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Cost of renting versus buying a house in PA
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by Midtown resident, Midtown,
on Jan 4, 2010
Can someone please explain why anyone in their right mind buy a house in Palo Alto these days? In our midtown cul-de-sac there are two identical houses - one was put on market for sale and another for rent. Both houses are ranch style late 50-ies, in very similar condition. The original owners no longer could take care of the properties and moved to assisted living senior housing. So one of the identical houses sold for $1.3m and the other rented for $3,300/month. Now please explain me the logic of the buyer - the cost of owning this house (e.g. mortgage payments and property taxes) will be in excess of $8K/month, not to mention the constant need to fix the old house. Why did he not rent a similar one for $3,300/month and invest $5K of difference?? This situtation with real estate prices does not make ANY sense. In central Europe where I come from cost of onwership is less than cost of renting, yet people prefer to rent, noone is willing to overpay so much for the dubious pleasure of future ownership or potential appreciation.
If the buyer just invests the incremental $5k a month that he could have saved by renting a similar house, he would have been saved at least $60K a year. Is he really betting that the house will appreciate by more than $60K a year??? Can someone please explain the logic???
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Posted by MM CA
a resident of another community
on Jan 6, 2010 at 6:53 am
BTW U6 unemployment in SV is 16% - this is the real unemployed number... I have been studying the relationship of housing and jobs for almsot 4 years. the correlation should not be lost anyone. Check the decline in City, county and state tax revenues as well as Federal SS tax rvenues to see where things are going.
Silicon Valley 'Bloodbath' Leaves Buildings Empty (Update2)
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Dan Levy
Jan. 5 (Bloomberg) -- Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.
More than 43 million square feet (4 million square meters) -- the equivalent of 15 Empire State Buildings -- stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space.
"There is a bubble bursting in much the same way as the residential market burst," said Jon Haveman, principal at Beacon Economics, a consulting firm in San Rafael, California. "None of those towers will fill up anytime soon."
Unemployment in the San Jose-Sunnyvale-Santa Clara metro area that includes Silicon Valley was 11.8 percent in November, down from the August record of 12.1 percent, according to California's Employment Development Department. Applied Materials Inc. and Sun Microsystems Inc. in Santa Clara and Adobe Systems Inc. in San Jose announced more than 5,000 job cuts since October amid falling sales of computer chips, software and equipment.
Commercial property foreclosures will at least double in 2010 and job growth won't return for two years after that, held back by U.S. consumers who are saving more and "getting back in line with sustainable spending habits," Haveman said.
Bloated inventory and tight lending standards will curtail office construction in pockets around California for "the next several years," said Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles Economic Development Corp.
"That means there won't be jobs for construction workers and hence no tax revenue from sales of construction materials," Kyser said. "It is the ultimate domino effect."
About 21 percent of Silicon Valley's Class A office space is vacant, as is 20 percent of low-rise so-called flex or research and development space for offices or manufacturing, CB Richard Ellis said.
More than 4 million square feet of speculative office projects opened since 2007 as developers anticipated that companies would move from flex space into new towers, according to CB Richard Ellis. Empty Class A offices totaled 13 million square feet and vacant flex space was 30.5 million square feet as of Oct. 1, the Los Angeles- based broker said.
"Many of these assets have lost half their value," said Dan Fasulo, managing director of New York-based research firm Real Capital Analytics Inc. "That's a bloodbath."
Start of Shakeout
Silicon Valley is in the "early innings" of a commercial property shakeout, said Erik Doyle, president of Cornish & Carey Commercial, a property brokerage in Santa Clara. The number of jobs in the information-technology sector that includes software and Web portals fell more in the prior year than in any industry except construction and mining, state data show.
Some technology companies are taking the opportunity to upgrade their space. Palo Alto-based Facebook Inc., the most popular social-networking Web site, signed a 135,000- square-foot office lease and a 265,000-square-foot flex lease. Solar-panel maker Solyndra Inc., which filed Dec. 18 for a $300 million initial public stock offering, broke ground on a new plant in Fremont in September.
Facebook will move into its new space in the second quarter, taking over four renovated buildings that used to house a medical-device company, said spokesman Larry Yu. "Several hundred employees" will occupy floors where lathes and centrifuges were once fabricated, and the company plans to keep its current office lease through 2013, he said.
Property owners are feeling pressure from tenants who want to lease for at least 10 percent less than published rates, said Michael Grado, a CB Richard Ellis broker. That makes this market worse than the dot-com bust after 2000 because back then defunct Internet companies continued paying rent despite a 60 percent vacancy rate, he said.
Asking rents averaged $34.56 a square foot for Class A space in the third quarter, 21 percent less than a year earlier. The rate for flex space was $14.16 a square foot, down 16 percent, according to CB Richard Ellis.
"You'll see buildings turn over," said Grado, whose listings include Riverpark Tower II, a 318,372-square-foot empty high-rise completed in July and owned by Foster City- based Legacy Partners Commercial Inc.
Riverpark II is the second-largest 100 percent vacant Class A office property in Silicon Valley. Oracle Corp.'s 381,000-square-foot tower at 488 Almaden Boulevard is the biggest, acquired in the 2008 takeover of BEA Systems Inc. Both properties are in downtown San Jose.
Moffett Towers, a complex in Sunnyvale with 1.6 million square feet, has partially leased only one of its six buildings. Owner and developer Jay Paul Co., based in San Francisco, completed them in 2008.
Legacy is showing the building to prospective tenants, said Lisa Morrissey, vice president of marketing.
Deborah Hellinger, an Oracle spokeswoman, and Matt Lituchy, a senior vice president at Jay Paul Co., didn't return telephone messages seeking comment.
Silicon Valley may need new industries to emerge from the property slump, according to Doug Henton, director of Collaborative Economics Inc. in Mountain View, California. Clean technology and social-networking are driving what little job growth exists amid a cyclical "churn" where layoffs at large companies lead to new jobs at start-ups, he said.
"We're at the end of the bubble," said Steve Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. "It will take a long time to get the momentum going."
To contact the reporter on this story: Dan Levy in San Francisco at email@example.com.
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Posted by stevec
a resident of Menlo Park
on Jan 14, 2010 at 11:51 am
OhlonePar. I agree with your comment on time-frame of ownership. My point is that all bets are off if the time frame is taken from you by circumstances beyond your control, job-loss being the most relevant in today's economic climate. I believe that this contributes much of the impetus for the condition of the real estate market, and affects the number of non-traditional rentals on the market as well.
It would be an interesting statistical study to see which variables weigh in as more significant in determining home values in high priced areas. Off the top I see many counterbalancing factors: number of long-term owners, location relative to jobs and amenities, quality of public schools in the area, current economic conditions, socio-economic mix, understanding of the concept of opportunity cost. I'm sure there are more that I cannot think of.
If I were to bet the farm on any of these, as far as families are concerned, I would put quality of schools at the top of the list, and location relative to work, next.
I think the school quality issue is key here because in many ways, it is a proxy variable that encompasses most all of the other factors. I am biased somewhat because it was the driver for why we live where we do.
The school quality issue is, as previously pointed out, a 'chicken vs the egg' situation. Regardless of how the quality of the school developed, it acquires its own momentum once established. Smart people try to place their children is the best educational situation they can afford. Smart people are usually more affluent, and they will pay the premium to live where they can get the best education for their children without having to pay for private schooling.
In many ways, quality of schools is the new "snob zoning" of our era: better schools drive up property values, or at least hold them up. It becomes a self-fulfilling prophecy of sorts.
Busing in of children from outside the neighborhood doesn't really change this much. It only changes if families relocate to the communities with the better schools. In general, that shouldn't dampen property values either though, as smarter families seek out the best schools, and smarter families generally are stronger economically, and bring smarter social characteristics as well.
There may be a caveat facing owners who are renting out their properties in hopes of salvaging boom time paper profits, though: if they rent their properties out for too little money, they risk devaluing the neighborhood by attracting families who normally would never be able to afford to live in the community, and may not bring those smarter social characteristics with them. In the sense that "block-busters" proliferated in the de-segregation era, these properties tend to drive down the values of all properties in the neighborhood.
I know this is a politically incorrect opinion that is abhorrent to many. But it is a fact of life. It is not necessarily racial. People prefer to be around people with similar interests and backgrounds. It is the reason why we have gated-communities, communities with gated-homes; it is why the Castro and Provincetown are Meccas for gays. Wealthy people are the most socially conscious of all. In fact, this can be a downside of relocating for better schools and better neighborhoods: students from families perceived as not wealthy can be shunned by the wealthy students, at least outside of school. Anyone who thinks this is not the case should treat themselves to a reading of "Richistan", a book about the habits of the rich and famous. NPR did a great series on this a couple of years ago. It may not be just affluence that creates a negative environment either: the size of the fish in the academic pond may come into play as well, the level of competitiveness achievement-wise. It can be a slippery slope. Having said that, I'll wager most families will take their chances for the hope of a stronger education.
It seems to me that most people would prefer to own rather than rent. Where we live is where our 'home" is. Home is an inherently emotional concept. It is hard to move that emotional hook from something you "own" to some thing you rent, especially if you have owned before. It is also hard to invest much, time or money, in a property you may never hope to own. But as any lawyer worth his salt will tell you, sometimes you really have to act rationally, and let go of the emotional drivers. Economists are partial to this view as well. However, very few people take the advice of their lawyers, and even fewer understand the reality of an opportunity cost, much less the reality of a sunk cost.
I think this explains most of what is driving the difference of opinion in this thread, because it seems to me that the renters are coming from the most rational, pragmatic side, while the owners are counting on a lot of blue sky in the future.