[nostrademons]

This is the sort of reasoning that scares me, because it assumes prices stay the same across wide economic shocks. Prices don't stay the same. In my neighborhood I've seen widespread move-outs at the end of March and April - as in I'd take a 10 minute walk around the block and see 5 families moving out at that instant. When you've got 20% vacancies you have a very strong incentive to drop prices and fill that apartment now, or else you get foreclosed upon because you're not getting rent. I just took a quick glance at Craigslist and am seeing a $200-300/month drop in rent just in the last couple weeks. My neighborhood is at the bottom of the market, but economic distress tends to travel up-market as spending drops, people seek cheaper digs, and vacancies trickle down.

If lots of people were buying 1BR condos because they saw a profit opportunity arbitraging the difference in rent vs. mortgage payments, then a small drop in rents might mean that a large number of people can't make their mortgage payments. That's a big problem, because it implies a foreclosure wave that'll put further downward pressure on prices.

[arcticbull]

That's the risk, right. You have to account for that or you're doing a really bad job of building a real-estate business. This is often cited as a reason multi-family homes (or larger) are better for landlords than individual units: if you have an apartment you rent out and you have a vacancy, that's a 100% vacancy rate. If you buy a 10-plex and you have a vacancy thats a 10% vacancy rate.

Luckily, or not depending on how you look at it, SF properties and rents tend to be fairly predictable as compared to other markets in large part due to the artificial supply constraints imposed by city council, and the huge demand of the tech industry which tends to weather downturns pretty well. If you can afford $4500/month in rent for a 1 bedroom, chances are you're not going to be fired first.