Is it a good time to buy a house in San Francisco? | Hacker News Reader

Is it a good time to buy a house in San Francisco?

rbhandari.com

59 pointstomerico39 comments

If you have money to buy a home in San Francisco right now I'm not too worried about your financial future.

True, but most people only have credit to buy a home, which is another matter.

you'd still need a chunk of change for the downpayment though.

you can get an fha loan for 3.5% down for a house up to $625M. If it's a multi-tennant property that can go up to $1.4MM. And to answer your next question, yes you can find housing for those prices in sf. EG I saw a few 800sf 1br and 1200sf 2 br condos about a block and a half from the caltrain station.

There's also a program called 'kiddie condo' that also allows just 3.5% down, but that usually if not always requires a cosigner.

Even in SF, you should manage all right with $625 million!

In the notation he used: M=1000 and MM=1,000,000, so $625M = $625,000.

I would LOVE it if the financial world got rid of Roman numbers (M=1000) because it's just confusing when Roman and metric units are intermixed.

How about we do that, but go back to long scale just to keep things interesting?

Good luck getting a buyer to accept a offer with an FHA loan. You have a hard enough time getting them to accept a regular mortgage with 20% down, trying to get someone to accept 3.5% will likely be impossible in this environment.

Yeah, I don't know how it is in SF. But in LA, you're competing with multiple cash offers, usually quite a bit over asking price. First time home buyers are pretty much left to the sob story route (that is, writing a letter to the owner and praying).

It depends on your goals. If you plan to live here forever, then you should buy, no question. If you plan to stay for just a few years, the taxes, transaction fees, and closing costs will eat you alive.

Now a better question is if you plan to stay 7 years or more, which is the "normal" amount of time people stay before moving on to a larger home from their starter home. Real Estate markets have about an 8 year cycle, so this fits well for this model of buying.

Also keep in mind are the taxes. In San Francisco, there is a special assessment if you sell a house worth more than 850k or so, and it steps up the more your house sells for (but there is a rebate if you get solar panels, hint hint). California takes 12.7% of your profit, which nearly kiss the $250k/$500k Fed tax exemption for living in a property for 3 out of 5 years.

First it is 2 years for the exemption and CA has the same 250k/500k exemption rule as federal. Not sure where you're getting your data?

Well said. If one's plan is to stay in SF long term, and they can afford a house they're happy with, they should go for it.

Perhaps well said, but presented without evidence or even any attempt at a persuasive argument.

It's not at all clear to me that one should buy a house in SF at this point in time regardless of one's expectations for staying.

It's a crazy market. Do you want to go all-in on up to 500% of your net worth given the market is quite obviously not in equilibrium? The odds are against you getting some great deal here, and there's a very good chance you'll lose several (5-10?) years of accumulated earnings. Leverage goes both ways </rant>

The P-value of the coefficient for the supply of new homes (0.10) is not statistically significant.

There's a high chance that the model is running into a correlation-implies-causation trap, since it's expected for prices to be correlated with macroeconomic interest rates.

The model is not statistically sound. An R squared of < 50% implies very little explanation of variance.

I bought a home in Berkeley recently. It was not an easy choice. In the end I decided to bet that this accumulation of new tech wealth in the bay area will continue. There will be more IPOs every year with their hundreds or thousands of engineers/etc making solid six figure paydays. And more growth and hiring and big RSU grants from existing tech giants. And more people selling pickaxes to the miners.

I think demand will continue for a long time to come.

A lot of the buyers right now, particularly the all-cash-over-asking buyers running up prices, are not necessarily the newly minted tech millionaires. They're newly minted Chinese millionaires. If that market deflates, I think we'd see a significant price correction, or at least a stall-out on the current frenzy in SF housing.

If you buy now, your property probably isn't going to tank (unless it's just ridiculously overvalued for what it is, and some houses in SF certainly fall into that category). SF will be a hot market for a long time to come, thanks to its constrained inventory. But housing might not appreciate significantly over a 5-odd year horizon. Which is fine, fwiw, because one shouldn't be buying housing as an investment in the first place, much less as a short-term investment. Buy income-generating rental properties, with significantly better tax incentives to boot, if that's the goal. Buy a house because you want a place to live. If it happens to appreciate in real terms, and not just in theory, that's gravy. But over the long run, it's unlikely to do so, especially when you factor in all your maintenance, holding, and transaction costs.

> A lot of the buyers right now, particularly the all-cash-over-asking buyers running up prices, are not necessarily the newly minted tech millionaires.

Yes, it's funny that so much of the mainstream discussion around housing in the Bay Area focuses on the wealth created in the tech industry when much of the eye-popping housing activity has actually been driven by foreign buyers.

When it comes to the prices these buyers are willing to pay, it's incredibly important to understand their motivations. Many of these foreign buyers are not buying houses in the United States as "investments" in the traditional sense. Instead, they are using houses as stores of wealth because they are acutely aware that their capital/assets are at risk in their home countries. In other words, a house in San Francisco may be more secure than a bank vault in, say, China, as far as wealth preservation is concerned.

American buyers competing for assets that have appreciated rapidly in value in recent years due to foreign demand, and who may be far more sensitive to the potential for gain or loss, should at least understand this.

> In other words, a house in San Francisco may be more secure than a bank vault in, say, China, as far as wealth preservation is concerned.

But wouldn't a bank vault in America be an even better choice than a house in SF? Why aren't these wealthy Chinese people making more liquid investments once they've moved their money abroad?

Like the grandparent poster said, it mostly has to do with culture. It's a common thing to buy housing as a place to put money in China, which is why there are whole ghost cities that no one lives in and places where the home ownership rate is 200%, ie on average each person own two homes. They also view buying abroad in places like the US as a safe place to store wealth.

http://www.forbes.com/sites/erincarlyle/2013/12/20/ken-deleo...

http://www.forbes.com/sites/realspin/2013/10/28/in-china-the...

A few reasons: Houses are perceived as good stores of values as prices in the Bay Area generally trend upwards. There is more trust in a house vs the stock market (or the investor has a diversified position and real estate is part of that diversification). Cash sitting in a bank is getting devalued with inflation. Real estate can also generate rent if you don't reside there.

Another angle, the house may be owned in another person's name, then the illiquidity is an advantage. The other person who you trust, may still be tempted to use tiny bits of large chunk of cash if its sitting in a bank account. Meanwhile selling a house is a pretty big deal.

The reason for not keeping the house in your name are possibly related to avoid the local government's oversight into your assets, etc.

There are a lot of factors. I'll point out two:

1. Negative real interest rates.

2. It's easier to protect your identity/privacy. Notably, real estate agents and title insurers are exempt from having to file Suspicious Activity Reports with the Treasury Department.

I'm not sure about #2.

When you buy a home the information on the title is public knowledge. Sure, you could create a holding corporation, but the officers of a company are also public information.

Also, real estate agents and title insurers don't handle cash at all. If you buy a house from me in cash, I'll kindly ask you to deposit it and send me a check. When the buyer goes to a bank with cash or other suspicious sources of money, the banks will fill out a SAR.

> A lot of the buyers right now ... [are] newly minted Chinese millionaires.

Can you provide data or cite a source to substantiate that claim? I live in SF and the data I've seen suggests it's < 2% (by property count, not dollar volume)

It's the normal "China is evil" FUD.

http://www.paragon-re.com/Home_Buyer_Seller_Dynamics_in_San_...

Articles that claim that Chinese are buying a significant portion of homes tend to conflate immigrants / people of Asian descent with foreign investors, and then complain about new wealth in China.

In my experience with this, all-cash and over-asking have nothing to do with one another.

Yes, I too have heard the anecdotal/unsubstantiated claims that many all cash offers are Chinese. It may well be true, but all I've ever heard was conjecture.

But over-asking has nothing to do with all-cash. We bid on several homes, all of them, including our final winning bid, were 20-30% over asking. That is normal in this market where the RE agents have decided we need to play this charade of low pricing instead of pricing accurately to the market.

While I agree that a house is not a good short term investment, I disagree with the notion that this is a market out of steam. I've seen nothing to suggest that.

Like most models this assumes there are no black swans. If housing follows tech valuations in bay area then this question is just another way of asking are we living in tech bubble? If bubble is going to burst then hot market will suddenly become very cold.

Looking at valuations of things like Whatsapp or even AirBnB or Dropbox for that matter, I personally think we are living in giant bubble. The profit has little meaning in tech now, revenue projections are extremely optimistic and on the top of that there is huge factors applied on to it to arrive at valuations. This causes funny implications like Dropbox can buy entire chain of Cheesecake Factory with over 150 stores and still have 3/4 of its valuation intact. This would be despite of the fact that all prospective buyers have developed effective competitive products and are giving it away for free.

Another poster was downvoted but raised a very valid point: what about the "big one", the earthquake that's supposed to hit SF sometime in this decade or the next? That's one big Black Swan.

http://www.sanandreasfault.org/BigOne.html

I guess insurance can be depended upon to offset that particular risk? (do try to insure with a company that reinsures somewhere that won't go broke in the event of said earthquake).

Other post: https://news.ycombinator.com/item?id=7882603

It's nearly impossible to buy earthquake insurance (affordably) in the Bay Area, because all the big insurance companies know that it's going to happen and aren't willing to expose themselves to a potentially company-destroying event. Policies are available, but the cost of insuring against them is nearly as much as insuring against everything else that your homeowner's policy covers.

Most Bay Area homeowners are depending on a combination of prayer and federal disaster-relief funds, figuring that the government will bail them out if an Act of God destroys San Francisco.

Summary: No. "Buying now will not yield to you a big upside in 5 years."

For most people, houses are machines for living in and not "investments". Given large up-front costs, you will almost always be in the hole for some amount of time after you purchase, but depending on what you buy and the alternative it can substantially lower your ongoing costs. Little of this has to do with year-to-year fluctuations in the housing market.

Of course, in SF, buying usually raises your ongoing costs. So...

Agreed. Buy for utility rather than as an investment. If you end up making money selling the house at some point in the future net transaction costs I'd consider it a bonus.

That said, IMO buying a house with the goal of selling it in a 2-5 years is foolish.

Are there companies in the US that will buy a house you pick and rent it to you?

Not so much for single family detached houses, but built-to-rent apartment buildings are becoming a fairly popular investment class. Real estate has generally used different capital structures for tax reasons (REITs) and to access the artificially subsidized by the federal government individual mortgage market, but there are now funds which buy distressed or underpriced real estate and convert it en masse into rentals, and companies building various kinds of multifamily dwellings-to-let.

No:

- supposedly there's going to be a big earthquake in the area: http://www.earthquakesafety.com/earthquake-faults.html

- other places have been trending on HN recently, Los Angeles, even Berlin (https://medium.com/wandering-cto/my-journey-into-the-berlin-...), suggesting hot things going to happen elsewhere in the future?

Last point is wild speculation of course: Peak Silicon Valley? The earthquake though...

The OP forgot about inflation and its effects on the model. It will probably have a much more profound effect that number of housing starts.

Is it ever a good time to buy a house in San Francisco? It's cheaper to buy a house in Sacramento instead and pay for the gas and/or transit fares required to commute.

That's a 90 minute commute by car, which is not very practical for most people. However, it is usually a better idea to buy a house across the Bay, where it is significantly cheaper, and commute the 15-30 minutes to work in SF or wherever every day.

time wise that's an expensive commute.

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