patrick.net

dunnross says

Yes, in fact the results of this graph’s technical analysis point to data which confirms all other predictions, including those based on fundamental and historical analysis:
Low Tier Target Price = 0 (Low Tier houses & land is pretty much worthless in a Depression - even in the Bay Area - see Detroit)

Middle Tier Target Price = 40

High Tier Target Price = 70

Nice work - I believe more colors, especially neons would really help get your point across to those who don't understand the "head and shoulders" action we have going on.

The H&S action hasn't quite yet been confirmed, because the index didn't break below the neckline. However, we are pretty close to it, and if it does break down, prices are going down to their respective target levels. That's an 80% drop from the peak for the middle tear, which equates to prices going back to the 1975 levels (in nominal terms).

TA gets a bad wrap. but it's pretty useful if, and that's a big if, you know what to look for when trading stocks(don't know how well it applies to a housing index).

claiming that list prices are increasing, so that must mean sale prices will increase is a form of technical analysis (ie chart reading).

Syphilis says

claiming that list prices are increasing, so that must mean sale prices will increase is a form of technical analysis (ie chart reading).

Is it on the same level as when I analyze someone's birth chart?

What does fortress area mean?

nrc2112 says

What does fortress area mean?

It means "Shangri-La" a mythical place, permanently happy land, isolated from the outside world. It started around the year 2000.

LOL! Seriously, Not sure what the big deal is. Plenty of people who lived in the Bay Area over the past several decades never considered some of these towns, or cities as the fortress.

^ basically an area where the only way homeowners leave is in a hearse.

Everybody wants in, nobody wants out.

Troy says

Everybody wants in, nobody wants out.

A black hole, where gravity pull is so intense not even light can escape.

A few times a year I look up my zipcode on foreclosure.com to form an opinion for myself about value in my neighborhoods and ones nearby. I was surprised to see among the names of "defendants" someone who used to be my boss (an engineering manager), in a neighborhood where homes are all on oversized lots and are said to be worth over 1 M.

thomas.wong1986 says

people who lived in the Bay Area over the past several decades never considered some of these towns, or cities as the fortress.

It's not the past anymore. In former decades, tech field employment in the region was dominated by defense which required citizenship, so mainly staffed by Americans with the Common Sense about what is a reasonable portion of the income to spend on housing. And besides, even for the growing consumer sector, employment was mainly of Americans because in former decades the H-1 exploitation and student visa gaming the system were not so prevalent.

It's not the past anymore.

Defense employment is not dominant, it's negligible.

In the Silicon Valley area, most of the tech employment is for recent immigrants who bring their own sense of what is reasonable portion of income to pay for housing. Even today's irrational Fortress prices are bargains; Fortress neighborhoods are like the Wide Open Prairie. I expect my ex-bosses' residence, if he hasn't straightened things out, will be gobbled up by an immigrant tech worker.

Because of these wealthy foreigners, the Bay Area and particularly Fortress communities in the Bay Area, is special; and it IS different this time.

Troy says

Everybody wants in, nobody wants out.

Not everybody. Just everybody among wealthy foreigners. To them, they are everybody who matters. They are creating a new reality here. It is a different place than it was back in Thomas' day, and it is a different time. It is different this time.

sybrib says

In former decades, tech field employment in the region was dominated by defense

That was certainly true back in the 50-60-70s. By mid 70s and into the 80s (long before even the 90s) it was entirely non-defense industries. Expanding industries in Chip, Semi Equip Mfg, Software, Networking, Mainframe, storage, and etc etc. As they say, Game Changer by 81-85. Certainly higher demand, higher incomes, etc etc. But prices never doubled-tripled in a few years. Yes this is much different from back than.

No! immigrants didnt have an impact. I know that the Indians and Chinese today make a big deal out of their presence in the valley. But that is just egos gone wild. They are clueless.

We certainly had plenty of 3-4rd generational asian and non-asian natives in defense and non-defense for decades past, but that too was not a factor.

sybrib says

Just everybody among wealthy foreigners. To them, they are everybody who matters.

OK! let them overspend and watch the prices fall anyway.

thomas.wong1986 says

By mid 70s and into the 80s (long before even the 90s) it was entirely non-defense industries. No! immigrants didnt have an impact. We certainly had plenty of 3-4rd generational asian and non-asian natives in defense and non-defense for decades past, but that too was not a factor.

Thomas, I agree with what you wrote. As our economy transitioned from defense-dominated to consumer products dominated tech employment, in a big way by the late '70s- early '80's, many of those workers in the new industries were former defense workers, Americans with American Common Sense about what is a reasonable portion of the household budget for housing. I was one of those defense workers who made the transition myself, in the late 1980's.
3rd and 4th (even 2nd-) generation Asian Americans are Americans, not Asians. They are not immigrants, they are Americans. I grew up with many of them, shared housing as roommates with some of them, one of them is my partner now, each of my kids has a different one of them as a godparent; and I saw most of them leave along with most of the other "locals" over the decades to places where they expected a higher quality of life outside of the Cool and Hip Bay Area. At my last HS reunion, those emigrants outnumbered those of us who are still here.
When our economy was in that transition you and I referred to, we still did not have such large numbers of foreign students gaming the system to stay in the US by getting a tech job in the Bay Area, nor did we have the H-1 exploitation. What we had was, as you pointed out, a population of Americans, including Asian-looking Americans, who mainly shared the same Common Sense about housing cost.

That was then, this is now. It *IS* different now.

Case Schiller looks like a down trend to me.

Fortress or no fortress the housing in the bay area is way to expensive compared to rent. Why buy when you can rent the same place way cheaper. The price to rent ratio in the BA is far to high so unless rent goes way up there is no reason to buy in the bay.

evilmonkeyboy says

The price to rent ratio in the BA is far to high so unless rent goes way up there is no reason to buy in the bay.

It seems no sense hiring in the BA either !! Bugger! Wish it wasnt happening..
but there you have it.....OMAHA!

http://careers.yahoo.com/jsearchresults.php?pagenumber=2&prev=1&next=&crumb=SiUsZARjZhT&sortfield=PostingDate&sortorder=desc&sort=&concept=&action=&submit_x=&totalrec=33&resume=&key=&reqid=&jcat=&city=NE-Omaha&proximity=&datecreated=Date+Posted&submit_x=Prev+15

evilmonkeyboy says

Why buy when you can rent the same place way cheaper. The price to rent ratio in the BA is far to hig

Evil Boy, you sound like another American with a different point of view than the people from very crowded cities in other countries, and they are the ones who are buying. In their point of view, Fortress communities along the West Coast are bargains.

Former Sun CEO Worries About Region's Prospects .

http://online.wsj.com/article/SB10001424052748704422204576130520662465078.html?mod=googlenews_wsj#articleTabs%3Darticle

Mr. McNealy: It's not a terribly job-filled recovery. Productivity gains continue to push the need to hire out. A lot of the jobs today are around two areas: government-sponsored green initiatives and the social-networking space.

I'm skeptical that the green jobs are [going to drive the recovery]. So far, the track record's been terrible. That's going to be a challenge for the people here who stuck their neck out to go green.

Then there's social networking, which is a pretty interesting phenomenon. There's a lot of energy there, but that's not a terribly labor-intensive kind of activity. I don't think social networking is the jobs driver.

I see a migration from the early days of the Valley. We aren't doing manufacturing; we aren't doing design; we aren't doing computers. It's all moving to Asia and other places where there are lots of technical engineers who are willing to work at a more reasonable salary because they don't have to spend $3.5 million on a home and pay half of it to taxes.

I think every new transition has created less job opportunity as technology has become very leveraged. I don't think our education system, our regulations, our government policies have kept pace with the changes that technology is driving.

WSJ: LinkedIn has filed for an initial public offering, and Facebook is expected to go public in the next couple of years. Aren't these positive signs?

Mr. McNealy: It's certainly going to make some venture capitalists successful. But I'm not sure that's going to change the rank and file's feelings of the recovery at all here, with all that's wrong with doing real business in California.

Thomas, I read the article too. He validated his worries with his observation about the players in his adult hockey league not spending as much on their hobby as in the past.

But I doubt that the wealthy immigrants in our region are represented in the Night Hockey demographic.

sybrib says

evilmonkeyboy says

Why buy when you can rent the same place way cheaper. The price to rent ratio in the BA is far to hig

Evil Boy, you sound like another American with a different point of view than the people from very crowded cities in other countries, and they are the ones who are buying. In their point of view, Fortress communities along the West Coast are bargains.

It really doesnt matter what your point of view is. I rent in san jose and I am considering buying rentals out of state because I can make money on them. On the other hand if I bought a house in the bay the interest on the house would be more the rent.... A property is only worth what you can rent it for.... so why buy the cow when you can have the milk for free?

evilmonkeyboy says

It really doesnt matter what your point of view is.

Point of view matters a lot. Just ask the Californians who voted the way they did (Yea/Nea) on Proposition 8.

>so why buy the cow when you can have the milk for free?

Lol! At least for a lot less...

Hmmm...What are we looking at? Still rents at 0.5 of a mortgage payment (with 20% down) in that area.

BTW I would think the "fortress effect" would keep a higher (ave. home price / ave. income) than in the rest of the US, but not necessary such a high gross rent multiplier...but what do I know?

@sybrib

Lol!
Thanks...

What inflation? You must mean wage inflation right? Wage inflation isn't happening with 20% unemployment.

I think you're right with the bottom-end. Mid-high? LOL, it's obviously going down much further.

It will continue to decrease until its found an economy that can support it and/or wage inflation meets it half-way. Oh, that's right, back to wage inflation. Not happening.

The last time the economy was this bad (1982) we threw everything we had at it to get out:

Unemployment (blue), Fed rate (red), Debt to GDP (Green, left scale)

The story this chart tells is pretty easy to see. Volcker kills the economy by pushing fed rate to near 20% in 1981, debt to GDP declines in response, and big double-dip recession with unemployment moving from 7.5% to 10%. Thanks, Paul.

But starting in 1981, debt to GDP was allowed to rise from ~1.0 to 1.5. Starting in 1982 interest rates fell from 15% to under 7.5%, and unemployment fell back to ~6%.

Today, however, we find ourselves in a very different situation.

Same graph, 1998-2010

The blue unemployment line is pegged at ~10%. It'd be higher but "participation" is falling and we've had 99 weeks of unemployment to fake-employ people, good for another 4% better number.

Fiscal policy (the red line) is clearly at the zero-bound, so the Fed is reduced to printing money, which will probably inflate everything EXCEPT people's salaries.

So we're left with debt as our savior this decade. It's already well above 2.0 x GDP.

Treasury is doing its part:

http://research.stlouisfed.org/fred2/series/FYGFDPUN

But everyone else seems to be tapped out:

http://research.stlouisfed.org/fred2/series/TCMDO

I'm not going to downplay this rise in foreclosures but I will say it's only part of the story.

The other part being that the bay area is diverse. In my local market that I watch very closely Case Shiller index will
be going up this spring. No question about it.
Rents also going up too.

@Troy

Thanks for the graphs... Now to look at them again...

If this downturn stretches up to 2025, would it be considered bad then Great Depression?

The misconception that low interest rates (i.e. 4%) is in any way part a bottom/buying opportunity is the kind of true idiot thinking that got everyone into this mess. Nothing would kill real estate prices quicker than a rate increase to 6% (a number we were told was a "historic low" only a few years ago). As Patrick has pointed out in other postings, for those who have actual savings toward a home purchase it would be far better to buy when rates were high and prices low. Right now we still have the opposite. Come on Chinese! Bring on the 7-8% rates and let's get on with it.

Very nice chart YesYNot. Could you plot the curves for the fed funds and the rate of change for the median home price as a moving average to smooth out the noise a bit?

Sorry, I should have stated this earlier. In the first plots, the FFR data were monthly, and smooth enough, so no averaging was done. The median price data had a lot of monthly fluctuation, so the derivative was meaningless. In the first plot, I did a 13 point moving average of the monthly data, essentially averaging over the year. It looked smooth enough, so I left it alone.

In the next plot (this post), I did a 11 point moving average on the fed funds rate & the already averaged median price data. This one is a lot smoother, and the lines have not otherwise changed much. As expected, the averaging made the peaks a little less extreme. For instance, the peak interest rate went from 19% to 17% or so in 1981. Applying the averaging twice like this allows data 12 places away 1 yr in either direction to influence the value at any one point.

The derivative is center weighted: (price_n+1 - price_n-1)/(2/12) := $ / year. This was normalized to percent change by dividing multiplying by 1/(price_n)*100.

Thanks, the trend looks a lot cleaner, particularly for the fed fund peaks around 1970, 1980, 1988, and 2006. The only strong exception seems to be ~1972-1976 where the fed funds and the price rate-of-change look to correspond. This also corresponds with the beginning of your trend line for Freddie Mac 30-yr in your earlier chart. Any relationship between the two?

Also, the rate-of-change response to the fed fund rate in the 1990s seems a bit weak relative to other peaks...

SF ace says

An accompany rise in the fed fund rates after the crash (and ultimetly rise in interest rates) lead to apppreciation subsequently.

Another interesting note about the graphs is that a double dip is extremely unlikely. There was negative appreciation 3 times - around 1970, 1990 and and late 2000's - dips ~every 20 years. Maybe this time will be different though.

YesYNot says

This seems to me to be great evidence that increased borrowing costs slow down demand.

It's utterly bizarre why this is even being debated.

The core miscommunication here is an expectation of late 1970s, late 80s, or late 90s style job market heat-up.

While there is an obvious pattern there, one needs to understand WHY these booms came as they did.

I think the 1970s was a bona-fide productivity boom, driven by the baby boom, women, and available opportunities.

The 1980s continued this but started the divergence of total debt vs. GDP.

Total Credit Money Owed (blue) vs nominal GDP (red)

Plus lower nominal oil prices 1985-1995 didn't hurt.

The 1990s featured the front-side benefits of our burgeoning trade imbalance, largely with China:

http://research.stlouisfed.org/fred2/series/BOPGTB

So yeah, if we get a job boom like previous decades:

Job growth in 5 year periods:
1970-1975: +8.6%
1975-1980: +17.5%
1980-1985: +6.1%
1985-1990: +13.3%
1990-1995: +6.6%
1995-2000: +12.4%
2000-2005: +1.3%
2005-2010: -2.4%

we'll see home inflation like those hot periods (1975, 1985, 1995).

Right now we're at the same number of jobs we had back in 1999, so any growth now is just bailing out the boat.

However, debt -- per the graph above -- has shot off the chart.

And now we've got 80 million baby boomers ready to enjoy their trillions of government cheese they've been promised.

This is not going to end well.

Here's a chart I like to make about population pyramids . . . you can easily compare certain years since the additive blend of their year cohorts turns gray thanks to the bar being complementary colors.

With this chart solid color is new additions to each 5 year group, 2020 vs 2003.

Eg. in 2020 we will have about 3 million more people age 80+ in 2020 compared to 2003.

You can really see the baby boom hit the 55-75 bins, too. Roughly 18M more people up there by 2020.

This is the demographic trend we're looking at. Inflation is not going to solve it.

Curiously, people in their 40s will fall by 4M people in 2020. I don't know what this means.

fwiw, here's the Japanese comparison, 2003 vs 2020:

It's kinda unclear but other than the seniors, only the 40-49 cohort is larger in 2020 than 2003.

The age 25-35 cohort is going to be missing ~8 million people!

I don't know if the Japanese pyramid is a lot worse or a lot better than ours.

The number of old people 80+ doubling from 5.5M to 11M is something, but I don't see why their unemployment problem won't go away later this decade.

Except for people in industries that cater to young adults I guess. That cohort is just disappearing.

Troy,

The charts are interesting.

When I look at it [and make the assumption that boomers will be retiring at "normal" ages], it appears that we will be removing far more people from the labor force than we are adding. (The yellow part of the 65-69 bar is much larger than the blue part of the 20-24 bar)....so, with time, our unemployment situation will get some help, I imagine. I think Japan is going to be hurting pretty bad over the next 3 decades or so -- especially if people just keep getting older instead of dying. :)