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Just like mobs of other San Francisco residents, I have awed at the ludicrous runaway value of real estate in this area. This dizzying trend that outpaces inflation and salary increases seems to defy reality. But this "twilight zone" of housing fits right into our world, a world gone bananas.
I have spent a lot of time researching our housing market myself, trying to ascertain whether to invest into a house, or continue to rent. After three years of coffee house chats, debates on the dance floor, spitfire sessions with homeowners, and raging rants with renters, I have ascertained that:
It is beyond ridiculous to buy a house or condo in San Francisco or most anywhere in California, now and in the foreseeable future.
I'm sure that conclusion is enough to ignite a battle among intellects (and counter-intellects) any day. Some of my own personal arguments, as well as many points in the conventional wisom of investing, all point me away from being a homeowner, and redirect me toward being a wise and diversified investor. Here's what I mean:
All investors with a lick of sense know that diversifying their portfolio is easily the most important step in protecting their financial assets. If we fail to diversify, we risk losing everything we own in one single storm. WILL SOMEONE PLEASE TELL ME HOW BUYING A HOUSE IS DIVERSIFYING? It isn't! For first-time homeowners, they essentially dump decades worth of toil into a single chunk of property, banking on the hope that its value will never decline, which is a critical error in judgement.
I have assembled a list of dozens of reasons in strict opposition to buying a house or condo in San Francisco, and I list the most undeniable ones below:
- Real estate prices will drop in the coming years, just as they have in cycles since San Francisco was a port town.
- When city-wide real estate value begins to drop, many will lose all of their hard-earned personal equity in their property, resulting in a wave of foreclosures. Welcome to San Franclosure!
- It's cheaper to rent— a hell of a lot cheaper. Although mortgage brokers lend roughly three times the homeowner's salary, most of these folks are dumping over half of their salary into their mortgage payments, which can approach two-thirds of their net pay. Too much.
- Earthquakes happen. These are a natural disasters that so many real estate investors seem to ignore, assuming that earthquake insurance will simply take care of any damage sustained. Is there no regard for personal trauma, relocation headaches, reconstruction delays, hidden costs, and the chance of insurance companies bankrupting after a major quake?
- Most of Bay Area loans (over 80%) are adjustable rate loans, which will hit homeowners very hard as interest rates hike in the coming years.
- My credit is not good enough to buy a house anyway, so I must pay for a property in cash years down the road, which has turned out to be a blessing. However, for the rich boys and girls that recently bought a house with cash *cough* Google PhDs *cough*, they stand to lose the most of all homeowners, since a housing crash will amplify the losses on their huge initial investments.
These detractors may sound either elementary or controversial, but I have dozens of other more complicated reasons against first-time buyers taking the real estate plunge right now. My whole case is befitting of a 100 page report, but it's not worth spending the time on such minutiae. Why over-analyze a bitter market when I can offer my advice in a single sentence:
Research all investment opportunities, then reduce your risk by diversifying your investments!
If your head now hurts from investor fever, then alleviate the aches with bubbly clarinet music by the British composer Malcolm Arnold. The excerpt below is the first movement from his only clarinet sonata written in 1951. Notice the jazz influence alongside the undeniable British idiom.
Sir Malcolm Arnold: Sonatina For Clarinet And Piano, Op.29: I. Allegro Con Brio
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SF Real Estate
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by Gary |
posted November 22nd, 2006 around 10:24 PM
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I think that your blogs are pretty good. I like the music blogs.
I also wanted to say that I think that you are right in general about the price of SF real estate. For the time being, the Google (and other tech companies) money will maintain the demand for good SF real estate (i.e., on rock, not landfill), but that the general trend is not good. I think that the first sign of how bad it may get will be in January when the ARMs re-adjust the interest rates.
In addition to ARMs, I think that interest only mortgages are a bad sign (why don't they just call that rent?).
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