Thursday, November 29, 2007

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.

Wednesday, November 28, 2007

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:

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.]

Saturday, November 17, 2007

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.

Friday, November 16, 2007


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.