Where the hell am I?

Sorry folks, was traveling for a couple weeks, and now hunkering down for the holidays. Light posting until 2008, but I'm definitely here, and definitely keeping up with the comments. I have some great properties I'm going to be highlighting soon, so don't forget about me.

Doom & Gloom... or is it?

A recurring meme I see among SF housing bloggers and commenters is to label the concept that prices may be susceptible to declines or stagnation in the near future as "doom & gloom".
I think this label is funny, and perhaps gives away something about the people using it. Because what they are calling doom & gloom looks a lot like a beautiful sunshining day to me.
One comment I was reading today was from a homeowner who was quite secure in that whatever the future brought, their home had already appreciated 35% since they purchased it a couple years ago. They too were using the "doom & gloom" label to generalize those that thought prices were coming down. While I was stewing on that, I started thinking about what it would really feel like to a homeowner if housing prices started to move in a negative direction.
It occurred to me that while housing market pricing typically moves very slowly, that doesn't mean you can pull out on a moments notice if things take a turn for the worse, because the reality is that selling a house takes a while, even if done quickly. And therein lies the problem: history is full of people who hung to real estate a little too long, and couldn't get rid of it in time when the tide turned. The event that sets all of this off could be an external force, such as an economic downturn, or even a recession, which leads to a significant amount of job loss, which in turn leads to a number of people needing to cut the fat and reduce those $10k monthly housing costs.
Once critical mass is reached among sellers, an interesting effect occurs: buyers stop buying because they see the writing on the wall. They know all they have to do is wait and prices will come down further. Meanwhile desperate sellers find themselves increasingly cornered. Eventually they start to capitulate, only to find the first couple of rounds of price reductions aren't enough and only exacerbate the situation. This leads to more price reductions, and unless they wise up and price their home very competitively, they chase the market all the way to the ground. And in short order you start to see some very sudden price changes across the board.
As an example, Miami has a number of sellers who were confident in the gains they had already achieved and their ability to extract those gains in an emergency. Sadly, many did not realize these gains, holding out for the market to turn upwards again, only to be buried under even larger losses, until finally they lost their equity completely and their house was foreclosed.
Yes, that was doom and gloom for the seller, but when it has all shaken out, there will be some very happy buyers for whom this was a very sunny event.

An interesting proposition, and a mystery...

624 10th Ave. presents itself as both an interesting set of options as well as a mystery.

The flat is a Richmond 3 bedroom 1.25 bath TIC in a 2 unit building. It is currently asking for $699,000. There are no pictures of the interior, so we don't know much about the size of the bedrooms, but judging by the bay windows it looks likely to have a nice sized living room.

The notes state that building has separate water and PG&E meters, which make it "perfect for fast track condo conversion". Another option is to keep it as a rental unit, as it is currently occupied under section 8 for $2500 a month. Supposedly the tenant is fine with vacating for the new owners (given 60 days notice) but the buyer can renew the contract with section 8 if they so choose. The question is why would they want to? And it is that question that brings us to the mystery: the notes claim the building has "no rent control!". Perhaps someone can explain to me how a two unit building built in 1919 escaped rent control? A quick check with the SF Tenants Union reveals that

"2-4 unit, landlord occupied buildings used to be exempt from rent control.
Pursuant to 1994's Proposition I, these buildings have had full rent control protection since May 1, 1994. "

but I can't find out if there is any special rule exluding a building from rent control if the building is not occupied by the owner.

At any rate, the last listed sale (with a price) on Property Shark was $324k in 1991. Clearly at that price, between the sale, and what they made in rent, those owners did very well. But what does it look like for the new buyers? Plugging the numbers into our spreadsheet reveals that if we change the sale price to reflect the same appreciation the previous owners enjoyed over the past 16 years of 8.3% (which seems to me to be an exceedingly unlikely event), we will wind up with a sale price of $2 million in 2023. Assuming the same tenant lives in the house for 16 years from 2007 paying $2500 a month with 1.5% annual increases, the owner will be poorer to the tune of $138,000 (or $656 a month). He would have better off if he had just rented the place himself! And if property appreciation actually slows down a bit (as opposed to going into reverse, as some fear) to a more typical 2.5%, the owner will be out $867903, or $4113.29/month!

Wow that was fast! And an update...

Thanks to Alex @ The Front Steps for linking to my previous post. I sort of assumed it would be a long time before anyone would visit this blog, so I'm a little shocked to see all the people downloading the spreadsheet I made only a matter of hours after posting it. This internet thing is crazy, isn't it? And as a huge fan of TFS, I'm more then a little flattered.
Welcome TFS readers, and I hope you'll come back and visit.

There have been a couple suggestions and comments made at TFS, so I thought I would port them over here, so anybody else happening to stumble across this blog would have some idea of what's happening, and that way I won't wind up answering the same questions over and over again.

anon8mizer makes several great points regarding taxes on capital gains. It's going to take me a little bit to assimilate these into the spreadsheet, as some of these are somewhat complex, and I'll need to make sure I understand them fully before coding the formulas. But I will do so.

bevel444 wonders why I don't have a field for rent increases. That's a good point. The short answer is that I am a bit myopic (as well as more then a bit lucky) and due to a wonderful landlord who our family adores, my own rent has not budged a penny in over five years.
But obviously, I'm the exception, not the rule, so I will add have added in a field to adjust for rental increases. I think those of you looking for this to wildly tip the scales will be dissapointed. In SF most apartments are rent controlled and any apartment that is rent controlled can only have an annual increase of half of the Consumer Price Index, which for this year is only 1.5%.

DGee points out that higher tax rates (i.e. higher incomes) can result in greater savings for owning. This is true, and is one of those things that makes me want to say in a church lady voice "isn't that special?". It's essentially welfare for the wealthy, right? Or am I missing something? You buy a fricking nice ass house, and my country gets less tax revenue. Nice.

James wonders if there is someway to share the spreadsheet without forcing people to be authenticated. He says they all need to give me their email. James: I don't get the emails. Don't see them at all (or if I do, I'm not aware of how). I'm on blogger, not typepad (I think! new to this blogging business...). At any rate, I'm still thinking about a better way to do this, and if you or anyone else has a suggestion, I'm all ears.

Anyways, enjoy, and keep the feedback coming.

Ending the argument: An easy to use spreadsheet to determine the true monthly cost of ownership

It is often the case when perusing the local blogs, that I'll notice "comment battles" will break out over whether x property made money, or how a particular owner would have faired if they had rented instead. Invariably someone will posit some theory, and then someone else will point out what they forgot, and then someone else will point out what they forgot, and it isn't long before the first posters point is forgotten, and the conversation drifts aimlessly along the lines of "tastes great - less filling" without any sincere effort to assemble all the information together and get a definitive, or at least semi-definitive answer.
I've decided to fill in the breach. I don't claim it's the be all end all, but it's a simple easy to use calculator that can at least give you a rough idea of whether a given property came out ahead, or might even help you decide if buying a particular property is in your best interest:

http://spreadsheets.google.com/pub?key=pM4Gw0s2zSeCXIvKktNGLbg

I'm looking for feedback, so if you see something I left out, or some way to improve it, let me know.

[update: I am working on creating an editable web based spreadsheet for everyone to use. In the meantime, you can edit the spreadsheet by following these instructions (thanks anonymous for leaving this tip in the comments!):
Go down to the blue links at the bottom and click either Edit or Google Docs. You may have to sign in or register but once the file opens in a new window click on File and then Copy. A new spreadsheet will open where you can edit the cells.]

What the hell is a median, and why should I care?

Often times, as I peruse the various blogs around real estate, particularly ones that are focused on the Bay Area, I will see many misconceptions about what exactly the definition of "median" is. And this misconception isn't limited to amateurs and newcomers, as even professional Realtors (such as here, and here) are prone to confusion about the term.

It's a fairly common mistake to confuse median with mean (more commonly known as "average").

In simple terms, the median is literally the number in the middle.
So in a three number set such as {1, 9, 10}, the median is 9, while the mean (or average) would be 6.66 (1+9+10=20, 20 divided by 3 = 6.66).

If there are an even amount of numbers in a set, the median is taken by dividing the two in the middle by 2. So in a four number set {1,8,9,10} the median is 8.5 (8+9=17 divided by 2 = 8.5). While the average in this case would be 7.

So how does this apply to San Francisco real estate, and why should we care? Well because San Francisco has a mix of properties selling at very different price tiers. And the result, as I am about to show, is that trying to determine short term market trends by looking at median prices can give you some very misleading answers.

Let's imagine 3 different scenarios:

Scenario 1
If you have 1,000 properties sell for $1,000, then the median is $1,000 and the average is $1,000.
Scenario 2
If you have 999 properties sell for $1,000, and one property sell for $2,000,000 then the median is still $1,000, but the average is now $2,999.
Scenario 3 (i.e. the "mix" scenario)
If you have 250 properties sell for $500, 250 properties for sell $1000, 250 properties sell for $2000, and 250 properties sell for $1 million, then your median is $1500, and your average is $250,875.

Obviously no one is buying a house for $250k in scenario 3, they are either paying a lot less, or a lot more, and that's why medians are used more often then averages in RE, because it tells us what people are actually paying, and it's a lot less susceptible to being manipulated by the top 2%.

Now, using these same scenarios, let's say all properties go down in price by 20% and also the bottom portion of the market doesn't sell at all due to a 25% reduction in sales volume.

What does that do to our medians and averages?

Scenario 1
Median and average both drop to $800.
Scenario 2
Median drops to $800, average drops to $2932
Scenario 3 (i.e. the "mix" scenario)
Despite a catastrophic bust in real estate, the median has risen to $2000, and the average has also risen to a whopping $534,000. Weird isn't it? Prices are down 20% and sales volume is down 25%, but the median went up 33%, and the average went up 112%!

When you have a relatively small sample size like we have in SF, and wide variances in pricing tiers based on micro-neighborhoods, it is really difficult to extract anything useful out of a city wide median or average, and that's assuming all things are equal. Add in the value of property improvements and it's just plain impossible. Prices could be going up city wide, or just in nice neighborhoods, the lower priced property could just not be selling at all, quality could be improving, or it could be a mixture of any or all of these. In short: there's no way to tell what the market is doing just by looking at median prices.

Welcome

So what is this blog all about? Well if you are anything like me, you live in San Francisco, and you love it. You want to raise your kids here. You want to spend your life here. Perhaps most importantly, you want to buy a house here. There's just one little problem: like most San Franciscans, you aren't particularly wealthy. And while you might be able to afford a modest home in this market, you don't neccesarily want to bet your life savings that it will keep it's value and not trap you in a tiny dump for the next ten years of your life or more.
There are plenty of local blogs about fancy houses and nice condos, and this blog may feature the occasional nice place too. But the point of this blog is to focus on affordable housing, or as close as San Francisco gets to it. It's to talk about great deals, and interesting strategies, upcoming neighborhoods, and ways to make it work for people who don't have six figure incomes, and maybe have a kid or two in the mix as well.
The goal here, and it's a lofty one I admit, is to be a blog for the rest of us. I hope you find it worth your time.