Everyone is super rich in San Francisco

[JimHow]

Interesting article:

https://www.nytimes.com/2019/03/07/styl ... -rich.html

[JimHow]

Uber is still dramatically unprofitable.

I predict a crash in SF.
Sell now, while all the new millionaires are buying.

What do you think, Jacques? Hound? Ed? Cab?
Is everything overvalued? Is it a bubble? Is a bust coming?

I mean, Uber is "dramatically unprofitable," for crying out loud....

[SF Ed]

This isn't how it works. There is now amazing liquidity for holders of equity in pre-IPO companies. There will not be the amazing demand for homes above and beyond what exists today because anyone with half a brain can already cash out or get a mortgage based on their current pre-IPO equity if they want to.

SF is a very dirty city with loads of homeless. It isn't very dangerous, but there is a lot of property crime. It isn't nearly as desirable as it used to be. The real estate market is already softening in SF.

That being said, I also don't think there is a real estate crash coming up in SF. Prices may go down, but not radically. Demand still outstrips supply, and it is almost impossible to build here.

SF Ed

[AlexR]

Of course, this reminds me of people who own vineyards that are worth a fortune.
But the operating expenses and taxes they have to pay need to be dissociated to see the full financial picture.

In other words, owning very expensive land is not the same as having money in the bank.

And then, of course, there are inheritance issues.
Don't know what it's like in California or elsewhere in the US, but in France there is a whopping big tax to pay on land/houses that are inherited.

Alex R.

[jal]

Agree with Ed, I predict a softening, probably not a crash.
The city burdened with the homeless problem will raise income taxes on the high income earners. At 1.5% income tax, the City will think there's plenty of room up, forgetting California already levies some of the highest income taxes in the nation.
These will move as soon as they can to low or no income tax states (Texas where Austin is already a high tech hub, Nevada, etc...)
Same thing happened in NYC and in New Jersey where there's an exodus to Florida https://www.cnbc.com/2019/03/08/tax-col ... tates.html, now good luck to NYC in collecting, in the meantime real estate prices in NYC have been steady or softening for the last two years.

[SF Ed]

Alex, the financial view for newly wealthy tech folks is almost exactly the opposite of what you describe of the classic French situation.

First, there are effectively no inheritance taxes in the US. And the very few super rich they hit, have nothing to do with real estate (all assets are effectively treated the same). So they aren't a buying consideration.

And while there can be operating expenses and taxes, the part of this situation that galls so many is that people are spending small fractions of their net worth to buy places in SF with all cash offers, so those type of expenses don't matter much to the buyer. Mark Zuckerberg (CEO of Facebook) paid $10M cash for a house around the corner from me when the market value was $3M because there was a very specific house he wanted to buy. He has tens of billions of dollars, so any cost is a blip to him. That is what is happening with tech wealth generally.

Jacques, the tax burden issue is an interesting one. Demand for living here so far outstrips supply that even with skyrocketing costs, people want to live here. That will stop when the gravy train stops. If taxes really stopped it, people would have already left a long time ago. Of course, they do have impact on the margin, but what will change San Francisco is change in ability to build tech wealth. When that changes, SF housing will go down. Someday SF will be Detroit or Chicago because their industries have been marginalized, but it might be a while.

[AKR]

My sister has a huge, rent controlled apt in SF and has never really grasped the NPV* of how insanely valuable that is. I've tried to explain that the differential between her rent x market rent x some reasonable multiple between 10-20 is what its worth -- and that she must never do anything to impair it. She was trying to have a pet there, in total violation of her lease, and it was difficult explaining the foolishness that entailed.

I don't see SF changing any time soon, beyond a slow long term degradation of city services for the working middle class, who will increasingly have to live in cloistered buildings and neighborhoods with private security/street clean up.

California's amazing pro growth laws on non compete agreements - unlike anything in the US - are a real long term draw for building new innovative industries here. In other states, its too easy for companies to sue ex employees. Here they are almost unenforceable. If one is starting an enterprise, and human capital is needed from existing firms, it can be done. It's much harder elsewhere, and the lobbying forces make it hard to change since the entrenched interests of existing employers can lobby much more effectively than uncreated new businesses. I've come around to that view after many years of thinking/observation on my otherwise fallen state.

But housing is hard to build. I had lunch yest with a friend who's been trying to develop a small student housing unit, and he's been mired in NIMBY litigation for a year, even though he has every permit / review / approval under the sun. His project had the ill luck to be sited next to a retired lawyer, who can do everything pro se.

One other factor - which I don't see changing - is the curious nature of Prop 13 / 168 property taxes. If one doesn't turn over their property, they can effectively lock in their property taxes, and even hand down that assessed base to certain family members. That keeps a lot of property off the market, and little old ladies toodle around in giant houses that are no longer the best matches for their needs (staircases, non ADA baths, narrow hallways etc). I once saw a listing for a 30-50mm SF property where the current owners paid something like 20k in ptax, and it had not changed hands in 90 years. For some reason the ptax was in the listing, as if some clueless buyer could assume they would get that same rate.

* depending on the inputs, its more than the equity either of her brothers have in their low LTV houses

[jal]

Yes, I was going to mention the property taxes in CA, Arv. I only just learned about them as my daughter moved to LA recently.
Degradation of services, softening of prices, yes. I don't see a crash short of maybe an earthquake or some new tax measures.

[stefan]

The capping of property taxes in CA has severely distorted the market. Rates are high because squeezing new buyers is the only way CA can raise money through property taxes. We looked at a very modest 1250 sq ft house in Berkeley on which our property taxes would be $17K/year if we bought it. Meanwhile, as Arv suggested, people hold on to property that is way too much for them because their taxes would skyrocket if they downsized.

[SF Ed]

My parents bought their house in Palo Alto in 1971. Their property taxes are assessed on its value in 1978 plus a minor inflation adjustment. Their house is worth more than 60x what they paid for it and about 20x the current tax assessment basis. That house will not be sold until they both die and we (their kids) inherit it with a stepped up basis. Those two things, low current property taxes and then easy avoidance of capital gains, distort the California real estate market a lot.

[Chateau Vin]

I agree with Arv regarding property taxes in the state of CA. Moving from chicago area, it was shocking to know how one can pretty much lock in the property taxes if the property doesn't turnover...Some of the state laws are totally out of whack and prices out new comers/movers/down-sizers...

And not to mention, some of the buyers on the west coast are from the far-east and europe, who are making cash down purchases trying to escape their tax burden issues in their home countries. I know a realtor who makes trips to europe trying to woo people to buy properties, especially in san diego and seattle...Quite often here, I see some houses listed in the market, sold, and within weeks appear on the market as rentals...

[AlohaArtakaHoundsong]

I don't know a thing about San Francisco, rich people or California property, Jim. I do know that Lewiston could use a new mayor. Why not step up once more?

[JimHow]

Ha ha, yes, we have yet another mayoral political crisis here in Lewiston, Hound.
We have not had a scandal-free administration since I left office in 1994.
I'm representing our mayor in his current travails, so I'm probably conflicted out.
Not that I would ever want that god-forsaken job in the first place.
There are nitwits out there telling me to run against Susan Collins.
When I go on CSPAN and watch the bullshit at some of those committee meetings, I literally can't imagine wanting to do anything less.

[JimHow]

Interesting discussion, I was not aware of those California real estate tax issues.

[Nicklasss]

I don't know if everyone is rich in San Francisco, but I remember in 2002 or 2003 that michaelP told me : "Nic, I can help you find a job at 400-500 000$ per year in SF, but you just can't live in SF with that salary".

Since that time, I always thought I'm the poorest member of BWE, moneywise. But friendship wise, I'm one of the richest!

Nic

[Chateau Vin]

Interesting discussion, I was not aware of those California real estate tax issues.

The repercussions are far deeper, Jim......(there are other reasons for the repercussions too)

When you have such property tax rules, the school systems have unforseen issues too. As nearly 1/3 of prop taxes go to local schools, (and the rest goes to local infrastructure/needs, etc.), when new houses are built, the schools get their fair share of money. But over a period of time, the schools will have hard time maintaining their standards with less money coming vis a vis rising expenses (people cannot sell their houses and want to remain in current homes, because it becomes harder to move out or downsize).

Maybe that's why the schools borrow money through bonds (Arv once mentioned on this forum about the Poway school bonds, which were insane - they borrowed 210 mil and will end up paying 1 billion! Go figure)...

To tackle this mess and prop tax cap, CA introduced another mess (such as Mello-Roos tax, which one can google) on top of Prop taxes. So people in new localities will pay prop tax plus mello-roos tax!)...God save CA!!!

While typing this, I am just watching on youtube the Led Zeppelin Reunion Celebration, performed in 07 at O2 Arena, London to forget these travails of living in CA...It's ironic the title of the song being performed is "Trampled Under Foot"...(literally and figuratively being screwed... )...

[Jay Winton]

Great discussion and why I could never imagine owning property in California. Renting maybe.

[AKR]

Renting doesn't really solve any of the issues, since rational landlords impound the costs they bear. There is also a low level movement afoot to use a voter initiative to lift rent control limits. If that ever/eventually passes, I would suspect a lot of units will be suddenly taken off the market (leases not renewed) and put up for sale, thus pushing tenants out.

In some cases, as SFEd alludes to above, one might be able to find a non economic landlord, who for whatever reasons is willing to rent their place out at off market prices for some reason that makes sense to them. Examples of that might include children renting out a home while parent(s) have been put into a facility, and the kids are waiting for step up in basis to kick in. Those can be good situations but they are inherently not stable as far as how long one can live there. Or one could look for a home owned by faculty on an extended sabbatical, but again, not a long term solution.

The nature of Prop 13 (and by extention 168 which allows the inheritance of assessed values!) creates a strange land aristocracy in an otherwise theoretically egalitarian state. People who've been here a long time and bought early enjoy a much better standard of living. So they'll happily support more local spending, since they don't bear the full brunt of it. The newcomer - paying prevailing ptax and MelloRoos - gets to pay the full freight of those decisions.

These also create a bias against moving as your housing needs change, and a reason why residents improve their homes rather than changing neighborhoods, as they build levered home equity, and in other places, would normally 'trade up'. There are architects who specialize in upgrading homes while keeping it compliant with existing assessed base.

The other weirdness of Bay Area IPO wealth is the amazing amount of early retirees. I refer to people in their 20's and 30's who have unplugged from the work force. I know at least a half dozen, maybe more. I'm sure SFEd, MichaelP, CabFan et al know 10x that number. One person I know had their entire portfolio in Apple, over 10-20 years or so, never diversified. This was 401k and their savings. They just live off the divs, ignoring what professional fiduciaries might suggest about paying some cap gain taxes, and diversifying into more stuff. They retired at 38, ignoring the cluck clucking of their (unwanted) Calvinist advisors.

[Blanquito]

I experienced firsthand virtually all of these dynamics in a single visit to CA:
I stayed at an Airbnb property in Palo Alto a few years ago. It was cute but small, just under 1200 sqft, on a busy road, and was built in the 1950’s to a code that would only serve as a rickety summer cottage in the NE (eg on a cement slab, absolutely zero insulation and weather stripping, flimsy doors and windows, paper thin walls, but with vintage 70’s cabinetry and decor!). We met the owners and they were a family from Asia recently immigrated to the USA who put their collective capital into this and other properties. After I met them, I checked Zillow in curiosity and to my amazement they’d paid $1.5 million in 2014!

You can see on Zillow that the property taxes before the sale were $2500, jumping to $20,000 only after the sale:
https://www.zillow.com/homedetails/795- ... 9038_zpid/

[stefan]

Patrick, now the Zestimate is $2,682,448!

[Blanquito]

I guess it was a brilliant investment on their part!

[Blanquito]

Ha ha, yes, we have yet another mayoral political crisis here in Lewiston, Hound.
We have not had a scandal-free administration since I left office in 1994.
I'm representing our mayor in his current travails, so I'm probably conflicted out.
Not that I would ever want that god-forsaken job in the first place.
There are nitwits out there telling me to run against Susan Collins.
When I go on CSPAN and watch the bullshit at some of those committee meetings, I literally can't imagine wanting to do anything less.

Is Collins truly vulnerable? Will she be another “moderate” Republican (an oxymoron nowadays, alas) taken down by the Trump cancer?

[JimHow]

Good question, Patrick, but make no mistake about it: She ain't no moderate. She's one of the biggest phonies in Congress. She talks a good game, then votes for Trump/McConnell's extreme right policies 99% of the time. Her floor speech in support of Kavannaugh was a disgrace... not because she supported him... that's her prerogative... but the stunningly phony reasons she wanted us to believe, as though we are all a bunch of idiots. It's hard to picture her losing but the Democratic Party is really energized here in Maine, after eight years of the freak governorship of mini-Trumpster Paul LePage. And the LePage right wing has never embraced Collins.

[Chateau Vin]

Good question, Patrick, but make no mistake about it: She ain't no moderate. She's one of the biggest phonies in Congress. She talks a good game, then votes for Trump/McConnell's extreme right policies 99% of the time. Her floor speech in support of Kavannaugh was a disgrace... not because she supported him... that's her prerogative... but the stunningly phony reasons she wanted us to believe, as though we are all a bunch of idiots. It's hard to picture her losing but the Democratic Party is really energized here in Maine, after eight years of the freak governorship of mini-Trumpster Paul LePage. And the LePage right wing has never embraced Collins.

I have been saying it for quite some time, Jim. She is a wolf in sheep's clothing....

[DavidG]

I think that’s the basis of Patrick's question. Collins' two-faced speech about her vote for Kavanaugh was seen by a lot of people who cared. Were enough of them in Maine and did they care enough to make her vulnerable?

[JimHow]

That speech of hers generated millions in contributions for the state Democratic Party. Susan Rice, of all people, has been making noise about running against her. Apparently she considers Maine her state of residence, unbeknownst to like everybody in the state. Good luck with that.

[JimHow]

https://www.newyorker.com/news/current/ ... ns-in-2020

[marcs]

Please run Jin! Senators are very powerful people, don’t be fooled by C-Span. And you would be a hero if you could save us from both Collins and Susan Rice in one stroke

I realize it’s a long shot but had to say it

[Blanquito]

Jim, I’d vote early and often for you if you run!

[Nicklasss]

Don't run Jim. Listen your good friend Nic! Your health is too fragile. You better spend the rest of your long life (if you don't run) enjoying the magnificent wines of Bordeaux with us.

Nic

P.S. with your late lovelife, scandal will prevent you to win anyway, sooner than later .