Bay Area Home Purchase vs. S&P 500

Return on Investment: 1994 – 2014

May 2014 Report

We recently put together an analysis comparing the comparative investment returns of buying a San Francisco Bay Area house, gold, Apple stock, an S&P 500 Index fund or putting money into a bank CD in January 2012 (Of Real Estate, Gold & Apple Stock). Not unreasonably, the issue arose regarding returns over a longer term. Now, whatever time period is used will always be fundamentally arbitrary, and different periods will often generate dramatically different results. Twenty years is a round number, which allows a nice mix of recessions, bubbles, crashes and recoveries to be encompassed within our inquiry.

Stock and home purchases cannot really be compared apples to apples: This is a simplified, good faith illustration pertaining to the investment of $100,000 in January 1994. February 2014 was chosen as the home sale date because that is the last published Case-Shiller Index (as of 5/20/14). Home prices in San Francisco have actually surged yet again in the past few months, but this is not reflected below. April 2014 was chosen for the stock sale date because that was last published update for the DQYDJ S&P 500 calculator.

S&P 500 Index Investment, 1994 – 2014

In hindsight, 1994 was an excellent time to put money into the stock market.
If hindsight investing was viable, we would all be rich as Russian oligarchs.

Invest-ROI_S&P-500_20years

Bay Area Home Purchase, Buy in 1994, Sell in 2014

1994 was an even better time to purchase a San Francisco Bay Area home.

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Return on Cash Investment: S&P 500 vs. Bay Area Home

Certain benefits to U.S. homeownership boost return on investment over stock market.

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Including dividend reinvestment, the S&P 500 appreciated approximately 9% per year for a total of 473% over the 20 year period. (If account and transaction fees were deducted, the return would be somewhat reduced.)

Bay Area home prices appreciated much less than the S&P 500 during this period, approximately 5.5% per year for a total of 189%, but the return on cash down-payment investment would be approximately 733%, significantly out-performing stocks. This difference increases when taxes on gain are included in the equation.

Note: Adjusting for inflation, investment returns would be about 2.5% lower per year (the approximate, average inflation rate over the past 20 years). Both stocks and home investments significantly outpaced inflation.

Financial Advantages Peculiar to American Homeownership

1) Leverage: 189% appreciation of a $500,000 home = over 900% appreciation, before closing costs, of the $100,000 down-payment. If one pays all cash this advantage disappears, but one’s monthly cost of housing plunges (though probably not close to making up for losing the supercharging that leverage adds to investing).

2) Long-term, fixed-rate home loans: Which substantially lock in monthly housing costs (while other costs, such as rents, continue to increase) and can be refinanced at opportune times. When one can get a 30-year mortgage at what is, historically speaking, an extremely low interest rate, it makes an enormous difference in total interest expense and monthly housing costs. As an example, in 1994, the average 30-year rate was 8.4%; now, in mid-May 2014, it’s 4.2%, (in 2013, it dipped to below 3.5%) i.e. today’s million dollar loan charges the same interest as 1994′s $500,000 loan.

3) Multiple homeownership tax deductions: Such as the mortgage interest deduction, which effectively subsidize monthly housing costs. (Consult with a qualified accountant regarding your own tax situation.) These deductions, along with low interest rates and ongoing principal repayment of the loan, generally make net monthly homeownership costs comparable to and often less than the cost of renting the same home. (Rent vs. Buy Calculator)

4) The huge, capital-gains exclusion on the sale of a primary residence: $250,000 for singles/ $500,000 for couples. It’s a rare investment that allows you to walk away with large, untaxed profits. For a couple selling their home in the above investment scenario, it means an extra $75,000.

It’s worth noting that advantages 2, 3 & 4 above are not found in most other countries, and indeed some of them remain issues of political contention in our country as well.

Homeownership as Investment & Homeownership as Housing

In this analysis, home-ownership is divided into two distinct financial spheres: 1) the investment return on the $100,000 down payment: you put in $100k cash and upon sale, you receive a certain amount of cash proceeds back. And 2) the cost of living in the home you purchase, i.e. the monthly net homeownership cost (principal, interest, taxes, insurance and maintenance, after tax deductions and principal pay-down), which is minimally assumed to be, over the course of time, comparable to the cost of renting.

Upon purchase in 1994, with interest rates at over 8%, the net homeownership cost probably exceeded the cost of renting by a good margin. But interest rates then started to decline: to under 6%; then under 5%; and in 2013, to under 3.5%. As of mid-May 2014, it is 4.2%. Refinancing at selected times over the 20 year period would have dropped net monthly homeownership costs substantially, while San Francisco rents over the same period have soared to historic highs. Ultimately, the monthly cost of owning would be far below – probably more than 50% below – the market rental rate for the same home.

The cost of housing issue is not figured into the return on investment scenario, because the equation simply gets too complicated. This is one of the ways in which comparing homes to stocks is not an apples to apples comparison.

Asset Building One Loan Payment at a Time

This analysis does not adjust proceeds of home sale for the reduction of outstanding loan balance over the 20 years, i.e. of the original $400,000 loan, only $153,000 remains due and payable upon sale. If this was done, then cash after-tax proceeds of sale would be almost $250,000 higher.

Homeownership over time — especially longer periods of time — not only typically delivers a good return on investment, but as long as one doesn’t refinance out increasing home equity to buy yachts or finance a child going to college, it acts as a lay-away savings account that grows each month as your loan payment reduces the principal loan amount due. In earlier generations, this was a classic strategy: buy a home, live in it for 30 years, retire, and then either live in it at a very low cost, since there is no longer a mortgage payment, or sell it and recoup not only appreciation but the initial purchase loan amount which has turned into home equity. Many of us are not that good at saving: Mortgage repayment can act as a “forced” savings account to be tapped far in the future, such as upon retirement.

If you want to read even more analysis regarding leverage, inflation and home equity, please see our October 2013 article: Home-Buying as Investment

Real estate markets, like other financial markets, typically move in cycles:
Where you buy and sell within these cycles can dramatically affect the outcome.
 

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San Francisco & Bay Area Home Values – in Maps

May 2013 Update

Below are 3 maps delineating recent median home sales prices and/or average dollar per square foot values for San Francisco neighborhoods and communities around the Bay Area. These statistics are generalities which may fluctuate for a variety of reasons, but still give an idea of comparative home values in and around the city.

Generally speaking, home price appreciation is continuing and indeed accelerating in 2013, extending the upward swing that began in 2012. This is being supercharged by increasing demand meeting inadequate supply. For more information about current market conditions and trends, please click on the “Market Dynamics Charts” link above.

In the maps below, “k” signifies thousands of dollars; “m” signifies millions; “$/sf” means average dollar per square foot; and “N/A” means there wasn’t enough data to generate a reliable number.

Home Values around the San Francisco

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San Francisco Neighborhood HOUSE Values

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San Francisco Neighborhood CONDO Values

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Real estate statistics in the Bay Area are based upon that relatively unique basket of homes that happen to sell within any given period, so instead of being exact measurements applicable to specific properties, they should be considered indications of the direction and approximate scale of market trends.

Median price is that price at which half the sales occurred above and half below – a single additional sale can sometimes make a 3-5% difference in overall median price, especially when the number of sales is low. Dollar per square foot is based on “livable space”, which should not include decks, patios, yards, garages, unfinished basements and attics, or rooms built without permit (“bonus rooms” and “in-law apartments”). Square footage figures are often unreported, measured in different ways or simply unreliable. Both these statistics can be affected by other factors besides changes in value, such as seasonality, available inventory, variations in buyer profile, changes in the distressed and luxury home markets, and variations in average home size (all things being equal, a smaller home will have a lower sales price but a higher dollar per square foot value than a larger home).
These analyses were performed in good faith with data derived from sources deemed reliable, but they may contain errors and are subject to revision. If you have any questions, please contact us.

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Paragon’s Noe Valley/Castro/Cole Valley Market Update

San Francisco Residential Market Trends

Realtor District 5: Noe Valley/ Castro/ Cole Valley

A market overview for Noe Valley, Eureka Valley (including the Castro), Dolores Heights,
Cole Valley, Mission Dolores, Haight Ashbury, Ashbury Heights, Clarendon Heights,
Parnassus Heights, Corona Heights, Glen Park, Twin Peaks & the Duboce Triangle

Below are a variety of charts detailing market conditions and trends in the neighborhoods of San Francisco’s central Realtor District 5. District 5 is one of the more homogeneous districts in San Francisco in terms of property values, but still any analysis of an area with so many properties of different type, location, condition and quality can only be a very general overview. Changes in general statistics do not constitute exact measures of changes in values: what’s important are the trends.

District 5 real estate soared in value between 1996 and 2008 and was one of the last districts to peak in value before the market meltdown in September 2008. Values then fell 15% to 20% very quickly, stabilized in 2009 and 2010 and finally started to turn around in 2011. In 2012, the competition between buyers became ferocious for a very low inventory of homes for sale, with many listings selling very quickly in multiple-offer bidding situations. This is still the case as 2013 begins. Due to this dynamic, values here have been rapidly climbing.
Since opening our doors in 2004, Paragon has represented buyers and sellers in over 1500
transactions totaling $1.7 billion in sales in District 5, making us 1 of the top 2 brokers in
these neighborhoods we know and love so well.

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Statistics can be affected by many factors besides changes in value, including seasonality, inventory supply, buyer trends, a few very large sales, the quality of the data reported, financing conditions and distressed sales.

MEDIAN SALES PRICE is that price at which half the sales occur for more and half for less. It can be, and often is, affected by other factors besides changes in market values, such as short-term or seasonal changes in inventory or buying trends. Though often quoted in the media as such, the median sales price is NOT like the price for a share of stock, i.e. a definitive reflection of value and changes in value, and monthly fluctuations are generally meaningless. If market values are truly changing, the median price will consistently rise or sink over a longer term than just 2 or 3 months, and also be supported by other supply and demand statistical trends.

AVERAGE SALES PRICE is calculated by adding up all the sales prices and dividing by the number of sales. It is different from median sales price, but like medians, averages can be affected by other factors besides changes in value. For example, averages may be distorted by a few sales that are abnormally high or low, especially when the number of sales is low.

DAYS ON MARKET (DOM) are the number of days between a listing going on market and accepting an offer. The lower the average days on market figure, typically the stronger the buyer demand and the hotter the market.

MONTHS SUPPLY OF INVENTORY (MSI) reflects the number of months it would take to sell the existing inventory of homes for sale at current market conditions. The lower the MSI, the stronger the demand as compared to the supply and the hotter the market. Typically, below 3-4 months of inventory is considered a “Seller’s market”, 4-6 months a relatively balanced market, and 7 months and above, a “Buyer’s market.”

DOLLAR PER SQUARE FOOT ($/sqft) is based upon the home’s interior living space and does not include garages, unfinished attics and basements, rooms built without permit, lot size, or patios and decks — though all these can still add value to a home. These figures are usually derived from appraisals or tax records, but are sometimes unreliable or unreported altogether. All things being equal, a house will sell for a higher dollar per square foot than a condo (due to land value), a condo higher than a TIC (quality of title), and a TIC higher than a multi-unit building (quality of use). Everything being equal, a smaller home will sell for a higher $/sqft than a larger one. (However, things are rarely equal in real estate.) There are often surprisingly wide variations of value within neighborhoods and averages may be distorted by one or two sales substantially higher or lower than the norm, especially when the total number of sales is small. Location, condition, amenities, parking, views, lot size & outdoor space all affect $/sqft home values. Typically, the highest dollar per square foot figures in San Francisco are achieved by penthouse condos with utterly spectacular views in prestige buildings.

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Case Shiller Chimes in With Good News: US Down only 17%!

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Case-Shiller published its closely watched indices yesterday.  Hooray! The broadest CS index shows that the rate of decline in the nation’s largest housing markets has reversed in recent months.  Now we’re only going down 16% year over year instead of 20%.

They also point out that we are now back to 2003 values, which also holds true of San Francisco.  Here’s my chart from an April blog:

Core Area Medians vs All Districts

Before you go out and celebrate, Case-Shiller has “San Francisco” down a whopping 26.1% year over year.  Why the quotes?  Because it’s really the “San Francisco-Oakland-Fremont, CA Metropolitan Statistical Area” and it includes ALL of Alameda, Contra Costa, Marin, San Mateo, and … San Francisco County. That’s 5 counties folks, a factoid often omitted even by such august publications as the New York Times (see today’s front page article).

Now here’s the “good” news.  My data says that the San Francisco we live in was down “just” 5.7% in June 09 year over year for homes.  Take a look under the Market Trends tab for annual and monthly data for the City and specific MLS Districts.  (By contrast, condos are down 15% year over year.  That also happens to be how much they’re down from their all-time highs, which occurred right about a year ago.  See my previous post.

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January Data Sings the Blues

Here’s the latest sales data broken down by MLS District.  Full reports are available here under the Market Trends Tab and are well worth a look.

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Median and Average prices are down substantially year over year for single family homes in all districts except District 7 (“North”, which includes top-shelf enclaves like Pacific Heights and the Marina), but with only 2 sales for the month in that area, it’s not a meaningful statistic.  Indeed, as I’ve pointed out in previous blogs, sales drop off so dramatically every year during December/January that I’d be cautious reading too much into the  statistics for those particular months.

However, the three month moving average  for SF as a whole, which smooths out the seasonal fluctation, has clearly been heading south since last summer, as these two charts show (also available, much more prettily, under that Market Trends Tab):

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sfcondosales0109

Details on individual MLS districts to follow in another post.

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Still Getting The New Blog Up and Running

Please be patient on the lack of content here.  I’ve been making a concerted effort to integrate an easy-to-use blog page with the more static content on my previous website, along with the really great market data that I want to be able to present to you on a monthly basis.  For market data, please take a look at my Market Trends page and click on the links that interest you.  It’s not quite where I want it to be, but it’s getting there.

Back at you soon.

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