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The Housing Market Is Officially Split


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2010 Nov 8, 7:33am   23,320 views  64 comments

by Patrick   ➕follow (55)   💰tip   ignore  

There is still very little housing that's a good deal to buy in the San Francisco area. You can rent the equivalent of the vast majority of houses for sale there much more cheaply than the monthly cost of owning the same thing. Most owners in the SF area are losing hundreds or thousands of dollars per month compared to renting, and prices are still declining as well, to add insult to monthly injury.

But Phoenix, like many other areas, has crashed hard, with the result that rent can cover mortgage and all other expenses for the majority of houses of Phoenix now. So it pays to own rather than to rent for the majority of houses there on a monthly basis, though there is still risk of further price declines as more foreclosures come on the market.

These maps and stats are from my What's It Really Worth? service.

#housing

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1   bubblesitter   2010 Nov 8, 7:38am  

I am sure this make Roberto happy. :)

2   toothfairy   2010 Nov 8, 7:59am  

only 1 house in Oakland is a buy?

3   Patrick   2010 Nov 8, 8:08am  

If you're subscribed to my service you can zoom in to see more. I had to limit the number shown when zoomed out, to avoid killing my database.

There are actually quite a few deals in Oakland, about 21 advertised for sale within the last seven days I would classify as worth buying, and many more farther out in the suburbs, in Antioch and Pittsburg.

4   Nick   2010 Nov 8, 8:35am  

What about Silicon Valley?

5   Patrick   2010 Nov 8, 8:42am  

Silicon Valley is just like San Francisco.

Meaning that there are pretty much no good deals. Almost all houses are grossly overpriced compared to renting them.

Even worse than just grossly overpriced. They are comically overpriced! I mean, really, you can rent a house for $3,000 and it would cost a million to buy the same thing in the same neighborhood. In fact, I saw a case of literally the same house available for rent at $3K/mo or for sale at $1M in Menlo Park. Here it is: http://patrick.net/?p=471990

So gross rent is 3.6%, and from that you have to pay property tax and maintenance.

It's just astonishing that people will waste that million dollars on a place that's worth maybe $410,000 in terms of rent-equivalence.

6   thomas.wong1986   2010 Nov 8, 10:04am  

Even worse than just grossly overpriced.

Should be called the "last bastion". Where it started in 1998 it will end here as well.

Similar home with price history. I expect these $1M home to defualt eventually.

What cost $260,000 in 1993 would cost $381197.31 in 2009. $400K may well be
more inline with many fundementals.

Property History for 2155 ASHTON Ave
Date Event Price Appreciation Source
Sep 14, 2010 Sold (MLS) $1,025,000 -- Inactive MLSListings #81041575
Aug 26, 2010 Pending -- -- Inactive MLSListings #81041575
Aug 21, 2010 Listed ** -- Inactive MLSListings #81041575
Nov 05, 1993 Sold (Public Records) $260,000 -- Public Records

7   Hysteresis   2010 Nov 8, 10:09am  

using only price-to-rent as the sole means for housing valuation is way too narrow.

that's like saying you can value stocks using just the P/E ratio.
that's ridiculous and a great way to lose a lot of money if that's the only metric you use to buy/sell stocks.

8   thomas.wong1986   2010 Nov 8, 10:18am  

mike4518 says

using only price-to-rent as the sole means for housing valuation is way too narrow.

Number of ways to measure valuations. I would certainly agree to use multiple methods to come to the same conclusion. Price to incomes 3.5-4x as you put it in historical context.

http://en.wikipedia.org/wiki/Real_estate_bubble#Housing_affordability_measures

9   Â¥   2010 Nov 8, 10:31am  

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.

10   lotr1978   2010 Nov 8, 12:00pm  

On one hand I get why renting in Phoenix is still so expensive - those defaulting still live here (above a certain price point) and need places to stay. Hence owners turn into renters, investors buy foreclosures and make nice money renting to the former owners. But at a certain point one would think that downward rent pressures would take hold. So far this hasn't happened. 1000 dollars per month buys a great house but a total wreck of a rental.

11   lotr1978   2010 Nov 8, 1:13pm  

I am in Laveen (collective groan). I figure rents here should be much less than 1000 dollars a month for a 3/2 in the 15-1800 sqft range but they seem to be holding at that price. But the commute from Laveen is easy compared to QC, Maricopa, Surprise, etc. 1200 gets you not much in Tempe and very little at all downtown.

12   joannemary   2010 Nov 8, 2:50pm  

What about Napa Valley?

13   Plays2win   2010 Nov 8, 4:12pm  

Roberto, what areas are the best if you want to pick up a condo in Phoenix . I saw some places in the 30K range that looked alright online but I don't know the area very well so it was hard to tell. Also, what kind of rent can you get for a 1/2 bedroom condo and what are typical association fees going to run you.

14   brichardadvisor   2010 Nov 8, 6:56pm  

mike4518 says

using only price-to-rent as the sole means for housing valuation is way too narrow.
that’s like saying you can value stocks using just the P/E ratio.
that’s ridiculous and a great way to lose a lot of money if that’s the only metric you use to buy/sell stocks.

And only looking at housing as a means to generate money to retire is also a losing proposition. Since we are going to experience worldwide hyperinflation in commodities due to QE2, QE3, QE4, etc.... it makes sense to put your money in commodities: gold, silver, wheat, oil, etc. Why take a risk with housing? Housing will remain deflationary until... as economist Michael Hudson puts it:

"But the key is not simply lowering interest rates. The idea is to flood the economy with credit so the banks will lend out more debt. And if the Fed’s policy works, then housing prices are going to go back up so high that most consumers are going to have to pay 40 percent of their income for housing. They’re going to have to pay more money for credit card debt."

Of course, that's assuming the Fed's policy works... and no one is assuming that right now, except the Fed, really. From a risk analysis perspective, commodities are at zero risk, while housing remains a highly leveraged casino-style bet.

15   jkl   2010 Nov 8, 8:59pm  

this discussion got me interested to see what rents were on craiglist and i was SHOCKED to see that rents across the board are down 30% from just 6 months ago in central florida, i even found some people renting rooms for 150$ no joke, the market is flooded and people are desperate can easily rent a 3/2 for 800 in a nice part of town

16   maxweber   2010 Nov 8, 11:13pm  

Patrick, you ahve a really useful service. Would be interesting to know how many sales are happening in the green metros versus the red metros. See if the market agrees with your assessment. Might be a house is a bad investment in SFarea but people have so much extra money its like buying an Escallade instead of a Pilot.

17   r2t   2010 Nov 8, 11:48pm  

Vegas, baby!

No, really, you should check out the housing market in Vegas.

Talk about Buying being cheaper than Renting!

No, I'm not a RE agent. I'm just a guy whose parents used to live there and follows the market just for kicks.

If you don't believe me, go to Realtor.com. Type in a range of $74,000 to $76,000. In just this narrow range around $75,000...

...you get a return of 250+ houses for sale!

Not condos, not townhomes, but single family houses.

Of course, not all of them are gems. And these days, you have to be careful about what part of town you're buying in.

But some of these are decent little homes:

I live in SoCal, where you can't buy a toolshed for that kind of money.

And I used to think the buffets were priced to sell!

18   maire   2010 Nov 9, 12:17am  

There's a saying in the Midwest, "What's happening in California will happen here in under a year." And, it is. On my block (behind, one side, and my side) seven houses foreclosed. Rents are decreasing too.

19   Patrick   2010 Nov 9, 12:30am  

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.

20   toothfairy   2010 Nov 9, 1:03am  

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.

21   Patrick   2010 Nov 9, 2:07am  

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.

22   thomas.wong1986   2010 Nov 9, 2:09am  

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.

23   thomas.wong1986   2010 Nov 9, 2:13am  

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.

24   Patrick   2010 Nov 9, 2:21am  

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

25   thomas.wong1986   2010 Nov 9, 2:29am  

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.

26   toothfairy   2010 Nov 9, 2:30am  

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.

27   thomas.wong1986   2010 Nov 9, 2:31am  

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.

28   thomas.wong1986   2010 Nov 9, 2:41am  

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.

29   bubblesitter   2010 Nov 9, 2:43am  

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.

30   toothfairy   2010 Nov 9, 2:48am  

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.

31   bubblesitter   2010 Nov 9, 2:59am  

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?

32   pkowen   2010 Nov 9, 4:19am  

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.

33   thomas.wong1986   2010 Nov 9, 4:49am  

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 !

34   Misstrial   2010 Nov 9, 5:50am  

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

35   Misstrial   2010 Nov 9, 5:53am  

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

36   Sulli   2010 Nov 9, 7:56am  

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!!!

37   Patrick   2010 Nov 9, 8:07am  

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.

38   davidh   2010 Nov 9, 10:26am  

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.

39   sam1   2010 Nov 9, 10:31am  

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)?

40   Â¥   2010 Nov 9, 10:59am  

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.

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