patrick.net

I interviewed for a job in Phoenix once and people talked about summer like we used to talk about winter in Chicago.

But if you think about it, the heat is irrelevant to the rent vs buy ratio. It's hot outside whether you rent or own. So it's on the top and the bottom of the ratio and it drops out of the equation. IF you want to live in Phoenix, THEN it's probably better to buy. Vegas too.

The interesting question to me is why rents are high enough to support prices in Phoenix, but not in San Francisco. Perhaps it is some kind of wealth-effect, where there are enough rich people in SF who can afford to spend an extra half-million dollars and be locked in to the purchase for no reason other than to say "this is mine" while the renter next door lives the exact same lifestyle in the same quality house for vastly less money per month and greater flexibility.

I wish I could tell how many sales are happening, but I'll need to collect all the county data to know that. I'll get there, but it could take a while. All the counties have different data formats and different procedures for getting data.

Another thing I can't tell yet is exactly when something goes on or off the market. I just see the ads.

Suggestions for data sources to mine greatly appreciated if anyone has ideas. I'm good at scraping things off the web. Has to be allowed though. The MLS people generally don't allow anything that might reduce sales, so I have to use other sources.

Theres definitely room for rents to go up in the Bay area. Strong housing market has helped keep rents low
in the past because people would rather sell houses for capital gain even if it's cheaper monthly to rent.

If housing prices continue to fall Rents will probably also go up.

I doubt rents will go up in the Bay Area. My own rent is lower now than when I moved in 11 years ago near the peak of the dot-com bubble.

It would take a large increase in salaries for rents to rise, and I just don't see that happening anytime soon. In fact, salaries have been going down instead because of the unemployment rate.

Troy says

thomas.wong1986 says
What cost $260,000 in 1993 would cost $381197.31 in 2009. $400K may well be
more inline with many fundementals.
Rates have fallen from 7-8% to 3-4% tho. 15 year money is 3.5% now, no?
At 3.5% a $700,000 house with 20% down @ 15yr has an average monthly carrying cost of $1500. After the loan is paid off the carrying cost is $1000/mo, plus $400/mo of lost interest on the DP.

A house is not a bond. We certainly have seen prices fall along with interest rates. Plus the cost of new development (replacement cost) is far less than the inflated prices we have seen over the past 10 years.

I doubt rents will go up in the Bay Area. My own rent is lower now than when I moved in 11 years ago near the peak of the dot-com bubble.
It would take a large increase in salaries for rents to rise, and I just don’t see that happening anytime soon. In fact, salaries have been going down instead because of the unemployment rate.

Yes, there has been lower demand due to migration of jobs to other regions. You would have to go back to the early 80s to witness a shift of higher demand for workers, higher wages/salaries and high demand for rentals and homes.

Schwab, my old employer, is still moving tech jobs out of California according to people I know who are still at Schwab.

toothfairy says

If housing prices continue to fall Rents will probably also go up.

If history will provide some insight, as in 1989 to mid 90s or in post 2000 both went down.
Even today, rents have not reach their year 2000 highs.

I doubt rents will go up in the Bay Area. My own rent is lower now than when I moved in 11 years ago near the peak of the dot-com bubble.
It would take a large increase in salaries for rents to rise, and I just don’t see that happening anytime soon. In fact, salaries have been going down instead because of the unemployment rate.

average renter income will go up if people who can afford to buy are choosing to rent instead.

Schwab, my old employer, is still moving tech jobs out of California according to people I know who are still at Schwab

I looked up their 10K sometime ago.. most of their facilites they own are in middle America, Data centers and major processing centers.

toothfairy says

average renter income will go up if people who can afford to buy are choosing to rent instead.

The days when we (SV industries) employed vast amount of people across all incomes groups working 3 shifts a day for 6-7 days a week are long gone. This had a profound impact on 2nd- and 3rd tier industries which benefited from the economic boom of the 80s. It came back briefly in the late 90s to Y2K, but went back down again. We are no were near our peak years of the late 80s. There are too many factors which will keep the number of people employed and incomes in this region depressed in the future years.

toothfairy says

I doubt rents will go up in the Bay Area. My own rent is lower now than when I moved in 11 years ago near the peak of the dot-com bubble.

It would take a large increase in salaries for rents to rise, and I just don’t see that happening anytime soon. In fact, salaries have been going down instead because of the unemployment rate.

average renter income will go up if people who can afford to buy are choosing to rent instead.

??????? So what you are saying is if I want to spend more than I can afford and my employer will help me with that? Please help me understand.

No I'm just saying that average renter will suddenly find themselves competing with 200k per year wage earners for the more desirable rental properties.

You'll be competing with people who can afford to pay the higher rent.

toothfairy says

No I’m just saying that average renter will suddenly find themselves competing with 200k per year wage earners for the more desirable rental properties.
You’ll be competing with people who can afford to pay the higher rent.

Agreed. But you are basing that on the assumption that 200K will remain constant some how, in this bad economy?

The interesting question to me is why rents are high enough to support prices in Phoenix, but not in San Francisco. Perhaps it is some kind of wealth-effect, where there are enough rich people in SF who can afford to spend an extra half-million dollars and be locked in to the purchase for no reason other than to say “this is mine” while the renter next door lives the exact same lifestyle in the same quality house for vastly less money per month and greater flexibility.

Patrick, I have thought long and hard about this. It is about the only explanation that has much credibility to justify the over-priced nature of SF bay area - there is a certain group who believe SF bay area is 'the promised land' and have decided that owning a piece of it, no matter the financial sense/nonsense of it relative to equivalent property rents, is just what they are going to do. That worked during the bubble, but now, that attitude could really bite you. I just don't want my tax dollars used to bail out the gamblers or the true believers who get crushed.

There is very little rationality to it. The arguments for the bay area's high valuations I see here always seem like rationalizations of foregone conclusions, from true believers. Tax benefits are overstated, time horizon is always 'after 30 years', etc.

toothfairy says

No I’m just saying that average renter will suddenly find themselves competing with 200k per year wage earners for the more desirable rental properties.
You’ll be competing with people who can afford to pay the higher rent.

As I said that certainly did happen in the 80s and briefly in the late 90s. But we are far far away from that happening again. There are fewer employers and jobs to fuel such events from happening again. As Bubblesitter is stating it clearly, its the employers who determine who gets pay and where to get the most for the dollar spent. Our industries have matured and workforce are dispersed far and wide, there is no motivation for employers to pay $200K in NorCal when they can pay less and get the same in other states. The world has changed !

toothfairy says

No I’m just saying that average renter will suddenly find themselves competing with 200k per year wage earners for the more desirable rental properties.
You’ll be competing with people who can afford to pay the higher rent.

Well, that doesn't apply to us - $215k annual and we rent waaaay under income in order to save perforce. $1700/mo suits us just fine as opposed to paying $4k/mo rent - which is what we can afford.

~Misstrial

thomas.wong1986 says

Schwab, my old employer, is still moving tech jobs out of California according to people I know who are still at Schwab

I looked up their 10K sometime ago.. most of their facilites they own are in middle America, Data centers and major processing centers.

This is true.

Called Schwab C/S last night and this afternoon; First representative was in Phoenix and the second in Indianapolis.

Love Schwab - great trading platform.

~Misstrial

I doubt rents will go up in the Bay Area. My own rent is lower now than when I moved in 11 years ago near the peak of the dot-com bubble.
It would take a large increase in salaries for rents to rise, and I just don’t see that happening anytime soon. In fact, salaries have been going down instead because of the unemployment rate.

Patrick .... just wondering when the rents will go down in SF and the average one-bedroom is $1,600. ....... and

the rents have kept going up since dot-com bubble! ps i just saw on Golden Gate Ave a studio for $1799!!!

If my assumption is true, that rents are driven directly by salaries, then it would take falling salaries to drive down rents.

It's pretty certain that the banks are not lending to people to pay rent with the money. So rents have to be coming out of income or savings.

Have you seen lake mead lately, its 60% empty and falling?
When Lake Mead is dry, there is no water for the CAP. without water, the value of a Phoenix house is about zero.

What are the current Bay Area and SF apt vacancy rates? Also, is there a rental shadow inventory (large landlords keeping units off the market waiting for rents to go up)?

davidh says

When Lake Mead is dry, there is no water for the CAP

That's the curious thing about Fresno. It's got a healthy chunk of the Sierras runoff all for itself. They're just now putting in water meters, LOL.

How can I know vacancy rates? Any sources, or ideas for deducing it?

Buying a house in Phoenix first means the person(s) have a job in the area.
Are there jobs in the Phoenix area that allows fora purchase of a house there ?

The areas you suggest in Oakland, that is the green areas, are in comparatively high crime areas and they are in much too close proximity to the noisy and polluted expressway. I think you do much better with the news letter of items to read than with the list of properties.

Well, that doesn’t apply to us - $215k annual and we rent waaaay under income in order to save perforce. $1700/mo suits us just fine as opposed to paying $4k/mo rent - which is what we can afford.

Mistrial - we are in the same range. 1350 rent for a two bedroom. Nice balcony, nice view, garage. Save the gap between what we can afford and what we spend. I have almost paid my student loans off and have 8 months in emergency savings. I am just fine in our apartment for now. I would like new carpet, but I don't need it. Going to wait on this split market to do its thing for a while.

Patrick,

Thanks for this post. It helps my world make sense. All these 700K boxes in Pacifica and San Bruno just don't make sense to me. The only thing I can figure is that these are families that have lived in these homes for a long, long time. Otherwise I just don't see how they possibly afford them. So many of the homes appear to be very poorly maintained. Three quarters of a million dollars AND it is dumpy. No way.

There are two things that make me wonder about other parts of the county. In the places where prices are more in line with income and with rents, aren't there still a bunch of foreclosures still headed into the market. Couldn't that still drive prices lower? Similarly, people without jobs still can't pay the mortgage. What about the downward pressure on prices that will come when interest rates increase down the road? Aren't these markets still vulnerable to those pressures, even if prices are much more affordable outside the Bay Area?

Love the "What's it really worth?" service. Very cool.

Sulli says

the rents have kept going up since dot-com bubble! ps i just saw on Golden Gate Ave a studio for $1799!!!

You mean the studio that was $3000 in 2000 and now $1799 .. right ?

How can I know vacancy rates? Any sources, or ideas for deducing it?

Apartment Owners Associations?

~Misstrial

pw says

Well, that doesn’t apply to us - $215k annual and we rent waaaay under income in order to save perforce. $1700/mo suits us just fine as opposed to paying $4k/mo rent - which is what we can afford.
Mistrial - we are in the same range. 1350 rent for a two bedroom. Nice balcony, nice view, garage. Save the gap between what we can afford and what we spend. I have almost paid my student loans off and have 8 months in emergency savings. I am just fine in our apartment for now. I would like new carpet, but I don’t need it. Going to wait on this split market to do its thing for a while.

Yeah, I understand. For us, the 2-car enclosed garage w/opener is a must.

The way to save is to under-rent.

Congrats on your savings achievement. :)

~Misstrial

Nomograph says

IF you want to live in Phoenix, THEN it’s probably better to buy. Vegas too.

If I lived in Phoenix or Vegas, the first think I would do is figure out how to get the hell out of there.

lol! :)

With the devaluation of the dollar and subsequent rise in the costs of energy and fossil fuels, I wonder how long these areas are going to remain affordable....Las Vegas & Phoenix - have to run the A/C most of the year 24/7.

We were in Tucson in late January 2009 and it was 91 degrees outside.

~Misstrial

Misstrial, seconded. Areas like Florida and the Southwest were under-populated prior to the era of air conditioning for a reason.

Throw in the soon-to escalate-again costs of gasoline in an automobile-dependent region (you need a 2-car garage, right?), and you've got more trouble ahead. So while heat/nergy-related costs might be on both sides of the rent-versus-buy equation, they're only on one side of the "do you want to be invested in this area for the long term at all" calculation.

toothfairy says

only 1 house in Oakland is a buy?

You mean, "a house in Oakland is a buy?" Isn't Oakland, CA the murder capital of the known universe? Why would you want to live, er, die there?

robertoaribas says

yeah, phoenix is out of water, and its 1000 degrees all the time here… Good grief the nonsense that people use to prove whatever idiotic point they want.
Summer is very hot here, irritatingly so. Payson and Sedona however, are just over an hour away, and are cool enough all summer that you need a jacket at night, so relief is close by. Today it is in the 60’s and nice, the weather will be very good all the way till May now. I remember how freaking cold and rainy northern California was in the winter when I attended Berkeley, though having skiing close by mitigated that somewhat. You can take Chicago winter, I’d much rather put up with Phoenix’s summer.
Our water is MUCH more assured than southern California’s, and my average electric bill on a 2400 square foot home with a large pool is $250 a month; my taxes are $150, so I’ll wager that a similar home ANYWHERE in the bay area would cost me so much more in taxes, that my utilities would be free in comparison…
I was in LA for the last week, the traffic there sucks 10 times worse than Phoenix, ditto the bay area…

Well, I don't know....I was in Sedona for July 4th weekend and the entire town is surrounded, closely, by huge red rock edifices.

In the summer, these rock faces would hold and reflect heat and imo, would be similar to living in a brick oven or at least surrounded by pizza stone.

A significant number of folks who moved to Sedona, upon living there, now regret their choice and are seeking to leave, albeit contingent on their house selling. Obviously, many of these owners must sell in a down market and Sedona is affected just like most places.
Using the Google Real Estate tool, you can see all of the distressed housing.

Best thing about Sedona is New Frontiers Natural Market (about 1/2 the size of Whole Foods in Cupertino), the town is an upscale southwest-territorial style is near a river where people like to go and recreate.

My above-comments on the AZ heat is in no way meant to be a slam on the State, however, IT IS WHAT IT IS, and being a 4th-generation Californian and 6th-generation Westerner, the entire southwest, including AZ, has a reputation for being very hot in the summertime and for most of the year, actually.

I travel to AZ about every 6 weeks throughout the entire year, and so I am posting from personal knowledge. (For those who need to know: 101 > 405 > 5 > 805 > 8 into Tucson; reverse to come back. Midnight to 11 a.m. in the morning and "No" I haven't seen any drug or human smugglers on the 8 near Casa Grande.)

I don't know what is is about other States' residents - on forums and message boards they are unwilling to accept any observations or established facts deemed by them to be critical of their State.

Seems that they can only tolerate "happy talk" which leads me to think that those who are this way are real estate agents.

One last thing: although electric bills may be currently lower in areas of the southwest, these rates will likely increase, due, as I stated above, to Quantitative Easing and the subsequent devaluation of the dollar.

I know this for a fact as many of you know, I rent in two states: CA (legal res) and southern NM and in southern NM, rates for El Paso Electric have doubled since 2006. The gas rates are controlled by a city-owned utility, however, rates have also gone up, by what I guess, about 1/3 since 2006.

AFA L.A. traffic, it has been greatly affected by the loss of about 2M residents since 2003. So traffic there in the Basin is nothing like it used to be, not sure if the poster was in the middle of a sig-alert or what.

In my experience, traffic around PHX is noticeably less than 2007-8 probably due to the hardships of the economy and collapse of real estate and construction-related employment (as in many other areas of the nation - mentioned just so that the poster is not offended by my mention of unemployment in PHX).

Unlike what most Arizonans think, *most* of the people who streamed into Arizona during the past 20 years came from the NE and Rust Belt states and NOT California. These relocated people often lied and made the claim of being a Californian, however, they are/were not.

True example: one Nebraskan young woman moved to Newport Beach, lived there for 9 months, moved to Mesa AZ and told everyone she was a "Californian." Liar. She is a recent arrival from the Midwest to AZ by way of California, however, SHE IS NOT a Californian. Just to make that clear.

And another thing: Patrick lives on the Peninsula (the "real Bay Area") and it seems to me to be of the utmost rudeness to be an out-of-Stater and come on here and rip California. Patrick wants to buy a home in the RBA. Please keep that in mind.

If you feel the need to lay it on, then go to city-dataforum.com and spout off there. Or start your own site for real estate in your own State.

I am tired of California being slammed on account that some newby poster decides that commonly known facts about their own State do not meet their liking.

~Misstrial

I live in south bay near Cupertino area with some great schools and houses that's still too expensive to afford. I've been to some open house lately. I noticed an increasing number of real estate agents selling their own houses. It's not the house they currently live in, but the ones they bought as investment and rent out. They bought the houses long time ago when the price was still low. If this is not just coincident, I wonder why they want to sell it now. I could think of these possible reasons below and I'd like to hear from other what you think.

1) The house price will drop next year, so they want to sell it now.
2) It's tough to find tenant nowadays.
3) There are some other bargains out there somewhere. So they want to take the money out and invest somewhere else.

^ 3 is probably it. Places like Fresno are an absolute steal right now.

This is a chart of the ratio of median home prices in 1980, 1990, 2000, and 2010 for different bay area counties, normalized to San Francisco = 1. 1980, 1990, 2000 are from the national census data. 2010 is the latest median sales prices from dqnews.com (september)

Admittedly not very good methodology, but what do you expect for 20 minutes work?

All counties I looked at have gotten cheaper relative to to San Francisco since 2000 by a good 20% or more. No wonder I think it's still to expensive here.

Interesting to note though that Contra Costa and Alameda seem to have been slumping relative to San Francisco for 30 years.

magnolia2000 says

1) The house price will drop next year, so they want to sell it now.
2) It’s tough to find tenant nowadays.
3) There are some other bargains out there somewhere. So they want to take the money out and invest somewhere else.

I would like to add a possible #4, and that is that with sales so slow they aren't selling as many properties and they need the money to stay afloat. Even once top producers are feeling the pinch.

robertoaribas says

misstrial: except for proving evidence of the obnoxiousness of many southern californians, what was the point of your post? that you are rude?
Patrick runs a real estate blog. you might notice that fact from oh, say the fact that he posts real estate news from boston, seattle heck even china on occasion.
“I am tired of California being slammed on account that some newby poster decides that commonly known facts about their own State do not meet their liking.” First off as to newbie, I wrote Patrick personally from this site in about 2006, back in the days when all anyone talked about was sushi… so there goes newbie, though I did forget my original password.
I post rent/price ratios from Phoenix which I know extremely well, to show how poorly those same metrics compare in the bay area, and get responses like, “nobody wants to live in Phoenix” an oddity considering 3.5 million people have chosen to live here.
Furthermore, unless I am mistaken the summer heat effects renters and buyers kind of equally. So, I’d expect rent to buy to be rather unaffected by days over 100 degrees.
But lets compare some fun facts: California has the very worst state budget deficit of all, and even higher unemployment rates than Arizona. So, once again, if I’m not supposed to be bothered by “commonly known facts about their state” being posted, then pretend you aren’t a raving hypocrite ok then, and don’t get your panties in a twist about commonly known facts about your state? Don’t let limited logic ability hold you back!

^AZ Real estate agent and/or troll.

~Misstrial

magnolia2000 says

I live in south bay near Cupertino area with some great schools and houses that’s still too expensive to afford. I’ve been to some open house lately. I noticed an increasing number of real estate agents selling their own houses. It’s not the house they currently live in, but the ones they bought as investment and rent out. They bought the houses long time ago when the price was still low. If this is not just coincident, I wonder why they want to sell it now. I could think of these possible reasons below and I’d like to hear from other what you think.
1) The house price will drop next year, so they want to sell it now.

2) It’s tough to find tenant nowadays.

3) There are some other bargains out there somewhere. So they want to take the money out and invest somewhere else.

Cupertino res here (Monta Vista).

They are probably selling for all the reasons you listed.

My understanding is that homes are taking much longer to sell as compared to the past, so its probable that they need the income from the property sale, that is, if the property has any equity in it.

(Recent example: a realtor acquaintance recently sold her investment condo at a loss of $220k.)

Could be that they have a funny money loan on the property that has a reset due and that could be another reason. Or a heloc loan that must be paid off and a divesture has to take place in order to make loan payments or pay off the note.

btw, my landlord's Los Altos property went down over $800k in estimated "value" this year alone. All of a sudden earlier this summer she started behaving, well, less than generous relative to rental repairs. Follwoing that, I went on to zillow and that explained the why's...

Whatever the case may be, real estate is not the investment vehicle it used to be - commodities, gold, oil, and certain currencies having supplanted RE. RE is deleveraging while those investments I listed are going up, up, up.

~Misstrial