April 26, 2012

Surprised By A Spike In San Francisco Rents? There's No Excuse.

According to RealFacts, the average asking price for a rental in large apartment buildings in San Francisco increased almost 16 percent from the first quarter of 2011 to the first quarter of 2012.

As we noted a year ago and plugged-in people knew to expect, "institutional estimates are calling for double-digit annual growth in rents in San Francisco over the next few years."

Keep in mind that RealFacts’s figures are based on surveys of professionally managed apartment complexes with 50 or more units, which aren't necessarily the norm in San Francisco, and reflect asking rather than effective rents after incentives.

Tech Job Quote Triptych [SocketSite]
San Francisco Rents Up 9 Percent As Vacancy Rate Drops To 3.2 [SocketSite]

First Published: April 26, 2012 10:30 AM

Comments from "Plugged In" Readers

Yet some people here still insist home prices will continue to fall through the floor. When your rent is only modestly less than a mortgage, you'd take the mortgage for tax and equity reasons. The major obstacle for most seems to securing a loan.

Posted by: kg at April 26, 2012 10:44 AM

Seems about right, 2+ bed/2 bath the apartment I had been living in for 5 years went from $2,550 for me to $3,500 for the new tenant after I moved out.

Posted by: lyqwyd at April 26, 2012 10:55 AM

Um, really, ed?

After you allowed your usual suspects to rail about how rents weren't really going up, all during 2010-2011? "This would never get this." "This would never get that." etc etc -- not familiar?

Deriding all the craigslist ads as "wish" prices, and whatnot?

Yet, "no excuse" to be surprised?

I beg to differ. A hypothetical casual reader might very much be surprised. You let the nutters talk too much, ed, and they cloud up even the easiest of topics. Please.

[Editor’s Note: Really. We’re not sure why you’d choose to listen to a "nutter," but that’s your choice. And we haven’t equivocated on what we reported to expect a year ago, and have backed it up along the way.]

Posted by: jrr silmarillion at April 26, 2012 11:08 AM

Rents started trending up much higher about 6 months ago. Case Shiller says home prices fell in that period. This probably helped them fall less far. Higher rents helps, but aren't going to help as much as higher rents in the past.

Posted by: tipster at November 8, 2011 10:28 AM


Posted by: ReadingForRealtors at April 26, 2012 11:21 AM

Um, seems most posters were in agreement that rents were going up. Why jrr silmarillion (great name btw but you can really shorter it a lot) thinks the opposite is beyond me. As for RfR, why am I not surprised that of all the posters in agreement about rents rising he pulls out a quote from Tipster?

Posted by: Rillion at April 26, 2012 11:42 AM

No doubt rents have gone up. Of course, that reflects the decreased appetite for buying in favor of renting instead. Higher rents, caused by an increase in demand, coupled with lower home prices, caused by slackened demand, are not inconsistent at all. Same thing is happening all over the country as people have decided they do not want to buy depreciating assets.

And even though we're not even there yet, it isn't as if "rent parity" is a floor for home prices!

Posted by: anon at April 26, 2012 11:52 AM

"No doubt rents have gone up. Of course, that reflects the decreased appetite for buying in favor of renting instead. "

Yup, leave it to the perma-bears on this site to spin the data. Of course, it's not possible that higher rents reflect higher employment rates in the Bay Area and more demand from an improved economy; no, it's all from the pessimism about home purchasing...

And on that note, the editor's comment about how these prices "reflect asking rather than effective rents after incentives" is pure speculation. Where is there any data that there continue to be significant incentives to renters in large apartment complexes?

[Editor’s Note: No, it’s not speculation but rather a simple understanding of the data which RealFacts collects. One could, however, speculate on how incentives have changed.]

Posted by: Unplugged at April 26, 2012 12:01 PM

Where is the data on incentives in the rental market? Show us, and I'll believe it.

Posted by: Unplugged at April 26, 2012 12:17 PM

Rents are up. Way up. It's nice to have someone validate it with a report but we've known/seen it for quite some time. And the rental stock doesn't really reflect the same quality as real estate inventory. This obviously impacts RvB analysis and it helps, more than hurts, the argument for buying. However, rental rates can / and do change much faster than the price of real estate. So the question is how much higher can rents go, and for how long will they sustain. All this bad news in the economy for jobs in the bay area and the crashing stocks from tech IPOs surly is a sign the end is near. :)

Posted by: eddy at April 26, 2012 1:12 PM

16% Ouch.

There must be thousands of renters out there under rent control who want to move but can't for affordability reasons.

"Literally trapped in their homes!"

Posted by: REpornaddict at April 26, 2012 2:58 PM

I work in the technology space. The reason for rising rents in rising employment. My company and all of my friends' companies are all hiring in the double-digits and hiring professionals with good salaries. This causes a thirst for housing. Most employees range from early-20's to late 30's. Many of these employees have no desire to own, because of the high cost of ownership (downpayment, maintenance, etc.) and the hassle of being a landlord. This is the Netflix/Zipcar generation, where people want to pay for access, not ownership. We need more apartments in SF--build up!

Posted by: NobHillresident at April 26, 2012 3:37 PM

Rents are insane right now. I could rent my non-rent controlled current place for ~$5k a month unfurnished vs. after-tax expenses (mortgage interest, tax and HOA) of $2,500. Trouble would be coming up with a few hundred K in cash for a new place.

I am amazed to see just out of college kids in my building paying $60k in after-tax dollars to annual rent.

Posted by: anon at April 26, 2012 3:39 PM

"Rents are insane right now. I could rent my non-rent controlled current place for ~$5k a month unfurnished vs. after-tax expenses (mortgage interest, tax and HOA) of $2,500. Trouble would be coming up with a few hundred K in cash for a new place."

Agree rents are insane but question your math. $5k is a two bedroom in a nice building, $3.5k for a one. HOA $600-800 which leaves $1,700-$1,900 for debt and taxes, you're not getting a nice one for $400k. $5k breakeven closer to $700k.

Posted by: Michael at April 26, 2012 4:12 PM

I just ran a rent vs. buy calculator here:


I used this Craig's list listing:


$5500/mo for a 3/2 in Noe. It doesn't look updated, so I used $1.2M for the purchase price. I put down 20%, 3.25% mortgage and figured home price increases of 2%/yr and rent increases of 6%/yr.

It says that I should buy! Are all you fence sitters going to buy now? I know a bunch of you said you would start looking to purchase when buying got cheaper than renting, it looks like that time is now.

Posted by: NoeValleyJim at April 26, 2012 5:19 PM

Giddy owners and agents must be angling for newly minted millionaires with wish ads like this: http://sfbay.craigslist.org/sfc/apa/2971172466.html

SF rents are hugely volatile, nothing new. There are limited supply of market rate apartments in the city and relatively small ebbs and flows in the demand make huge dent on the vacancy rate. And no major new supplies have come online past 4 years.

I'm staying out of the city till someone offers me a $500k job.

[Editor's Note: Keep in mind the advertised asking rent of $4,500 for that unit is down from $4,950 last month. And yes, you could probably negotiate an incentive or two...]

Posted by: sfcommie at April 26, 2012 5:25 PM

"...it looks like that time [to buy] is now."

... unless we're at a local maximum. I have no idea when/how the Fed will increase interest rates but do expect they will affect home sales.

Posted by: The Milkshake of Despair at April 26, 2012 5:33 PM

What would lead one to believe that we are at a local maximum? Are you using that in the geographical sense or like in calculus?

I think we have an idea when the Fed will increase interest rates; this is from yesterday's release, 'graph three:

…the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
I seem to recall that rents get factored into the measurements that The Fed uses to get a handle on inflation, so if rents go up at double-digit rates nationwide, then THAT, rather than commodities prices, will make The Fed ratchet up rates sooner than 2014.

Posted by: Brahma (incensed renter) at April 26, 2012 9:00 PM

The Fed will remove rents from CPI calculations if they think it would affect their numbers. As simple as that. I see no reason why Fed will hurt banks by increasing rates. Also, it's election year. Nothing will happen.

Posted by: Sfwatcher at April 26, 2012 9:21 PM

$5500/mo for a 3/2 in Noe. It doesn't look updated, so I used $1.2M for the purchase price. I put down 20%, 3.25% mortgage and figured home price increases of 2%/yr and rent increases of 6%/yr.

Other than the current rent, not one of those assumption seems realistic to me. $1.2M for a 3/2 in Noe? Even a dated one? Doubt it. 3.25% on a non-conforming jumbo loan? Only if you get in on some crazy variable rate that will shoot to 10% when the Fed moves. Perpetual 6% increases in rent price? Ok....

(If your whole post was meant to be snark and I missed it, I'm sorry.)

Posted by: shza at April 26, 2012 9:48 PM

^^^ I take back the point on the sale price, NVJ. Looking at the listing and seeing it's small and not an SFR, I think $1.2M is high, as is the rent ask. But you know the neighborhood better than I.

Posted by: shza at April 26, 2012 9:51 PM

Well, snark or not, I will say that as a former fence-sitter, I have been actively looking to buy. As NoeValleyJim points out, given the current interplay between rents and low mortgage rates, buying is a better proposition than renting in certain cases.

The problem, at least here in Soma, is that a lot of the nicer buildings were built during the bubble and sold at peak prices. Now those people can't sell, or refuse to take the hit. They list a condo at $1,000 psf, it sits for 3 months, and gets withdrawn. So not a lot of inventory because bubble-toppers can't write a $200K check at closing. This may not be the case in neighborhoods like Noe or Pac Heights, where folks have owned for 10 or 15 years and still have equity.

Secondarily, I'm not convinced that current rent levels are sustainable given many apartments are rented by companies - not people - and sit empty 90% of the time. Again, I'm speaking about Soma specifically.

Posted by: Legacy Dude at April 27, 2012 8:12 AM

"What would lead one to believe that we are at a local maximum? Are you using that in the geographical sense or like in calculus?"

I meant in the calculus/AI sense which I tend to think of in geographical terms even when working beyond the third dimension.

The only thing that makes me think we could be at a local maximum is that interest rates are so low and must rise sometime in the near future. (i.e. "the other shoe"). Thanks for that Fed quote. So it looks like prices could rise for the next 18 months if the recovery is solid and rates are clamped to 1/4%.

But then you never know. This could be a fake out from the Fed and rates could start rising just after the election. Or there might be other skeletons in the closet yet to be revealed to the public.

If I were at the Fed control console I'd clamp rates low until the recovery looks fairly solid. Then I'd gradually raise rates but not so fast as to damage the fragile recovery. For home prices this could mean a slight rise as the recovery sets in and then a plateau as the Fed ramps up interest rates. Just a wild guess, I'm not savvy in the ways of Big Finance.

Posted by: The Milkshake of Despair at April 27, 2012 9:26 AM

Good catch shza, I did not realize that was a flat.
The cheapest SFH I can find with 3+ BD in Noe is $4995/mo, tilting prices even further in favor of buying!

And you are right, I am using conforming interest rates. I need to use jumbo, which are higher. I am going to use 4.5% for Jumbo rates, which are pretty conservative. Patelco will give me 4 3/8% with a pretty small amount of points.

Now I get "buying is better than renting after 7 years." I am still using 2%/yr for home price appreciation and 6%/yr for rents.

6%/yr rent increase really seems right to me, but it could be too high. Anyone got any real stats and is willing to share?

Posted by: NoeValleyJim at April 27, 2012 11:37 AM

"Are all you fence sitters going to buy now? I know a bunch of you said you would start looking to purchase when buying got cheaper than renting, it looks like that time is now."

i'll buy when i'm sure prices have stopped falling (probably 3 years or so after the actual bottom)

Posted by: * at April 27, 2012 12:39 PM

NVJ, if you can really find a comparable 3+ SFR in Noe that one could purchase for $1.3M (that's a premise I'm still not totally buying but maybe it's out there), then I agree that would be a better move for most people than renting for $5k/month, even if rents went up less than 5-6% annually (which I still think is unrealistically/unsustainably high as a perpetual average).

I put in the top marginal tax rate, 4% rate of returns on what would otherwise be the down payment and any savings (potentially also optimistic), and 2% annual increases on home prices, and I had to push rent increases all the way down to 0% in order not to break even on the buy (at some point).

Posted by: shza at April 27, 2012 12:57 PM

Only a fool would ignore the possibility of rents declining dramatically in the near future.

Posted by: nnona at April 27, 2012 1:52 PM

Anecdotally I have nearly doubled the rent I charge for a nicely updated mission Dolores apartment I own, compared with about 3 years ago. Rented out easily. Probably could have charged a little more 3 years ago, but not much. Rents are WAY up in hip neighborhoods.

Posted by: JB at April 27, 2012 2:16 PM


Sort by price. Lots of 3/2s sold for less than $1.2M. I am sure that none of them are recently remodeled and that they are all smallish.

Average price there is $728/sq ft, so that would be 1648 square feet.

Thinking a bit more about it there is no way that rents can rise faster than home prices for too long, the disparity would have to end up pushing up home prices.

What will be the long term increase in rents and home prices, that is the real million dollar

nnona why do think it is more important to consider the risk of a sudden decrease in rents mover a sudden increase in rents?

Posted by: NoeValleyJim at April 27, 2012 5:23 PM

In Fortune yesterday; Will the rent be too damn high for Bernanke?:

Increased rates for rental homes and apartments will serve as a big drive of a rise in inflation. After all, rents make up a relatively significant share (31%) of the consumer price index. And when it comes to core inflation, which excludes volatile food and energy items, rents make up an even larger share of about 41%

Indeed, the rental market could soon push inflation higher…higher rents could actually be a good thing for both the housing market and the broader economy. As some economists see it, the price of rentals would rise to the point where it becomes cheaper to buy. And if that happens, that could help reverse the housing market's malaise.

I tend to think of this playing out in multifamily housing, but the overall point still makes sense. I don't believe I'll live to see the day when owning is cheaper than renting in S. F., though.

Posted by: Brahma (incensed renter) at May 4, 2012 7:30 AM

Depends on the hood. You just need to be ahead of the curve. I think there are areas where you could buy and in a few years hipster or yuppies or techies or commuting families will have moved in and it's cheaper to own.

Posted by: sparky-b at May 4, 2012 8:54 AM

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