May 6, 2008
Moving Chronicles (08v1)
(c) copyright,
View from Silicon Valley, 2008. All rights reserved.
We rent in Silicon Valley. We've done so for
five years now. During that time house prices went up, flattened and now are clearly declining. The moment of
truth may be finally coming into sight. Sales volume is down 50% to 60%+ from past years and prices seem to be finally
following suit. After a quick -$100K off the top from November to January, prices fell another
~-$25K (so far) during what should be the strongest part of the local selling season.
Another
year or so of this behavior and the mood may finally shift. Local owners might stop counting their equity-appreciation
chickens while ignoring the broken eggs of their negative cash flow. Just like in 1999 and 2000, the difference between
wealth "on paper" and cash-in-hand will once again become relevant, even critical.
Unfortunately, just at the moment
where we can look across the Silicon Valley landscape and see market forces turning (finally!) in our favor, our housing strategy
blew up in our face. We are hoist by own petard. Done in by the unlikeliest of sources-- the owners of our rental.
It
turns out the owners' decided to end their decade-long relocation to Shanghai and will this summer move back to Silicon Valley!
When
they visited, they told us they wanted to be in the Monta Vista High School district. Even from Shanghai, they heard
this was a great school. This news was a great relief to us since their house is not zoned for Monta Vista.
We deduced that even though they were moving back, they would not want to live in "our" house.
Unfortunately, this
was a subterfuge to keep us from breaking our lease early and/or they discovered house prices grew so ridiculous during their
absence that they were better off giving up on Monta Vista and moving back into their old house. Saving on housing cost
was even more important than putting their daughter in a preferred school.
Our "spin" is that we were so "right" that
objective strangers are now actively choosing NOT to spend their own money buy a house in this market. Unfortunately,
that leaves us looking for a new place to live.
We don't expect you to be moved by this story. That's the
way the cookie crumbles. You cannot simultaneously gloat about the genius of not buying a house and then cry about getting
squeezed out of your rental.
In case some of you follow the rental market, here's our "menu," roughly in descending order of
wishful thinking:
+three bedroom /two baths
+central heat (you'd be surprised, especially in Palo Alto)
+excellent
schools (Los Altos, Cupertino, Mountain View, Palo Alto, Almaden(?))
+accept pets ("no pets" is often a smokescreen
to avoid pit bulls and Rottweiler's)
+two-car garage (no car ports, stuffed with owner's junk doesn't count either)
+roughly
2,000 square feet (a couple owner's claim 2K but Zillow shows ~1,700)
+one story (definitely not three, as found on many
townhomes)
+Central Air Conditioning (we do NOT buy into the shtick it's not needed)
+short commute to work
+refrigerator
+washer
and drier
+two sinks in the master bathroom (trust me, this is important!)
Unfortunately, in this market, we find we also have to screen for:
+property is not also listed
for sale (you'd be surprised...)
+property was not recently listed for sale
+not owned by an obvious flipper (floppers
becoming landlords)
+not showing up as a foreclosure (we've seen several)
Since we shred Craigslist on a daily basis, we've looked at a lot of places. (We've also seen dozens and dozens of
foreclosures disguised as rentals on Craigslist.) Even so, if you know a place roughly matching this description, feel
free to write back!
So far, we find houses matching most of this description listed for as low as ~$2,500 to as much
as $16,000(!) per month. The lower-end places tend to be shabby and in bad districts. We can't imagine who pays
$7,000 or $8,000, not to mention $16,000, per month, even if it's Shangri-La and everyone's kids get into Ivy
League schools. Unless maybe they're spending somebody else's money?
Judging by what we've seen so
far, our annual rent will go up by at least 25%. A 35%+ increase is not out of the qestion. The annual
rent for this new place will amount to more than twice what I earned my first year out of college.
Even so, we retain
our focus on the actual numbers:
1) Our rent will still be less than 50% of the cash flow needed to own the same house.
2) Based on current Zestimates, our annual rent will be 2.75% to 3% of the price of the house.
Using an aggressive 8.5% as total cost, instead of the 9% or 10% used by professionals, the after-tax costs to own run
~5.25%. (i.e, we're saving $33K+ on a $1.5M or $39K+ on a $1.8M house, even after accounting for taxes
and assuming zero AMT).
Conclusion: Meanwhile, we stay in the game for another year.
Collecting a decent pay check while renting and watching for house prices to fall. We extend the bet
that our portfolio can outperform house prices for the fourth consecutive year.
