June 29, 2006
"rent me im cute"
(aka, A Median-Priced House in SV, 2007 Edition)
(c) copyright, View from Silicon Valley, 2006. All rights reserved.
Santa Clara County's median
at this time last year was $765K compared to 2007's $795.25K. While the headlines trumpet "new all-time high," we've
only had a gain of +3.95% in 52 weeks. Regardless of whether or not you accept medians as useful, a rate
of increase below T-bills should scare people.
Instead, it's off to the
races. Silicon Valley continues to behave as if prices can only continue to increase.
"A median-priced house
in Silicon Valley, 2006 edition," described a 3-bed, 2.5-bath 1,424-square foot townhouse in Sunnyvale across the
street from a CalTrain station. At $729K, it spent only 14 days on the market, selling at slightly above
the asking price, according to the realtor. Assuming the actual sale price was $750K, it went for $526.69 /square foot.
We ran through the finances
required to manage $750K, assuming 20% down and a likely rent of $2400/month:
1-yr ARM 5-yr ARM 30-yr 40-yr
(4.282%)
(5.875%) (6.5%) (6.5%)
Cash paid $45,876 $55,440 $59,184
$55,836
Cash rcvd $28,800 $28,800
$28,880 $28,800
Net Cash -$17,076 -$26,640 -$30,284
-$27,036
The "winner" of this 2006
median house gained the privilege of paying $20K to $30K more, per year(!), to own it than comparable houses cost to
rent. (Not to mention another $7.5K interest income lost, per year, on their $150K down payment.)
At zero down, the cash
flow is ~125% of the figures shown.
Now let's look at this year's
numbers starting with another
Sunnyvale house listed near the median.
The only near-median we
find this week in Sunnyvale is a 4/2 with 1,556 square feet, listed as 65 years old, on a 6,500 square foot
lot, priced at $788,888. (The 2007 median price is up 4% while the square feet are up 9%, leaving a decrease
in price per square foot from $527 in 2006 "only" $501.)
Consistent with earlier
reports, 2007's median-priced house is 9%+ larger than last year's. However, the quality of this median-priced
house is dramatically(!) lower. Instead of a newer house and neighborhood feeding into one of the better Sunnyvale
schools, we have a 65-year-old shack feeding into one of the weaker Sunnyvale schools.
In other words, this a
classic example of the junkier junk we referenced a few weeks ago. The 9% median price increase seriously understates
the "value" degradation seen at the median.
Our next step is to estimate rental value. Craigslist conveniently
shows several houses available for rent within just a few blocks. Some newer and bigger houses go for up to $3,400,
but houses of comparable size and age were $2,195, $2,200 and $2,200. One of these caught our eye with the
owner's admonition, "Rent me im cute" (sic).
As an aside, while we might
have considered living in last year's median house, we would be very hard-pressed to accept that renting this house
is the best we could afford in Silicon Valley. Never mind considering this a long-term home at $788,888.
(One other hand, if you guarantee us it will sell for $1M in two years, that's different story ;=)
Now let's dig in and run the numbers. Figure $780K
(assuming it sells ~1% for below list, $501 per square foot), minus 20% is $624K
financed.
Using current rates and assuming:
+the property never sits empty,
+RE taxes at the same 1.14% as last year's median target house, and
+maintenance is only 0.6% per year (rather than the classic 1.0% /year)
1-yr ARM 5-yr ARM 30-yr 40-yr
(5.500%) (6.125%) (6.5%) (6.5%)
Cash paid $54,060
$57,960 $60,300 $56,916
Cash rcvd $26,400 $26,400 $26,400 $26,400
Net Cash -$27,660 -$30,912 $34,752 $31,260
You quickly notice the relative
savings for taking out a shorter-term ARM is much less in 2007 than in 2006.
Conclusion:
Last
year's "ownership deficit" ranged from -$17K to -$27K per year. This year's deficit is at least -$27.7K (62% worse)
and ranges up to -$31K (16% worse).
In
other words, rent /ROI /cap rates are all falling relative to prices!
