patrick.net

Gentle Cheetah,

This is your first and last warning. You know where you stand with me.

His graph shows relationship between gold and housing starting from 1975! Ah Ha, showing such a relationship just before gold peaked in the last cycle? What about from 1929 to 2007? what about going back a hundred years?

That is what people call "lying with statistics". Well, I certainly hope all his clients are going to pick up a few more houses based on his advice. Fewer bidders to compete with 5 years down the road.

@Randy,

I can understand your frustration on these sellers that would not lower their price. For me, it is somewhat akin to buying a car, the salesperson will pull all kinds of BS, but then when I say "you have 20 cars on the lot, what do you mean you can come down a thousand dollars", they usally go ballistic, so now I don't even do that anymore, I would just tell them how much I am willing to pay. Luckily the internet changes the dynamics of car buying much to the car-buyers' advantage.

Randly, please call me GC. You're acting as if we are strangers, for God's sake.

I think Cheetah's comment was intended ironically (hard to tell).

But there is a grain of truth to the theory that a certain amount of income redistribution is socially optimal. (We can debate about what that level should be.) Others (even if they are not very bright or motivated) should not starve so that we can gorge on premium sushi every night.

But I agree with SFWoman. "Temporary Aid to Needy Famlies" (formerly AFDC) spending was $20 billion in '06. War spending on Iraq and Afghanistan was roughly $120 billion in '06. Total defense spending was $439 Billion in '06 and is scheduled to increase to $532 billion in '07.

That's a lot of sushi. To put it in perspective, TANF is around $70 for every man, woman and child in the US (or around $210 per household of 3). Defense spending in '07 is around $1750 for every man woman and child in the US (or about $5,250 per household of 3).

That is just ridiculous. I wouldn't mind getting some of that back.

It was hard to tell, because I meant both the grain of truth and the irony. Doing either alone would be too boring and I am bored.

Randy,

Let me be the first one to admit that I was one of the people here arguing with you against the stickiness. And I was wrong.

I agree with you, that the downward moves can be substantial. I have already seen evidence in the asking prices being slashed by 10%. I also see the change of mood in discussions with sheeple. I mean everyone, even in BA knows that it's no longer a sellers market. The change is amazing. It seemed so slow while happening, now in retrospect it seems very sudden.

Not sure about 2008 spring. BA is little bit behind the curve. But on the other hand it is far more dependent on JUMBO mortgages than many other parts. I was at least correct on that part. Without any job problems, just the magic number going over 8 has put a serious chill in the market.

Personally, I will buy when I get a house I like at a price I am comfortable with. 2008 or 2009, it's fine with me.

I think we should all wait for Aug number first before we make our forecast.

Aug07 was the month in which JUMBO was yanked. Let's see how the BA market dealt with that shock.

OO,

Wouldn't the real effect be visible in the number that get reported in October ? Whatever god sold in August will close in September and be reported in October.

I hear that August sales are way down vs. July 2007, and vs. Aug of 2006.

You will have to wait for a while to see what actually closes. However, the NAR does also track homes that go under contract. These numbers are way down.

FYI: Bubble-bailout anger has gone mainstream. If even Tom Tomorrow is anti-bailout, we're in pretty good shape, public opinion-wise:

http://www.salon.com/comics/tomo/2007/09/10/tomo/

Oh my. This is priceless. Simple, straight and spin-less. From a Realtor.

From http://www.rereport.com/scc/

For sellers, pristine homes in the best neighborhoods are still getting multiple offers, but that is now the exception rather than the rule. Over-priced listings are not even getting offers. If you get an offer, a rarity in this market, work it. Do not reject any offers out of hand. You may not get another.

I couldn't figure out which parts to make bold :-)

Those RE report guys are real Doom-n-gloomers. Everyone know a lowball offer is an insult and the surest way to upset seller's delicate feelings. You can't expect them to just "give it way"! Their house is their identity, lowballing is "like calling someone's baby ugly". Hell, lowballing is actually *worse* than insulting the baby --most Bay Aryans are too busy flipping condos to have time for children anyway.

The market's all set to rebound this spring, you just wait and see! Those "stupid" lowballers'll be sorry. It's got to come back, right? I mean, it can't stay down forever, right? Sweet Jeebus, it's got to... my NINJA resets this April. Where's that Lereah-flavored Kool-aid? I really need a hit right now. (*cough*, *gasp*...)

The lowballers who will be sorry are the ones who get the deal. Better to wait for a lower price in 2009.

I am not planning to think about looking to buy till fall of '08. At that point, I will make an all cash, low-ball offer to the seller who writes the best essay on why I should choose him to feed me squirrels from the backyard.

SP

I am a realtor, so I have access to daily data here in Phoenix AZ. I have noticed an interesting and unexpected trend I would like to share with this group.

6 years ago, I bought a fixerup home in a nice north scottsdale neighborhood. I paid $200K, though I made the seller pay closing costs and leave 8K in escrow for needed repairs. It was the last sub 200K home in that neighborhood, and in fact needed a fair amount of work and every bit of the 8K even though I did all the work myself, suffice to say it comped around 230K but was in bad shape and months away from foreclosure.

3 years ago, I sold that same home to a Cali investor for 369K. I just couldn't see the basis for those prices, as the home would rent for maybe $1450 at that time. I moved into another home in Tempe I had owned for 10 years as a rental, rehabbed it from the fraternity boy damage it had sustained, paid it and another rental off, and relaxed.

But the truth is, I miss my old neighborhood. Yeah my neighbors were mostly stuck up rude shallow people, but I could mountain bike out of my garage up spectacular desert trails, watch sunsets at night, swim in the heated community lap pool year round and walk back to my house.

So, I have been watching that neighborhood as real estate starts to unravel. So many of the residents there were real estate agents, title agents, mortgage brokers that it seemed to me it should be almost an epicenter for dropping prices.

But it hasn't! While inventory has skyrocketed, prices are holding firm from 400K and up. When I check the records on the owners, most bought years ago with original prices 200K and more lower then todays asking, so it would seem they could just lower the price and sell it now, but that isn't happening. Instead, what is happening is that rental listings are growing by leaps and bounds. In the past, there would be 2 or 3 homes at most for rent at the lower price points, (under 2000 a month) and these would rent quite fast. Today, there are 15 homes there for rent under 2000 a month, and they seem to get rented at about 4 a month on average. While waiting 3 months to sell a home isn't bad, most landlords get ulcers over those kind of things, believe me!

So, it seems many many people are going to try to wait this market out, and rent their homes out, until the market comes back.
If this trend continues, I would predict that at least in this particular neighborhood, rents will be under pressure almost immediately...

I am kinda thinking of writing some lowball rental offers for say a 4 year lease... Heck, that would be almost like owning the home anyways, I only stayed 3 years in the one I bought!

actually, I agreed with GC that time...

iTulip.com predicted 15 (fifteen!) years from 2005 as the bottom nationally. Thats the longest time period I’ve seen predicted. They back it up with logic and graphs and data too, check them out.

thanks for including the link ;)

I am not planning to think about looking to buy till fall of ‘08. At that point, I will make an all cash, low-ball offer to the seller who writes the best essay on why I should choose him to feed me squirrels from the backyard.

Funny you said that, I wrote a letter once (advise from realtor) to the seller asking them to sell us their house. It is the most ridiculous thing ever, who would care about a letter when there many other things to consider (down payment size, days to close, etc.). I swore I will never write such letter even if it means I can never buy in the BA.

Randy,

I also think there's a housing bubble in the anglo world, in the USA, in California, and in the Bay Area.

But Marin County, especially that part where you want to live, is a small and coveted area. Even though I am a lifelong resident of the Bay Area (South Bay), I wouldn't pretend to understand the small area you are interested in. Because I would see it from the perspective of living in Santa Clara County.

Did it occur to you that maybe since you looked at things from your perspective of the midwest and Redwood CIty and elite biz school or whatever, that you didn't really know what you were getting into, and that all of your predictions might come true in the aggregate, but not in the particular area that you are interested it? Because what you write sometimes sounds like you are arguing with or getting frustrated with the facts that you share your share from your observations.

FormerAptBroker Says:
> Aren’t landlords social parasites? Using their control
> over land to exploit others for a passive income?

Since no one needs to rent a place landlords are business people who need to create value for others so they continue to rent from them.

The only thing missing from this is an outline of other variables in Michigan or Ohio such as:
- what is the typical income?
- what is the job market like, particularly with relation to casual or precarious employment/layoffs?
- how large is the rental market there as a % of housing, compared to more in-demand places like CA, given how it's so affordable'n'all? -- if it was just as easy to buy as to rent, there should be very few rentals indeed going in those areas -- you may as well cement equity than keep renting, if you don't intend relocating interstate any time soon.

all of those missing factors above make the supplied comparison suspect and irrelevant (like many of FAB's supplied figures and anecdotes, it grieves me to say).

the usual reason housing is cheap somewhere is simply demand factors: there are no/low paid jobs, or it's rural, or whatever. Even I'm aware of the economic situation in places like Ohio and Michigan, the declining industries, massive residual unemployment, etc...

The 'control over land' aspect means that market conditions have allowed equity and capital-rich people to acquire more and more property in sought after areas, and in doing so keep property prices high and thus maintain the existence of a pool of renters who can never afford to buy at the asking rate.

P.S. With the exception of land leased to long term credit tenant leases owning land does not provide “passive” income (it takes a lot of work to keep the income coming in)…

as per my earlier remarks. A rental manager takes a 7% cut of the earned rent to manage the whole thing for you if you like.

Re the iTulip prediction (Housing Market will Keep Declining for Another Five to Eight Years - iTulip.com Forums), and on topic for a change, I had an interesting discussion with a financial guy last night, comparing housing corrections to stock market corrections -- he pointed out that there could be a point where owner-occupiers who bought at or near the top will have to sell down just to avoid a huge negative equity hit, just like a stop loss on the SE -- so they will not necessarily just hang in there in their own house, unless they are comfortable with their repayments and the 'it doesn't matter what price you paid, as long as you're happy with your home' view. I personally think he may have his head in the financial clouds on that one, as people don't treat their own home impassively like a stock investment to be dumped if it loses value. There are other reasons that people in this position will be a very small volume subset of the market. Any thoughts?

sybrib

Yes I'm getting frustrated with south Marin, I have been quite open about that. Earlier in this thread I also said that if prices north of the "wall of traffic" drop by enough to overcome the commute factor we will very strongly consider moving somewhere like Novato. A million dollars saved pays for a lot of private schooling and commuter comforts (like a Z8 carefully checked for subframe damage).

But not all of south Marin is superprime. The so-called "Mouth of Mill Valley" is entirely outside of our search set. But Tam Valley, Strawberry, a good swath of Corte Madera and parts of Larkspur are certainly not superprime, just good old prime with some average tossed in here and there. There is a school district premium, but nothing significantly more than you have in Santa Clara county's best schools. There are plenty of homes in Tam Valley which I fully expect to lose well over $1mm in value. It's already apparent because comparable things in the superprime areas are now listing for very close to the perma-listings in Tam Valley, so clearly it is due for correction. The question is how much goes to rental, how much to mummy, and how much really clears market to buyers.

By the way, we continually reevaluate moving back to San Mateo Cty, but prices there so far have been exactly on track with here, so there's no advantage as of yet. I'd happily move back to Redwood City (or rather maybe Emerald Hills) if prices commanded it--same analysis as Novato, except maybe in that case I'd want a private chauffeur, so I'd need to save more than just a million bucks.

or, in other words, I can see how ARM resets all at once would cause the jerkiness described below -- but what else would cause it? without single, discrete, catastrophic events such as ARM resets, or a sudden credit squeeze from lenders (ahem), why not a smooth descent? what real world psychological beliefs or events would cause jerky corrections? or did I just name them?

(this is a bit like charting vs fundamentals)

The stickier prices are — the longer they stay stuck — the more traumatically they will heave during periods of movement.

Skibum described it a long time back as pulling a big rubber disc along a long rubber mat by a rope

Because there is a market, not just isolated one-off sales. In simplified econ terms, there are a number of willing sellers at different points on a very jagged supply curve with discontinuities (or near discontinuities). I'm agnostic as to which direction the macro moves come from which reach the various market-clearing points. Shifts in the supply curve, sellers jumping across discontinuities due to ARM resets, other distress, or psychology -- it's irrelevant to the market per se. Similarly (though it will pain some I dare utter this), the demand side is also affected from macro variables like inflation, tax policy, government intervention and psychological perception of opportunity costs.

An example of the last point would be the different likely behaviors of buyers if you tell them they should wait 1 year or 5 years before buying. Many will view waiting 5 years as a greater cost than buying in 1 or 2 years and losing money for the next 3. Similar for sellers, only harder to get over psychologically since they are actively "experiencing a loss" whereas buyers are "potentially risking a loss".

"It is my current opinion that nothing significant will break in prices — and I mean significant — until next Spring."

Many things happen out of the Blue...not many did see the subprime blow up. I expect some of another earthquake not to mention the rest of ARM loans in the Bay Area.

svcaysguy,

I thought you're a local. Earthquake?

1989 quake did not really rattle the houseprices around here. If it made any difference at all, it exacerbated a shortage of housing. Prices did start doing down in 1990 for other reasons, but not because of the earthquake. Remember?

Same kinda thing happened down south with the Northridge quake, which kinda coincided with the "bottom" of the house prices there.

DS,

I think the credit squeeze is the key,

Sure prices will be sticky, as long as there is at least some buyers acting at the current price level, and must-sell sellers are outnumbered by can-buy buyers.

The real question what the current tightening in Jumbo (>$417k) mortgage underwriting will do to all of this. With no buyers (because of the squeeze), the must-sell crowd has no choice but reducing price.

It was the loose credit that made the prices go up, and likewise one could speculate that the severe credit tightening will be what makes the prices go down, perhaps faster and sooner than what ARM resets will do.

You should probably specify whether predictions about cuts are in nominal dollars or real dollars. We've already seen 2 years of inflation from the 2005 peak. And it could be about to get a lot worse, as all the ingredients needed for another bout of stagflation are present, including job losses in an important economic sector, a looming recession, while at the same time we have rising commodity prices and a falling dollar. Shucks, we even have another energy crisis brewing - can polyester leisure suits, bell-bottom pants, mood rings, and disco music be far behind?

A cut in the funds rate to 4.5% now seems in the bag, possibly by year's end. Before the cycle is over we could see 4% or lower. This won't be good news for the dollar, or US savers holding cash equivalents. At some point foreigners will refuse to lend long at today's ridiculously low rates and the game will be up, long rates will soar as the market finally prices in the inflation risk that it's ignored for so long. The only winners will be debtors with fixed-rate loans, and owners of tangible assets.

So my bet is that there will be an optimal point sometime in 2008 or 2009 when mortgage rates will hit the sweet spot, and nominal house prices will be down just enough, to create an opportunity for buyers. I don't think that will be at fire-sale prices, at least not in desirable areas (e.g. areas where you, Randy H, would consider living), simply because I don't think that many houses in those areas were bought with exploding loans. People with fixed-rate loans or 5-year ARMS can hunker down to ride it out, rein in their spending, postpone their plans to trade up on the property ladder, or whatever. People forced to move can, if necessary, rent in their new city and rent out their bay area home. My guess, which I'm pulling out of my @$$ and is for entertainment purposes only, is a 10% nominal haircut from 2005 prices in 2008, perhaps another 5% in 2009, and then everything depends on whether Ben's Huey can fly him out of the stagflation trap or not.

Randy,

Is Emerald Hills western Redwood City bordering 280? I think it is a very up-and-coming area. If I were to bet anywhere in San Mateo county that will have a great appreciation potential, I'd say that is the place.

DifferentSean,

you miss out one thing about California real estate - anti-deficiency protection. I doubt if Oz has such a thing.

In Japan where it took 16 years to unwind, there's no such thing as anti-deficiency. If you sell and you owe the bank money, you pay till you declare bankruptcy or die, whichever comes first. Here, one can just walk without even triggering a bankruptcy event. I am sure that many FBs will take advantage of such a wonderful protection.

Did Japan go to ZIRP because of the property crash? Was property implicated in the overall economic doldrums Japan might have been facing? (Too lazy to google it -- but there could be some prognostication value in it...)

Here is a update about house prices in Stockton that demonstrate the stickiness in prices as well as the factors that overcome stickiness.

Single family homes, 3 bed, 2 bath in the area I am familiar with, were selling at their peak between Mid 2005 and Mid 2006 at about 370K. The sellers were very slow to reduce prices and have been chasing the market down. The median price in Stockton has fallen about 10% while existing home sellers have only been gradually reducing prices.

The foreclosures and REOs on the other hand have been much quicker to react. I have seen comparable 3 bed 2 bath homes that have been foreclosed listing for 330K six months ago. The prices have been aggresively reduced to the 260K range, about 25% drop in six months. If there are enough foreclosures. They can drag down existing homes prices reducing the stickiness.

OT, this is a 1-year running thread (!) from Ireland on the crash:

Dublin property prices falling by €4,500 a month :: Politics.ie

RandyH said:
It is my current opinion that nothing significant will break in prices — and I mean significant — until next Spring.

You may be correct - however, I have said referred to this Masai saying before and I will say it again. The birds will show you where the leopard moves, not the grass.

In this case, watch the credit market, and not the prices. From everything that I am seeing, many sales are falling apart due to financing issues. In other words, no Jumbos for the Dumbos.

SP
test

what do we think of Dr Kurt Richebächer at patrick.net? Passed away at 88 last month, the patriarch of the 'anti-bubble' camp. I'm surfing all manner of strange money sites for the first time and turning up all kinds of oddities...

Ron Paul-love having him in there for the sake of debate, like his foreign policy proposals, scary, scary domestic agenda.

Different Sean,
My cleaning lady bought rental property in San Francisco (Potrero Hill) in 1995. She lived very frugally, scrimped, and bought in an up and coming area when just the first few gay pioneers were living there. Now she has a couple of rental units and lives in the small unit (now that her kids are in college). It can be done, it's just not easy or comfortable sometimes.

OO,
Probably 10-20% of the houses and condos I looked at in 1994 were places that owners had walked away from.
There was a difference between then (still falling market) and now (psychology has finally changed, fallen a bit in real terms, not so much nominally)-there was a TON of stuff on the market. It will be interesting to see when the number of things for sale really starts picking up.
I was in southern Oregon this summer, there was so much for sale there it was unbelievable. A lot of new spec stuff and tons of two year old houses for sale.

re: Ron Paul

That maybe moonbat craziness is exactly what the doctor ordered?

Actually, no. I think a lot of things he wants destroyed has some value. He seems like a decent guy and I would agree with many of his points over a beer, but what he proposes is impossible and rightfully so.

DJM

I like your analysis. I am talking about *NOMINAL* prices in my original post. The reasons are (a) it is a lot easier for people to think about; (b) I learned in my brief foray on the Zillow discussion groups that realtors are trained to attack anyone using the words "adjusted dollars" or "real prices" with folksy, belittling "common wisdom". If a reader in a forum like this doesn't already know a little bit about inflation, or at least want to know a little, then arguing about it only makes them think you're trying to pull something over on them; (c) I assume in my economics analysis that inflation is a macro force largely affecting the buyer-demand curve.

We've been talking about stagflation for a probably a year and a half now. It emerged during the "deflation or hyperinflation" debate. I see neither of those as likely, but stagflation is probably just as likely as a true soft-landing, maybe moreso now.

I think your nominal price cuts guesses are in line relatively, though I'd argue that the 10%, 5% could easily be 25%, 15% respectively. Truly, none of us can know until after we get there.