patrick.net

Letter to inman.com today pretty much sums up the sentiment of this website:

LETTERS TO THE EDITOR

Renters not losing out in all markets

Re: ''Normal' real estate market creates new winners, losers' (Dec. 28)

Dear Editor:

I am one of those people living here in Los Angeles, but I don't think I am that much of a loser. To make my point, I rent in L.A. at the beach for $2,000 (out of pocket). If I were to buy an $850,000 home, which is a step down from what I live in today (roughly valued at $1 million) with a 20 percent down payment, my property tax: $566 ($885 per month at 1.25 percent before deduction, $566 lost after deduction) plus interest: $2,097 ($3,277 per month at 5.9 percent before deduction, $2,097 lost after deduction) plus other costs: $350 (insurance, maintenance, etc) gives me a total: $3,013 (out of pocket).

The equity gained from my payment is awash with the loss of interest I could have gotten on my down payment of $170,000. So I can rent a dwelling for $2,000 or rent money to own that dwelling for $3,000. This is not an exaggerated story. Here in L.A., home prices are 10 to 15 times average incomes. Traditionally, five times incomes indicates the top end of the market due for correction. Also, home prices are 300 times rents. I rent because I have a nicer dwelling on the beach with a full ocean view for $1,000 a month less after tax deductions than owning an actual house. The only thing that substantiates the value of that home is the assumption that it will continue to appreciate. When that stops, and it will, there will be absolutely no financial reason to pay that price for that home in relation to rents.

I don't see rents skyrocketing, so where does that leave home prices? In the past, home prices would stay flat in many markets after a boom because inflation pushed up rents and incomes until they caught up with home prices. Today we have about 2.5 percent inflation. If Southern California home prices remained flat it would take 16 to 20 years for rents to catch up. When you have fundamentals like these, the benefits of home ownership literally evaporate.

Right now the loser is the person buying a home at a price they can't afford with an interest-only loan at the top of one the largest run-ups in real estate this country has ever experienced.

John Butler

hai bloggers
i want to know more about argentina.
actually i will be visiting buenosaires for 2 weeks. Is it a gold loving country? When the argentinian financial crisis happened did the government seal off all the bank safety vaults.

did the argentinian govt confiscate all the gold of the private
citizens?

I think homes are overvalued, too and looking for a correction, but I think it will be a moderate one initially (10-15% yoy from now) and then a decade or so of stagnant nominal prices, which means the real, inflation adjusted, values will slowly go down.

That is what happened after the last boom and the one before that and things really aren't that different this time.

I am pretty happy to be locked into a 30 year mortgage at 5.25%. If nothing else, it is a great hedge against inflation, which I suspect will be picking up pretty soon.

Glad you found happiness elsewhere Need 2 Leave, but I am personally quite happy with where I am now. I think San Francisco is a great place to live, probably the best place if you are one half of a mixed race couple. I would hate having to commute on the freeways here though. Both my wife and I work downtown and take MUNI to work. The only time we use a car is for shopping on the weekends.

Friggin awesome site. I’ve got a mortgage broker friend who is trying to tell me that it’s still wise to buy now, and that the house I buy will never be worth less than I paid for it. I just sent him your article.

I sent my friend the link to this web site and he said that it is completely stupid.

This is a friend who is always wrong. He bought gold at $800 and sold after it crashed to a new low.

"Maybe John Butler is lucky that he can rent $1mil home for 2000. Archstone apts here rent at 1600 for a 2 bedroom"

Perhaps, but that 2 bedroom Archstone apartment, if it went condo, would likely go for $500K minimum, correct?

Perhaps, but that 2 bedroom Archstone apartment, if it went condo, would likely go for $500K minimum, correct?

Apartments can command higher rent because

1) leases can usually be extended over many years
2) there are more services and amenities (e.g. pools, package signing)
3) maintenance and management are usually on-site

"Apartments can command higher rent because

1) leases can usually be extended over many years
2) there are more services and amenities (e.g. pools, package signing)
3) maintenance and management are usually on-site"

Very true...my newly divorced aunt just rented a 3 bedroom SFR on a 0.25 acre lot in Clayton, an upper middle class Contra Costa town, for $1700/month.

Very true…my newly divorced aunt just rented a 3 bedroom SFR on a 0.25 acre lot in Clayton, an upper middle class Contra Costa town, for $1700/month.

I am trying to move out of San Jose when our lease is up. Then we will have to go through looking for an apartment again.

(It is not bad considering that we would be stuck if we had bought)

I do not want to rent from a private landlord because many homes will be put on the market very soon.

There are many choices but finding a good apartment is always a challenge because I am quite picky and have strange requirements/preferences.

In other news, again streight off of my little superheterodyne mindrot machine, renters are being evicted at rates not seen since the dot-bomb in SF, as owners are converting apartments under the Ellis Law, to condos etc. “This will create a whole new class of homeowners” lol.

They are just converting them into future affordable housing. This is fine with me. :)

Since this thing is about BA RE, with all the earthquakes happening around the world and around the US, what size of one would it take to turn the SF RE market around, maybe a 7?

Let's not hope for one.

For instance, I’d not buy this place I’m in, no matter how cheap - it’s a $hitbox.

But they will drag down values of other places too. :)

Somehow, that story is no longer interesting to the mainstream media, anyone else notice how the Vegas RE collapse is no longer news?

How about San Diego?

When the burst hits more people, media sensationalism will come in and spread the news. When suffering becomes personal, fear will reign among leveraged homedebtors.

Yet another f@cked borrower anecdote...

I've acquired something of a reputation as RE bear/Bubble theorist at work (shocking, I know :-) ). Despite this, occasionally people I've known for years will come up to me out of the blue and start talking shop about RE "investing" --as though this is something I would think is a great idea (under the current circumstances).

Just today, a colleague I've worked with some 4 years told me all about some great opportunities (through his local chapter of Marshall E. Reddick investment club). He recently bought two out-of-state rental properties --one near SLC, Utah, the other in Dallas. Naturally (on the sage advice of his investment club), he used 5/1 I/O ARM hybrids.

I asked him why he did that given rising rates, and relatively still cheap fixed-rate loans (he had good credit). What else?: negative cash flow. He could not afford the "burn rate" of conventional amortizing loans on these two properties --"affordability" was based on the I/O teaser rate only. Plus, he "can always refinance" when the I/O fixed period is up and "cash out my equity gains".

*Sigh*...

So, once again, I found myself congratulating another clueless friend and f@cked borrower on his great "deal", while politely suggesting that (a) RE prices don't necessarily always go up, (b) if they don't, he may have a tough time with the re-fi, and (c) he consider converting his I/O hybrid ARMs to amortizing fixed-rates, or sell if this isn't possible. He politely nodded while this went in one ear and out the other, while asking me if I'd like to come to the next club meeting.

Such is life in Bubbleville.

Just today, a colleague I’ve worked with some 4 years told me all about some great opportunities (through his local chapter of Marshall E. Reddick investment club). He recently bought two out-of-state rental properties –one near SLC, Utah, the other in Dallas. Naturally (on the sage advice of his investment club), he used 5/1 I/O ARM hybrids.

SLC does not look as bad. If one does not want negative cashflow, she can always "buy" positive cashflow with more downpayment. It is fine to use a hybrid loan so long as a hedge plan exists. Relying on future refinancing is a dangerous move.

People never learn. I stopped advising friends. They will have to learn it the hard way.

What happened to the Housing Bubble News Links? They seemed to have stopped on 12/30. I look forward to reading them as my morning pick me ups!

Perhaps Patrick is busy. It is good to know that the news of bubble bursting is going more mainstream every day. The psychology is changing. The sheeple are scared.

@Peter P,
I know --it's just hard watching it happen to nice (but financially clueless) friends. Hopefully, since these aren't major bubble markets he will get out with minimal damage --and a new outlook on the fundamentals of RE "investing".

@BustBubbleBust,
Patrick's probably taking a much deserved rest for the holidays. I'm sure he'll pick it up again soon.

I know –it’s just hard watching it happen to nice (but financially clueless) friends.

Yes, it upsets me a lot. But there is only so much one can do.

Another useless restriction from a useless group:

http://tinyurl.com/chsfr

Perhaps they should convert the UN HQ in NY to condos.

KurtS..right now a great deal of Napa is flooded.

Yes, we just spoke to friends in St. Helena. Luckily they were on higher ground.

"Question to all you wonderful RE Bubble posters, what kind of a % down cut do you see for SF, and is SF the epicenter bubble?" -- Seenthisb4

I personally do not see SF as the epicenter of the bubble at all. I think SF will drop 20 to 25% TOPS when this thing stars to deflate over the next few years. What SF IS the epicenter of is the strongest economic region in America. This of course is a HUGE driver of our current housing boom. Easy cheap money from the FED was almost an equal driver, but we never would have seen the crazy bull run we've had if the Bay Area didn't have such a strong economy with so much money to throw around locally.

If I was going to call a bubble epicenter of the whole country it would be SoCal: San Diego and then LA. And then all these boondock NorCal little towns that blew up just because they're within commuting distance of SF: Modesto, Madera, Sacto, Vallejo, etc. Those places I think are going to blow up big time.

"I am pretty happy to be locked into a 30 year mortgage at 5.25%." -- Jimbo

As well you should be. If you can afford to own here in SF with a 30 year fixed on a great rate, you're all set. You are definitely in the minority though!

"I would hate having to commute on the freeways here though. Both my wife and I work downtown and take MUNI to work." -- Jimbo

Me too, and the great public transportation here is one of my favorite things about this city. I only drive my car on the weekends when I want to leave town and explore the rest of the NorCal wilderness!

In the visions of looking for the perfect dream home, and investment opportunities, this may be the new mecca…

http://www.burjdubai.com/

I did "looked" at some Dubai website. Nice condos they have.

One crucial thing: can I get bacon there?

I will not live in a place that restricts my diet. I am already pissed about the restricted caviar export.

"In other news, again streight off of my little superheterodyne mindrot machine, renters are being evicted at rates not seen since the dot-bomb in SF, as owners are converting apartments under the Ellis Law, to condos etc." -- SunnyVale_Renter

Hey, that's funny, I just read that article in the Chronicle an hour ago on BART on my way back from SFO. They put in a nice little bar graph showing that Ellis Act evictions are at the second highest level they've ever been--first highest was 2000, just before the tech crash. I would put good money on the line that this will be the last big year for Ellis Act condo conversions for quite some time. Lots of my SF friends and neighbors are going to rediscover the "joy" of renting!

"Hmmm….according to whom or what is SF “the strongest economic region in America”??? Top or close to top in income levels perhaps, but that’s nothing new. In terms of overall economic heealth, the unemployment rate, for example, is reasonably low..."

According to ME of course, for many of the reasons you just cited! I think we have the 2nd highest American median income to NYC here (I could be wrong of course, I'm just pulling that out of my ass), as you said low unemployment, and a very diverse economy that has everything from super high tech computer stuff to International finance hub to agricultural breadbasket to Dungeness crab fishery! There's no denying that the economic strength of this region is a HUGE factor in the run-up in our real estate. Anyway, if you've read any of my prior posts, I think we've shot way past any sustainable RE level and will have a nasty fall.

If yu are really serious, I can get you a connection for Chilean caviar that makes Russian stuff look paltry. I will have to charge you my caviarrealtor â„¢ commision though. Let me know.

I am sure Chilean caviar is very good, but I prefer FSBO caviar at this point. ;) You know, I need to save the commission money.

For now, there is farmed caviar from good old USA. It is not bad for the price. I just do not like the UN. It cannot prevent human suffering in the world. Yet it worries about fish!

But my point is, the US’s population overall could be much better off under the type of moderate Islam the US could end up under, than under the Jewish/Christian regime they suffer under now.

Huh?

Sunnyvale_Renter, you have a point. However, Christianity is not really meant to be materialistic. Isn't it ironic that the Soviet was materialistic by doctrine and they collapsed?

Harm,

I've never heard of the inv. club your co-worker refers to above but I'm sure we've all been to a "tent meeting" just like it at some point. They get novices all hot and bothered but then the club decides that in order to make this "bullet proof model" to work they need to go over SLC and Dallas? What does that tell you right there?

I am by no means a lic. Realtor TM and confine most of my activities to equity trading but clients come to me w/regularity on RE issues. I take great pains not to portray myself as a RE expert but they seem to appreciate a "Bear's" take on things. "I'm being pressured on all sides, PLEASE talk me out of this"! I am currently working with a client that is trying to make sense of positioning a "rental portfolio". We have been through the math you describe above repeatedly and just can't seem to make rentals pencil out, and that's in Oregon! Wrongly or rightly I've always described aquiring a rental or business, say, a laundramat more like "buying a job" than an investment. Have I been wrong all these years?

newsfreak,

That's something I just can't hear enough of! Why work, innovate or otherwise create value when we can have a perfectly "viable" economy just flipping properties back and forth to one another? Sounds like a hawker at the carnival, everyone's a winner! Patrick posted a great article and you might have to go back a bit but I believe it was called "THE UNITED STATES OF REAL ESTATE". Very funny author. I have no problems with an individual that employs professionals and COMPLETES a meaningful restoration on a property with the expectation of a reasonable profit. Sadly that's become the exception. What I've seen more times than not (judging from experience) has been half-assed attempts where it was obvious that this is where the money ran out so we just pulled the plug and put it on the market. Mostly superficial fluff done more with an eye toward curb appeal than any real substance or long term benefit.

Remodeling is an art! It takes years of experience and a lengthy and well mentored apprenticeship. It's a lifetime commitment not a weekend fling. What amazes me is how few Americans today can seem to tell the difference!

I may get flamed for saying this, but what's wrong with being a little materialistic? Yes, the psychology of extreme greed is playing a key role in the bubble right now, but in my view it's ignorance of the fundamentals and reckless government policy that are most to blame, not materialism alone.

I don't see religious fundamentalism/anti-secularism as necessarily being the "cure" to all modern ills, any more than it "cured" society's problems in medieval or ancient times. On the contrary, religious extremism and blind opposition to all forms of technological or social change often creates more problems than it solves. Call me crazy, but bubble or not, I think we're all much better off as individuals and as a society than we would be under a theocracy or a government that promotes slavery.

OTH, I agree that most religions (in moderate/mainstream forms) can provide a moral anchor and glue which helps bind communities together by promoting ideals like charity and caring for the common good. Social darwinism in its purest form is no more an ideal form of society than Taliban-style theocracy.

But my point is, the US’s population overall could be much better off under the type of moderate Islam the US could end up under, than under the Jewish/Christian regime they suffer under now.

History would suggest: the less any government enforces any religious viewpoint, the better. Any overriding theocracy, or culture based on one religion, has the inevitable tendency of limiting the potential of its citizens. Anyone remember the dark ages?

Btw, I do have religious views, just not the boring institutional variety.

I may get flamed for saying this, but what’s wrong with being a little materialistic?

HARM-
Yeah...to a degree, materialism tends to motivate--provided there are ample opportunities. However, materialsm and poor economic opportunity induces social unrest. I suspect this is why some countries enforce a theocracy: to "keep their citizenry clean from the ills of western materialsm". In other words, so the rules can sit on their fat, rich asses and keep the status quo.

Sunnyvale_Renter Says:

"But my point is, the US’s population overall could be much better off under the type of moderate Islam the US could end up under, than under the Jewish/Christian regime they suffer under now."

I don't agree that what we are"suffering" under a Jewish/Christian regime. We're suffering because we are being led away from Judeo/Christianity by the secular progressive libs.

Where I do agree in your assessment of moderate Islam is that Christians might fare better under a moderate democratic Islamic society, if one existed--although Christians would be 2nd class citizens--than, say, for instance under a radical, progressive society like San Francisco if it
were to expanded to the size of a state or country.

The liberal progs in San Fran. HATE Judeo/Christian values and see them as homophobic, obscurantist, sexist, capitalistic, superstitious, classist, oppressive, paternalistic, fascistic, racist, etc. etc. etc.

Moderate Islam looks like a friggen' paragon of sanity compared to the left-wing, liberal Taliban feifdom of insanity in places like Berkeley or San Francisco.

History would suggest: the less any government enforces any religious viewpoint, the better.

Absolutely. A secular government works the best.

I suspect this is why some countries enforce a theocracy: to “keep their citizenry clean from the ills of western materialsm”. In other words, so the rulers can sit on their fat, rich asses and keep the status quo.

Exactly. I've (thankfully) never had to live under a theocracy or another form of autocratic rule, but my guess is the people who desire it are mainly those at the top of the social pyramid (mullahs, priests, brahamin, rabbis, etc.). Those at the bottom tend to be less than enthusiastic about the strict limitations imposed and lack of personal/economic freedoms.

SQT Says:

"I can’t figure out how Christianity has become linked with materialism on a housing blog."

"Thou shalt not steal" is a direct reference to Christianity. I don't see how you can separate Christianity from it's association with the material world.

Moderation is a Rennaissance virtue.

Moderate Islam looks like a friggen’ paragon of sanity compared to the left-wing, liberal Taliban feifdom of insanity in places like Berkeley or San Francisco.

Interesting choice in likening "left-wing liberals" as some form of Talibanism. I'd happily take that version over the one exercised in Afghanistan. :)

I can’t figure out how Christianity has become linked with materialism

Yes, interesting thread drift. However, I'll offer the idea that modern christianity is inherently materialistic. Not just in the sense of "money", but in its overriding philosophy: an emphasis on the tangible or measurable, vs. internal or reflective. But, I'll stop here because it's a subject better discussed elsewhere.

This I agree with completely. I can’t recall ever going to church and hearing materialism listed as a virtue, and for the life of me I can’t figure out how Christianity has become linked with materialism on a housing blog.

I can't recall materialism in church either. I actually remember the priest scolding people for using phrases like "happy holidays" and "season's greetings".

Only communist countries preach materialism. I think we are seeing consumerism rather than materialism here.

“Thou shalt not steal” is a direct reference to Christianity. I don’t see how you can separate Christianity from it’s association with the material world.

Moderation is a Rennaissance virtue.

True. Good point.

Weird, I can't seem post anything longer than two sentences. Peter P can you check on this? thanks.

Keep trying to post the same comment (no quotes symbols or any other suspicious characters), but nothing takes. Odd.