East Bay Real Estate Thoughts

Besides our primary residence, we still own our old house in Pleasant Hill’s “Poet’s Corner” whose streets are named after poets like Byron and Shelley and other names most people who live there will vaguely remember from tenth grade English.  This is presumably more respectable or better marketing than the names of the daughters of the real estate developers or some trees and flowers and other conventions, and is among the better neighborhoods of this suburban community.  Most of Pleasant Hill was like the rest of the East Bay, developed after World War 2.  Our neighborhood was built in 1947 on what appears to have been a former Mushroom farm, whose spores still disproportionately take hold in the spring.  There are touches of character such as Molino’s Ravioli but dining like “Nibblers” Catalan menu sadly failed in competition with Roundtable Pizza or BBQ.   This is family-raising territory, good California living subject to all the pros and cons that means.

It is easy to access San Francisco and Oakland via BART — a 42 minute ride and next to the ever-growing commercial hub of Walnut Creek.  It will also get easier to drive there with the Caldecott tunnel additions.  But the area stands on its own.  I had come to Walnut Creek for the night of the 2000 election and the downtown has transformed immeasurably since.  Now Neiman Marcus and Apple stores, less discount hair supply strip mall.  I believe — and SF tax measures made this almost a certainty, that the corridor from Walnut Creek to San Ramon to Pleasanton will be vibrant with corporate headquarters and other white collar activity.  Heck even Zachary’s Pizza came from Berkeley & Oakland to San Ramon (dragging credit card acceptance finally along with it) and is opening in Pleasant Hill shortly.

The schools of Pleasant Hill had been highly ranked — 9s and 10s on the great schools scores but budget cuts made them considerably less appealing since.  Three young daughters we were facing Kindergartens of 30+ students and hauled off to Lamorinda for better schools and shorter commute.

We bought in 2003 at $740k – a touch before the final surge in pricing that had Zillow say the house was worth $900k (almost certainly not, but a neighboring house did sell at that amount) in 2007 and definitely (uh, I hoped) not worth the low point of $510k in 2009.  Our mortgage, a 5-year adjustable adjusted in 2008 to the insanely low 1 Year Treasury composite index + 2.x% which means we’ve been paying around 2.8% each of the last few years; this September renewal has us locked in for one more year, and the Fed is volubly committed to keeping rates low, now through 2015.

We rented the house out for $2950/month, which is about $2700 after the manager’s fee.  Taxes run 520/month, maintenance 180, insurance 150, and we pay for lawn care: 170.   With 430,000 on the mortgage, interest charges are 1100/month now, with another 1100 going to principal.   There is a large credit line available.  In other words (pre tax) we’re coming up with 520 more per month to pay down the principal.  Depreciation is getting banked given our adjusted gross income.

Do we sell the house in a year or refinance and commit to longer term ownership?  Refinancing does mean the loan becomes a recourse loan.

First Republic bank before QE3 last month offered and I assume these rates still are likely:

5/1 ARM = 3.45%  +.25pts

10/1 ARM =4.35% +.25pts

7/1 ARM = 3.85% +.25pts

the 10/1 ARM option would mean effectively adding $500/month in interest costs but obviously locks in the rate further.  A follow up email suggested a 4.2% 30 year non owner occupied was possible.

Playing with various figures at real estate investment calculators (like this one at Yahoo) I can generate 6-9% after tax rates of return on the investment in what I think are probable scenarios, after slightly re-levering the home and starting on a new 30 year mortgage.

I believe I can exceed that in the liquid public market and we already effectively have a large stake in east bay real estate in our primary home.  If we were to sell it and move to a lower tax state I think it might make sense to keep the old house from a portfolio diversification standpoint.  Otherwise it seems like next summer would be a good time to sell; possibly to our current tenants, who are well received in the neighborhood and appear to be in good financial condition.

The calculators all for simplicity’s sake assume linear appreciation rates; but I think a bounce followed by underwhelming growth is probably the likely outcome.  It was a nuclear blast on housing prices just further east in Antioch and Concord, and the fallout hit Pleasant Hill too.  Capacity constrained for new housing development yes, but California has so many risks associated with long term state liabilities, a synecdoche and foreshadow for future US problems,  it is hard to think of housing here as “safe” and as such a higher return less correlated to our other house is probably the best course after said bounce.

I went to an open house in an adjacent neighborhood — there were none in Poet’s Corner itself, itself a major change of pace from last year — and the scene was mobbed.  A house listed at 450 that had over ten parties swarming right on the opening bell — six offers, the agent said to someone who said “you’ll get a seventh” and the offers are back to setting deadlines two days away.  I had scouted this as an investment property, and maybe the math could work as a standalone but glancing though the inspection report, seeing 85 items from the trivial remarks about a polished-looking-to-me kitchen counter top to questions about wiring and the roof makes me think further real estate investment is only for those who will concentrate on it full time.

I had looked at properties in the same neighborhood last year and they’re pretty much off the incredible-steal levels; but even then would it not have been better to invest in Avalon Bay AVB 138 or Equity Real Estate EQR 57 and enjoy even better liquidity and leverage?  Single Family Homes as an asset class are probably on their way according to Bill Ackman at some point to the public markets and will be an even better play.  Here is a Reuters summary of the debate between Ackman and Gary Shilling from two years ago.  (So far, Ackman’s argument winning.)

Takeaway?  No more real estate exposure in the East Bay, and will likely look to sell in next summer’s season.  At some other point I should investigate more seriously Oakland, who could experience an analogous rise like Brooklyn.

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