patrick.net

The landlord (the first one) had no choice. After filing bankruptcy, the landlord could no longer collect rent. The luck came in the length of the bankruptcy process and the subsequent foreclosure. But yes, I realize this is not the norm.

Buying makes sense only if you plan to be there for a long time, and/or if the costs are less than renting. Some properties are there on the cost front.

The problem that I, like many other buyers face, is that if 2 years from now I lose my job and despite having an emergency fund, can no longer afford that house, the supposed equity is gone, especially if I have to sell.

I'm not one of those people who say "don't buy" just to be contrary. There are a lot of good facts presented here, I just think some important ones (like bad landlords and lack of quality rentals) are not highlighted.

Most Sundays I'm out looking at houses. It's the usual mix of REO/foreclosure, which are decently priced but neglected, 1-2 decent properties at a fair price, then the bulk are grossly overpriced attempts at humor by their underwater owners trying to recoup their equity, or at least their downpayment. :)

I previewed my rental about 2 weeks before I moved my family in. It had medium quality light brown carpet in all the living areas and all the walls were custom painted nice neutral colors. We did the walk through with the management company the day before we moved in. All the walls were repainted white, the carpet was replaced with a bottom of the line off-white cheap carpet, and the entire hallway was replaced with cheap vinyl flooring!! I was incredibly upset, but we were already moved out of our old house, and had already signed the lease on this place. I called the management company to give the boss lady a piece of my mind. She tried to convince me that the vinyl was an upgrade! Off white carpet? I have 3 little kids!! What about the paint? I specifically told the representative showing us the house that I loved the interior paint and want it to stay even if it had a few marks on the wall (I saw her write this down, and it was mentioned again at the lease signing). After giving her a piece of my mind, her final answer? "What's the big deal.... it's only a rental." Chaos ensued..... but of course, I still live here today, almost 2 years later. Nothing was ever rectified. Irritating. Oh, but I sold my last house in summer of 2006 for 475k, and could re-buy it today for 210k. I guess I'll survive, after all, "it's only a rental."

I'm on the renter side as well, moving out of a place the landlord is losing to foreclosure. We've found another great place and will be moving in two weeks. I've owned two houses but got out of the LA market because I could see the writing on the wall, and I'm glad I did. I pay half in rent what I would for a mortgage, and couldn't really afford to buy in the great school district I'm in anyway.

There are hassles, but overall renting is the right choice for us (yes, even with kids and pets) now. Ask me again in a year or two.

I've always rented.

The downside for me, which you make a small mention of, is the slipshod maintenance & upkeep that is all too common.

If you get an owner who live the next street over, and is a FixIt type, great.

However in Prop13 country as far as SFH, what is more common is the owners haven't lived in that town in years, and run it through a property management company. The property managers will do minimal repairs, and if you need a new fridge say, will get the cheapest one in the outlet store not a better Energy Star model. So you pay for this in higher utility costs, and so does society. I've even had idiots like this want to nickel-and-dime over smoke detectors. You pay for it in reliability and quality of life issues too. When I'm putting in even a disposal unit, I put in Insinkerator Evolution Compact which is a quiet and excellent unit, not the plastic cheapo grinder.

Living in a Streng home these days that I'm pretty happy about though. The owners moved out of town and let me do repairs and send the bills for parts. When I do the job, it's done RIGHT not as cheap and fast as possible. I find it very sad the Streng "Carter Classic" series of homes didn't take off, and just petered out after the Strengs left the business. It's a neat design with atrium and large skylight in the entryway.

Speaking of living a simple life, this looks interesting:

http://www.guynameddave.com/100-thing-challenge.html

2006-2009 is not the norm and will not be the norm going into the future.

You either guess or hope or both. 2000 - 2006 was also not the norm. We are not at the norm now because the government has decided to put a floor under housing.

As to the original post: No, renting is not the best of all possible worlds. You could look at it as a sacrifice in your standard of living for the benefit of increased savings. I would suggest taking the money you're saving by renting and using it to afford items of interest which were out of your range before the HELOC-go-round finally seized.

my total net worth is up around six figures since last year (when most asset classes like stocks, bonds and even commodities have been flat year to date).

i rent.

i would not be up anywhere near that if i owned a home.
it would've been a double whammy.
less money to invest because of the down payment and a house that probably would've lost value.

most new home owners i know (that bought in the higher priced areas in the last 3 to 5 years) are not happy with their purchases since they were expecting appreciation. everyone i know who bought after 2005ish, are down at least $100k or more; well one guy bought in palo alto last year and his home value is "up" although he'd have to sell to realize any gains.

i love that i'm in a nice, safe, high income area (redfin shows the average home price in my city is listing at $1M or about $4000/month mortgage payment) and I'm paying minimal rent at $1100/month. not really a fair comparison, but who cares, i'm saving a boatload of money and happy where i am.

between the amount of money I'm saving (mainly because I'm not paying a huge mortgage) and being disciplined and experienced enough to invest it wisely, renting is an easy win for me. it's not even a close call.

there's a stigma with renting, but in the bay area in prime, sought after neighborhoods, it's absolutely the right choice.

But the norm IS a steady appreciation of real property, and despite what Case-Shiller wants you to believe that rate is greater than the rate of inflation.

This means someone who rents and saves is fighting two wars. Housing is going up while the value of his money is going down.

Renting: personally speaking, my savings power and mobility would have been seriously impaired by mortgage debt these past few years. Renting can suck, yes, but I think renting is the way to go for savers. Frankly, the BS that's played out over the last few years with housing has made me reconsider ever taking on a mortgage. Those big silver roach coaches are looking better and better.

As for housing going up up up; I just...doubt it. I think the housing market enjoyed its seven years of feast and is just barely into its seven years of famine. The reason it might not seem that way is because of the aggressive government intervention programs which had the effect of throwing a gargantuan area rug over the hole in the floor -- that, and likely even shadier back door shit that we won't know about until ten years from now when nobody cares anymore. In any case, unless this new housing policy becomes permanent, along with other more radical measures, (40 yr mortgages with 2% down; community service in lieu of down payments, etc.), it seems clear that we will continue to see a very slow but sure reversion to a healthy norm, where residential RE tracks more closely the local wages/salaries of buyers.

What could prevent such a reversion to normal? Undying legions of bubble equity barons endlessly beguiled by the scent of their own bullshit? An increase of foreign investors with property worship? Trickle-down from financial sector bonuses or war profiteers? Could be...a colleague of mine in San Jose just accepted a one year contract in Iraq and will be making just shy of 400K for a job that pays about 150K in the States in order to pay off his mortgage. Sorry, but I can't help thinking what a boring waste of that kind of bread. He'd be better served in the long run by buying a copy of Spider Man # 1 or an Elvis Presley toe nail clipping.

mike4518 says

i love that i’m in a nice, safe, high income area (redfin shows the average home price in my city is listing at $1M or about $4000/month mortgage payment) and I’m paying minimal rent at $1100/month. not really a fair comparison, but who cares, i’m saving a boatload of money and happy where i am.
between the amount of money I’m saving (mainly because I’m not paying a huge mortgage) and being disciplined and experienced enough to invest it wisely, renting is an easy win for me. it’s not even a close call.

BINGO!!! I'm in the same boat. Moreover, mike's comment regarding mortgage payments being $4000 + and being able to rent at just over a quarter of that cost is the whole point of Patrick's site. Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position. Hence, why it is far more likely than not that prices will come down as we move forward. Currently, the purchasing environment is still a laughable, shameful joke.

It's not just the crapy appliances that I hated when renting, it's also the crappy repairs. As in if you owned the place you would fix it right. One apartamnt I had they would not replace a copper pipe run until it had more than a certain amount of patches in a length of pipe (as in piece for rubber clamped over the pipe as a fix). That and crappy single pane windows.

I'd say about half the prospective tenants I get are moving because "the house they're renting is being sold"

I guess it's a bigger issue when you're renting a house. When I rented it was always an apartment so that was never an issue. However the one time I rented someone's condo a year later I was forced to move.

I've rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded. The owner paid nearly $1 million in 2006, and we rent for well under 1/2 the nut. We are thinking of moving to something cheaper because there is so much available that is just fine, for less.

I'd estimate landlording on the peninsula is a losing proposition, unless you inherited the house and have been sitting on it for 20+ years. You certainly can't get anything like positive cash flow without major capital outlay (think $500Gs at least), and I think there are better returns on your capital elsewhere. All the negatives noted here are of course possible, so all I can say is do your research - and, "you don't get what you deserve, you get what you negotiate". I have pretty high standards and as a good tenant, I just walk away from 'crappy'.

I do feel sorry for you Californian renters especially. In exurban and rural Minnesota many of the brand new apartment buildings they build have their own private movie theatres, beauty salons, tons of pools, music room, billiards room, community room with mega-theatre screen, heated underground parking, etc. The apartments themselves are like 4-star hotel suites. Not every building has every amenity mentioned above, but it's usually at least a few extra special things (like a concierge service or marble baths or something to set them apart from all the other brand new complexes). In the exurbs apartment residents live like spoiled hogs for a small fraction of what it would cost elsewhere.

Many 1-bedroom units in these buildings go for about $700-750 per month. I am not joking.

Have a look:

http://www.grandview-estates.com/gallery.php?gazpart=show&gazgal=2

hooch_raider says

Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position.

I've seen trends, and this holds true in San Jose as well, that families pool together loads of money (yes, even from Grandma), and has a monster downpayment. There are many people in that position. After the purchase, their parents/grandparents will still move in with them. Not so much luck for the nomad looking to start a life on their own without their parents though. They will then rent out their old homes which will fund them majority of the mortgage payment on the new home.

Vain says

hooch_raider says

Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position.

I’ve seen trends, and this holds true in San Jose as well, that families pool together loads of money (yes, even from Grandma), and has a monster downpayment. There are many people in that position. After the purchase, their parents/grandparents will still move in with them. Not so much luck for the nomad looking to start a life on their own without their parents though. They will then rent out their old homes which will fund them majority of the mortgage payment on the new home.

This is kind of what's wrong with the bay area. Some people have very low standard of living expectations compared to much of the U.S., and they push up prices while pushing down quality of life overall. I'd say there is value to having Grandma, Grandpa, Mom and Dad nearby, but not ON TOP of you. In other places I have lived, people who want that buy a little 'compound', and these aren't rich people. Sometimes the compound includes trailers but at least they are outside of earshot. Maybe it's a cultural thing. But my WASP upbringing makes it unthinkable to live in 1000 sq ft with 6 people. I am always amazed how people in the bay area can live in such squalor and think they have the good life. Good for them I guess.

You can find great deals in the bay area too in the exurbs. Just remember the bay area is large. So you're looking at past Tracy. Or out past Brentwood or out past Gilroy.

Everything within a decent commute's distance is going to be bid up, because it's not worth throwing away your entire life to a commute to live in something you'll never get a chance to use.

There are really nice homes around here, they're expensive. They get bid up. There are nice apartments as well, they get bid up as well.

As most investment professionals advise - Don't put all your eggs in one basket, spread them around. Don't put all your stock money into one stock, and don't have all your money in just stocks. Housing isn't a great return, but it's been steady for a very long time. Placing bets on how housing is going to unfold using the last 7 years data is pretty fool hardy. Look at over the last 50-70 years. Don't pick the top of one bubble and the bottom of the next to be fair judgments either.

I must admit I find the entire concept of the stock market strange, as most investment seems to be based on stock value rather than the value of the underlying company. As a kid, not having even basic economic principles, I imagined the stock market to be based around identifying companies with strong fundamentals but limited cash and investing in the stock of said companies to provide them with that cash. Most people I talk to invested in the stock market either buy stocks based on them being recommended by talking heads or use an investment company or broker to invest for them. None of these people are remotely interested in identifying companies with long-term value, because they expect to only hold any given stock in their portfolio until it increased or decreases in value a certain amount. By my way of thinking, this is not investing, this is gambling, trying to stack the chips in one's favor as much as possible before the cards are dealt. I prefer to invest locally in start-ups that provide what I consider to be a good product or service.

ahasuerus99 says

The standard deduction plus a few children puts the majority of potential homeowners in a financial situation where they gain nothing on their taxes from owning a house.

Children are irrelevant to this issue. Most people who own a house gain on their taxes from the interest and property tax deduction. Many gain significantly. Doesn't mean it makes buying better than renting however....

Vain says

hooch_raider says

Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position.

I’ve seen trends, and this holds true in San Jose as well, that families pool together loads of money (yes, even from Grandma), and has a monster downpayment. There are many people in that position. After the purchase, their parents/grandparents will still move in with them. Not so much luck for the nomad looking to start a life on their own without their parents though. They will then rent out their old homes which will fund them majority of the mortgage payment on the new home.

Vain,

I have no doubt this is taking place in various parts of San Jose and the greater Santa Clara county area; however, I don't think that is a major driving factor, particularly in the Los Gatos, Monte Sereno, Saratoga, Cupertino, Campbell and Willow Glen areas (not to mention other similar areas). In fact, I credit easy money via low rates, dual incomes from professional industry work (i.e., doc, lawyer, accountant), as well as employee stock plans (although dwindling now) as the real driving force behind the sky high prices in the greater San Jose area. I mean, to buy a 1300 + sq/ft home in any of the above mentioned areas, the cost is going to be north of 1 million dollars, and that is with the declines!!!! With a million dollar purchase, one has to come in with a down payment of at least $500-600K in order to get to a mortgage payment that is anywhere in the ball park of rental costs. And that is for a 30yr fixed!!! Forget the 15yr! That is simply an amazing amount of money and totally wacked. Why anyone would do that is unknown to me. People are still selling their souls to get these properties. It can only end badly. This is unsustainable.

Two people earning 125-150K each, saving for 3-4 years. SF ace has a nice earnings to loan amount. 1M isn't that hard to get.

This *IS* sustainable. It's not just not what most of us want.

repeated

the general idea of 3X income to afford a home loan is flawed because:

1) it ignores the impact of interest rate. The lower the interest rate, the less housing will cost.

2) Affordability and living cost is a function of house cost and non-house cost. If housing cost is 3X more, that doesn’t mean food payment, insurance and everthing else is 3X more as well. In many instance, it cost less to maintain a 1M house in CA than a 300K house in Texas. But in general I believe non-housing cost is pretty much fixed within the boundary of 0% to 25% more. So once we comingle the impact of housing cost and non-housing cost, 3X cannot be applied evenly.

The higher the earnings, the more valuable the 401K and benefits package, this is the hidden value of wages in the bay area people seem not to be able to recognize.

3) The house cost itself is a function that the more you make, the more tax benefit there is relative to lesser household income, especially in CA, varying anywhere from 0% subsidy to 40% interest and property tax subisidy. The income tax subsidy is worthless in TX, FL, NV and midwest. The income tax subsidy is the most lucrative in places like Menlo Park.

The income tax subsidy is a huge reason why a million dollar home rents for $3,500 in places like Menlo Park (utilizable) compared to places like Concord where home rents for 2,000 but sells for 250K (not utilizable). High income people simply don't buy in Concord. Conversely, if you are making good income and renting, you are losing out on huge income tax breaks vs. people who have low income that loses nothing.

Here is my guideline of what people can afford (probably in tune with underwriting standards) in CA based on the following income scenerio based on current interest rates. I do have calculations behind them but too exausting to detail here: Interest rate are down quite a bit between then and now so probably can increase the loan amount by 10% or so.

25K income = not affordable
50K income = 100K loan 2x income
75K income = 225K loan 3x income
100K income = 350K loan 3.5X income
150K income = 600K loan 4x income
200K income = 900K loan 4.5x income
250K income = 1.25M loan 5x income

Anything beyond is probably not based not only on salary, but net worth so correlation breaks here. So prime Palo Alto is probably a function of people’s net worth as well as salary.

If anyone can dispute this table, I like to know why/how.

"i love that i’m in a nice, safe, high income area (redfin shows the average home price in my city is listing at $1M or about $4000/month mortgage payment) and I’m paying minimal rent at $1100/month. not really a fair comparison, but who cares, i’m saving a boatload of money and happy where i am.

between the amount of money I’m saving (mainly because I’m not paying a huge mortgage) and being disciplined and experienced enough to invest it wisely, renting is an easy win for me. it’s not even a close call."

If you are renting a million dollar place for 1,100, congrats and yeah of course rent, and sign a lifetime lease too. But that is not the norm. A million dollar house probably rents for anywhere between 3K to 4K in SFBA.

The real question people face is if I make 200K, am i better off renting for $3,500 or buy a similar place for $1M based on current environoment. Considering that ITI net of income tax benefits is around 3K after 200K downpayment.

> If anyone can dispute this table, I like to know why/how.

simple.

your prices are predicated on a home as an investment, implying some form of positive return on investment.

taking an extreme example to make a point - if a home owner was guaranteed to -lose- money on his house every year he owned it, he would not pay those prices.

i'm just clarifying one of your underlying, unspoken assumptions. it is the mentality that the home is a great investment.
if it is true, prices will remain stable or appreciate.
if not prices will decline.
over the last 4 years the housing bears have been right.
prior to that the bulls were right.
only time will tell who is right in the next 5 years.

simple.

"your prices are predicated on a home as an investment, implying some form of positive return on investment."

No it's not, it doesn't say whether it is a good deal, the table represents what is affordable based on current underwriting standard, nothing more. 3X income cannot be applied evenly if you put in more advanced variables. Most people rely on 3X income as the benchmark when it is not true at all.

Your're absolutelly right people are not buying based on falling price expectations.

i agree with you about affordability and that 3x can be higher for higher income.
but that by itself is not very meaningful.

i can afford a $2000 pair of shoes, would I pay that much? never. since i'm all about value.
my personal opinion is that mid/higher end houses are severely overvalued.
affordable - maybe. overvalued - absolutely.

just because i can afford something doesn't mean i should buy it.

so you can say a $250k income can afford a $1.25M house. i completely agree.

i think they'd be foolish to spend that much just like it'd be foolish to buy the $2000 shoes.
both easily affordable. neither are smart decisions in my opinion.

Mike, cool now we get into the concept of value and specifically how much it costs to attain that value. Of course, it is sort of subjective as what is valubale to me, you, others and how much I am willing to pay. Your shoe analogy is dramatic as a reasonable person sees no difference between a 200 dollar pair of shoe from a 2,000 pair except for the 1800 in branding.

I have childrens one and 3, so school is really important, the only choice is a great public school such as (Fremont Union, Cupertino, Lafayette) or private school which is probably around 2,500 a month aggregate. From that perspective, school is an incredible value and one that is worth around 300K to me.

Others:

Close access to jobs. Time is of the essense and every minutes count, value??

Safety and community. I know people view rich people as snobby, but I rather live among the rich than the poor, I rather live in community that is owner occupied than renter occupied. value??

Size, I need a minimum of 3 bedrooms and 2 bathrooms and preferably SFH. Admittetly, anything more is not that valuable. value??

Notice these are not just my values, but pretty much values every other resident has, especially those in similar situation as myself. I don't want to pay 300K for schools too, but that is the value set by the market, not me.

So it comes down to great community with great schools, close to concentration of high pay jobs and it must be a 3/2 SFH. Guess what, all my competitors are looking for the same thing and why it is not cheap. Especially since these are also the same places that haven't built SFH in 20 years.

Do you really think some of these values are overpriced given these parameters?

The key difference is how many other people are willing to pay 1.25M. If there are enough people willing and able to pay that amount, then that is going to be the price for all similar homes. It won't come down in value because there are buyers at 1.25M. Affordability isn't likely to change by much, and the number of people willing to pay that amount isn't likely to change much either.

If you base your housing pricing on the last 4 years and then the previous 5 years it's going to look odd. How about 40-60 years. Average things out. Or at least 30 years, the lifetime of many mortgages.

Pointing out housing prices over a 4 year time frame is akin to looking at a 5 minute sampling of a stock price and making a year end prediction from that 5 minute sample.

SF Ace,

People bid up these housing values as you say too high over the years... And in our current economy they are still too high... I understand the value of spending more on housing for a great school district and safe neighborhood. I understand there will always be a premium for housing in some areas over others. My belief is it's just still far too out of whack to be sustainable given current economic conditions, but moving forward who knows... I currently rent in an apartment complex surrounded by 800K-1 million dollar homes... next to a highly sought after elementary school in Studio City. My rent is 1/3 of the monthly payment of neighboring homes on small crowded lots. Sure they get a little more privacy and maybe a tiny yard. But it's not worth the thousands more a month. I get the same benefits of the neighborhood, they get and save those thousands.

LA renter, fair enough, lets reconcile your difference a little bit. so I Presume your rent is 1500 a month vs. PITI of 4,500 or 1/3. Of course if the house was bought in 2006, the cost is a lot higher than a house available now.

principle is about 700 for a new mortage and more for a more established mortgage.
income tax benefit is probably around 1000 a month, so ITI is around 4500-1700 or 2,800.

so 2,800 for SFH
vs. 1,500 Apartment

My understanding is there is a big value difference a SFH and apartment and there is a big value difference between 3/2 and 2/1, especially in kid friendly neigborhood as you described. You didn't give me enough facts to help me determine the difference betweeen the SFH and apartment, but as you can see, the gap is not as wide as you think.

Some people have great rental deals so I understand it's hard to give that up.

SF ace says

A million dollar house probably rents for anywhere between 3K to 4K in SFBA.

A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO.

The real question people face is if I make 200K, am i better off renting for $3,500 or buy a similar place for $1M based on current environoment. Considering that ITI net of income tax benefits is around 3K after 200K downpayment.

I understand what you are saying here and agree to a certain point. However, the question is really "Am I better off renting for $2500 - $3000 or buying a similar place for $1M (or more)?" The lower rent range puts a bit of a squeeze on your number crunching, but I give you the benefit of the doubt because I realize one should factor in the full financial picture, which would include any tax benefit. Of course, I believe the tax break on home ownership has historically declined since its inception and with the ever dwindling tax base our federal, state, and local governments are facing, a further reduction or possible elimination of tax break for home ownership isn't out of the question. So, potentially in the long run, your tax break basis may turn out to be a non-factor in determining whether to purchase a home.

Also, the kicker assumption in your analysis is that people have $200, $300, $400K, etc. in their possession with which they will use as a down payment. I do not believe that the average SF Bay Areaian is much of a saver. Really, how many people making $200K a year are going to put away $100K+ of the a year for 3-5 years instead of buying the latest ipod, car, or whatever. This is the Bay Area man!!! The land of consumption. My point? People my have enough income to pay $2500 - $3000 a month in rent, but they don't have the down payment to buy the comparable home and convert the rent payment to a mortgage payment.

People don't have the capital they did even two years ago much less 10 years ago. Unless wages go up or people start living a truly frugal lifestyle, housing prices at current levels is unsustainable.

pkowen says

I’ve rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded. The owner paid nearly $1 million in 2006, and we rent for well under 1/2 the nut. We are thinking of moving to something cheaper because there is so much available that is just fine, for less.
I’d estimate landlording on the peninsula is a losing proposition, unless you inherited the house and have been sitting on it for 20+ years. You certainly can’t get anything like positive cash flow without major capital outlay (think $500Gs at least), and I think there are better returns on your capital elsewhere. All the negatives noted here are of course possible, so all I can say is do your research - and, “you don’t get what you deserve, you get what you negotiate”. I have pretty high standards and as a good tenant, I just walk away from ‘crappy’.

That's part of the problem. There's no cashflow so that rental you're in isn't really a rental. It's certainly not a sustainable situation for your landlord. Eventually you'll be asked to move.

toothfairy says

pkowen says

I’ve rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded.

That’s part of the problem. There’s no cashflow so that rental you’re in isn’t really a rental. It’s certainly not a sustainable situation for your landlord. Eventually you’ll be asked to move.

Really? Have you met the landlord? Know about their finances? This person put down $500G and I'd say she does break even on my rent. Not a good investment in my estimation but I am not worried about being asked to move.

pkennedy says

Second, there are few people like Warren Buffet who can beat real estate in the markets.

There are few people like Warren Buffet that can make as much money in Real Estate either.

He bought his Laguna Beach, CA vacation home for $150,000 in 1971 and is currently paying around $2,200 per year in property taxes on a home currently valued at around $4 million thanks to California's Prop 13.

He sold another home he owned in Laguna Beach for $3.5 million in 2004, which he also bought in the 1970's. Perfect timing on buying and selling, give or take a couple of years on both transactions, but overall...it was a home run!

Warren Buffet can make more in the stock market and business side than he can in Real Estate, that is why he doesn't buy land. He only owns minimal property, and that is for living in.

3.5M isn't much money to him, and it wasn't an investment. My guess is that it was around when his wife passed away, or when his children stopped using the place. As he's stated in many writings. He doesn't need 8 homes, but 1 home and a private plane is nice.

It's possible for people to make money in the stock market, but buying land is much more of a sure bet for most people, even if it doesn't offer the same returns, it's fairly safe and stable. It can be utilized and provide a good retirement home as well as a good place to transfer wealth from generation to generation. For the average person, it's a good investment.

"A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO."

Your methodlogy may be flawed as well as I have no assurance that a craigslist search of 3br or larger homes in those places marketed on Craigslist are those that average 1M in market value. I still maintain that a million dollar home rents for 3K+ in the SFBA.

"Also, the kicker assumption in your analysis is that people have $200, $300, $400K, etc. in their possession with which they will use as a down payment. I do not believe that the average SF Bay Areaian is much of a saver."

Yes for 80% of the population, people are pretty much paycheck to paycheck, the other 20% of the working adults, they have more wealth than you think. An avergage mid manager working at Saleforce.com, VISA and hundreds of other similar companies for 5 years is probably sitting on around 100K-250K in stock options. I know cause my friend who transferred to work at Saleforce.com was given that amount as a sign on and is valued around 200K alone and does not reflect additional ESPP bonus subsequently. The executives are exponentially more. Well, the 20% of the people with the wealth is also the people that most likely buys in Cupertino, saratoga and Menlo park.

SF ace says

“A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO.”
Your methodlogy may be flawed as well as I have no assurance that a craigslist search of 3br or larger homes in those places marketed on Craigslist are those that average 1M in market value. I still maintain that a million dollar home rents for 3K+ in the SFBA.

I must be lucky then, since my $1 million place rents between $2500 and $3000. Exactly as stated.

SF ace says

“A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO.”
Your methodlogy may be flawed as well as I have no assurance that a craigslist search of 3br or larger homes in those places marketed on Craigslist are those that average 1M in market value. I still maintain that a million dollar home rents for 3K+ in the SFBA.
“Also, the kicker assumption in your analysis is that people have $200, $300, $400K, etc. in their possession with which they will use as a down payment. I do not believe that the average SF Bay Areaian is much of a saver.”
Yes for 80% of the population, people are pretty much paycheck to paycheck, the other 20% of the working adults, they have more wealth than you think. An avergage mid manager working at Saleforce.com, VISA and hundreds of other similar companies for 5 years is probably sitting on around 100K-250K in stock options. I know my friend who transferred to work at Saleforce was given that amount as a sign on and does not reflect additional ESPP bonus. The executives are exponentially more. Well, the 20% of the people with the wealth is also the people that most likelt buys in Cupertino, saratoga and Menlo park.

I suppose we could be splitting hairs, as I can't really take issue with a lot of what you are saying unless I get really nit picky. I believe you are right about the average mid-manager income and bonus, as I know someone at salesforce too. The interesting thing is that the person I know at salesforce makes great money but spends it all on a million dollar home, new cars, private school for the kids, vacation cottage, electronics, etc. That same person told me recently that all the available income was going toward "lifestyle" and NOTHING WAS BEING SAVED!!! Not even for retirement!!!

I know this is only one person, but I fear that this is the way most Bay Areaians live today, which is risky. 10 years ago one could live like that and go to sleep at night believing thier ship would come in the next day. Most of the time it did. Today, however, that type of belief just seems foolish.

pkowen says

Vain says

hooch_raider says

This is kind of what’s wrong with the bay area. Some people have very low standard of living expectations compared to much of the U.S., and they push up prices while pushing down quality of life overall. I’d say there is value to having Grandma, Grandpa, Mom and Dad nearby, but not ON TOP of you. In other places I have lived, people who want that buy a little ‘compound’, and these aren’t rich people. Sometimes the compound includes trailers but at least they are outside of earshot. Maybe it’s a cultural thing. But my WASP upbringing makes it unthinkable to live in 1000 sq ft with 6 people. I am always amazed how people in the bay area can live in such squalor and think they have the good life. Good for them I guess.

pkowen,
Sounds like you're comparing yourself to a different demographic than the typical buyers nowadays.
The living standards that you describe, that you refer to as squalor, are more like the wide open spaces of the Big Sky West to persons who dominate the buying demographic nowadays.
After our Fortress communities become as overcrowded and uncomfortable as places like Mumbai or Shanghai, then houses won't seem like such a good value proposition any more. But we're not there yet, so these are like the wide open prairie for the time being.

There are always people who live pay check to pay check, spending on a "lifestyle" but there are also many who invest and save wisely.

The lower income people have very little choice, other than to live check to check. They can change their lifestyles only so much.

The more wealth someone has, the more options they have. If your friend has bought "any" property, then at the end of 30 years, he'll have something saved. It might not be enough to maintain his life style, but he'll have something.

Remember, it's the "horror" stories that are passed along, not the boring ones. "So-and-so worked the same as everyone else, paying down his mortgage and now lives a retirement of an average retired person" - that isn't as interesting as "so-and-so bet the entire farm on google stock and made out like a bandit!" that will pass from mouth to mouth over and over.

sybrib says

pkowen says

Vain says

hooch_raider says

This is kind of what’s wrong with the bay area. Some people have very low standard of living expectations compared to much of the U.S., and they push up prices while pushing down quality of life overall. I’d say there is value to having Grandma, Grandpa, Mom and Dad nearby, but not ON TOP of you. In other places I have lived, people who want that buy a little ‘compound’, and these aren’t rich people. Sometimes the compound includes trailers but at least they are outside of earshot. Maybe it’s a cultural thing. But my WASP upbringing makes it unthinkable to live in 1000 sq ft with 6 people. I am always amazed how people in the bay area can live in such squalor and think they have the good life. Good for them I guess.

pkowen,

Sounds like you’re comparing yourself to a different demographic than the typical buyers nowadays.

The living standards that you describe, that you refer to as squalor, are more like the wide open spaces of the Big Sky West to persons who dominate the buying demographic nowadays.

After our Fortress communities become as overcrowded and uncomfortable as places like Mumbai or Shanghai, then houses won’t seem like such a good value proposition any more. But we’re not there yet, so these are like the wide open prairie for the time being.

Yeah, well, I can see what you mean. I believe you, I am just astounded by how little taste or aesthetic sense people here have. You don't need a ton of space to live well, make it beautiful, but cementing the front yard, that's a bay area (or perhaps CA) phenomenon. I've mentioned before, had a RE agent show me a brand new town house, he could barely speak a word of English, and advised me, "you cut in half and rent out". Yeah, sounds great, I'll just go get some 2x4s and drywall and start livin' da life. At the risk of sounding Xenophobic, those 'dominating the buying demographic' may well ruin this area. "Call someplace paradise, kiss it goodbye!"