha, got a feeling some humble pie coming my way!
Posted by: eddy at May 26, 2011 10:28 AM
Was there some sort up follow up that was forgotten here?
Posted by: eddy at June 28, 2011 2:43 PM
Lol at AT talking about a couple more years till bottom at that stage, 2011. Once again we see the lie given to the notion that the Internet made fence sitting novel.
Posted by: Anon1 at August 29, 2012 7:42 PM