patrick.net

Paul,
Problem is, what bank will give someone making less than 1 HaHa per year a loan to buy an annuity? That's the problem here - banks are loaning out obscene amounts of money that they would never do so for any other purpose than to finance a home "purchase" to people without the means to pay it back if they were to default.

I think it is just the calm before the storm. You could also say this is one of the many false bottoms to bring out any on the wall buyers out there.

Also, if 2m is invested at 6%, inflation would take a chunk out of that and then the IRS would tax it at our rate so we would loose another 40% or so - right?

In Mountain View, Los Altos, I have also noticed that some of the houses that have been put on the market are long-term investment properties - i.e rental properties - I think the landlords are trying to cash in while they can. If prices drop a lot, then they might decide to just hold onto their properties again rather than sell.

Also, one listing noted that the seller reserved the right to withdraw the property from the market - almost like they were testing the waters, if they got the right offer, they'd sell, if not - they'd hold on. Maybe I was reading it wrong, but that's what it seemed like to me.

Claire,

Your post and the others are correct. However, I stand by my post that if someone is spending in excess of 1M (all things equal) just to be in a better school district they are not acting in the childs best interest.

Paul

Paul,

I think you're right, they could just send their kid to private school instead for less, but people with that type of money are also looking for the kudos of the zip codes (I think).

That’s the problem here - banks are loaning out obscene amounts of money that they would never do so for any other purpose than to finance a home “purchase” to people without the means to pay it back if they were to default.

Skibum,

That is an excellent point. I could probably qualify for a $1M mortgage, but there is no way the bank would give me a $1M loan to speculate on stocks, bonds, metals, currencies, or even a small business.

Just like the FBs, banks are willing to lend these sums based on the assumption that "real estate never goes down." But they think they are more sophisticated than FBs because they build into their models the possibility that some RE markets could "temporarily" decline by 15 or 20% or defaults could rise as high as they did in the '80s or '90s.

Most banks have not adequately reserved for the possibility that RE prices could decline by 25 or 30%. But if prices can go up 200-300% in the last ten years, why couldn't they go down 30% in the next ten? The liquidation of bank REOs could be long, slow and painful.

SFWoman - Is propertyshark free? You've got me curious, but I don't want to get into a contract with them or anything. That's why I don't use ziprealty. Or perhaps you could list the numbers for me for zip 94040?

Thanks

Glen,

Hence the "credit bubble". I wonder if we are going to see a scandal that surpasses the savings and loan or LTCM scandals - as a country, we're about due for one anyway.

skibum,

I agree--we are about due for something bad to happen. Or, in Greenspanese, perhaps a return to more normalized historical risk premiums or a sustained period of heightened volatility in asset markets.

I haven't posted in a while. It's nice to still see people actively discussing things real estate related. I thought this was really funny!

http://tinyurl.com/fk5he

SFWoman - Thanks for the info, I may just look into that.

SFWoman - I have signed up for an account, but am waiting for a link to be sent before I can access the site - no mention of beta testers needed on the layers I could read, so hopefully, I will see the link once I am allowed to log on.

SFWoman - didn't see your post before I posted - have now signed up with the help of your directions, although it is unclear whether I will be lucky enough to become a betatester for the BA or not.

Scott J,
I think what the Tom Stevens house not selling tells me more than anything is the underlying mentality of most sellers: "My house is special. We have so many great memories of living in it, we put X amount of dollars and blood, sweat and tears into renovations, and it's definitely better than the comps for sale. That's why the listing price should be Y amount more than everyone else's, and I'm not willing to budge."

1987- $307
1988-$294
1989-$293
1990-$333
1991-$335
1992-$310
1993-$311
1994-$244
1995-$326 etc.
2006-$1120

So if you bought something in 1987 you would be underwater in 1994.

OT

but "state of the landing" has a totally different meaning where I'm from..

as in "babe, what're we going to do about the state of the landing?"
"oh, i dunno, Hoover it and take the clothes off the bannisters before the Bailiffs come..."

On topic

I'm hearing so much 'soft landing' from friends and coworkers that i'm starting to wonder if L.A really is different...

From my trawls on Zip/Zillow it seems that, as predicted, the less 'nice' places in L.A (Inglewood, L.A proper, SFV above the 101) are seeing price declines, but nothing really catastrophic as of yet.

Pricier areas seem to be just...stuck.
A few places have come off the market, a few have had insignificant reductions (2-5%) but most of them are just sitting there day after day with the original asking price.
Maybe people in the more affluent areas really can ride this out. So far, it looks as if they will.
But then, you compare what they bought for in 98/99/00 and even 01 and all of them show about a 200% increase. It makes me wonder just who the hell can afford to buy?

If I listen to my friends then, by this time next year, I'll be priced out yet again, as they tell me prices will slowly go up.

If I listen to you guys and my own gut feeling, then I'm going to have to wait until at least this time next year to find anything affordable.

I just don't know any more.
Consequently, I've made a Plan A and Plan B.

Plan A - tanking prices - I get to buy a $1 million house for between 500K - 750K, and can afford to buy the kind of place I want, rather than having to worry about the cost.
Plan B - my friends are right - I get to buy a less amazing place, at a price I can afford.

I guess I really won't know which plan to use until Sept 2007...

SFWoman,

I meant no disrespect regarding "normal people". As a rule, I do not consider anyone here "normal" by the very fact that they're here. Normal people listen to Suze Orman once and proceed to make a decade's worth of decisions based upon that half hour of "knowledge".

speedingpullet Says:
Pricier areas seem to be just…stuck.

Inefficient markets are, with very few exceptions, always fast to rise and sticky to decline. I think what we're debating is how long the sticky phase will last.

skibum,

I guess the president of the NAR "drinks the koolaid" and forces himself to not see what's right in front of his face. Does this guy NOT read what his own group is publishing i.e. the rismedia link that SFWoman posted? Sheesh!

To say something that's barely on topic, the prices in the western part of the east bay seem to be pretty sticky until you get north of Richmond. Cities like Pinole, Hercules, Rodeo and Martinez seem to be falling a bit. I think the prices have been pretty sticky in the rest of the east bay because a lot of people just aren't moving. When I go to open houses I don't see immaculate homes with great staging. I see normal home that people lived in. They are selling because they got a new job or are retiring, not because the previous owners were speculating unlike Sacramento and San Diego.

Since there haven't been massive layoffs like the dot com bust, people are staying. Also prices were very high to begin with, so the margins didn't look as good for speculators. Mountain House and the central valley homes are looking pretty shakey now. I do think prices will come down slightly in the western part of the east bay, but I can't give a quantative answer why I think so. I'll just hazard a guess for a bottom in 2009-10. So what if I'm wrong, no one can predict the future. =)

Claire Says:

> If a Brit can afford a pied-a terre in SF then they
> are of the type that money is no object and won’t
> care about the dollar too much!

Then SFWoman Says:

> Not necessarily. I looked at Paris apartments a
> few years ago, and can afford one, but I won’t
> even consider one right now.

It’s easy to loose touch with reality living in the north part of San Francisco but for the most part anyone buying a pied-a-terre on another continent is really F’ing rich…

About $250K a year will put you in the top 1% of all “households” (most with more than one income) in the US and about the top .00001% of households in the world (I used to have the URL to a site that would show this).

Living in San Francisco many people really feel “middle class” (since half their friends will be doing better) when they make “only” $500K a year and have a new worth of under $20mm…

Scott J. Says:

I guess the president of the NAR “drinks the koolaid” and forces himself to not see what’s right in front of his face.

Drink the kool aid? Hey, this guy is Jim Jones himself!

Claire Says:

> Paul, I think you’re right, they could just send their
> kid to private school instead for less, but people
> with that type of money are also looking for the
> kudos of the zip codes (I think).

The problem for most people is that they can’t get their kids in to good private schools, but if they can afford to buy in an area with good public schools the schools have to let the kids in. A middle class white family that decides to save money buying a home in Daly City and paying the $50K a year they are saving in mortgage payments to send little Brittany to Burke and little Spencer to Town in San Francisco will be very disappointed that there kids have close to zero chance of ever getting in…

In the long run paying extra for a home in a good area with good schools is always a good investment since prime areas appreciate more than regular areas (as long as you can afford it with a fixed rate loan). Actually prime anything appreciates more that regular anything. Compare the current price of a ’68 flat roof apartment in Sausalito with a ’68 flat roof apartment in San Leandro or even a ’68 Camaro with a ’68 Ferrari or a ’68 Timex with a ’68 Rolex, or a ’68 Bottle of George de Latour Cab with a ’68 Jug of Gallo Hearty Burgundy…

I’ve got a lot of people that agree with me ready to invest in prime apartments in prime areas (taking lower than average cash on cash returns going in) hoping to get above average appreciation when we sell at the top of the next cycle…

"a ’68 flat roof apartment in San Leandro or even a ’68 Camaro with a ’68 Ferrari or a ’68 Timex with a ’68 Rolex, or a ’68 Bottle of George de Latour Cab with a ’68 Jug of Gallo Hearty Burgundy…"

That's a false dichotomy. The cheaper car, wine and watch were never engineered to be collector's items but practical items - that's why they were affordable in the first place. Their value didn't lie in the investment aspect but their functionality for their 1968 buyers. Furthermore, there are other sectors where expensive things greatly depreciated in value, like all consumer electronics. Lots of people owned Lucent and Enron in the belief that they are bluechip companies and lost it all.

As for real estate, what's prime and what's not prime is fluid. Harlem went from middle class housing (early 1900s) to ghetto (most of the 20th century) to yuppie colonies (today). Ditto the East Village. A lot of the prime BA properties of today were not especially prime 20 years ago. The fact that they appreciated so well is in part because they went from sub-prime to true-prime in the intervening years.

But more generally, our perceptions are molded on the American post-WWII experience AKA best of times. There's no guarantee that values of any property, prime or ghetto, will hold up if the macros weaken for good.

Mercury News Saturday Reality section

Mercury News Saturday Realty section

Can I buy a vowel?

Mercury News Saturday Reality section

About $250K a year will put you in the top 1% of all “households” (most with more than one income) in the US and about the top .00001% of households in the world (I used to have the URL to a site that would show this).

Living in San Francisco many people really feel “middle class” (since half their friends will be doing better) when they make “only” $500K a year and have a new worth of under $20mm…

FAB is dead on. It is all too easy to lose touch living in the Bay Area. It's almost tragic to hear a friend bemoan their measly $300K/year single income household as "middle class" and then travel home to the midwest where a family of four is getting by as "middle class" on dual incomes totalling $70k, most of which is eaten up by daycare and debt payments.

Muggy,

I didn't mean to ruin anyone's weekend, lol. Remember, all real estate is local and many areas will suffer very hard landings, even if the overall national market lands more softly. A lot of my comments are somewhat specific to the Bay Area, where I think there's a generally higher and more diversified income base to power a few more refis than the general 1-company town.

I’d say most of the families that live in my neighborhood here in Sac are living on $70k a year or less. I often feel as if BA people are either very rich compared to everyone else or just seriously out of touch.

I would say they are seriously out of touch.

On the other hand, the economy appears more and more to be a zero sum game.

Remember, it’s not all or nothing. The bottom can come up even as the top is coming down.

I'm sorry Randal H. Esq., but did you mention "top", "bottom" and "SF" in the same sentence?

’68 Camaro with a ’68 Ferrari

Dude, come on now. '68 Z/28 convertible, one made, priceless, '68 SS/RS 375HP convertible, also very high priced. It's all relative.

But more generally, our perceptions are molded on the American post-WWII experience AKA best of times. There’s no guarantee that values of any property, prime or ghetto, will hold up if the macros weaken for good.

Do you have a sister that's around 35? If so I need a fast car and an alibi.

Just like the FBs, banks are willing to lend these sums based on the assumption that “real estate never goes down.” But they think they are more sophisticated than FBs because they build into their models the possibility that some RE markets could “temporarily” decline by 15 or 20% or defaults could rise as high as they did in the ’80s or ’90s.

Most banks have not adequately reserved for the possibility that RE prices could decline by 25 or 30%..."

Glen,

I truly believe most banks and other mortgage lenders are not run by self-deluded idiots. Lenders are by and large rational, profit-driven actors trying to maximize profits while minimizing risk. The reason they continue to lend absurd amounts to obviously credit-unworthy borrowers for ridiculously low interest rates is because these loans are typically SOLD OFF by the banks as soon as they're originated.

The magic of MBS (mortgage backed securities) and CMOs (collateralized mortgage obligations) means the banks can instantly unload this toxic crap on investors, foreign central banks, and pension & hedge funds all over the world. Once the loan ownership is securitized (either by a GSE or private entity) and sold off, the default risk to the bank is GONE. Yet the bank has already pocketed origination fees, points paid by the FB and any profits realized by selling the loan.

Hence, one of my all-time favorite catchphrases: "privatize profits, socialize risk." If there truly was a genuine "new paradigm" anywhere in the current bubble, it was this explosion of MBS/CDO risk-offloading by the banks.

Used to be banks might actually *gasp* HOLD a loan on the books after originating it. If the borrower defaulted, they might end up having to eat the resutling loss. This bizarrely "quaint" alignment of risk & reward produced lenders that actually CARED if the borrower could afford to repay the loan.

Soooo old-fashioned, I know... :-)

I'd recommend browsing a couple classic threads on the subject from the Patrick.net archives, in case you're interested:

Too Big to Fail?
GSEs too Socialistic for Red China

I said:

That prime items from about 40 years ago tend to appreciate than non prime items and gave examples of a ’68 flat roof apartment in San Leandro vs. a ’68 Sausalito apartment, a ’68 Camaro vs. a ’68 Ferrari or a ’68 Timex vs. a ’68 Rolex, and a ’68 Bottle of George de Latour Cab vs. ’68 Jug of Gallo Hearty Burgundy…”

Then astrid Says:

> That’s a false dichotomy. The cheaper car, wine and
> watch were never engineered to be collector’s items
> but practical items - that’s why they were affordable
> in the first place.

None of the examples I gave were items designed to be collectors items and all just cost a little bit more in 1968, but are worth many times more today

> Furthermore, there are other sectors where expensive
> things greatly depreciated in value, like all consumer
> electronics.

Take a look at the value of a ’68 McIntosh Stereo or a ’68 Gibson Les Paul and you will see that even prime consumer electronics appreciate more than non prime items…

> Lots of people owned Lucent and Enron
> in the belief that they are bluechip companies
> and lost it all.

I just want to compare how completed items (like homes, apartments or consumer goods) appreciate. The value of any company with poor or criminal management will eventually drop like a rock…

astrid wrote:

> As for real estate, what’s prime and what’s not
> prime is fluid. Harlem went from middle class
> housing (early 1900s) to ghetto

Can anyone name an area that was prime post WWII prime that is not nice today.

> A lot of the prime BA properties of today were
> not especially prime 20 years ago.

astrid said "a lot" of BA properties became prime since 1986. I can't think of one.

surfer-x Says:

> Dude, come on now. ‘68 Z/28 convertible,
> one made, priceless, ‘68 SS/RS 375HP
> convertible, also very high priced. It’s
> all relative.

I went to three auctions in Monterey last month so I know that people have done very well holding on to rare Camaros, just like the guys that bought San Leandro apartments have done real well. My point is that the guys who bought Ferraris and Sausalito apartments have done many times better. As far as I know only one Camaro has sold at auction for six figures (the amazing '69 ZL7 that was restored in the South Bay), while almost all Ferraris from the 60's sell for six figures or more with rare ones selling for seven figures...

"Can anyone name an area that was prime post WWII that is not nice today."

As a guess I would say Detroit would be a winner :-)

Prime/Non-prime:

Chicago's near west side went from Prime, to so feared that even cops and firemen wouldn't enter, to Prime again, all post WWII. Wiki Cabrini Green.

Jeremy,

Those arguments are certainly popular and repeated as if they are gospel. There is some truth in them. But, unless you put them to the mathematical test, it's all just rhetoric. Luckily, I've done that for you and you can download it for yourself here: The Bubblizer Model.