patrick.net

This 2nd aspect is what scares me more than out here.I pay attention to the stories coming out of there, and the SE seems to be the latest thing that RE investors, business, and individual families have discovered, and as I see, there is the start of what looks like a possible escalation in home values just like it did here 5 years ago. I’ve always used the SE as my safety net. If things didn’t get better here, I’d move back. But now there seems to be a ticking clock and a window of time where moving back would still be amazingly affordable.

Nomadtoons2,

I completely understand this fear (the California Specuvestor Tsunami spill-over effect). Luckily, there's no shortage of easily developed land and regulatory barriers in most SE states (yet), so I don't see this happening anytime soon (outside FL anyway). Plus, as the Bubble chickens come home to roost, probably causing a recssion in the near future, there won't be any monopoly money for Mr. McSpecuvestor to play with anymore. Of course, as the mortgage credit market becomes increasingly nationalized (and internationalized) and NIMBY anti-development laws (and people) spread to new areas, this could possibly change. I'd hate to see a permanent 15-year housing (un)affordability cycle take hold everywhere. This would truly be a "paradigm shift" along the lines the prem-bulls have been promising. Not saying it can't happen, but as the Scots say, "not proven".

Harm,

I definitely appreciate your situation but have you ever considered that there is an entire population that slowly migrates up and down the west coast. I realize it's different with a family in tow (school, careers etc.) but they move up here to OR/WA when things are rocking up here and back down to CA after things have bottomed out and actually make some decent coin in the process. Some even continue this into their retirement years taking advantage of inefficiencies as they go. Not for everybody but some have done quite well. Outside of some lingering 'loft bidding wars" things are getting much more sober here. Even the new sub-divisions that are still going on are more in the 175K to 225K range where building above that price point has virtually stopped.

-"prem-bulls "
+"perma-bulls"

DinOR Says:

Our daughters were able to grow up on 3 acres in a 2,400 sq. ft. home but as they got older it just didn’t make sense anymore.

Interesting, as many people would consider 2400sf small these days!

I'll confess that honestly, my biggest worries are talking about this stuff with my wife. We've talked about the fact that it doesn't make sense to live in California if we can't afford a home on a decent salary. We've also discussed a few cities we might choose to research. But other then that, I'm kind of scared to bring it up because while I'm almost sold on the idea of leaving, setting out to actually do it is going to be a nightmare. I'm going to be leaving behind a lot of friends, business contacts, and places I know for perhaps an entirely diffrent city and state. I might have to alter what I do for a living. I may have to make some rather painful decisions I'd rather not have to. It is likely that some day.. I'm going to have to make a brash decision, pull the plug, and just move.It sacres the bejesus out of me, because eventually, we're going to have to make that call.
In the end, nobody involved in RE asked what this would do to the future families getting started. As a result, I'm not neccesarily forced to leave, but staying becomes more and more of a joke the longer I stay. That really pisses me off. Why should I have to pay the consequences of greed? Why do I have to put me and my wife under potentially serious stress just to escape a problem that I didn't make? It's humiliating and frusturating at the same time. Am I no smarter and talented than the people who bought 10 years ago? What do they have that I don't? Nothing. Just time, and time that was on their side. Now that we're priced out, We are the ones that have to pick up the tab. Add to the fact that the crash will turn around and bite a lot of people who did buy in the ass, and probably put pressure on people who already have their homes to sell( Who wouldn't pass up the chance to make a cool 500k?).Sometimes I think California deserves what is happening, which is the leaching of it's future artists, authors, and fresh talent. I pray those people will be absorbed into the regions I might move to.
So here I sit. I'm working, working, working so that I can save, save, and save for a home I can never afford here in CA, yet can easily upgrade my lifestyle overnight somewhere else. So... I hope almost for an economic calmaity not seen in this state for decades. I want those prices to drop like a bomb, people to get back to business- their families, their jobs, and their lives and stop using houses to "build equity". There's room for us all.

I realize it’s different with a family in tow (school, careers etc.) but they move up here to OR/WA when things are rocking up here and back down to CA after things have bottomed out and actually make some decent coin in the process.

DinOR,

I'm actually quite fond of the Pacific NW, as you already know. However, thanks primarily to CA specuvestor a$$holes, many parts (incl. Seattle) are now almost as unaffordable as CA.

PS: Just wondering, but if you buy high and sell low (as you implied above), then how do you make "decent coin"? Or do you mean, you make money by selling your grossly overpriced CA property in a peak and using th proceeds to buy a somewhat less overpriced property in OR/WA?

Skibum,

Now that may be true and I suppose that many folks that just couldn't "shoehorn" their lifestyle into 2,400 sq. ft. are probably thinking "new home". Anyone that's tried to keep up with an older, larger home will readily tell you that they are no such thing as "little projects". Everything becomes a major undertaking, it's a whole different scale. We'll see just how many of the bubble believers are eager to stay in these McMansions when they start needing their first water heater, re-roof, siding replacement and can no longer rely on equity extraction to make these things happen. Trust me, 2,400 sq. ft. is pain in the a$$ enough.

Harm,

You got me laughing on an otherwise dreary Monday morning, much thanks! To answer your question, true this may not be the most ideal to time to effect one of those moves. However our rents are dirt cheap compared to SoCal so yes we are having a bull run on rents. B/c your transfer would be "inter-firm" you would also be able to write off the move as well. Chill out with me and my other square friends up here and move back to a post bubble apocalyptic SoCal. Many Oregonians go to school in CA, stay, get married to live by her/his folks then move up here to raise their kids then move back when the timing is right.

Ha-Ha,

That's a question I've asked all throughout the inflation, over inflation, dangerous over inflation, slow leak and now the rupture of the bubble! Yes, if you are going to make anything over minimum wage it's going to be stressful. Simple as that. But when we look at say for instance Zillow where we see a home going up 8 or 10K for the week, well that home must be going through some serious renovation (but not likely). This is the "real time" tool I've hoped and prayed for and it's funny because it seems to more a measure of sentiment than anything?

I could've used that HAHA. Oh well, maybe he won't get his price. I hope he drowns in it.

Linda,

I wouldn't let it get to ya. The guys a joke and the amount of risk that he is taking is tremendous when compared to frankly some pretty limited upside. Yes 200K is a lot but even without "opening a can of paint" he still has int. expense + transcation expense plus no guarantee he'll get his asking price. Did you tell them you used to own it?

Linda,

I believe the expression is "I hope he chokes on it". And so do I.

Nomad
Its hard to move away. I find the longer I stay here, the harder it is to jump to another state. That was our plan...to move to Charlotte, NC. Then we looked at each other and thought...is moving a young teen...who has no sibling...no cousins...whos only family are his friends...is it a good idea? We decided not to risk it. Maybe later, after he goes away to college. Maybe then we'll get an historic home in another state and fix it up...unless we hit it big with that LA funny money.
I do believe that along with the bubble popping...the crime rate will triple. I believe that bubble areas will become less safe. There will be more armed robberies, more home invasions, carjackings. Face it, when people get desperate, they do desperate things.....and there will be a lot of desperate people...especially in the lower classes. This will be part of the ugliness of the crash.
Perhaps investing in alarm companies or the safety industry is timely?

Linda,

Have to second the others --don't get too angry about it. The flipper's carrying costs (since last August) for a $1.2 million mortgage (assuming the CA standard $0-down I/O or neg-am special) have to be on the order of $10-11K/month+. Plus, asking and getting are two different things. the fact that inventory --even when limited-- is taking as very long time to move is a telling aspect of where we are in the current cycle. Your flipper will be very lucky to break even after sale transaction costs. And that assumes s/he'll be able to sell close to asking price.

LiLLL,

I must confess I don't understand the outrage at someone who just paid you $1.2 milion.

I assume you sold because you thought the price was right and felt you would lose money by holding on longer.

The buyer must expect a later market peak or he just thinks the house was worth more.

If it turns out he's wrong I suppose I understand a little gloating. But if he took a risk and makes a profit, then I just don't get the anger.

As to "flippers" or "speculative investors" in general I presume they serve a purpose helping markets move up or down. The economists here would know better than I do.

I just have a hard time getting angry at someone who makes a risky investment and then lives with the consequences, good or bad. The last flippers will get hurt the worst by any downturn, right?

Linda in LALA,

The flipper will get much less net of taxes than the gross return. With that smaller payoff, he/she is undertaking tremendous risk for the return. It's all fun and games until the teacher takes the needle off the record. Then said flipper will get stuck with financing costs, diminishing equity, and a lot of sleepless nights. Most of us are too smart to get into a situation where we have to pray every night that the music keeps playing only for a relatively small payoff.

I operate off the theory that if these flippers were really all that smart (meaning they could accurately time the market and make the financial leverage proposition work), then they'd be running a RE income business or working at a LBO or somewhere like that earning nearly the same coin for much less risk and for much greater forward career investment. What will a flipper put on his resume in a couple years? Probably the same thing professional day-traders put on their resumes in 2002: independent consultant (thus tarnishing the reputation of all those actual independent consultants).

As far as your lost HaHas, remember that this is only a "mental accounting" bias. You made a gain, and that is now history. What happens after that to the property is irrelevant from your perspective. It's not like you knew the future.

Thanks guys. I knew you'd understand. I'll keep you abreast of the situation. With $ in the bank, I can't really complain. I've got several Hahas to play with so the world is my oyster in a coupla years after this crash. Right? ;)

Garth Farkley,

Speculators are generally good for markets because they add liquidity. Simply, the create buyers and sellers allowing non-speculators (people who hold long) to get in and out when they want to.

I'm not sure this holds in residential RE, where there is not much liquidity to begin with. The value they add in additional liquidity probably doesn't compensate for the effect they have on prices, especially in local bubbles.

You guys are right...poof...anger gone!
We saw our accountant for taxes last week and my husband was unhappy because we had to pay significant taxes on our capital gains. For me, any time you make more than the 500K deduction....that's something to celebrate! So, nevermind about the flipper.We got most of the equity...and that's what counts.

Randy H,

After hearing your explanation I'd have to say that Linda's "flipper" would have to sell at the 1.4 mil level just break even. And you're right again, this would be a STCG. Eight months would be a long time in a hotel room, and a pain for an apartment but in the end this guy may wish that is what he did. Great strategy! Pay 8-10K per month for 8 months then sell using full service realtor at what, 5%?

Randy H,

Liquidity may be what I was groping for. I assume that the existence of speculators makes it easier for owner occupiers to get in or out by providing inventory and comparable sales prices for what is otherwise an extremely illiquid commodity (RE).

On the other hand, I suppose speculators add momentum on the way up or down in a free market. That is, they push the market up or down past the mean point that fundamental conditions would otherwise dictate.

If so, what are the fundamentals that have led California to such high traditional ratios of price to median income. (Or is it the other way around?) Finally, why are the ratio so exaggerated in the last few years? And what about other inflated markets. I assume that relaxed credit is a big factor but that can't be the only impetus, right?

It's not really your job to give us free lessons in economics, but if these questions are interesting to you, I'm all ears.

LLiL,

Okay, if you have to worry about excess capital gains you should be kissing that guy.

By the way, I'm sure you already know that if you made any improvements you get to deduct those from your profit.

Garth Farkley,

I'm not sure I'm up to the challenge of really explaining in defensible economic terms the pervasiveness of regional differences. I like to defer to Easterley, "The Elusive Quest for Growth" in answering this question. Although Easterly covers an international perspective, I think it equally applies to regions in the US. Simply, some regions enjoy very long lived "virtuous circle" economies. These economies become engines of commerce, producing far greater economic growth than the cost to keep it all going. They spill their affluence out into other regions, as investors try to search for higher returns elsewhere, but these local economies are able to maintain a premium over the "median" for a very long time.

The inverse is the "poverty trap", where certain regions become so depressed that they suffer an opposite vicious circle economy. The risk in these areas is too high for capital to dare chasing returns, even very high returns. These areas suffer long-lived discounts to the median.

There are a lot of forces that keep these differences in equilibrium for long periods of time. Not the least of which is inflation. When things inflate, they inflate unevenly and inflation rises faster in the high-cost areas and stagnates in the low-cost areas. Another force is demographic. High-cost areas become magnets for optimism and entrepreneurialism. They also have higher turn-over. All this makes it more rational to pay the premium because people tend to be younger, expect more wage growth, anticipate higher inflation and often plan to stay for a shorter period.

Eventually employers leave in search of lower costs (mainly wages and taxes). But this may not happen fast enough to cause enough rise in inflation in low-cost areas to cause them to catch up to high-cost areas. Often, the high-cost areas shed established industry in favor of emerging industry, further perpetuating the cycles on both sides.

All this changes over time, but usually over a very long time. And then there are the intangibles, like weather. But, I don't personally give intangibles much credibility except in very specific circumstances. Overall, fundamentals drive this phenomenon.

ps...you're funny :)

Garth...Yes, I love to add on..Sarah Winchester here...build, build, build...and yes we deducted every penny.

astrid
Actually, the broker has been a friend of mine for 2 decades...so I don't wnt to f@ck with him...but I am asking him for a referral fee! He's our big, black, bald realtor and he's a really good guy! When the NC thing fell through for us...he's the one that said"It's a terrible time to buy now...rent for a few years'
Otherwise...I'd love to mess with them. BTW, how do you guys make the devil face...I can only make smlieys and frownies???

astrid,

That's actually a perfectly legitimate question. Ha-Ha asked the same thing. My answer to "fluffed up" home pricing is simply taking out the trash and cutting the lawn once in awile doesn't constitute "home improvement". I wish more people would press this issue.

Randy,
Not sure if your model of low cost and high cost comparisons holds up in this day in age. Forbes and a number of other economic publications recently posted the top 50 places to do business. Most at the top of the list were in the southeast and midwest. My whole family still lives in the south. The job situation is good, infrastructure is rapidly growing, modernization is rampant, and certain things like public transportattion, research facilities, and colleges are all experiencing nothing short of a cultural and economic rennaisance.Even in my lifetime- and I'm only 28, there has been enormous changes occuring up and down the entire region, in places one would thought would never crawl out of their hole.We've never seen this before.If you look at the pattern of growth in these regions, it is coming from fairly stable foundation of industries. Manufactoring, research, education, entertainment, and medical related fields are all experiencing double-digit growth. Basically, the south in particular was in the past fairly seperate and isolated from the rest of the country. It had been this way since the end of the cival war. So in modern times, the south has never been associated with progress, growth, diversification, and entrepreneurship.
This rennaisance has been going on since the mid 1990's- long before the infamous exodus being caused by housing prices in the last 5 years from CA and NY, thus it is not relying on any infusion of "outside" influence to carry the girth of its economic well-being.
If the world can be tailored to fit the model of the US, then California is turning into a service industry only state, while other chunks of the country are becoming what California was. That could very well mean that the middle class will basically not exsist in CA anymore. It will only be the wealthy, and the poor- with poor being an ever changing definition as inflation goes out of control.
The entire country is under immense change, and I would put money on the south and parts of the midwest having pheonominal success in traditional, non RE related fields for the foreseeable future, regardless if CA and NY falter due to their lack of residential planning.

Clearly California has been a huge economic engine for the last fifty years. So that has helped the fundamentals here.

I also suspect that the national and international mythology of California has helped inflate prices. Our real estate values (fundamental values) have benefited from a strong national and international perception that California is a special, magical place. I wonder if a substantial downturn in real estate could change that mythology and make California a symbol of something else.

What won't change is our agricultural base. We will continue to be world power in agriculture for a long, long time. Nor would I expect a dramatic drop in tourism or high tech.

Otherwise, how will California fare in comparision to the rest of the country in a recession?

Michael Says:

"What is someone who is going to be forclosed on do? All the recent laws have been written against them, bankruptcy, credit card etc. What they should do is stop paying all bills except, utilities. Cash all paychecks. Hold off forclouser as long as possible. Deposit extra money in Swiss bank accounts. After they take everything, at least you might have something to start over with."

Ah, the "pity parade" I spoke of in previous thread. The bubble blowers are now "victims" of bankruptcy laws as well as evil lenders pushing loans down their throats. I can feel compassion for a non-bubble inflater with a medical emergency or an unexpected job loss, but not for those who added air to the bubble by leveraging to live the high life facade. Screw, em, the bubbble blowers just raise home prices and home taxes for the rest of us.

Garth,
As mentioned before, the I80 Tech corridor that runs from Raleigh to Atlanta is one of the fastest growing tech meccas in the country. Most major national chip makers and research firms have or are planning to set up shop there. The diffrence between California then and now was that in the past, Ca had an almost exclusive dominance on technology of all sorts. Now that this exclusivity has been somewhat dilluted- making the neccesity to pay california engineers huge salaries less the case, I think the 50 years prior to now are just that- 50 years. Perhaps california will find some magical new technology, but again, most of the tech that got the state in the rosey position it was in for a few decades was from military research.Most came from cold war era. That was in the 80's, and it floated the state throughout the 90's and partially through this decade. Basically, just about any state can easily replicate the same research, and in fact, there are states, like NC for instance spending millions on developing favorable locations and operating conditions for companies that do such work. Thus I expect to see california being more of a role player along with the rest of the country, not neccesarily as the out front player it has been for the last 50 years.

One observation: rent is Mountain View appears to be rising considerably, although other rental markets in the silly valley are showing little more than an uptick.

George Says:

Apparently, men are spineless and cave in the face of a full frontal N.A.G (No Ass for you Gentlemen) Assault.

SCENE OPENS WITH JILL & JOE RENTER SITTING ON SOFA IN SQUALID APARTMENT WITH REALT-WHORE ON THE PHONE

JILL: "I just don't see what you're so worried about, Joe. Real estate never goes down! It's gone up 300% in the last 6 years and if we don't get on board now, we'll be priced out forever."

JOE: "I don't know, Jill, the house looks pretty nice, but is a 40-year-old two-bedroom ranch in the Valley really worth $1.2 million? Plus that loan our broker got us just doesn't seem on the level. What the heck is a "neg-am" anyway?"

JILL: "Look, buster, I've put up with a lot from you renting these last two years. I didn't know I was taking a vow of poverty when I married your sorry, loser ass! And need I remind you my biological clock is ticking? "

JOE: "I'm sorry, sweetheart, it's just that we're saving a lot of money renting and I just don't want to jeopardize our future by making a mistake on the biggest purchase of our lives."

JILL: "The only "mistake" you can make is to give up and not buy! It's impossible to lose in real estate --a no-brainer. Besides, have you forgotten what happened the LAST time you tried to make an important decision without my approval? You lost your "cuddle" privileges for six months, as I recall!"

JOE (LOOKING SHEEPISH): "Yes, dear..."

JILL: "Now pull yourself together and be a man for a change!"

JOE: "OK, I... guess we'll be alright."

REALT-WHORE: "You guys can do this! I ran the numbers, and everything looks super!"

JILL: "There, there, that's more like it! Keep it up and maybe I'll let you have your testicles back for the weekend. No promises or anything, but if you keep being a good boy..."

FADE TO CENTURY 21 LOGO.
PLAY TAGLINE:
"Century 21, it's not just a home, it's an ATM!"

Probably a large part of this is due to Google.

It would seem so. I am looking for a new rental and nice units are getting quite pricey. They appear to cost at least 25% to 30% higher than two years ago.

Should I avoid Mountain View? Or am I just too picky?

Haven’t you seen that Century 21 Commercal with the nagging wife bullying her husband into submission?

I haven't seen this (I watch very little TV, and all of that is Tivo'd, so I never see commercials unless I seek them out). Anyone have a link to the commercial on the web perchance?

astrid,
This ought to help you get started:

www.strawbuilding.org/
mha-net.org/html/sblinks.htm
www.buildinggreen.com/features/straw/straw.cfm
www.dsaarch.com/
www.skillful-means.com/menupages/strawbaletips.html

nomadtoons,

I fully agree with your observations (with the exception of the rust-belt Midwest, which is still mired in decline). The question is whether this trend will hold up long enough to permanently shift the equilibrium. We won't know this for a while, unfortunately. It's very hard to spot such major shifts while they're occurring. Lots of people get it wrong on all sides because, buried within the big shifts, there are lots of smaller cycles, some of which send out "false signals". You can't tell a cycle from a trend often until after the fact.

Right now though, the Southeast is doing much (economically) right, whereas I'm less appreciative of what the Midwest is doing to power the improvements there (the Southeast is doing it "the old fashioned way" while the Midwest is doing it with more artificial subsidies and barriers). Also, there is no reason that CA and NY have to decline in order for the South to rise. There is plenty of room for CA and NY to restructure and maintain their economic power base while the South rises. Similarly, there is also a chance that the whole shootin' match goes down the tubes, coasts and inland alike. One of the big questions I keep reading about is what the future of Florida, for example, holds over the next 50 years. A lot of economists are worried that FL is likely to come under growing risk of stagnation because of demographic reasons. Again, no one knows even though lots of people have complicated, well reasoned hunches.

Economic models don't really predict anything, they just help to understand the forces and process of changes.

Astrid,
Try going to craigslist Nashville, type in Minumum 50k and maxiumum 150k. There are pages of homes. Of course there's also lots of million dollar homes in the southeast, bu the key diffrence here is that none of those million dollar homes are 2 bedroom stucco bungalows next to the freeway. Many of these 150k homes are million dollar homes in CA. It isn't neccesarily the cost, but what you get for the price. Then go to just about anywhere else in that region on CL. The results are the same. My dad bought a rental last year- a 3 bedroom for 40k.

I haven’t seen this (I watch very little TV, and all of that is Tivo’d, so I never see commercials unless I seek them out). Anyone have a link to the commercial on the web perchance?

Randy H,

I wasn't able to find any links to the actual commercials, just press releases. Perhaps it's because it's so new. Btw, the multi-commercial campaign is called "Agents of Change".

Randy,
The biggest economic forces right now in the SE is manufactoring and healthcare. Cities like Nashville and Atlanta have some entertainment industry (CNN,Scripps,Food network, TNN, CMT, and turner networks) but by and large, the rest of the region is manufactoring, mainly in automotive and automotive parts. The majority is from foreign makers, like toyota, nissan, Mercedes, BMW, Hyundai and Kia- newcomers, and then some of the domestic makers. My father has been working as an HR manager for years. He was head of a regional HR research firm for a few years, and the number of startup manufactoring companies is pretty high. So in reality, the economy of the new south could look like what california did 50 years ago- small towns that grow up around manufactoring sectors, and average middle class citizens in average homes with normal single digit appreciation. basically- middleclassdom. The research sectors are the areas that could come and go. Right now the severe diffrence in costs between California and NC might as well be the diffrences between China and the US. But if more engineers move in, the prices will go up and the sweetness of the deal will be soured. You are right- if enough influence moves into these regions, then it could jump start a new section of the country to start infringing on California's heels. But that could take years, and the time it takes for the bubble to cool may not be enough.

Bap33,

I was at Castle AFB in 1990 for a few months. Sounds like Atwater and Merced have gone dowhill since then. Sad.

I have been a landlord of good working class homes (3-4 bed, 2 or 2.5 bath, garage, 1500 sq ft) for almost 20 years (I have sold all but one during this absurd bubble). I refused to do any Section 8, as my houses were all in owner-occupied areas and I was not going to put a scumball in amongst people who had pride in and earned thier houses. In fact, I was surprised when I found out that Section 8 allowed them to rent houses that nice. Welfare is supposed to be a safety net, not a method of living comparably to a foreman or manager.