patrick.net

People who participate in bubbles seem to have three main characteristics:

1. They are very greedy. I believe some greed is human nature, but for many in this generation getting something for nothing and living off other peoples work is their highest aspiration, their ultimate thrill. (this may now be a part of popular culture)

2. They don't have much common sense. They cannot judge for themselves when something has become overvalued. They continue buying into the pyramid hype.

3. They may be insecure. They think that if they can buy a house, turn a quick 100 grand for doing nothing, and stick a young family with the bill, this makes them somebody... a big shot.

Zakrajshek says

People who participate in bubbles seem to have three main characteristics:

1. They are very greedy. I believe some greed is human nature, but for many in this generation getting something for nothing and living off other peoples work is their highest aspiration, their ultimate thrill. (this may now be a part of popular culture)

2. They don't have much common sense. They cannot judge for themselves when something has become overvalued. They continue buying into the pyramid hype.

3. They may be insecure. They think that if they can buy a house, turn a quick 100 grand for doing nothing, and stick a young family with the bill, this makes them somebody... a big shot.

Couldn't have said it better myself.

There is a difference between price and value. The price of something is the number of dollars that you pay. The number of dollars you pay increases with inflation because the purchasing power of your dollars decreases. You need more dollars to pay for the same item whether it is a house or a tube of toothpaste. Value is those things mentioned above. Schools, location, freedom to paint the walls when you want. The value of a property to me is different from the value of a property to you and always will be. When many people want to live in a nice climate, in a nice state like California the value of that property increases to more people and the price people are prepared to pay for that value goes up. If you want to live in Michigan in the cold then not so many people want to live there and the value is less and the price reflects the lower value.
Who knows what a fair price is? It depends on the number of people who are prepared to pay it. That is how the free market economy works.
As there is more demand for rental property and it becomes in short supply (as it will) the price of rental properties will increase.

It is often forgotten that the creation of family units did not stop with the recession. While the housing market is in the doldrums now, time will always correct that. Supply currently outstrips demand in housing. As less houses are built and more family units are created that will end. Perhaps not soon - but it will end.

It is just a matter of time that is all.

Malcolm

Canada Eh says

There is a difference between price and value. The price of something is the number of dollars that you pay.

For those of you who don't understand why anyone would pay between $2500 - $3000 (or more) for a rental I can answer very simply. That is what it costs to live here. (In my case a mid tier neighborhood in OC)

The difference between the OK neighborhoods and the nice ones is just a few hundred bucks. I can cram my family into a 2 bedroom condo/townhouse for maybe $1900-2100 but it would be cramped and they probably won't lease one to someone with 3 kids. Or I could move into Riverside county and commute more than 1 1/2 hours to work each way and save some real money but lose all quality of life. Maybe I should rent in a neighborhood in Santa Ana and send my kids to some of the worst schools in the country to save a few bucks? Or perhaps I should move out of state and leave all of our friends and family to save even more money? So how much should we be willing to give up?

You can scream from the rooftops that houses should cost 300K or whatever but the fact is they don't. I am not an idiot who thinks house values are going to go up - I am not greedy and I don't think that a 500K loan for a house is my ticket to the good life.

I am a realist and I am saying that the economy is not going to collapse, we're still going to have to pay to live somewhere no matter if you rent or buy. Period. The people who benefit from keeping housing prices up have the means to drag this out for far longer than my kids will be living at home no matter what housing costs should be.

mommy1 says

I have to wonder if the people who have $500,000 to put towards a house either have old money, flipped money, or no debt at all? Or if they really make enough, based on the fundamental basics of owning a home to support that kind of house payment on their income? And if they do, how can they afford to post here all day?

The middle class is being squeezed out of existence and its taking an upper middle class income to afford a middle of the road standard of living. People who can afford 500K houses and don't want to go into debt over their heads are competing for houses in neighborhoods that should be just regular middle class neighborhoods. My point is that we are all doing the best we can and squabbling about who is an is not right for wanting to buy a home to live in is unproductive. Is there greed out there? Sure. People living beyond their means? Yup. But most people are just doing the best they can trying to get by the best they can. The real problem is that all the wealth has been sucked out of the hands of 99.9% of the people in this country and the rest of us are left fighting over the scraps. They are not the people who can afford a 500K house (which in another era would have been quite a nice house) or even an 800K house. The people who have the all money and are benefiting the most are invisible to us. They are not our neighbors. Until we change how wealth is distributed in these United States nothing is ever going to change.

I paid $875k for a 3/2 house in SF back in 2007. Yes it's lost some value, but I've paid half it off and my mortgage was recently refinanced to $2,050 a month ... that's way lower than the equivalent rent or even some rents for 1 or 2 bed apts in SF. Even when we purchased, the mortgage balance was only 2.5 times our salary.

Who knows whether the economy will collapse, but right now it's cheaper for me to own than rent in SF and I guess that's why I'm participating in the "bubble mentality".

I would not argue that things are going to collapse but the stock market and housing market certainly have put off retirements for many.

I wish I could remember the article that stated this but it was that after the dot com bubble many simply wanted something "solid" to invest money into. Post 9/11 with dirt low rates (at the time) and the whole "cocooning" thing they plowed it into homes.

Speculation leads to saturation which leads to loss and then heading somewhere else.

We will continue to have bubbles as markets expand and people look for a cheap and easy "thing" to put their money into.

mdovell says

Post 9/11 with dirt low rates (at the time) and the whole "cocooning" thing they plowed it into homes.

It also helped that it was a rising market. . .

10% pa returns, 2002-2005.

http://research.stlouisfed.org/fred2/graph/?g=2wf

Pretty much a ponzi at the end, thanks to the "affordability" products which were really just suicide loans since they only made homes temporarily affordable (until they recast at 120% LTV or the teaser rate reset).

edvard2 says

bubble mentality is still very much alive and kickin'. This is ever so apparent around here in the Bay Area. There are many people- even some on this site it appears- that think that 500k+ for a starter home sound swell

edvard,

why don't you leave bay area and here is 5 places good for you:

http://realestate.yahoo.com/promo/5-cheapest-places-to-live-in-america.html

HAHA

Seems like you want bay area prices to match these 5 cities...

Well, we pay $3,060 in rent for a 4 BR, 2400 square foot house in the Santa Cruz Mountains on 2 1/2 acres. We have an in-ground pool along with nice, mature landscaping. We are a six person family with four youngish children and one reason we moved here was for the excellent school system. The commute time is not bad, around 35 minutes to get to the San Jose airport which is near my place of work.

That said, we'd like to buy a place but most of the houses we've visited have been priced between $350 and $400 per square foot -- ridiculous. We moved here from Florida where we paid $75 per square foot to build a house in 2007.

Auntiegrav says

They pay according to their perception of that future, and their perception of what is "useful" to them, not what is useful to the real future and resources which will be needed later.

"They" isnt the buyer but their employer. Its the employer who provides $$$ greenback... And if the employer has other options of hiring elsewhere where housing is cheaper and so are salaries they will and already have.

Wow, a lot of judgement here. I agree with Canada Eh and Teri. As Americans always seem to know the price of everything but the value of nothing your points hit the bull's eye.

I just relocated to SF from Vancouver. One of the most expensive places in the known universe to one of the most expensive places to live in America. So from this perspective, SF, while outrageous in price, is still a relative bargain compared to Vancouver.

Our situation now is that we pay 3,200/month for a 1/1 downtown. Great view and location but the apartment itself is mediocre. Guess what, rent is going up to 5K at the new year. So buying a 1M place with 20% down we would still make the home a cheaper outlay. Will we do it and make the plunge? Testing the waters and may do so if we can't find a decent rental.

But more to the original point. Me and my spouse LOVE our homes and I get more joy out of our homes than from most other things. Love the yard and playing in it, nurturing it, watching it grow and change. Love decorating, yea, even maintaining, etc. I guess living in a 'home' would even be considered a hobby of ours. I also love good architecture. From modern to old. This also makes us very picky and I do consider 80% of the housing out there as either pure junk or severely lacking in a soul, quality, design, etc. We also love our neighborhoods and sense of community that we get when we purchase a home. Sure you can get many of these things from rentals but I have rented and owned about 50/50 and I can say from my experience that owning has always brought me much more fulfillment, joy and VALUE than renting has.

So will I buy again? You bet. If the right place comes along. I always pre judge car and home purchases (clothing and other large ticket items too in a lesser way) before I buy by a single rule of thumb; will I gladly pay the monthly payment or not mind the lower bank balance, or will I hate the experience that causes pain, regret or resentment on the first of the month? If I say yes to the latter than I simply don't buy.

In the end though, money, stocks, bonds, etc. are just imaginary symbols that really hold no value. Things like homes that cradle us and love us, to me anyway, do hold value. So the experience of owning a home to me has real value. My checking account balance doesn't.

Yes, many will judge me for being foolhardy. With a warped sense of what is valuable because my idea of value goes against the norm.

However, I have learned a few things in life along the way. One of the things I learned is that my value system is the right thing for me, even if not a popular one. I used to work as a critical care RN. I held the hands of many patients as they transitioned from this life into the unknown. You know what? Not a single one of them ever shared with me the idea that they wish that they would have saved more money, had more stocks and bonds, been richer, etc. You know what most of them shared with me? That they regretted not living or traveling to where they wanted to and spending more time with themselves, friends and families in environments that they loved. You don't have to take my word for it. But I will ask you this. Pretend that you will die an hour after reading this. What advice would you give to your children, friends and family or your RN on what to value and what brought you the most happiness. Perhaps for some of you it may include renting that 1/1 with a crummy landlord. Somehow I doubt it.

Remember folks, it is only YOU who can be the true judge of value for yourself. Screw what everyone else thinks. Go after what makes you happy , content, joyful or your family and friends too. For some that may be a big checking account. No judgement. If that is what you value, go for it. My hunch though is that if you really honestly dissect your feelings, in such an example, is that you may not really value the large checking account but rather it may just be a futile attempt at controlling the unknown and a way to alleviate your ever present fears of lack of.

In sum, you all deserve better. You all deserve the best! You get to decide what that may be. Start giving it to yourself today. And hey, it may not even cost you anything at all.....

I researched building permits in Bay Area yesterday. Cost of building a brand new house is around $100-110/sf. Yep, some builders still makes over $100,000 in pure profit.

shrekgrinch says

Denial...especially 'selective denial' is alive and well with people in general. That's all.

I agree. Denial will never be gone. But I do believe will they will give up the fight once people start starving to death on the street - The same thing happened in the great depression.

The true crash hasn't come yet. Same thing happened with what led to the great depression. You first had a semi-crash in 1929 but then the full-blown real crash came in 1933.

The same thing is happening right now and the sheeple can't fucking see it. 2008 was the semi-crash - the real crash will likely come in 2012. I have known this for the past 12 months. First people will become more optimistic that things are improving but then a collapse will come and they won't know what hit them. - I speculated this 12 months back and it's what's beginning to slowly happen. False optimism turning into pessimism. But right now people I wouldn't say are pessimistic but rather more indecisive and helpless at determining which way to go. They will mostly be pessimist after the crash hits.

Once the sheeple are pessimist, that's the time to be optimist because you will buying stocks, real estate and commodities at their lowest rates generally.

The same thing happened during the periods of the great depression

There is an opportunity to profit from economic crashes; I know I sound like a scumbag banker but the truth is if you prepare and know what's coming; you can profit if you have a plan and know what invest in and which business is going to thrive in the crash.

The housing market will fully collapse once the real crash hits the economic system. Housing can't crash because the denial will not fade away until the bogus foundation that this economic system was built upon falls apart.

Once the system collapses - the sheeple will be preoccupied with more basic things like growing food, cleaning themselves, getting clean water to drink and protecting themselves against looters.

At that point, none of the sheeple will give a hoot about living the "american dream" but rather actually LIVING...

I also want to add that paper currency does have a risk of becoming useless.

Even though I had a lot of heated debates with me supporting deflation. I believe it's generally foolish to hold on to paper currency with all you assets tied to it regardless.

It's okay to hold some.

thomas.wong1986 says

Auntiegrav says

They pay according to their perception of that future, and their perception of what is "useful" to them, not what is useful to the real future and resources which will be needed later.

"They" isnt the buyer but their employer. Its the employer who provides $$$ greenback... And if the employer has other options of hiring elsewhere where housing is cheaper and so are salaries they will and already have.

Agreed. The choice to work for a particular employer and then live someplace that is not accessible to that employer, requiring more and more expensive gasoline to get to work, is not all that intentional, either. Most people take what they can get and buy what they can buy just to be 'normal'. It's too bad that 'normal' seems to involve living as part of a machine instead of as a human being moving and taking actions with a variety of sensory inputs and desires. Instead, all choices are monetary, all decisions about where to live or what to do are made by a computer when it puts the statistics on a spreadsheet. Yet, we are surprised when the bubbles pop.
Amazing, isn't it? Employers don't just go where something is cheaper; they go where the labor is cheapest. Important distinction when we are told how they are "concerned for the environment" or how our government "respects human rights".

Zaphod says

Employers don't just go where something is cheaper; they go where the labor is cheapest.

This may be true for many companies, such as car manufacturers setting up shop in China or Alabama. OTOH, San Francisco is not cheap, and arguably has one of the highest wage cities in the nation. So why is it that Google, Apple, Yahoo, Facebook as well as all the high tech biotech and pharma doing here? Why aren't they setting up shop in Birmingham, AL or Fargo, ND? It is because they are highly successful companies only because they can attract the brightest of the bright who chose to cluster in such cities as SF because they are creative, offer lots to do, are geographically pretty, have lots of other like minded people, are liberal enough to make life enjoyable for about anyone, etc. It costs a lot for these companies to park it here in SF and pay huge salaries to boot. Yes, they can move to Fargo, but most of the brightest are not going to follow, and thus their company will suffer and probably crash and burn as well. So in the end, it is worth it to pay the highest for the best. Fargo anyone?

I should also add, this is why you will also find some of the highest real estate prices in places like SF, NYC, Vancouver, Vienna or London, etc. and not Cleveland, OH; Buffalo, NY; Detroit, MI; Calcutta, IN; or Lagos, Nigeria.

SFace says

Gross margin is a fuction of receipts - direct cost. If you believe in profits based on top line growth, you also attract talent to reach top line (I'll give you a 50K raise if you add 500K in value for us). If you believe gross margin should be achieved on cutting cost, then yeah, find the cheapest employee possible to do job. (We'll make 50K more if we hire someone cheaper)

Start-ups always take the top line approach.

Totally agree with all.

To give Zaphod his due, in my example, I am sure that most all the folks who work in Cuppurtino, for Apple, are paid very handsomely - from the person who mops the floors to the CEO/CFOs. OTOH, Apple makes up for the high cost of designing, creativity and innovation here in CA with relative low cost production labor in China which actually makes and assembles their products. Those poor suckers in China are so overworked every time there is a major new production release the suicide rate at their China factories goes up. (I am not sure if it also spikes here in Cuppertino). It will most likely be no different with the release of iPhoneV next month. Even so, the argument still holds. As of yet anyways, Apple has no plans to move its entire company anywhere cheaper, say like China where they have the bulk of their production facilities. They are setting up shop for the long haul, right here in the way expensive SF Bay area.

SFace says

Ipads and Iphones came from Silicon Valley

Apple was Cool and Hip, before, too. When Jobs was the creative force behind the Mac. Then the Army of Sycophants came along to join the ride, personified in the person of John Sculley. What could go wrong? They were so much smarter than everyone else, because they were in Silicon Valley, they had fancy degrees from fancy schools, and they were beknighted by the personnel department at APPL. Right?

It took one smart person, a local prodigal son of Santa Clara County, one without any fancy degrees from any fancy schools, it rescue the company from itself with his vision for products and services. For whatever reason, the Army of oh-so-smart folks with fancy degrees from fancy schools nearly drove the company into the ground before his return.

Apple is all about the intelligence,vision and tenacity of Steve Jobs. It is not about the fancy degrees from fancy schools of the fancy people.

SFace says

Amazon, and Nokia are moving in the area as well

Yeah right. Maybe those companies got to where they are now because they weren't till now staffed by gold rush people with gold rush mentalities rushing to Cool and Hip Silicon Valley.

Sybrib says

It took one smart person, a local prodigal son of Santa Clara County, one without any fancy degrees from any fancy schools, it rescue the company from itself with his vision for products and services.

Good point. It should be noted, if not already obvious, that education IS NOT necessarily indicative of wisdom or intelligence but rather conformity and tenacity. Somehow though, Apple has been successful in recruiting enough people with all of the above, plus creative, out of the box thinking smarts.

Sybrib says

Apple was Cool and Hip, before, too. When Jobs was the creative force behind the Mac. Then the Army of Sycophants came along to join the ride, personified in the person of John Sculley. What could go wrong? They were so much smarter than everyone else, because they were in Silicon Valley, they had fancy degrees from fancy schools, and they were beknighted by the personnel department at APPL. Right?

Lets put the question to a long time x-apple employee ... see what he says.

http://www.youtube.com/watch?v=aLj2QHEUC5w

SFace says

That's kind of the value in engineering and design in Silicon Valley and web applications in San Francisco, you create something that can build 1B in value, I'll pay multi-millions to get the team that can get there. In other words, paying an engineer 200K in SV vs. 100K in Austin, I rather pay 200K to get a little more assurance of success.

But that isnt how its done... you can talk to any CFO out there... or better yet speak to any FPA staffer and they will enlighen you with reality of how things are really done in SV. $200K only go the the VP officers as comp, not the line employees.

"Bubble mentality"

During the great Tech boom of the 80s we didnt see bubbles in stock nor in housing. Yes, prices for homes were "frothy" but hardly the massive bubble we saw more recently.

Now after some 30 years, as the local tech industries have greatly matured and greatly shrunk, here comes the bubble heads claiming otherwise. Someone is going to come here and want 200K in salary after all is done.

Ipad/Ipod toys have been evolving for many decades with semis circuits. It took years years/decades to get to this point. Now some claim, anyone can just waltz into the region, with degree in hand and claim a higher salary ($200K) and other comp, than employees who actually worked on such products. Just to buy a bubble house. Crazy thinking...

Yep, bubble mentality is still around...

We may still be in a bubble for housing in all/ some areas, I just can't figure it out, too many variables??. I am glad to hear so many thoughtful opinions shared here, it helps fill in the variables for me. Edvard2 thanks for starting this thread. I just feel like the calibration in housing is taking so long and is often disrupted by the government. I think the fed and states just can't let the prices fall on housing because if governments don't get their property tax money they will bankrupt which will start new cascades and calibrations in the economy. Our governments will do alot to keep their paycheck coming,.

No one wants to spend more that they have to for anything. But we all want and desire housing to some degree. A home whether you rent or buy is probably your largest cost each month(unless your paid off with low property tax or live with mom and dad etc). I think each person deciding on housing is balancing quality of life decision with financial outlay combined with their crystal ball estimate. Whatever all of our decisions/actions are as a whole will determine the outcome. We just have to combine all the parts to form the whole crystal ball.

Zaphod says

Employers don't just go where something is cheaper; they go where the labor is cheapest

That's true and also interesting because sometimes there can be a spike up in labor costs. The last place I worked at the top hourly rates were in SF, NYC (Brooklyn but NOT Staten Island), LA and New Orleans....why the last one? After Katrina they couldn't find enough people.

I'm not claiming that we'll see another bubble in 2012 but I will say this. I'm predicting that any business that is waiting for the housing market to come back probably won't see any significant gains on a national scale for awhile. With this being the case richer companies are probably waiting for other ones to gradually slide. I predict within five years we are going to see some significant mergers in anything related to housing.

Besides as there is further consolidation and layoffs it makes future mergers less likely to have anti trust action.

edvard2 says

Who in the heck is spending $3,000 a month on rent?

Sensible well off Aussies.

Sorry, I know you guys are well into your crash already. Over here we are still totally off our heads - it's still different here. I pay well over twice that in rent and it is money well spent. I have four kids and I have no intention of living poorly despite being well off just because I live in a demented market.

If you have a high income it makes sense to pay a lot of rent. The alternatives are to live in a crappy rented house or a crappy owned house. Then you die and your kids have what they learned from you to help them decide how to live their lives before they die....

Some of the responses I see being written are almost delusional. If you see things from my perspective. Understand if you don't owe anyone and own everything you have. You sit and watch people blindly talking about bubbles and all the other stuff the people you OWE so much to. Who actually own you in many ways. Including credit and your little jobbies your so afraid of losing. They throw you little things like bubbles for you to help them out with. So they can get their own brand of slavery up and running again. Yes massah we can talk about bubbles for you. See it. It really is hysterical. Whats even more funny is you can't survive without the people you OWE so much to. Your admitting to it. Its a the kind of degradation I really can't bear seeing another man going through. So I write.

Even the Indians living on the plains of America are pissing in their pants laughing at you because you don't have the balls to make it on your own. They won't do it of course because they have to much pride in being a man.

So go get a jobbie and sit their and shuffle your feet before your new master with your little job application. Pretend like you don't squat when they tell you to. Hey lets pretend ole Fred over there squats for a couple of weeks. Dosen't work. You'll squat for that little credit you get.

I love reading all the comments from obvious bubble buyers trying to justify paying 800k for a shitbox in the RBA. Protip, it doesn't matter if your equity stays; you were dumb enough to pay beluga caviar prices for fish bait and you have to look at it every day and look at your payments every month. nice

I gave attention to the seven hundred or so. . Objectors of Wall street. Look your never going to stop a good con game or con artist. Con artists love it when you show up no matter when and for whatever reason. They like to find every way on the green earth to keep you in their game. It's hypnotic, charasmatic, part sexual-a lot sexual and fascination. Also your FEAR.