Coastal rents…will they ever go down?

[Escoguy]

Regarding SF rents:

Many rentals have 3-4 people in 1-2 bedrooms.
That’s how they pay $4K for 1BR and $5K for 2BR.

I met a girl who worked at Nordstroms, just moved here from SF, all of her Millennial friends had multiple roommates to keep up with the rent in SF.

In that sense, I think the situation is more sustainable here. There is some inter-generational renting going on (parents plus adult child) but mostly it is larger families with 3-5 kids who need the bigger houses.

In a nutshell, the rents in SD can be supported by 1-2 professional incomes but perhaps not in SF.

[sdsurfer]

[quote=Escoguy]Regarding SF rents:

Many rentals have 3-4 people in 1-2 bedrooms.
That’s how they pay $4K for 1BR and $5K for 2BR.

I met a girl who worked at Nordstroms, just moved here from SF, all of her Millennial friends had multiple roommates to keep up with the rent in SF.

In that sense, I think the situation is more sustainable here. There is some inter-generational renting going on (parents plus adult child) but mostly it is larger families with 3-5 kids who need the bigger houses.

In a nutshell, the rents in SD can be supported by 1-2 professional incomes but perhaps not in SF.[/quote]

I think this is a solid example that it’s relative in a way. Like you mentioned above people get used to the prices in places like SF and SD over time and it becomes normal in a way.

[sdsurfer]

[quote=joec]This thread is interesting…I agree that unless there is some subsidy, I doubt there will be much lower (< 600k) sfh construction anywhere in primer San Diego (coastal/north inland, not counting east or south SD). As mentioned in the home insurance thread, I think building costs have probably also sky rocketed from just 5 years ago as my home insurance has doubled pretty much. With so much anti-development all over SD and CA in general, I don't think supply will ever catch up to all the higher income jobs in the work centers so if I was lower income and didn't buy already, I'd seriously move. With the crash in 08-10, rents probably stayed the same more or less because people who lost homes still had to live somewhere supporting the rental market. I know a few people who were doing the massive leverage home buying during the bubble and loss all their homes. As mentioned, I think unless something drastic were to happen with people leaving SD or CA in general, prices won't do much, but probably steadily go up continuously as will rents. Good for the asset holders for sure... SF may drop a little I think since the tech IPO market seems to have slowed a bit. Rent there is insane I hear with 2bdrms going for 5k/month+.[/quote] It's interesting what you mention about the pricepoint aspect. It does seem like most of what is being built is above 600k so the builders must feel there is plenty of pent up demand in that range. I was talking to someone recently that mentioned 47% of the cost to build a home is related to the planning/permitting process. I'd think with expenses that high to go through the process it's justified that the builder ends up building a more expensive home to hit their desired return.

[The-Shoveler]

The hard reality is that the Land (bringing in utilities etc..) and entitlements are about 80% of the cost (more so the closer you get to the coast).

The hard truth (the Gov does not want cheap homes despite what the politicians say now and then).

The other hard truth there are limited resources for any given region.

[gzz]

Best thing to do is buy a new house to live in and rent out the old residence. That way you get a very low primary residence interest rate.

I think SD rentals make sense if you can get 3.25-ish purchase rates or you are investing cash that otherwise would get getting 2% or less as a safe long term rate.

A mostly-financed rental at 4% seems a bit aggressive. Probably it would work out including appreciation, but you’d likely be cash flow negative at first.

[gzz]

The strongest rental growth will be where there is limited supply and growing demand.

The supply of single family homes with nice sized back yards for kids/dogs in central San Diego is going down each year as more and more are infilled with apartments or second units.

The fastest demand growth IMO will be from retiring upper-middle class boomers. The features that may be most popular for them may be 3 or fewer bedrooms, space for gardening/dogs/grandchildren, walk-able/bikeable neighborhood, single story house and a lot without deep canyons or drops.

For older couples, single retirees, and those without the budget to have guests stay over, condos with a lot of amenities should also do well. Within Central SD and mature North County areas, this is also the fastest growing supply as new lux complexes get built and old dumpy apartment complexes get converted to lux condos.

I think working couples with kids are probably averse to having less than 2 full baths. But retired people with only the occasional guest will probably be more willing to have 1 or 1.5 baths.

I think the coastal areas with plenty of smaller SFH on their own lots, from OB to Carlsbad, is likely the sweet spot for long-term appreciation of both rents and prices. IB and OC seem a tad too remote and downscale to attract boomers with pensions and equity from bigger paid-off residences.

[sdsurfer]

[quote=The-Shoveler]The hard reality is that the Land (bringing in utilities etc..) and entitlements are about 80% of the cost (more so the closer you get to the coast).

The hard truth (the Gov does not want cheap homes despite what the politicians say now and then).

The other hard truth there are limited resources for any given region.[/quote]

I think these truths actually work in my favor as far as rents going up over time. Thanks for chiming in.

[sdsurfer]

[quote=gzz]Best thing to do is buy a new house to live in and rent out the old residence. That way you get a very low primary residence interest rate.

I think SD rentals make sense if you can get 3.25-ish purchase rates or you are investing cash that otherwise would get getting 2% or less as a safe long term rate.

A mostly-financed rental at 4% seems a bit aggressive. Probably it would work out including appreciation, but you’d likely be cash flow negative at first.[/quote]

I agree with the rates aspect, but classifying it as an investment does have some great tax advantages depending on ones financial profile (prop tax, depreciation, insurance, etc.)

I’m approaching it from the mindset that I might break even more or less (maybe a couple percent), but with an avg conservative rent increase of 3% per year in 5-10 years I’ll have a nice little cash flow relative to my original downpayment plus expenses over that time.

That is kinda why I’m looking for the historical data. I’d like rent data going back through a couple downturns so I can see what the rents did during those times. I already know they were not effected much during the last one, but I’m trying to go further back.

My gut says that with everything going on my 3% is extremely conservative, but I’d like for someone to disagree with me and provide some reasons or data too.

[bearishgurl]

[quote=gzz]The strongest rental growth will be where there is limited supply and growing demand.

The supply of single family homes with nice sized back yards for kids/dogs in central San Diego is going down each year as more and more are infilled with apartments or second units.

The fastest demand growth IMO will be from retiring upper-middle class boomers. The features that may be most popular for them may be 3 or fewer bedrooms, space for gardening/dogs/grandchildren, walk-able/bikeable neighborhood, single story house and a lot without deep canyons or drops.

For older couples, single retirees, and those without the budget to have guests stay over, condos with a lot of amenities should also do well. Within Central SD and mature North County areas, this is also the fastest growing supply as new lux complexes get built and old dumpy apartment complexes get converted to lux condos.

I think working couples with kids are probably averse to having less than 2 full baths. But retired people with only the occasional guest will probably be more willing to have 1 or 1.5 baths.

I think the coastal areas with plenty of smaller SFH on their own lots, from OB to Carlsbad, is likely the sweet spot for long-term appreciation of both rents and prices. IB and OC seem a tad too remote and downscale to attract boomers with pensions and equity from bigger paid-off residences.[/quote]This is a pretty good analysis of the available residential SFR inventory going forward in well-established areas of CA coastal counties … with a few caveats.

First of all, 1.5 baths is a design mistake of primarily builders of the ’80’s thru the ’90’s. Primarily used in small units/PUDs (townhouse-type) of 2 floors, the 1-1/2 bath design leaves no tub/shower on one floor, which is a huge inconvenience, especially if a bdrm exists on that floor. Any units being remodeled or converted (or built after about 2000) include at least a shower on the 2nd bath (in a 2-bath unit), making the unit have 1-3/4 bath … a much more usable unit for a small family or roommates. Even a downsizing boomer doesn’t want 1.5 baths! A “powder room” or 1/2 bath is fine for a home which already has two full baths.

Yes, boomers DO prefer one story homes. Many of them (perhaps more than 70% in SD County) already own a one-story SFR as a residence. But if they do happen to have stairs, they’re not going to sell and re-buy a residence in CA unless they can take their old assessment with them pursuant to Props 60/90. There are limited counties participating in this “statutory scheme,” besides SD County:

http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm

Boomers are not going to suddenly start paying $350 to $600 month in HOA dues at the age of ~60+ for a condo in a “Luxe” complex if they haven’t paid HOA dues in the past 20+ years … or ever in their lives. H@ll, effing NO! And that’s the vast majority in CA!

Even one collecting pension(s) (which are generally fixed with low or no increases every year) does not want to add to their monthly expenses when that money could be much better deployed to other uses such as home improvement, travel and assisting grandchildren with college.

It’s much, much cheaper to hire a gardener (even if one has a large lot which they can’t maintain by themselves anymore) than it is to be suddenly subject to HOA dues (and possible MR on a *newer* “Luxe” condo complex) PLUS any impromptu special assessments … especially for a deferred maintenance period which commenced long before the new buyer even took ownership of their unit! Witness all those beautifully-landscaped large two story “period homes” on Coronado which are occupied by just 1-2 people. And do not believe for one minute that they will all suddenly go on the market after the last homeowner dies!

Both of the above reasons (PLUS the effect of Props 13, 58 and 193 on CA’s books) represents 85-90% of the reason for the dearth of SFR listings on decent-sized lots in well-established areas of CA coastal counties in recent years. The closer to the the coast, the more pronounced the scarcity is and will be into perpetuity unless two or more of the above laws are eventually repealed. The proliferation of SFR zoning to multi-family/comm’l zoning is only occurring in 10-15% of urban micro-markets in CA coastal counties (ex: in SD, University Heights and parts of North Park). It is NOT occurring in every well-established urban neighborhood in coastal counties, nor will it . . . ever.

North Park (SD) began to be upzoned by City as early as 1988. It had a majority of residents who were renters in swaths of it, hence they had no voice when City voted to upzone those sections. This is NOT the case with the vast majority of aging urban neighborhoods in CA coastal counties!

In sum, a boomer would rather have their old house with stairs (and keep their <$1000 annual tax bill) than sell and move into a condo in the same county or move out of county (unless they can make Prop 90 work out for themselves) or out of state. To a great extent, the existence of stairs is the lesser of all evils. Don't count on SFR inventory in well-established sections of urban coastal counties of CA getting any better for decades ... or ever. With the existing laws on CA's books, there is no reason whatsoever to believe this could or would happen.

[bearishgurl]

The dearth of availability of SFR’s for sale in CA’s most established (and even coveted) neighborhoods (most pronounced in CA coastal counties) is here to stay and will likely never be “fixed” in our lifetimes.

As Trump would say, “The `system’ is rigged.”

And there is nothing anyone can do about it :=0

[bearishgurl]

[quote=The-Shoveler]I was looking at some absolutely mind blowing population growth projections for California earlier this morning.

The current population in California is 38 million, which is project to grow to 60 million by 2050.

That is absolutely astounding if true, they need to be pounding nails as far as the eye can see for the next 35 years just to keep up if that is what the future really holds.[/quote]Um, Shoveler, we’ve been thru this before here a few times :=0

This “prognostication” is unrealistic, pure fantasy and not doable in CA (unless the Mojave Desert gets some infrastructure and jobs and begins to be built up).

A more realistic assessment of the situation is … “If CA DOESN’T get anymore new construction, newcomers will buy/rent what is on offer or NOT move here at all!” And, believe it or not, that is okay! We don’t OWE the rest of the nation and world “affordable housing” or even any housing at all.

“Population projections” for an already built-out state are nothing but hogwash. They will be whatever the existing property owners and VOTERS want them to be. Sure, some of our rural counties “appear” to have a lot of open land. But that land is “protected.” Read, legally PROTECTED for various reasons and purposes.

In some CA cities (ex: SF) the vast majority of the population is already shoulder to shoulder, live within spitting distance with one another and fight for street parking on their own streets every single day. SD has areas like this as well. Good luck with your continual population prognostications here but just realize that all they are is a fantasy … they stem from a delusional mindset of CA having endless resources.

Nothing could be further from the truth.

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