Owning in the Bay Area really makes little sense (San Francisco: 2013, rentals)

[HappyinCali]

Originally Posted by bmw335xi

You forget that property values tend to go up over the long run. I could sell my 1 bedroom condo for $150k more than what I paid. If I had rented, I'd be down around $50k right now. I bought at a good time though. When the market is near the top it is better to rent and wait for the next correction. However, to say it is always better to rent is a joke.

There are rarely absolutes. It is definitely not ALWAYS better to rent than to own.

It seems that the crux of a lot of arguments of buying is price appreciation.

If you look at a Long term comparison from 1978 to 2004, investing in the stock market vs. Real Estate resulted in 5% higher returns! That's pre-recession, which has likely further amplified the difference.

Stocks vs. Real Estate | 1 | CNNMoney.com


To me, saying that an asset is worth more because it will appreciate it is pure speculation. It very well might appreciate. But it will be pure luck. Just like if you bought in 2007. I would rather buy a 30-year investment grade bond that guarantees me 4-6% return (unless the company goes bankrupt) than hope that my house price will go up by 5% every year.

Rents also increase over time, so they SHOULD track pretty closely. But in San Francisco you have the great disruptor in the form of stringent rent controls. So, that adds an element of predictability to you rent expenses, while your house value is pure speculation.

If I am reading chart #1 correctly here, the CAGR of inflation adjusted house prices from 1970-2012 is 0.4%. Pretty shoddy investment.

Real Estate Charts: Graphs of inflation-adjusted, historical housing prices.

[HappyinCali]

Originally Posted by wooliemonster

The tax benefits are huge. You can't compare the nominal costs of rent vs. mortgage payment without factoring this in.

Also, sure appreciation, but that can drown you just as easily. Our house in Houston is going on the market for about 60k more than we paid for it 6 years ago. Of course, we've put a big fraction of that into the house as improvements, maintenance, repairs... and for long stretches of time after we first bought it, the market value was barely what we paid. The appreciation has only occurred in the past 2 years.

Good point on tax benefits. I need to do more research on that.

[wooliemonster]

On average residential real estate is a poor long term investment. But that's a national average, many areas have periods of intense appreciation and sometimes subsequent crashes.

[ssmaster]

Originally Posted by HappyinCali

There are rarely absolutes. It is definitely not ALWAYS better to rent than to own.

It seems that the crux of a lot of arguments of buying is price appreciation.

If you look at a Long term comparison from 1978 to 2004, investing in the stock market vs. Real Estate resulted in 5% higher returns! That's pre-recession, which has likely further amplified the difference.

Stocks vs. Real Estate | 1 | CNNMoney.com


To me, saying that an asset is worth more because it will appreciate it is pure speculation. It very well might appreciate. But it will be pure luck. Just like if you bought in 2007. I would rather buy a 30-year investment grade bond that guarantees me 4-6% return (unless the company goes bankrupt) than hope that my house price will go up by 5% every year.

Rents also increase over time, so they SHOULD track pretty closely. But in San Francisco you have the great disruptor in the form of stringent rent controls. So, that adds an element of predictability to you rent expenses, while your house value is pure speculation.

If I am reading chart #1 correctly here, the CAGR of inflation adjusted house prices from 1970-2012 is 0.4%. Pretty shoddy investment.

Real Estate Charts: Graphs of inflation-adjusted, historical housing prices.

real estate appreciation in some of the bay area has outperformed national numbers
(for example Palo alto had consistant appreciation during the housing downturn)

but in addition to appreciation have had
1) tax deduction
2)my mortgage payment has decreased while rents have gone up.

[wooliemonster]

Mostly, I'm worried about not being able to save enough for a down payment before I get priced out of the market.

So, for instance, say I have 80k available when I move, and my HH income is enough to make the mortgage payments / tax / insurance / maintenance / etc (assuming 20% down) on say 600-800k, depending on the assumptions. However, to get to the 120-160k downpayment point I'll need another 40-80k in savings. That could take me, with great discipline, another 2 years to acquire. However, in that 2 years, am I going to be priced out of the market completely? The houses I like in Berkeley and Rockridge are already routinely selling at 800k. So, every year it takes requires additional compromises on house location.

In Houston, it hasn't been as much an issue because there are various forces that put realistic caps on house appreciation (high property taxes, easy to build new units and subdivide lots for townhomes/condos). However, it seems that Bay Area houses can easily appreciate into the stratosphere. So, I have anxiety about coming up with the down payment very quickly, e.g., dramatically lowering our rent budget, getting a less expensive car (we share 1 car), cutting other budget items, etc.

When I started seriously considering a move to the Bay Area a couple years ago, prices were still at a low point. I guess I waited too long and might not be able to make it work.

[bmw335xi]

This is the way I see it, if you rent, all you are doing is paying someone's mortgage payment. After living there and paying rent for 15 years, you will have NOTHING to show for it. Eventually, you will most likely be removed from the property for various reasons. There is the article of the luxury apartment building that is going to be converted into a TIC (example). If you own, eventually, it will be all yours free and clear. You won't have to worry about one day being forced to move and find a new place (who knows how much rent will be by then). You will have tax deductions. And maybe, your home's value will be worth a lot more 5-10-20-30 years down the road. The only time I would recommend renting would be if you cannot afford to buy or if you don't know where you want to live.

[countofmc]

Originally Posted by wooliemonster

Mostly, I'm worried about not being able to save enough for a down payment before I get priced out of the market.

So, for instance, say I have 80k available when I move, and my HH income is enough to make the mortgage payments / tax / insurance / maintenance / etc (assuming 20% down) on say 600-800k, depending on the assumptions. However, to get to the 120-160k downpayment point I'll need another 40-80k in savings. That could take me, with great discipline, another 2 years to acquire. However, in that 2 years, am I going to be priced out of the market completely? The houses I like in Berkeley and Rockridge are already routinely selling at 800k. So, every year it takes requires additional compromises on house location.

In Houston, it hasn't been as much an issue because there are various forces that put realistic caps on house appreciation (high property taxes, easy to build new units and subdivide lots for townhomes/condos). However, it seems that Bay Area houses can easily appreciate into the stratosphere. So, I have anxiety about coming up with the down payment very quickly, e.g., dramatically lowering our rent budget, getting a less expensive car (we share 1 car), cutting other budget items, etc.

When I started seriously considering a move to the Bay Area a couple years ago, prices were still at a low point. I guess I waited too long and might not be able to make it work.

I'm in the exact same boat as you. I often kick myself for not buying in 2009 when we first moved here. Our incomes were actually higher then too, banks would probably have been begging us to take a mortgage. I missed it, blinked, and all of a sudden it was 2012 and bidding wars were back on. It happened so quickly.

Now, I'm not too concerned about it. There WILL be another recession. If interest rates keep rising, that will dampen consumer spending and hurt some of the Bay Area giants, and venture capital will probably dry up as well. Not to mention the effect the rates will have directly on mortgages and demands for homes. At that point for those that have managed to hang on to their jobs and saved some money, it might be another good opportunity to buy, much like the early 90s, the early 00s, or the early 10s.

If that doesn't happen, who cares? I keep renting if I want to live here, and if I get priced out, so be it. I move to the East Bay or Los Angeles.

Until then, I only do what I can. Just keep saving money and looking for opportunities.

[HappyinCali]

Originally Posted by bmw335xi

This is the way I see it, if you rent, all you are doing is paying someone's mortgage payment. After living there and paying rent for 15 years, you will have NOTHING to show for it. Eventually, you will most likely be removed from the property for various reasons. There is the article of the luxury apartment building that is going to be converted into a TIC (example). If you own, eventually, it will be all yours free and clear. You won't have to worry about one day being forced to move and find a new place (who knows how much rent will be by then). You will have tax deductions. And maybe, your home's value will be worth a lot more 5-10-20-30 years down the road. The only time I would recommend renting would be if you cannot afford to buy or if you don't know where you want to live.

That's a fair point. The way I view it is that I think I can take my annual savings from renting and put them in Bonds/Stocks portfolio that will yield a return that is comparable to home ownership without the massive downside risk of the large upfront investment.

[wooliemonster]

The alternative is to investigate 10% down loans, but my understanding is they are difficult to come by in the present market, as well as the downsides of having limited equity and PMI.

[countofmc]

Originally Posted by wooliemonster

The alternative is to investigate 10% down loans, but my understanding is they are difficult to come by in the present market, as well as the downsides of having limited equity and PMI.

I've heard they are not that difficult. Also correct me if I'm wrong, but don't they usually do a "piggy back" loan? 10% down, 80% traditional mortgage, and 10% home equity loan? So that you don't need to pay PMI?