San Francisco rentals: do you believe in mathematical models?

Question

Hey,a very interesting historical analysis and model of rents in San Francisco (with data source on GitHub).For numerical guys such as @Brian Burke, @J. Martin, @Minh Le etc etcSome excerpts:"Overall [rents], they went up 6.6% every year. Today's outrageous prices are exactly in line with the 6.6% trend that began 60 years ago.""After adjusting for the Consumer Price Index, real rents have only gone up 2.5% per year and have only quadrupled in effective cost in 60 years""CONCLUSIONS" - In the long run, San Francisco's CPI-adjusted average income is growing by 1.72% per year, and the number of employed people is growing by 0.326% per year, which together (if you believe the first model) will raise CPI-adjusted housing costs by 3.8% per year. Therefore, if price stability is the goal, the city and its citizens should try to increase the housing supply by an average of 1.5% per year (which is about 3.75 times the general rate since 1975, and with the current inventory would mean 5700 units per year). If visual stability is the goal instead, prices will probably continue to rise uncontrollably."https://experimental-geography.blogspot.com/2016/0...

Account Closed · Answer

Raimondo,The politicians and our government agencies know we have a housing shortage. Unfortunately, they're not doing much about it. What are we going to do about it? The answer is "Capitalize On It." LOL! I recently did a stress test on my portfolio so I was looking at some historical data to input them in my spreadsheet. The data shocked me. At the depth of the Great Recession, the vacancy rate in San Jose was just a tad above 4%. We're below 3% now. Rents dropped an average of 6% peak to trough during that time. I guess I was way too conservative when I was stress-testing my portfolio using 30% vacancy rate. :>)Thanks for sharing the data.

David Faulkner · Answer

You mean you took the historical trend only just established over the last 60 years and projected it into the future?!? That's just pure speculation I tells ya! :)Mihn makes an excellent point, though, as usual, to stress test the heck out of your model to make sure when you get in you can stay in ... you have to make it to the long term, through the good times and the bad, before you can see those long term gains ...Lastly, people hate rent control, and lord knows I do, but rarely pause to think a bit about the types of markets and demand conditions that cause governments to feel the need to put rent control in place in the 1st place ... I still prefer to invest in adjacent non-rent controlled areas, of course, but food for thought.

David Faulkner · Answer

Agreed, but the astute investor should be able to pick out the top center in the WNBA over your male processing supervisor (hope he doesn't read this forum BTW ;) ), or at least the RE equivalent, and use the fact that they are NOT buying the perfect median home to their advantage, and thus do better than median performance. If you want a tall woman, know what a tall woman looks like and start your search in the WNBA where your odds of finding one are much better.

Chris Mason · Answer

His top processor, who has her selection of dozens of loan officers across all the Greater Bay Area counties and rural NorCal, and insider knowledge about us all, just sent her niece my way last week. That's about the highest compliment someone in my position can possibly receive, and I've been absolutely waiting for an excuse to brag about that so thanks. I think I have enough positive karma points that I can afford the hit to my karma score from this dwarf inquiry. :P

Chris Mason · Answer

No one here is buying a perfectly median home that will rent for perfectly median rents. If I were thinking of putting money in a REIT that was going to be spreading it out across dozens of properties, I might be inclined to trust the model because what I end up getting into might be close to the medians/averages/etc.For specific properties, like specific people, the averages do not matter nearly as much, and in fact could get you into trouble. To wit: Your median woman is shorter than your median man, but that doesn't mean my male dwarf of a processing supervisor going to dunk on the top center in the WNBA.If I'm looking to bet on the height of 100 people, then picking "male" over "female" is a good bet. Hence my mention of REITs above.If I'm looking to bet on the heights of some specific people, it's more useful to look at those specific people, to ensure I'm not betting that someone like my processing supervisor is going to dunk on a WNBA center.

Account Closed · Answer

Geez David, I've posted that I'm retired and lazy, per @Ben Leybovich's definition ;-( . I only went back to 1970. Hey it was a prom year for me! Still 46 years. I speculate is was similar the previous 20 years.

Account Closed · Answer

Geez, I've been saying 6-8% rent growth for years only based on my data. I've even backed off a bit and just post 6% since inflation has been so low and I've been getting some heat, Hey, give me 6%!

Raimondo F. · Answer

Minh,exactly, I'm all in for visual stability!BTW, when you did the stress test were you more concerned with negative cash flow or out of wack LTVs? I was speaking with a Wells Fargo commercial banker at one of the meetup and he told me that, to cover them from the interest rate increase risk, they now borrow using the Debt Yield Ratio of ~8% (http://www.c-loans.com/knowledge-base/debt-yield-ratio). Practically is a cash on cash return on the debt of 8%. It's funny that you see a lot of investment properties selling with a 3-4% cap in these days in the Bay Area. Someone will probably get burned. Your conservative approach is definitely smarter!Thanks,Raimondo