Monday, October 20, 2014

Do I Rent or Do I Sell?

A fascinating case study just came up: I was recently speaking with someone who was asking me – should I continue to rent my former home, or sell it outright?

Now there are many facets towards this decision beyond making “financial sense,” like convenience, time and specific goals – but I’ll show how to at least make sense of the numbers. Numbers don’t explain everything, but they sure help when a justification is trying to appeal to reason.

Here was the scenario:

They paid $925,000 for their residential property, put 20% down to avoid PMI, got a great rate at 3.85%, and just completed their 14th year of a 30 year mortgage. We had a conversation as to what their estimate of property value and we agreed that for the time being we would leave that number at cost, the $925,000. The scenario looks like this:


The nitty-gritty surrounding the rental numbers look like this:  

So the immediate thought is: What!? How does this make any sense? I’m losing $4,000 per year; it’s costing me money to rent this home out?

But like most things in life, it’s never quite so simple. Based on the mortgage contract—year 15 looks like this:

It boils down to the fact that people don’t think through just how much equity is created on the back end of the mortgage! Even though there is a negative annual cash flow, the actual equity had increased by nearly $23,000 (The $267k less the $245k equity from last year). The net appreciation when one considers this equity growth less the annual cost to rent is a net appreciation of ~$18,940. 

Obviously nobody is making life altering changes over $18,940, but we left out the most important point of all: what if the value of the home appreciates? Selling the property meant that the upside potential is eliminated; it was determined in this case that the cost of waiting wasn’t so bad: and that they could afford the modest annual expense. As far as tax-planning goes, they were looking at the best case scenario: negative income (write off) + appreciating assets. People that are buying bonds today, for example, are getting the exact opposite: income + losing value. That conversation is for another day.

Anyhow, I have taken the liberty of creating a model for this. If you are interested, please give me a call.

Tuesday, October 14, 2014

Inspiration: Honeymoon in Paris



When you travel internationally, you have a chance to discover things you never thought about your home.  For example: you might not think about how young San Francisco is until you find yourself standing on a Paris street.  Sure, the Spanish settled here in 1776, but Paris was around for the Roman Empire!  The Eiffel Tower may have been a modern wonder, a hymn to industrialism at the 1889 World's Fair, but that still makes it a good 50 years older than San Francisco's marvel of engineering, the Golden Gate Bridge.

When my wife and I traveled to Paris, the comparisons came naturally.  These are both cosmopolitan cities, centers of culture with great international renown.  Both are married to water: San Francisco has the Bay, and Paris has the Seine.  And foodie culture in Paris may have a longer history than San Francisco's own, but San Francisco is no less in love with its food, infusing it with international inspiration and entrepreneurial creativity.  And you can see the French-born Art Deco movement stamped in many of San Francisco's buildings, from the Rincon Center to Coit Tower.  And art deco is just scratching the surface of Paris' exquisite art and architecture – just as it doesn't sum up our proud and varied history of buildings here.

It may be 5,500 miles from San Francisco to Paris, but it turns out that's not that far, in the grand scheme of things.



Paris also gave us a chance to see San Francisco’s housing market in a new light.  While the $1,000-per-square-foot real estate prices here might give some people sticker shock, consider this: in 2011, according to Credit Sesame, a square foot in Paris would cost you over $3,000. Whew!  You can't get a better baguette here, but you can still dig into some San Francisco sourdough, and have a place to call your own at under a third of the cost.

Paris is a lovely city to visit, crammed to the gills with history, with monuments, with beautiful food and beautiful people – especially if you happen to bring your beautiful wife along for the trip!  But while I encourage everyone to visit if they get the chance, I still choose to live in its younger (but just as cosmopolitan!) cousin.  San Francisco may look back to the Gold Rush and the 1906 earthquake for its history while the foundations of the Louvre were laid in the 12th century, but when I come home to the house I'm building my family in, I love my younger city that much more.

Monday, September 1, 2014

Earthquake's Effect on Bay Area Real Estate

I was asked to share my opinion in the SF Chronicle on Sunday, 8/31/14, on the potential effects of an earthquake in the Bay Area.  Here’s what I had to say:

Despite the severity felt by earthquakes in the short term, home prices in the Bay Area have continued to appreciate over the long term at an astonishing rate. The impact that earthquakes have had on home prices honestly depends on the period of time we focus upon. There have been six recorded earthquakes in the Bay Area with a magnitude of at least 5.0 since 1979. The National Association of Realtors reported in 1989, the same year as the Loma Prieta earthquake, that the average median home price in San Francisco was $260,600. In 2014 that figure has risen to $972,800!

The greater question to pose to ourselves can be stated simply: Do we believe that these specific and erratic occurrences will derail the long list of positives that this region has to offer homeowners? Using history as a guide, I would not bet against this place. Back even before the Gold Rush, Bay Area residents have always been a determined and resilient breed with a history of rolling with the punches - or earthquakes - and bouncing back. I believe that the response to these natural events comes with a positive contribution from every person who has a stake in this unpredictable and beautiful place we call home.

Tuesday, July 1, 2014

The Middle Class Struggle to Obtain Property in San Francisco

It is worth being derivative sometimes; following suit in content, if that means we can better appreciate an important point.  The Wall Street Journal did a good job a few months ago highlighting the undeniable, fundamental challenge of the San Francisco housing landscape.  One quote read:

Workers are finding jobs by the bucketful in San Francisco, but housing supply hasn’t kept pace. About 4,000 housing units have been added in the past three years, for roughly 10,000 new households, according to the city planning department.

            rents are up 17% over the past three years.

            the housing shortage is “a crisis of our own making.”

The messy reality is that…any sustained boost in construction would require the city to overcome a slew of neighborhood and political forces that are aligned against building anything in a hurry, or in certain areas.

And so the paradox at hand is balancing the desire for affordable housing for all while maintaining best interests for existing homeowners.  The estimate within the piece is that it costs $650,000 to build an 800 square foot unit in a midrise building.  Further, it was reminded that building permits themselves must undergo discretionary review (in some cases).  

So in a nutshell, what we are dealing with here is a social problem very much opposite of what is happening across the nation: political activism seeks to push prices down, versus propping them up, in SF.  This is the challenge as to why areas like SF really cannot be compared to national averages.  It is also worth expressing how it can be relevant to pay attention to the local political agenda.

As for the “middle class”—a concept that needs its own elaboration—what is supposed to happen within the marketplace is supposed to play out as the graph below illustrates: 

 


And thus what agents, like myself of course, pay attention to are the how and when homes are sold for gains (unique and specific to individual seller preferences) and inventory returns to the marketplace at large.  That’s something to appreciate.

Monday, May 19, 2014

San Francisco Valuation Update

All real estate is local…

Good, got to get the aphorism out of the way first.  

Now one more: Numbers lie, numbers lie, numbers tend to…well…stretch the truth.

Let me merely highlight some of the complexity at hand by detailing two separate pieces of contrary fundamental evidence that come to two alternating conclusions. Beginning with the arguments then the evidence below each:

1.      Housing prices will cool down in SF:

·         Relative to national metrics, SF is an over-achiever. The 10-City and 20-City Case-Schiller index was up 13.6% and 13.4% over the past year. Pretty good year for housing at large (granted SF makes up 11% and 8% of those indices). SF, on the other hand was up over 20%! No denying that SF continues to outpace the national metrics.
·         The “Price-to-Rent” ratio for SF is now at 32x. The P/R ratio is a less-than-robust indicator of how much of an “earnings power” a home potentially has if one chose the landlord route. The reason 32x is considered high is that it is 14% higher than the ratio of 28x, which was the average spanning from 1989 through 2003. See blog(s) on Cap Rates for an analysis on evaluating rental success.
·         The “Price-to-Income” ratio for SF is at 4.8: meaning a home is nearly 5x an annual salary, which is about 20% higher than it was in the pre-boom era. National averages are not relevant to compare because the local marketplaces are desperately heterogeneous.

2.      Housing prices are supported and will continue to rise in SF:

·         Interest rates remain low and the Federal Reserve remains accommodative. The Credit spigot is still open and the 30-year fixed is high-fiving with 4.31%, as of the end of last week (source: Bloomberg).
·         According to the Brookings Institute, between 2007 and 2012 San Francisco had the widest spread growth of income divergence between the rich and poor. One has to step back and chuckle at the irony: in one of the most tolerance-promoted cities of America, home prices have reflected nearly the opposite outcome.
·         But it is not the fault of the people. The Elasticity Score of SF is among the lowest in the States. Translated: it continues to be extremely difficult for developers to build! With supply absolutely unable to meet the level of demand, only the wealthy continue to justify housing prices. The matter really is deeper—more sociological than purely economic.

The numbers by themselves do not give the whole story. Paying attention to fundamental trends is how to resound one’s self with the confidence needed to get a good price with the right justification.