January 31, 2012

S&P/Case-Shiller San Francisco: Homes Dip, Condos Slip In November

S&P/Case-Shiller Index Change: November 2011 (www.SocketSite.com)

According to the November 2011 S&P/Case-Shiller Home Price Index, single-family home prices in the San Francisco MSA fell 1.9% from October ’11 to November '11, down 5.5% year-over-year (versus a 4.7% YoY drop in October), down 40.6% from a peak in May '06.

For the broader 10-City composite (CSXR), home values fell 1.3% from October to November, down 3.6% year-over-year and down 32.9% from a June 2006 peak.

Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall. Weakness was seen as 19 of 20 cities saw average home prices decline in November over October...The only positive for the month was Phoenix, one of the hardest hit in recent years. Annual rates were little better as 18 cities and both Composites were negative.
Nationally, home prices are lower than a year ago. The 10-City Composite was down 3.6% and the 20-City was down 3.7% compared to November 2010. The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.

On a month-over-month basis, prices were up nominally for the bottom third of the three San Francisco price tiers but fell for both the middle and top.

S&P/Case-Shiller Index San Francisco Price Tiers: November 2011 (www.SocketSite.com)

The bottom third (under $314,749 at the time of acquisition) rose 0.2% from October to November (down 7.5% YOY); the middle third fell 1.6% from October to November (down 8.6% YOY); and the top third (over $586,246 at the time of acquisition) fell 1.0% from October to November, down 1.9% year-over-year (versus up 0.3% in October).

According to the Index, single-family home values for the bottom third of the market in the San Francisco MSA have dropped below May 2000 levels having fallen 60% from a peak in August 2006, the middle third has dropped below March 2002 levels having fallen 42% from a peak in May 2006, and the top third has dropped below February 2004 levels having fallen 26% from a peak in August 2007.

Condo values in the San Francisco MSA fell 0.2% from October '11 to November '11, down 7.5% year-over-year, down 35.8% from a December 2005 peak.

S&P/Case-Shiller Condo Price Changes: November 2011 (www.SocketSite.com)

Our 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).

Home Prices Continued to Decline in November 2011 [Standard & Poor's]
S&P/Case-Shiller San Francisco: Homes Slip, Condos Dip In October [SocketSite]

First Published: January 31, 2012 7:00 AM

Comments from "Plugged In" Readers

"""
the bottom third ... down 7.5% YOY;
the middle third ... down 8.6% YOY;
the top third ... down 1.9% YOY
"""

awesome

Posted by: * at January 31, 2012 9:54 AM

I bought my two bedroom TIC in Russian Hill in 2008 -- and I currently pay $3,000 per month, once I net-out the HOA, property tax, and write-offs.

The unit below me, which is not as up-to-date as my own, just rented for $4,200/month.

The best part of all? My ARM is going to reset in just over a year, and I should see a full two percentage point drop in rate. My bank is already asking me if I want to negotiate a longterm rate that is below my current one.

What would my home be worth if I put it on the market today? Who knows. Who cares?

The reality is that my home could be returning me a handsome fixed income cash flow if I rent it out next year... meanwhile, some yuppie engineer is going to pay off my mortgage over the coming decade.

Posted by: NewBuyer at January 31, 2012 10:18 AM

It's pretty obvious there is going to be no turn-around any time soon, as most here have been saying a long time. Drifting downward to flat at best.

Inflation is having a growing impact as the housing downturn drags on into its fifth year. 3% inflation in 2011 means we have real SFR price declines YOY at 10.5% (tier 1), 11.6% (tier 2), and 4.9% (tier 3). 9% inflation since August '07 means the real top tier decline since then is 33%.

Condos are at a new post-bubble low, even ignoring inflation.

And that's all with record low mortgage rates.

Lots of good non-financial reasons to buy a place, but anyone looking to do so should be sure he/she can absorb a significant decline in value. May not happen, but it's looking like a strong likelihood that can't be prudently ignored.

Posted by: A.T. at January 31, 2012 10:25 AM

NewBuyer - You forgot to factor in a vacancy, management costs, and some factor for the TIC partner default risk. Beware of going into the landlord biz without considering long term events.

Posted by: The Milkshake of Despair at January 31, 2012 10:26 AM

@NewBuyer -- agreed. Although, you've seen the cranes rising around SF. There's a tidal wave of rental units that will hit in years to come and offer some relief. That said -- do rental rates ever decline? I don't know for sure, but I suspect not.

I still feel that one thing that most people overlook is that rentals are a force that will prop up home prices past a certain point. If it becomes so extravagantly expensive to rent, why wouldn't you eventually make the decision to buy with all the incentives out there?

Posted by: kg at January 31, 2012 10:30 AM

The $3000/4200 comment is an excellent point. If the unit is worth $700K, and it is losing 4% per year, the loss is $28,000 per year or $2300 per month. Thus, your neighbor's renter is paying their loss, plus $1900. That's the cheapest rent in decades and a wonderful negative rate of return.

You should buy two of those. You'll lose your entire downpayment funds twice as fast.

Posted by: tipster at January 31, 2012 10:40 AM

How crazy rents have gone?

I recall we had quite a few 2009 stale listings for mini-mansions that had to be converted to rentals asking in the 6 to 8000s. Now a decent 3/2 apartment in a good area with a garage can rent for that price.

There was a discussion about "accidental landlords" in ORH, Beacon or Infinity where 3500/m listings seemed out of touch. Now the math even starts to make sense to purchase for the sole purpose of renting out.

This means a lot of things for buyer and already owners:

If you were selling and do want to be stuck with a loss, you can rent out and break even on cash flow. It also helps regarding job mobility. Many Americans today are underwater and unable to move to a better job. This removes some of the fear of being trapped when making the buying purchase.

Prices are lower, rents are higher. The pendulum sure has shifted.

Posted by: lol at January 31, 2012 10:53 AM

The worst of the nineties was a 1.17% Oct./Nov drop in 1990.

Posted by: EBGuy at January 31, 2012 10:54 AM

@tipster, -4%/yr for how long?

Posted by: kg at January 31, 2012 10:55 AM

"If the unit is worth $700K, and it is losing 4% per year,"

Never mind that a glance at Russian Hill TICs 2011 over 2008 shows no such 16% loss. In fact, it shows a gain. (That's probably due to mix, of course. But taking 4% loss per year, since 2008, --- the very year of the market shift -- is b.s. Like everything else you say Tipster. Full stop.)

Posted by: [anon.ed] at January 31, 2012 10:56 AM

How long? Probably a few more years, and by then, builders will be building apartments like crazy.

And yes, according to fully-self-interested posters on this site, every neighborhood is gaining except for Tenderloin Heights, which has a 1000% YOY loss, which is how you get the Case Shiller averages, while every realtor in town and every recent buyer touts the "gain" in any given other neighborhood. (For that analysis, I deserve a beer. Full sail.)

Posted by: tipster at January 31, 2012 11:24 AM

@tipster

You are correct that my home purchase price was around $700k when I bought it four years ago.

Please find me a two-bedroom Russian Hill home that is currently priced at the $590k that represents 4% annual decline...

Let's see what you come up with...

Posted by: NewBuyer at January 31, 2012 11:26 AM

Yes, condos have held their value tremendously well since early 2008. TICs have done even better.

That big dip you see in the condo chart above right about at the beginning of 2008 (the dark blue line) is totally wrong and should in fact be a flat line.

Posted by: A.T. at January 31, 2012 11:41 AM

Honestly, what are people really even arguing about anymore on these threads? The government has nationalized real estate. Mortgages are artificially cheap, foreclosures are being intentionally kept off market, and lending standards remain generally lax by long-term metrics. In other words, it's obvious that DC will not allow another big drop to occur nationally.

Add to that the current local uptick in tech (part of which, as always, is speculative, but part of which is fundamentally real and creating wealth) and to quote ex-SFer, it's like watching grass grow. More like staring at a highly-leveraged zombie watching grass grow.

These threads have become a waste of time:

Month 1, average/median price goes down 0.01%. Bears post, "Look, prices still falling! Where's that resilient market I hear so much about?"

Month 2, average/median price goes up 0.01%. Trolls come out of the woodwork, "Where are all the stoopid bears that said prices would go to zero? $X is still expensive!"

Seriously, does anybody out there really think we see either a material increase or decrease in real estate prices over the next 3-5 years? Define material however you like, say 10%+. I just don't see it but I'm happy to hear other theories...

Posted by: Legacy Dude at January 31, 2012 11:52 AM

Yeah, every neighborhood is the exact same. The Case Shiller thread can be exactly extrapolated.
lOl.

Go look at Russian Hill TICS yourself, then.

I'm tired of you two guys making the same arguments that you know are bunk. Not sure why the editor isn't. Because you're suffocating the website.

Posted by: [anon.ed] at January 31, 2012 11:57 AM

fluj, you have access to the MLS. You can see for yourself that the only Russian Hill 2BR TICs that sold in early 2008 in this price range were in one building on Hyde. And they are dinky, less than ordinary places. No way have they held their value - far nicer places have sold for less in the last couple years. And no way are they renting for $4000/mo. They have lost far more than 4% a year since 2008.

We know where the bunk is, and it is not with those calling B.S. by referring to actual facts.

Posted by: A.T. at January 31, 2012 12:12 PM

At a National level:

"In real terms, the National index is back to Q1 1999 levels, the Composite 20 index is back to April 2000, and the CoreLogic index back to February 2000."
"On a price-to-rent basis, the Composite 20 index is back to April 2000 levels, and the CoreLogic index is back to February 2000.
In real terms - and as a price-to-rent ratio - prices are mostly back to 2000 levels and will probably be back to 1999 levels within the next few months."

http://www.calculatedriskblog.com/2012/01/real-house-prices-and-house-price-to.html

On a bearish note, it feels like we are headed to, in real terms, 1995 levels before the market 'bottoms'. While timing for local markets can and will be different, as we have seen in the past, all areas tend to hit peaks and bottoms around the same time.

While SF has the advantage of Silicon Valley, I see know fewer and fewer people interested in the 1 hour bus ride (1.5 hours by car) to Google but preferring to locate in South Bay, or other location, closer to their jobs.

Add to that the lack of public transit on the Peninsula and the increasing nightlife, entertainment, and cultural options in and around San Jose the 'tech effect' may not be as strong in San Francisco as it once was.

Posted by: badlydrawnbear at January 31, 2012 12:30 PM

So it is "Early 2008" now, parsing one year. When the talking point is the fallacious 4 percent losses every year, year over year. Nope. Not having that.

Posted by: anon@ed.com at January 31, 2012 12:40 PM

The other thing I noticed is that Caltrain is absolutely emptying out at the Bart connection in the northbound direction from Silicon Valley. The work-on-the-train laptop crowd has discovered the East Bay.

As for Russian Hill, we've seen plenty of places down much more than 4% per year. And though I don't see interest rates rising by much in the near term, I doubt they go much lower. They have dropped by around 50% since 2008, and that cushioned the fall, but I think that cushion is probably done. Full stop.

Posted by: tipster at January 31, 2012 12:43 PM

BdB,

You are forgetting that local trends can also be permanent. Say a region loses its main industry or gains one, or social and demographic shifts cause blight or gentrification. There are very important local factors that can cause an area to have a separate long-term trend.

Posted by: lol at January 31, 2012 12:51 PM

lol ... while I take your point, Detroit being the prime example, It appears there are still enough SF, and mid peninsula, based tech companies to keep SF attractive as a place to live for the foreseeable future (IMHO).

Posted by: badlydrawnbear at January 31, 2012 12:55 PM

@badlydrawnbear. I won't argue with most of what you said, but i think your statement about the 'tech effect may not be as strong as it once was' is arguable.
During dot-com boom, we had tech going crazy - but beyond that one period in time, I think if anything the effect has increased rather than decreased..and seems to be continuing at the moment. I see more profitable tech's located in SF now than I ever did in the past (is Zynga today's Pets.com? :) Maybe, but hard to argue that, Zynga is profitable, Pets.com-maybe never was). Twitter in 09 had about 50? in 2012 they've got 300+? SF.com is probably more so. Zynga the same. All three are actively expanding.

Lack of public transit: I think that's been the same as it ever was. Shuttles have helped but that's about it.

Now, maybe the decrease of Wells, BofA, Schwab, etc in SF has more than killed any increase in the above, but still would say at least Tech is maybe stronger in SF now than ever before.

Posted by: DanRH at January 31, 2012 1:03 PM

Newbuyer: "I bought my two bedroom TIC in Russian Hill in 2008" and "my home purchase price was around $700k when I bought it four years ago."

Flujie, you really think that assuming a purchase "four years ago" in "2008" - and it's now January 2012 - was made in early 2008 is a giant leap? Really? Easier than trying to rebut incontrovertible facts, I guess.

Posted by: A.T. at January 31, 2012 1:32 PM

Eh? Parsing 4 years now. Naaah, you just want to argue. The fact, which I brought to the table, is that YOY Russian Hill TICs do not reflect anything along the lines of what Tipster said. And that was comparing all of 08 to all of 11. Never mind that latter 2008 would have been post-shift, and quite worse. Anyway, now Tipster is on about East Bay discovery vis a vis an anecdotal laptop count. So why don't you get his back when somebody else invariably takes him to task for that silliness? I will step back and observe.

Posted by: anon@ed.com at January 31, 2012 1:51 PM

"While SF has the advantage of Silicon Valley, I see know fewer and fewer people interested in the 1 hour bus ride (1.5 hours by car) to Google but preferring to locate in South Bay, or other location, closer to their jobs.

Add to that the lack of public transit on the Peninsula and the increasing nightlife, entertainment, and cultural options in and around San Jose the 'tech effect' may not be as strong in San Francisco as it once was."


BDB - I rented my house in Glen Park last year and about two thirds of the applicants were young professionals working in the Peninsula or South Bay. I still live in Glen Park and I can assure you that there are so many corporate buses that come through the neighborhood every day.

Also, help me understand what you mean by cultural options in San Jose? I would think most well paid young professionals who move to the Bay Area area are going to want to live in San Francisco. At least for the first few years. They may even consider Berkeley or Oakland but I don't buy that SJ is considered a destination of any sort.

Posted by: Willow at January 31, 2012 1:53 PM

One other reason to consider renting if you are currently under water, can afford the payments and the market rent covers your expenses...once the residence has been rented for 24 months, should you decide to sell, you get the full tax benefits of selling at a loss. If you sell your primary residence at a loss you get nothing from a tax perspective.(Of course there are inherent risks in deciding to become a landlord, particularly in SF, so you should carefully weigh the pros and cons.)

Posted by: Willow at January 31, 2012 2:12 PM

Berkeley and Oakland are much harder commutes to the south bay no matter what mode you use. Thanks to Caltrain and fairly direct freeway connections, south SF is much easier to reach from the south bay. The only exception might be for jobs in the northeast corner of the county: Milpitas and CiscoLand.

As for cultural options in the south bay go, they are improving but still nowhere near what is available in SF.

Posted by: The Milkshake of Despair at January 31, 2012 2:33 PM

^I think you can only claim the loss incurred since the date you placed it into service as a rental.

And I suspect its probably a nearly automatic request for documentation, if not a full scale audit, if you go that route.

Posted by: tipster at January 31, 2012 2:33 PM

"^I think you can only claim the loss incurred since the date you placed it into service as a rental.

And I suspect its probably a nearly automatic request for documentation, if not a full scale audit, if you go that route."

Tipster: Most tax accountants will recommend you choose the county assessed value of the home at the time of conversion to rental status. Often there is a lag in downward adjustment of property tax assessments so it invariably works in favor of the homeowner.

On the audit question...I think you are overstating the consequences. People rent there homes out all the time. It's a fairly routine practice and wouldn't raise any red flags in and of itself let alone a full scale audit.

Posted by: Willow at January 31, 2012 3:36 PM

"Berkeley and Oakland are much harder commutes to the south bay no matter what mode you use."

MOD - You are correct. Let me clarify. I was not thinking of Berkeley and Oakland necessarily in the context of Silicon Valley commutes. More in terms of general attractiveness to young people. (I.e.bars, restaurants, live music, art galleries etc.) Honestly, I couldn't imagine taking the 80 on the way to the San Mateo or Dumbarton bridges. Sorry for the confusion!

Posted by: Willow at January 31, 2012 3:47 PM

If you're underwater, it's pretty likely you bought close to the peak and thus could not cover expenses with rent. And do you really want to risk a likely further decline in value for two years just to get a fairly minor tax benefit that might not amount to anything at all? In the biz, we call that letting the tax tail wag the investment dog.

I suppose there might be unique circumstances where this might work - e.g. if you had some other big capital gain you wanted to try to offset. But it's pretty rare that you can transform a capital loss into a positive. Better to just avoid the further loss.

Posted by: A.T. at January 31, 2012 3:53 PM

"If you're underwater, it's pretty likely you bought close to the peak and thus could not cover expenses with rent."

AT - Depends on the situation. With ARMs under 3% that's not always the case, particularly if the buyer put down 20%.

However if the value of your home continues to drop faster than the revenue generated as a rental plus any reduction in mortgage principal then you are correct. The owner is playing a losing game.

However I posit that the biggest declines in value for SF are behind us. At this point it's a sunk cost for most buyers who have held on to this point so in some instances it can make sense to delay realizing any losses if you are cash flow positive on a rental. It won't work for everyone but its worth considering...

Posted by: Willow at January 31, 2012 4:25 PM

be aware that renting a TIC is a dangerous proposition. Rent control still applies to TICs so if you get a tenant you may be unable to get rid of them.

Selling a tenant occupied TIC will most likely result in far greater difficulty during the sale, and in all likelihood a much lower price as very few people looking to owner occupy would be willing to buy a TIC that has an existing tenant.

I believe this is an example of a sale price affected by a TIC tenant. I didn't see it, so I can't say for sure. Also, I don't believe anybody took a loss as it appears all units were sold by the former full property owner, but other units in the building sold for between $739,000-$830,000 while the tenant occupied unit sold for $420,000

Posted by: lyqwyd at January 31, 2012 4:30 PM

I'm with Legacy Dude for the most part, not expecting any big drops, but not expecting any near-term gains. Claims that a recovery is right around the corner have rung hollow for months.

With respect to the TIC rental topic, double check continuous owner-occupancy requirements for condo conversion before you rent; co-owners aren't going to be too happy if you blow your building's lottery eligibility.

Posted by: Michael at January 31, 2012 5:38 PM

Willow:

Don't have the IRS rules at hand, but Tipster is right. When you convert a personal residence to rental, your basis for calculating any future "loss" when selling is the lessor of fair market value at time of conversion or original purchase price. Thus, if you paid $500k to purchase your personal residence and then converted to rental when FMV was $400k, your basis for calculating any loss on sale of the rental property is $400k. It was a nice loophole while it existed, but I believe it was closed 5-10 years ago.

Posted by: JustLooking at January 31, 2012 7:33 PM

This is a moot point by and large. Think about it. If audited the IRS won't be hiring an appraiser to determine FMV. So what is the IRS going to use to determine fair market? They'll use the city assessor. Well, unless you were proactive about an informal or formal review to get it reduced, rest assured Phil Ting is going for his. And it's gonna actually be higher than it was when you paid.

Posted by: [anon.ed] at January 31, 2012 7:46 PM

Your IRS agent will live in SF and isn't stupid. They understand the difference between assessed and fair market value, and they have lots of data on what the difference can be. The federal government isn't bound by the state government's inflated value. They read Case Shiller just like you do. You shouldn't count on such a strategy working out for you.

Posted by: tipster at January 31, 2012 8:51 PM

Tipster:

I see plenty of folks still on the train by the time it rolls into 4th and townsend (and tonnes getting on at 4th). Even more are on corporate buses (whose companies have by-and-large left Caltrain for dead -- no wifi, no realistic 'last mile' connections). And more yet just drive. SF is loaded with folks driving south to work and there are more all the time....


Posted by: around1905 at January 31, 2012 9:25 PM

Utter nonsense. Tipster once again your vocabulary and your understanding show that you should not be speaking about a subject. The assessed value is city based, not state. Your "IRS agent will live in SF" statement is speculative/fanciful. The Case Shiller thing willful. Just stop it and/or change. You're simply not good enough to narrate when talking about SFRE.

Posted by: anon@ed. at January 31, 2012 9:42 PM

Legacy Dude wrote:

The government has nationalized real estate. Mortgages are artificially cheap, foreclosures are being intentionally kept off market, and lending standards remain generally lax by long-term metrics. In other words, it's obvious that DC will not allow another big drop to occur nationally.

…Seriously, does anybody out there really think we see either a material increase or decrease in real estate prices over the next 3-5 years? Define material however you like, say 10%+. I just don't see it but I'm happy to hear other theories…

Well, let's just assume for the sake of argument that it is true that "government has nationalized real estate." If that's the case, then a change in who is in charge of the government will likely mean a change in the policies that have resulted in "mortgages being artificially cheap, foreclosures being intentionally kept off market, and lending standards remaining generally lax," no?

Suppose we had an election, and a someone who did NOT believe the aforementioned policies (which we are also accepting, as a premise, are actually in existence and are having the described effect in practice on the housing marketplace) were beneficial and who promised to change them.

Say, someone who believed (we know he believes this because he told the assembled editorial board of The Las Vegas Review Journal that he believes this) that the government should not try and stop or slow the foreclosure process:

As for what to do for the housing industry specifically, and are there things that you can do to encourage housing? One is don’t try and stop the foreclosure process. Let it run its course and hit the bottom, allow investors to buy homes, put renters in them, fix the homes up and let it turn around and come back up. The Obama administration has slow-walked the foreclosure processes that have long existed and as a result we still have a foreclosure overhang.

Emphasis added. Would that result in a material decrease in real estate prices over the next 3-5 years? We're talking nationally, now. I think that it would.

Posted by: Brahma (incensed renter) at January 31, 2012 10:07 PM

Mitt is just saying this to differentiate himself from Obama. In the unlikely scenario that he beats Obama he will quickly reverse his stance on this matter as the banks don't want foreclosures accelerated since they will then have to realize the losses on their books.

Posted by: lyqwyd at January 31, 2012 10:21 PM

I could give you lots of ways to benefit financially if you were willing to cheat the IRS. Tax schemes that depend on an IRS error to work aren't worth trying.

Posted by: A.T. at February 1, 2012 6:56 AM

So it's "cheat"ing the IRS to use the tax base you've been assigned.-- The valuation you're paying taxes on -- They'll take it upon themselves to go onto Redfin or whatever to prove both you and the city assessor recorder wrong. No chance that's true, and once again, reel it in. "Cheat the IRS"??? Indeed.

Posted by: anon@ed.com at February 1, 2012 8:51 AM

"That said -- do rental rates ever decline? I don't know for sure, but I suspect not."

I've been wondering about what will happen with rents in SF. Two comments/questions:
a) It's hard to tell what rental price places really are trading at vs list price on craigslist. Anecdotes from a number of friends seem to indicate that beyond, say 4k a month, a lot of places have room to negotiate on the price vs what is listed on craigslist. It seems that craigslist is dominated by just a few rental brokers who can spam CL all day and control the appearance of prices.

b) That said, there's no question that rental prices have skyrocketed. To some extent this is normal; normally when the marginal buyer is squeezed out of a softer purchase market, rent prices rise-- which is what gives us the counter-intuitive Owner's Equivalent Rent action in the CPI calculation during these cycles.

But, my question is about rent control in SF. Let's say you have a closed system of 100 rental units. Let's say, that the norm is roughly for 40 or so of those units to be to long-term renters who "can't afford" to leave. I know a lot of people like that. In a normal market with gradual rent increases, you would have to have been in an apartment for, let's say (randomly) 7 years to really have the disincentive to move. As rents rise more quickly, instead of 40 out of 100 stationary renters, maybe you have 55 out of 100. This in turn accelerates the pace of rent increases, which accelerates the number of "stationary renters". All of the sudden, I know people who moved in to places 18 months ago who feel like rents have risen since then and they can't move. It's circular and accelerates until you have a much smaller pool of available rentals.

So what breaks that cycle and can rents go down? What if you have 80 out of 100 units going to stationary renters and a very small available rental stock. Is there any decent data out there on pool of available rentals?

Posted by: nanon at February 1, 2012 8:57 AM

Thanks for your helpful insults, anon.ed, it's good to have a real estate professional correcting me. But aren't property taxes assessed by the county, not cities?

In that case, even the state tax board could ignore the assessment. That makes it even worse than what I said above.

Thanks for the correction, even if it was wrong. Does that mean you yourself should "not be speaking about the subject?"

Posted by: tipster at February 1, 2012 9:07 AM

nanon,

In theory rental prices could go to the moon if not for the physical limitations of what potential renters can afford and the pressure on the rest of the market.

Say a landlord has 3 long term tenants paying 30% of current market rate. The very large difference can justify better buy-out terms and therefore free more units for market rate rental either by the landlord or another investor he would sell to. Of course this doesn't even start to address the real problem which is rent control and its unintended consequences.

Posted by: lol at February 1, 2012 9:13 AM

Tipster, you talk too much and you don't have a knowledge base. It would be fine if you didn't try to build arguments based upon nothing. Or if, when caught, you didn't try to parse/cloud argue your way out all the time. Four percent YOY losses, links to neighborhood code that refutes your position, acting like SF isn't city/county, positing fraud where there's none, and on and on. Stay in your lane. You are getting owned on a daily basis.

Posted by: anon@ed.com at February 1, 2012 9:27 AM

Are we witnessing the wintry moulting of the fluj handle?

Posted by: lol at February 1, 2012 9:33 AM

What does that mean lol? And why was sparky's comment deleted? Man. Talk about bias. Any crummy thing Mutt amd Muttier have to say in order to back each other's lies up gets the greenlight. But somebody makes an actual point about city/county and it gets deleted? Ugly stuff.

Posted by: anon@ed.com at February 1, 2012 9:44 AM

lol, definitely agree with you that there are practical limitations at a certain point in terms of what people can afford. I know my illustration was largely academic but I think there is definitely some degree of that playing out in the recent spike in rents. I'm not sure where the inflection is, but there is a point where the rent increases accelerate because of itself. (i.e. the faster rents go up, the shorter time period that renters have to have been in a place to have a disincentive to leave, thus the continued dwindling of the available rental pool, and . . .the faster rents continue to go up; the rate of change changes).

I don't know anything about the second part of your comment. Even if it is economically rational, do landlords regularly offer to buy out old rent-controlled renters to rent out at a higher price? I thought this mostly happened when buildings were being sold.

Finally-- I have some friends who were looking at 2br condo in Pac Heights recently and the selling broker told them that at the asking price, they could definitely sell it for more money in the next couple of years and they could rent it out and make money right now-- essentially they were told there is zero downside. I don't know if and how rent prices decline from the current spike, but the market seems to assign zero probability to it ever happening. Maybe it's usually a one-way street, but zero probability of rent decreases is incorrect.

Posted by: nanon at February 1, 2012 9:49 AM

[anon.ed], I meant the new handle "anon@ed.com".

nanon,

Yes, the buy-outs I have seen were either before or after a sale. A building on my block for instance would be a perfect candidate. The building was for sale for ever and never found a buyer because of tenants who pay less than 1/2 market. They should be bought out, if the landlord wants to get the best resale value then do a cosmetic refresh then a sale either as a whole building or a TIC. As a complete redo he'd get 3X the $/sf he was last asking. The key is getting the tenants to move with a big smile and to have the "eviction" stigma.

As far as whether there's any "zero downside" in your friends' purchase or any purchase, it's debatable. Anything can happen, good or bad. FB could do the IPO of the decade, or do a resounding dud, or a swarm of locusts could settle permanently in SF.
What counts for me is having plan A, plan B and plan C: plan A: what happens in case of a job loss, B: market collapse, C: unforeseen disaster.

Many bubble toppers failed to account for anything and got the shaft. I hope I have hedged enough of my risks.

Posted by: lol at February 1, 2012 10:11 AM

"the selling broker told them that at the asking price, they could definitely sell it for more money in the next couple of years and they could rent it out and make money right now -- essentially they were told there is zero downside."

Gee, the selling broker said that? I heard the same thing a lot in 2006. Realtors spout B.S. to try to get people to but things from them? Whodathunkit?

Posted by: A.T. at February 1, 2012 10:14 AM

"Thanks for your helpful insults"

Even that is an attempt to shift the argument and cloud. Admit error with grace like everybody else on the site save one other does. Everyone makes mistakes. But not everybody builds arguments based upon misdirection and falsehoods, then lashes out while backing up. They'll simply say something, and if proven wrong, own it. Do that and you'll never see another disparaging word from yours truly. I didn't use to think you were a bad actor. But lately you're acting as if you're unhinged.

Posted by: [anon.ed] at February 1, 2012 10:21 AM

"I don't know if and how rent prices decline from the current spike, but the market seems to assign zero probability to it ever happening. Maybe it's usually a one-way street, but zero probability of rent decreases is incorrect."


Yeah it's funny how no one even considers the possibility of a rental market bubble when doing their rent-buy comparisons. Not just in this thread, but in all of the recent SS threads that touch on the topic of rents increasing. Instead, just the usual rationalizations of why SF is different, or tech is invulnerable, or rent control, badabadabada.

All rationalizations, if one might remember (and it appears that many don't or weren't around), that were blown to smithereens the last time the rental market heated up quickly and sharply before inevitably deflating. This wasn't very long ago, folks.

------------------

kg asks...."do rental rates ever decline? I don't know for sure, but I suspect not."

A unit my family owned rented for $3500 in 2000 at the height of the dotcom boom. It rented for $2000 in 2004 (or roughly the same as it did pre-dotcom boom not considering inflation).
------------------

lol bloviated....."Now the math even starts to make sense to purchase for the sole purpose of renting out........

......"If you were selling and do want to be stuck with a loss, you can rent out and break even on cash flow. It also helps regarding job mobility. Many Americans today are underwater and unable to move to a better job. This removes some of the fear of being trapped when making the buying purchase..........

........."Prices are lower, rents are higher. The pendulum sure has shifted."


And if the pendulum (particularly pertaining to rents) shifts back? Like it did less than a decade ago? The latest pendulum shift has been unnaturally strong for such a short period of time, if you catch my drift.

Posted by: nnona at February 1, 2012 10:38 AM

"Don't have the IRS rules at hand, but Tipster is right. When you convert a personal residence to rental, your basis for calculating any future "loss" when selling is the lessor of fair market value at time of conversion or original purchase price."

JustLooking: That is correct. As I noted, absent of any other information, the FMV would generally be the county assessed value of your home.

On the subject of rent declines, it obviously does happen. As a landlord the trick is to align your rental price as closely as possible to the going market rate. (If that means an adjustment downward then you should act on it. Your tenants will appreciate the gesture.) Lots of small investors underestimate the costs associated with vacancy. It can really be very expensive.

Posted by: Willow at February 1, 2012 11:13 AM

nnona, I was around and renting post-2000 dot comb bust and I think the key thing you're missing out on with your comment at 10:38 AM was that in 2000 there was what economists call a negative demand shock.

Because so many dot com companies were either going out of business or losing VC funding rounds in such a short time period, people were moving out of the city in droves, and a large number of those people were renters that only moved here to participate in the dot com boom. You (read: I) had to really beat the bushes to find a u-haul or ryder trailer, so many people were moving out. Indeed, you could probably hang your hat on that phenomenon as a leading economic indicator for rental real estate.

The exodus of renters increased supply of rental units and thus lead to decreased rental prices. In economic terms, the AD curve shifted to the left.

Just because something happened in recent memory doesn't mean that it must repeat. I don't think we currently have people leaving The City (and the Peninsula) en masse like they were in 2000, even with the weak economy, although I haven't tried to rent a u-haul in the last two years to see how difficult it is in comparison.

Posted by: Brahma (incensed renter) at February 1, 2012 11:26 AM

As I noted above, this idea of getting some tax benefit out of past unrealized losses depends on getting the IRS to accept a basis (FMV) that is higher than the actual FMV. Might work, might not, but there is no end to the tax schemes that rely on trying to trick the IRS. The tax assessment is not the fair market value, by the way. You may get some lazy agent to accept that, but I doubt it, and gambling that you'll get a lazy auditor is not a prudent strategy! If you got audited by the state or IRS or both, and the basis were challenged, it would be a cumbersome, expensive process to support your position. Not worth it for the pretty minor tax gain. Better to just sell the thing, avoid the expenses and hassles of being an accidental temporary landlord and the risks of further losses. May be some unique circumstances where this would be worth attempting, but I can't think of any.

And don't ever take tax advice from a realtor! Yes, that's a bit of snark, but very sound.

Posted by: A.T. at February 1, 2012 11:28 AM

And certainly don't take tax advice from anonymous internet posters who regularly make things up.

Posted by: R at February 1, 2012 11:41 AM

And you shouldn't take tax advice from anonymous internet posters who actually engage in complicated tax analyses day in and day out in their professional lives, like me.

Posted by: A.T. at February 1, 2012 11:45 AM

And you shouldn't take tax advise from a genius vodka company executive who actually coaches girls soccer on a weekly basis in their free time, like me.

Posted by: sparky-b at February 1, 2012 12:01 PM

"take tax advise"? Uh, drinking a lot of vodka at noon does not qualify one as a vodka company executive! Although, by that standard I'm a mid-level vodka company manager . . .

Posted by: A.T. at February 1, 2012 12:06 PM

But does it qualify you to give tax advise, that is the question?

Posted by: sparky-b at February 1, 2012 12:12 PM

No tax advice was given. This is in the abstract.("Realtor advice" -- again, an attempt to change/spin/cloud/backout. Gross) I said the IRS would be using the assessed tax basis and you two trolls went www.trollcity.com after.

Posted by: anon.ed at February 1, 2012 12:37 PM

The tax assessment is not the fair market value, by the way.
Thanks for bringing this up. As a wannabe landlord, I'm always trying to understand the subtleties of tax law. What confused me initially is this IRS pub The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it.
If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.

The example that follows in the IRS pub makes clear that the ratio is what you're after (and can apply to the cost basis for allocating a portion to the building for depreciation purposes). I haven't run across any publication that says FMV = tax assessed value (please post if you find it anywhere). IANAL, or accountant for that matter. For reference here's the IRS definition of FMV
Fair market value. This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Posted by: EBGuy at February 1, 2012 1:18 PM

@Brahma

I'm not missing anything. That "negative demand shock" followed on the heels of an equally intense "positive demand shock", did it not?

I don't get your post. You misstate my argument and then proceed to give me a middle school level economic turorial.

I never claimed people were leaving en masse, rather that there is a possibility of this happening in the near future. A possibility that people might want to factor into their rent/buy analyses, that's all.

If we do see this happen, this new "negative demand shock" would have followed on the heels of an equally intense (though less so than the dotcom era) "positive demand shock".

I do agree with you that history must not always repeat. But, you see, only a fool would act as if history never repeats.

Posted by: nnona at February 1, 2012 3:36 PM

I bought in 2007 but used a comp in my building to refi a 4.2% and am also seeing rents go up.
In this case of clear substantial profit, what does it matter if your property does go down if you just keep it as a rental and have the money to later buy another place. Like the original poster, the monthly cost is lower than market rent and will stay lower. Eventually paying off the mortgage.

Posted by: TimD at February 1, 2012 8:08 PM

lol I love all this rental talk. it's so bubbly! come on guys don't you remember the real estate bubble (it wasn't that long ago).

I hear so much talk from the everyman about how they are going to buy a "rental property" or convert their home to a rental property or create an in-law income unit or put a cute little cottage on the back of their lot. how different than when everybody was buying a little "investment property" because it couldn't lose?

the rental market is going to explode like every other bubble people. rental units getting built is a big part of it but also fha. renters aren't dumb. when you can get into a condo for less than a security deposit and when it costs less than renting (situations that currently exist in many areas), the market will shift to the lower ground, demand and rents will drop.

it's just that the fha limit is too low for many nice condos that could hold a family (who are the demographic who would buy and not rent if they could). just wait if home prices continue to slide, they pop the ca fha limit to $1m and you see what happens to the rental market.

Posted by: fancy rental at February 1, 2012 11:27 PM

Posted by: fancy rental at February 1, 2012 11:43 PM

"or put a cute little cottage on the back of their "lot."

Really? Never saw that idea talked about. In SF?

"they pop the ca fha limit to $1m and you see what happens to the rental market"

What are you talking about there? A 3 unit?

Posted by: [anon.ed] at February 2, 2012 8:13 AM

well, sf is a little behind the curve on the whole backyard cottage thing. but it's the new big thing in urban planning. seattle just broadly legalized them.

you're missing my point re: the fha limits. I mean you do realize that the fha single family limit of $729k is pretty much responsible for supporting housing prices in much of sf right?

do you really think that 1500 sf house in excelsior would really sell for $550k if the fha didn't exist? or bidding wars over the nicely remodeled sunset home that listed for $600k and sold for $700k would happen today if it didn't simply mean the difference between putting $18k down or $21k down?

if the single family limits were raised to $1m, my thought is that it would result in downward pressure on sf rents as it would allow many families to buy in sf instead of continuing to rent.

but come to think of it, families are probably not the main driver of rents here in sf anyway though so it might not have a really huge effect actually.

Posted by: fancy rental at February 2, 2012 8:32 AM

well, sf is a little behind the curve on the whole backyard cottage thing. but it's the new big thing in urban planning. seattle just broadly legalized them.

Interesting. I can't say that I see SF going that route due to code restrictions + NIMBYism.

you're missing my point re: the fha limits. I mean you do realize that the fha single family limit of $729k is pretty much responsible for supporting housing prices in much of sf right?

I think I took your overall point but the "pop to 1M" part threw me.

do you really think that 1500 sf house in excelsior would really sell for $550k if the fha didn't exist? or bidding wars over the nicely remodeled sunset home that listed for $600k and sold for $700k would happen today if it didn't simply mean the difference between putting $18k down or $21k down?

FHA is definitely driving that price range. I've said as much many times on this website.

if the single family limits were raised to $1m, my thought is that it would result in downward pressure on sf rents as it would allow many families to buy in sf instead of continuing to rent.

OK. Yes, I'd agree with that. More people would be buying, certainly. But it was pretty tough to get the 729,750 FHA reinstated last fall. So the concept of actually raising high cost FHA lending is probably not being considered.

Posted by: [anon.ed] at February 2, 2012 8:49 AM

Post a comment


(required - will be published)


(required - will not be published, sold, or shared)


(optional - your "Posted by" name will link to this URL)

Remember Me?

(you may use HTML tags for style)


Continue Perusing SocketSite:

« Preaching To The Choir With Respect To Architectural Innovation | HOME | Five Teams Competing To Design A New Gateway To The Presidio »