patrick.net

Well, on the bright side this means that the RE industry will be seeing increased unemployment right? Cannibal anarchy among realtors?

This is a very interesting situation. With inventories what they are, only people with relatively serious money can buy, and they seem to be willing to do so at any price, so we'll continue to see "rising prices" on the anemic inventory we have. That means that everyone else that wants to live here either has to commute, or rent. I am wondering if we will see another year of merciless rent hikes simply because landlords can. There are piles and piles of people making six figures that are effectively priced out of buying, and since they have no mortgage to sink money into, rents could easily rise to soak all of that up. All discussions about how good or bad that is for the economy aside, it is looking pretty likely. I don't like it since my wife and I are one of those high-earning DINK renters, but it is what it is. We are actually in the process of working out the logistics of a move to the Seattle area.

It all looks like it is spiraling out of control, and most people's common sense tells them that it has to hit a breaking point. Mine sure does, but the pessimist in me has managed to come up with logical reasons why things will not only NOT get better for middle class folks, but will in fact get far worse for them here. Think back 40-50 years here in the SFBA. It was mostly an agricultural area with industrial, pre-tech jobs. It was basically blue collar. Put yourself in the mindset of a person then. "Damn all these tech geeks, moving in here and blowing up the cost of living. How's a man supposed to live a peaceful life minding his own business with all these overpaid assholes making it impossible for my kids to be able to live here when they grow up? I wish this bubble would hurry up and be over with so things can get back to normal!" Sounds sort of familiar now, eh? Replace tech geeks with "coder nerds" and "wealthy Asians". Maybe they are just the next wave that will take this place over and drive out anyone that is not interested in a life that revolves around work and money. It happened at least once already...shit, the native Americans got that treatment by the "farmers"/Spanish a long time ago.

In that scenario, we'll see the wealth disparity grow further. Any and all halfway decent areas will be insanely expensive, even by 2006 standards. These places will be inhabited by a weird mix of work-obsessed coders that are convinced that online advertising will save the world, and monied Mandarin expats that contribute nothing substantial to the area other than property taxes, sales taxes on department store luxuries and various under-the-table illegal business ventures. Everything else will be violent ghetto where all of the service-providing class resides, hoping for table scraps from the "Mandaringrammer" bourgeois. Anyone with common sense and a desire to actually live life will be driven out or murdered by the people from the growing slums who will be given additional EBT credits and a sincere apology from the state of CA for not giving them enough freebies to stop them from murdering others to subsist (and buy Air Jordans).

Well, that's the worst that can happen anyway.

On a more serious note though, here are reasons why I see inventories being so low, and likely staying there for some time. Some of this probably repeats SFace's post.

- A LOT of baby boomers probably look at their monthly expense and figure that they can live there a hell of a lot longer given the rates they just locked in if they refi'ed in the last couple of years. If rates go up, you can bet your ass that people that refinanced in the last few years are not going to sell because any sort of "move up" would involve a new mortgage at a higher rate. I doubt that very many have the equity in their houses to be able to "downsize" in this area and still have anything left to live on for retirement after paying off the remaining balance. And of course, many will just give the house to their kids since it's likely to be the only way that their kids can afford to be near them in their old age.

- Underwater people. Despite the price increases, they still exist in a lot of the SFBA.

- Rent-u-lators. Damn near 1 in 4 purchases is made by a specuvestor, and many of them plan to play landlord. These properties will either not hit the market again for a long time, or all hit it at once if comp's rise enough that they can't resist the quick money. Our resident ones have already said that they will unload when the teeming retail masses enter the game again, which is only likely once we see the return of NINJA ARM bombs. You can bet that the NAr and CAr will lobby hard for those loans to come back because they will all starve to death with today's sales volumes.

- Hedge finds and private equity firms. News is emerging about them packaging up future rent income as pristine AAA pension-grade investment fodder. They have the money to buy up a huge percentage of what is out there, and they already are buying properties in bulk that never even made it into the inventory figures that us peons look at.

- Formerly underwater people. People that bought at the last peak and are now above-water again are probably just happy to be where they are and able to refi to 3.5%. They got burned, and I bet that many of them are going to play things cautiously for a while and just stay put with their "lowest interest rate in US history" payment.

- Would-be sellers. They want to sell, but are watching things unfold and salivating at the prospect of even more free money if they wait until next year, or the one after. This seems to me like another one of those groups that will do nothing, until they all start to move in a mad rush to capture as much free money as they can. I am not sure how much of these folks there are though, and even if they were to dump properties onto the market, it might not be enough to counter the other groups.

- Shadow inventory. Great debates have been launched on here about this topic. There is surely some amount of shadow inventory lying out there. The HOBOR that passed last year likely increased its ranks, but I think that it has been well established that even if it does exist, the TBTF can sit on it indefinitely.

Greg,

Thanks for the chart. A picture is worth a thousand words. Here is a recap of what I saw in the Bay Area, especially San Jose. As shown on your graph, inventory peaked at around 30,000 homes and started to decline since spring of 2008. The savvy investors started buying the low-end SFHs in the 4th quarter of 2008 to the 3rd quarter of 2009. They exited the SFH market in the 4th quarter of 2009.

Flippers made a boatload of money since the 3rd quarter of 2009 when the housing market made a U turn. Things hit the wall after the tax credit expired in the 2nd quarter of 2010. The 3rd quarter and 4th quarter of 2010 gave buyers a great second chance to buy because things were hell of slow. The tax credit pulled a lot of future demand forward.

No doubt 2011 was a buyer's market, but things were already getting a little competitive. Things started to get more competitive at the courthouse steps in the 4th quarter of 2011, but I didn't care because I could outbid all the flippers. I'm a buy-and-hold guy. By the 3rd week of January in 2012 things started to look more dire at the steps due to the lack of inventory. It gave an indication that the housing market will be hot spring and summer of 2012 due to the lack of inventory from both the flippers and the banks. No sales = no REOs and no flips.

The rest is history. Right now, there's an average of 3 houses per day being auctioned at the steps for the entire Santa Clara County. Most of those homes are in San Jose, Morgan Hill or Gilroy. You hardly see anything from the Peninsula like Palo Alto, Mountain View, Sunnyvale, etc.

The REO market is pretty much dead. REO agents are starving. The inventory WILL HAVE TO come from regular sellers from now on. You know how the regular sellers feel about their house especially the FSBO ones.

bmwman91 says

In that scenario, we'll see [. . .] Well, that's the worst that can happen anyway

You are one fem-bot and a programmed memory away from 'Blade Runner'. When science fiction is no longer fiction, it is just science, eh? Where's my Cherry 2000 and Burning Man all-terrain vehicle???

from about 1999 to year 2006 REO and Short Sales were almost non existent due to prices increases yearly which would allow anyone to sell with profit if they couldnt pay.

I guess those days are coming back in as few as 2 years.

Most People were like 'whats a short sale?' in 2007 when they all came at once.

Philistine says

bmwman91 says

In that scenario, we'll see [. . .] Well, that's the worst that can happen anyway

You are one fem-bot and a programmed memory away from 'Blade Runner'. When science fiction is no longer fiction, it is just science, eh? Where's my Cherry 2000 and Burning Man all-terrain vehicle???

lol

Well, I figure if one considers the grandiose worst-case outcome, one can then feel better about whatever actually happens since it isn't that.

OK, ladies can we take it outside? There's an ignore feature that seems to be grossly underutilized.

bmwman91 says

OK, ladies can we take it outside? There's an ignore feature that seems to be grossly underutilized.

you're not the mod of me!

let the ladies go at it. we like drama here.

E-man says

The inventory WILL HAVE TO come from regular sellers from now on.

Agreed. Unless prices collapse again, the reo and short sale inventory will continue to quickly shrink to zero.

yup1 says

Can you show back to 2000?

Wish I could. I don't have the data.

I'm looking at an ancient Credit Suisse ARM reset chart I recently unearthed. Perhaps we're looking at the final bit of indigestion from the last bubble as resets really tail off from Summer to Winter of 2012. Not to mention, in this interest rate environment, payments may go lower for may individuals.

gregpfielding says

E-man says

The inventory WILL HAVE TO come from regular sellers from now on.

Agreed. Unless prices collapse again, the reo and short sale inventory will continue to quickly shrink to zero.

Really? Are we heading toward golden ages or what?

I really attribute it to the "underwater" owners. They can't sell so they are stuck. In LA it seems like there are a lot of foreclosure or short sales because of all the folks who were too dumb with equity during the bubble years.

bubblesitter says

Really? Are we heading toward golden ages or what?

History is made every day, and it never repeats itself exactly. It looks like we are at the foot of another big run-up. As of now, the pipelines of cheaper properties are basically empty in the SFBA. It is what it is. None of our resident investors are claiming that prices will go up forever, but they are saying that we are in the beginning of the next boom cycle that will last a good few years.

I know a guy whose job is transfering from LA to SFBA. He is totally effed on the housing situation. He went up there a few weeks ago to look at homes for sale. Its all 20 offers+ and bidding wars. So he makes 120k and is gonna rent a small crapshack. Its almost like'whats the point in working so hard'. You could move to TX or AZ and drive a delivery van all day - and still rent a crappy old home.

PockyClipsNow says

I know a guy whose job is transfering from LA to SFBA. He is totally effed on the housing situation. He went up there a few weeks ago to look at homes for sale. Its all 20 offers+ and bidding wars. So he makes 120k and is gonna rent a small crapshack. Its almost like'whats the point in working so hard'. You could move to TX or AZ and drive a delivery van all day - and still rent a crappy old home.

That boy could learn an old lesson from Rockefeller "Its not what you make, it's what you keep."

My sister has a home in the East Bay that is above water now on the mortgage, but she can't refinance because she owes 100k on a HELOC.

I think there's a lot of people in the SF Bay Area like her, who would like to refinance or sell, but can't because of a huge HELOC.
Banks won't foreclose on these people unless they absolutely have to because doing so would cause a loss.

It would be interesting to see if there's any data available that lists how much HELOC money is taken out per home and how many of those homes are in default.

My friend finally got 100K principal reduction. Don’t want to short sale now. Well…begin to love Obama.

REpro says

My friend finally got 100K principal reduction. Don’t want to short sale now. Well…begin to love Obama.

Those principal reductions come with a 5 year commitment or something right? If so, sounds like another source of declining inventory.

Yes, some strings are attached. People got excited by 20% appreciation increase in CA, but this 20% can be less than 10% in non-income tax states. "Its not what you make, it's what you keep." And yes, this is a bottom line. Why mafia cash was invested in Las Vegas???

Neg am, HAMP and 0% real interest rates. There is not bubble. Cost of food up like 100% since 2007. No bubble. Fundamentals in play. Oh yeah, my salary is up 10000000% too, right on!

REpro says

My friend finally got 100K principal reduction. Don’t want to short sale now. Well…begin to love Obama.

Criminal.

Mick Russom says

Oh yeah, my salary is up 10000000% too, right on!

With that kind of salary increase, you should be able to buy almost anything you want. Why are you still complaining about real estate prices in the Bay Area?

E-man says

The REO market is pretty much dead. REO agents are starving. The inventory WILL HAVE TO come from regular sellers from now on.

Your comment was a great reflection of the Real Estate market. It's perfect in every way. The REO markets are what have driven this last bit of rally, and I also hear that it is over.

What I think is that Bernanke promised low interest rates until 2014, and that will be the end of it.

As interest rates increase prices will decline, and sellers who missed the "top" will get busy selling, and buy again on the way down in price, or maybe move out of the area.

robertoaribas says

we'd have roughly 4.5 million more people employed.

Increased employment doesn't mean increased wages. The Fed is only interested in employment.

Wages are a matter of return to the employer.

Housing prices rising isn't a good thing for the economy. It sounds good in that wealth effect, but phantom equity has to be financed out of the property or the property needs to be sold.

So, a few million people paying higher, and higher prices looks good on a chart, it creates that wealth effect, consumer confidence goes up, but that is where the disappointment lies.

You haven't seen it, but it happened in the 1970s, and 1980s.

robertoaribas says

As employment rises, there is less supply of workers, and the equilibrium wage rises.

Why would any employer pay more? We have RomneyCare, increased taxes, and threats of a spike in the minimum wage.

robertoaribas says

Obviously, I have studied US economic history in depth.

When have we seen this before?

We are in a global market place the likes of which we have never seen. We are competing with the wages in China for God sakes.

Kind of like how the government is now propping up banking, and the Real Estate market, employers will need greater government incentives to start hiring the way you want, and paying higher wages.

Right now a corporation, or individual, can do business anywhere in the world. Why will any one rush back into the United States, and start hiring for more money?

Employers will hire, but wages are based on a profitable return, and profits are at an all time high.

The bigger question is how the consumer is going to pay more for these wage increases on top of the high prices that we have today?

I think employers will simply move money to another market place where they can maintain higher profits.

Where is the incentive to pay more?

robertoaribas says

actually have real facts as your basis.

You're quoting a calculation chart for Social Security that shows a $10K wage increase in a ten year period. That would be less than $100 per month.

Here in Seattle we have had much higher wage increases at Amazon, Microsoft, and Boeing, but not so much in other areas. So this is another one size fits all situation.

As a matter of fact in that ten year period we had massive job losses. I don't see the reconciling for that. So, could that mean we had massive wage increases in technology, but the working guy didn't get counted in the mix?

What kind of reality is that?

I always find it funy when some one tries to dazzle me with data. There's a book called Lying with Statistics that outlines most arguments people try to make with charts, and graphs.

I Google, and can win all arguments with Google, but I prefer to read for an hour or so a day about what's going on in the world of business.

You make stuff up about what I say.

Look at the job loss of 2008, to 2010. I asked where that was in the calculation of wage increases. Rather than address that you pull out another graph to show me the job losses, and that employment is at about evens.

Well if employment is at about evens then the Fed has nothing more to do about employment, it's a job well done, the Fed can move on with more important stuff.

This chart however doesn't show me wage increases. It doesn't show me anything about wages.

You used the Social Security calculation chart which show one picture, but the Census data shows the stagflation of wages: http://www.census.gov/hhes/www/income/data/historical/people/

You used the first reference you found in your Google search to dig yourself a hole. Now you really have nowhere to go with this.

robertoaribas says

And to repeat: you predicted prices would drop 2 years ago, and you sold.... 2 years of being wrong, and you haven't learned a thing yet

I'm still predicting prices will fall, and I am continueing to sell.

donjumpsuit says

FEENIX.

http://www.youtube.com/embed/Y2kIPN1SQe4

robertoaribas says

yeah, well, you might as well be consistently wrong

This is by far your most childish comment.

You have nothing to say, but pull out charts, and graphs to prove my points that wages aren't increasing. The Census data shows that, but hey let's live your reality.

Job losses are significant in that the chart you provided doesn't account for those job losses, it's like it never happened, but it did.

I might as well include my favorite graph, the one I've used, and shown you a few times now, because it shows the consumer debt:

but you still come back at me with some childish game about what I have said.

I've said prices will decline, I sold accordingly, and chose not to buy back in. I will sell again while prices are high.

BTW my personal residence never lost value, but I will sell in a heart beat as soon as the kids finish high school.

Hey, why don't we let wikipedia settle it: http://en.wikipedia.org/wiki/Household_income_in_the_United_States

robertoaribas says

YOU sir said: Seattle has less jobs than 10 years ago.

We were talking about wages. We have high paying tech jobs, but that doesn't translate into higher paying jobs across the board.

robertoaribas says

That in 2009 you sold your home in Atlanta.

That was a part of a trust. The price of the property had declined in price until the day it sold. What has happened since? I don't really care. It sold for $30K which was spent, and enjoyed. So what?

robertoaribas says

I have honestly never had a conversation with anyone as mentally slow as this in my life.

You see, while I was addressing your childish outburst Cyprus is now threatening the Euro. Cyprus? who would have thunk that.

http://www.cnbc.com/id/100560852

You made a million dollars, whoopee, who hasn't. As a college professor you're thinking you got some game going on, but to some you look baffoonish.

You should be grateful for your wind fall, but I have other things to do. Real Estate isn't going to be one of them. As a matter of fact we are preparing to sell another property, hopefully by May 1st, or June. I don't see any reason to hold onto it.

There is always more money to be made.

robertoaribas says

These are facts.

You don't have any facts. You are making arguments.

The fact is Real Estate is supposed to be the stable investment, the safe haven. When it becomes a roller coaster, when it crashes, then re-inflates based on massive government incentive, that's volitility.

We provide jobs. I would prefer to provide jobs, because I think housing is going the way of lumber jacking, or salmon fishing. The big players are coming in to squeeze out the little guy.

Now if you wanted to make a case against me by saying I should have continued to flip properties, you might have a point. My buddies, who make fun of me also, are making big dollars flipping properties. My ultimate argument is that we make more by cleaning toilets.

Last, but not least, this is the Internet.

As you say, I'm everywhere on the Internet. Patrick, at Patrick.net is looking to monetize his website. Most web developers want to monetize.

My time on the internet, with my wide variety of web sites, and domain names, is monetized by the fact we have a service to sell. We have a high quality service that is priced to compete with National Franchises.

I'm currently working on a new web site for our cleaning business, at www.SeattleHouseCleaning.com that will be mobile device compatable. Sorry Patrick to use your site in this shameless manner.

Bottom line is that I get paid to be here with you. Commenting on blogs is one of the ways to introduce myself to a broader audience. I have services to sell, and so far this is the only advertising I do.

As far as Real Estate, for the consumer, I would recommend they wait. I have always thought it is foolish to buy into a hot market.

Many people haven't listened to that as buyers, but sellers have enjoyed huge profits this year by selling. I recommend selling in a hot market. I don't see how you can argue with that.

The Professor says

Buffoonish

I'm sure you're right. It's not a term I would normally use, but seems appropriate in this case.

This argument is a good illustration of the market we have versus perhaps the market we want.

We can probably all agree that during the bubble, home prices were too high and debts were far greater than what people could afford. Not just mortgage debt, but also student loan debt, federal debt, municipal debt, etc.

There are only two ways out: to destroy that excessive debt through bankruptcy and foreclosure, or to inflate incomes and asset prices do where the debt is affordable again.

For those of us who wanted less debt, foreclosures and bankruptcies and falling home prices were solutions. The sickness is debt. The cure is destroying it. Philosophically, this is where I sit. I would have loved to face our economic problems head on, take our lumps, and then slowly rebuild on a solid foundation. I think that most of the doom-and-gloomers on this site are also in this camp.

The problem is that Uncle Sam has taken us in the other direction. Instead of debt destruction and more affordable homes, we have ballooning debts and re-exploding home prices. The FHA has taken the place of the old subprime lenders, and the housing bubble is coming back. To Uncle Sam, the bubble isn't the problem, it's the fact that the bubble ever popped.

robertoaribas is right that the market is rising quickly and will continue to do so for the foreseeable future. David Losh is correct in suggesting that so much of our housing economy is beyond fundamentals.

Regarding those fundamentals, it IS fundamentally true that Demand is outstripping Supply and that with today's low rates, buying makes sense for a lot of people. However, it's also true that Supply, Demand, and interest rates are all being manipulated. Even if home prices rally up another 20%, foreclosures and short sales are effectively over, and negative equity is a thing of the past, what have we actually accomplished? All we'll have done is gone back in time to 2006 and set ourselves up for another crash.

I'm not happy about any of this. I wish we had much more affordable and stable home prices, not going up or down much through the years. I want a boring, but liquid market, but that's not going to happen any time soon.

Let's not let what we want blind us to what's actually happening. At the same time, let's not let what's happening blind us to all of the bigger-picture concerns that suggest we are setting ourselves up for disaster once again.

robertoaribas says

you sold in Atlanta in 2009, and Seattle 2010.

What did I sell in 2010?

Let's go over this again for you, we sold in 2005, 2006, and last in 2007 in Seattle. We sold the place in Atlanta in 2011, I don't really recall because it was dropping in price, and a part of a trust.

Now we will sell another place in Seattle this year.

Your problem with me is that I didn't buy back into the Real Estate market. I don't think Real Estate is the investment it used to be.

gregpfielding says

set ourselves up for another crash.

I don't see a crash. I see equilibrium coming in home prices.

The government has spent trillions of dollars that banks used to recapitalize, and corporations have made massive profits, in cash, on that government investment.

I don't see a crash. I see that we can now go back to business as usual.

Debts will need to be paid, businesses can move on to making products, and trade will need to be on a more even footing.

I see all of that with a gradual rise in interest rates.

Cheap money created debt for those who bought into it. Those who moved out of debt, and into cash are in a much better position. This was the time to reconcile accounts.

bubblesitter says

gregpfielding says

E-man says

The inventory WILL HAVE TO come from regular sellers from now on.

Agreed. Unless prices collapse again, the reo and short sale inventory will continue to quickly shrink to zero.

Really? Are we heading toward golden ages or what?

Alright! We all made it out alive. Great to hear, these are great times we live in. Prosperity all around, all you have to do is work hard and the American Dream is back alive. Yippee! It was a long wait, but I can feel the energy now. So good...

robertoaribas says

So, I'll keep my belief, that no way in hell the hedge funds sell into a collapsing market.

Not sure I would bet on the actions of hedge funds. Many have imploded and it could happen again, this time in real estate hedge funds. I agree that they can suspend redemptions, but all in all, the manager is only successful if he/she keeps attracting new money. Things go sour really quick.

http://hf-implode.com/

robertoaribas says

OR they try to wrap the existing loan.

This is something else we agree on.

The Real Estate attorney I used since the 1980s as my escrow agent specialized in wraps, and phantom holding accounts. When rates went to 16% wraps were the best thing going.

My guy retired a few years ago after the crash, but there is another guy here in Seattle that does that kind of work.

If I were in that business of brokering wraps I would also encourage a buyer to take over an underwater loan that was seasoned for five years or more.

robertoaribas says

you seem to be really grasping for straws to predict a crash... Kinda like david9 with his "cyprus is going to cause US real estate crash" theory...

I benefit from things not crashing. I hope it keeps rolling along, however, I just have a lot of fear that things are not as they appear. Hard to see the reasons for being optimistic besides counting on the same folks that created the problem.