patrick.net

In a house sale the money just changes hand. It doesn’t disappear.

What if your 650K $hitbox is now worth 375? Where did the money go?

The few houses that get on the market in Cupertino and Los Altos, for example, still sell in practically no time.

Los Altos, maybe. It is less credit dependent.

For the small number of houses that become available, there are more than enough people with the financial ability to buy them.

This is arguable. 50+% of recent house buyers in California are using 30+% of their total income for house payments. 20+% are using more than half of their income.

I am not sure whether the "financial ability" you talked about is the NAAVLP-enhanced ability. Newly created liquidity can readily disapper.

What if your 650K $hitbox is now worth 375? Where did the money go?

Worth is a believe system. I choose to believe in something else.

Median santa clara county household income is ~72K.
Median bay area household income is ~68K.
There are norms, and there are exceptions.

What towns north of SJ and on the west side of the bay are “credit dependent” in your opinion?

Sunnyvale
Campbell
East Palo Alto
Redwood City
South San Francisco
Daly City
Pacifica
...

I can assure you that there are less high-income executives and options-benefishies than highly leveraged marginal buyers.

Yes, but when supply is tight, exceptional people start making a big difference.

When the market turns, you will not be able to use the same supply and demand assumptions. We argue that the demand will be tight, exceptionally-leveraged people start making a big difference.

For example, Santa Clara County has a population of over 1.7 million people, and over 600K housing units, but there are only about 3000 houses on the market. Only some of these are in decent shape and in decent areas, so it is not that far-fetched that there are enough people with much above median income and wealth to keep prices high.

Yes but when the market turns there will be more sellers and less buyers.

People with above median income may or may not buy. Most have bought already and they are not going to buy more.

Also, there there 3000 house at any time. It is not a diminishing pool. On the contrary, this pool appears to be expanding at progressive rate.

What would make it turn so much in this area as to cause a crash? I just don’t see this scenario, but I guess that since we’ve been waiting so long for this already, we can keep waiting. What’s the new date? It looks like October isn’t going to be it…

A small turn initially can cause a much larger turn. It will just snowball itself to critical mass. Welcome to the world of reflexivity.

It may be hard to believe, but people are still getting promoted into positions with high pay, making it on stock options, businesses, investments, etc. There are new people joining the group of people with some wealth (at least a few hunderd thousand) or high incomes around here all the time.

Valley economics: promotion != pay raise

Also, every time I go to an open house and ask why is the house on the market, the answer is always: the seller is moving to Seattle/Vancouver/NY ...

People with some wealth or high income leave the Silly Valley every day. Population statistics would support this.

Face Reality, I am not "hoping" for a crash so that I can buy. If I am convinced that the market is stable I would buy now. High prices do not turn me off. However, the bubble (pricing based on unsustainable and unrealistic expectations) bothers me a lot.

It seems like the job market stabilized, but I’m not sure.

It does seem so. If rent goes up significantly we may have a soft landing like the one in 1989-1995.

Do you think rent will be 50% higher in 5 years? I will re-evaluate my position if someone can convince me of this scenario.

What towns north of SJ and on the west side of the bay are “credit dependent” in your opinion?

Sunnyvale
Campbell
East Palo Alto
Redwood City
South San Francisco
Daly City
Pacifica

Does this represent some economic demographic? Actually, a good deal of Sunnyvale is similar to Cupertino, Mountain View, and parts of Los Altos.

Surprsingly, based on the stats I've compiled for foreclosues, some of the more "prime" areas have higher incidents of financial failure per capita. Los Gatos is one of the highest in the S.Bay, with Palo Alto not far behind. North, I've found Sausalito and Mill Valley w/higher rates. Sunnyvale is actually quite low.

I'm not sure what to make of this, but my guess is that people overextend themselves financially to "move up" to more expensive areas. This tracks with discussions I've overhead of people in various circles.

"It may be hard to believe, but people are still getting promoted into positions with high pay, making it on stock options, businesses, investments, etc."
This will always be true. But it is less true now than in previous times...and it is becoming less & less true, relative to the ~30-yr-old bay area tech-based economy. This valley is a shadow of its former self. Bay Area economy is leveraged in not only real estate but financing as well. Because of this leveraged position, there is at least a *potential* for disasterous shrinking of BA economy with slow downs in RE sales and equity extraction. When, and to what extent, this potential is realized is of course debatable (that's why we're here, right?!?). But many believe it'll be more fully realized than not. There are trickle effects to consider: i.e. over the past few years, many many contractors have been able buy brand new F150's and 650K SFR's with all the RE-related work available.

How long have you been waiting for the market to “stabilize”? How long are you willing to keep waiting?

I can wait indefinitely. I certainly does not wish to wait that long though.

I often feel that unless you’re working on something that may make you a lot of money, you’re better off moving somewhere else (even changing professions if needed…)

True. But the housing bubble is global...

Again, these people are still a minority, but it is not an insignificant one, and they can continue to keep prices north of San Jose (and some parts of San Jose) at high levels.

Dude you are smoking some serious crack, is MP your brother? You are talking about at most, 1000 people. You mean to tell me 1000 people are driving the real estate market in a population of ~3 million? No fucking way. Avg income avg home cost. The BA with the exception of maybe the penisula and SF is a shithole. Come on who are you trying to fool? SJ? Give me afucking break. Sunnyvale? Isn't that SJ north? Cupertino? SJ west.

There are just too many people around here who can definitely come up with at least a few hundered thousand in cash when buying a house.

I am sincerely worried about you, that crack pipe is going to fall out of your hands as you type and catch your house on fire. Odd, the opinions people have of the BA, THE STREETS ARE PAVED WITH GOLD! I venture to say that for every person earning 100K there are 50 earning 45K.

By the way, what’s so special about the peninsula compared to Sunnyvale and Cupertino?

To me Sunnyvale and Cupertino are too warm. Cupertino is fine but I keep calling it Cappuccino. Sunnyvale has many bad pockets.

I have one test for prime urban areas: you can tell that an area is nice if it has many premium (1M+) condos. I am not going to buy those condos, but it is a pretty good test.

Do you really think that there are only 1000 people with high incomes or some wealth here?

More like 993. ;)

My point is that those people buy prime properties and they will not stop price decompression and the crash of regular homes.

I have one test for prime urban areas: you can tell that an area is nice if it has many premium (1M+) condos. I am not going to buy those condos, but it is a pretty good test.

I consider places like Los Altos, Saratoga, Woodside, Tiburon ... non-urban, so this test does not apply.

Have you actually lived in the Bay Area in the last few years or looked for a house here? How much do you know about the economy here? Do you really think that there are only 1000 people with high incomes or some wealth here?

I grew up in the BA and know all about it. Please kindly point your sage crystal ball towards the blog and let us all know where this wealth is coming from? Please list the companies, the products and how many employees. The BA "used" to have a great economy. Who is there now? Intel? No, not really. Applied Materials? No not really. What exactly is there now, realtors.

The top executives and from about the director level and above make bank. The average employee makes about 65K, my friend is a Sr. Director at Applied and supplied the figures. You are talking about the movers and shakers, and they are not going to buy in SJ, Cup, Sunnyvale, they are going to Portola Valley, Hillsboro, Los Altos etc.

By the way, what’s so special about the peninsula compared to Sunnyvale and Cupertino?

Proximity to the Ocean and a better class of people, less segregated areas etc.

Proximity to the Ocean and a better class of people, less segregated areas etc.

Surfer, you have never failed to amaze me. You are able to say things that I am afraid to say. ;)

Santa Clara County income distribution data comparing 2004 to 2000. Look at page 3 of this pdf file. It shows highest growth in

uh-oh...where's the rest?
...highest growth in 200K). So therefore, house prices...skyrocketted???
This file appears to show very relevant data:

http://tinyurl.com/9qrfh

I give up. Just look at the file.

What is annoying about the "paved with gold" argument is that say hypothetically there are just an ass load of wealthy people in the BA. Say every third person is making 175K. Doesn't this scream BULLSHIT, as if you're making that much money and all you get for it is a $hitbox without a view, bad schools, traffic, etc, you've got the cabeza up the ole culo. Come on, if you are making that much money, you had to work for it, and if you had to work that hard to get to where you are at, why would you settle for a $hitbox in SJ? Wouldn't you drive your M5 to work every day and think "this is it?" wouldn't you, punk?

SJ_Jim, thank you, one data point is worth a million opinions.

Face Reality, any data you would care to share with the group?

Face Reality, any data you would care to share with the group?

Well, it is easy to think that the Bad Area is “paved with gold”. I was golfing in Metropolitan (Oakland) and saw the number of private jets landing in OAK. I thought every fourth person has his own plane!

Allah, man we have got to have a beer some time. This is amazing stuff you write . . .

"The best place to find out if people are leaving the area is to go to site like hertz rent-a-car and get quotes for their biggest truck going to and from the area and compare the costs….If the price leaving the area is a lot more than the price coming in, then it is proof that people are leaving."

No it's not.

You are talking about at most, 1000 people. You mean to tell me 1000 people are driving the real estate market in a population of ~3 million?

I agree with surfer-x, but I think his 1000 number is low. I think the number might be as high as 30,000 to 300,000. Even so, from 1%-10%, is not high enough to "pave the streets with gold" given that a large portion of those are demographically/regionally fragmented. If we assume that 50% of those guys and gals are sequestering themselves to insular communities, which may command a premium even in a downturn, then the rest are those who affect the middle-to-lower market we're talking about. Even 150,000 people aren't enough to move the market. So you're right surfer-x-man, just probably a bit pesimisstic with the numbers.

Further, the Valley is experiencing the largest infusion of VC funding since the height of the boom. This is being complicated by the fact that many pension funds (state and corporate) are being driven to invest a percentage of funds in VCs because of their rigid asset allocation models. (We can argue later about how these managers are following allocation models blindly, contributing to the problem). The number of new funds is the highest since 1998, according to my data.

This money will be disbursed in mainly BA companies over the next 3 years as these funds rush to find prospective ventures. Although I don't think this is anywhere near the dot-com boom proportion, I think there may well be a mini-boom as this money desperately looks for companies.

Just my "keeping it real" self assumption challenging input. (I still think RE is going down, even with all this, btw)

I'm familiar with a few people in Ha Ha's position. Seems untenable to me.

_shrug_

Cheers,
prat

Isn’t the Florida housing market significantly impacted by people who made their money somewhere else (like New York or California)?

Anecdotal: A dear friend who's lived in Menlo Park since 1991, made over 650K in property appreciation, and her salary plus her doctor husband was over 450K/year for the past few years, plus her 2 option windfalls a couple 100K per. They just sold and moved to Tampa, bought a ~850K home 100% down, and banked the rest for retirement. They won't be part of any bubble burst, unless things don't recover for 30 years, even though their new family salary isn't half what it was here.

Outsourcing engineering and G&A is no longer confined to mature products and larger corporations.

From my work a smaller total percentage of R&D and G&A total is being offshore outsourced. Primary research is still being done in the BA, and development which is IP sensitive. As to G&A, a lot of the constraint is being driven by SOX rules. The big guys are increasingly fingering offshored G&A as "material weaknesses" in controls. This could change as things develop, but for now much G&A is not going offshore, but onshore; outsourced to places like Nebraska, Kansas and Indiana.

So maybe this will be a bubblette and not a true burst?

For this to come to pass, there would need to be significant wage inflation in the BA, which largely keeps pace with general inflation, coupled with a deflation of RE prices. That's a lot of ifs. But then again this is the Bay Area, so never say never.

never.

*poof*

Cheers,
prat

Face Reality, what makes you think that when the market is tanking those higher income household will support the prices?

History suggests that people do not like to buy assets when prices are falling.

"...but one thing I don’t like about it is that it uses 2000 as a baseline."

FAce Real, that's a good point that I though about as well. I agree it's not the best baseline for comparison. But it does illustrate how far we've come. And it confirms that the deviation from traditional RE fundamentals is real in the bay area. The low housing affordibility index, low rents, low median income...are real numbers that can have real economic consequences. These numbers aren't subjective, as a human's impression could be skewed based on his own niche in society. And I think that, unless there is something like a VC-driven "bubblette" (as discussed in previous posts), the default scenario for the future is bleak rather than rosy. The "differentness" of the Bay Area can only go so far.

A friend of mine who works in Santa Clara, near Lawrence & Kifer (near the formerly-huge campuses of Applied Materials, National Semiconductor, and others), says the commericial office suite vacancy around there doesn't look any different than 3 years ago...ghost town. But I really hope there is something new & exciting in store to help pick this valley up if/when the RE & related segments of the economy tank.

ajh,
I don't know much about it personally. Here's a link I got from google.

http://www.californiataxdata.com/A_Mello_Roos/index.asp

g'day...& watch out for those lazy mello roos down there.

Just based on personal observation, and that is also why I had a skewed view of household income, most of my friends (20+) in the Bay Area make more than 200K household income, and hence able to afford McMansions. They are not company executives, just engineers and managers in the tech industry. I believe although some are stretching themselves to buy homes, some actually have quite a few hundred thousands stashed away and have a big quity cushion, which means, they are in no hurry to sell.

People tend to overestimate or underestimate the wealth of the Bay Area. Whether an area is prone to crash is not dependent on the rate of defaults, but dependent on how many cash-rich, ready-in-the-sideline owner-occupiers are ready to jump in when the price dips. There are plenty in Tracy or East Bay residents waiting to come to the west side of South Bay, so don't expect a 40% drop in Los Altos, Saratoga, Los Gatos, Cupertino, etc., it is just not going to happen. If it happens, I guess the entire Bay Area will see easily 60%-80% drop, which means the entire CA is deep doodoo. By then, buying a home is not your major concern, surviving is.

Bay Area amazingly has a very high concentration of high-pay jobs. The distribution of income is not exactly a bell curve, you have a lot of poor people, a lot of rich people, and few middle class (as defined by nationwide standard).

The intepretation of a median household income 120K can be interpreted as such: In a bell-curve distribution, it may mean 2/3 of the households converge towards that 120K. But in an abnormal distribution of income, which I believe is more of the case here, you may see half of the households making 50-120K, and another half making 150-xM, with a lot of them converging around 200-250K. Just my take on the situation.