patrick.net

Claire Says:

> If a Brit can afford a pied-a terre in SF then they
> are of the type that money is no object and won’t
> care about the dollar too much!

Then SFWoman Says:

> Not necessarily. I looked at Paris apartments a
> few years ago, and can afford one, but I won’t
> even consider one right now.

It’s easy to loose touch with reality living in the north part of San Francisco but for the most part anyone buying a pied-a-terre on another continent is really F’ing rich…

About $250K a year will put you in the top 1% of all “households” (most with more than one income) in the US and about the top .00001% of households in the world (I used to have the URL to a site that would show this).

Living in San Francisco many people really feel “middle class” (since half their friends will be doing better) when they make “only” $500K a year and have a new worth of under $20mm…

Scott J. Says:

I guess the president of the NAR “drinks the koolaid” and forces himself to not see what’s right in front of his face.

Drink the kool aid? Hey, this guy is Jim Jones himself!

Claire Says:

> Paul, I think you’re right, they could just send their
> kid to private school instead for less, but people
> with that type of money are also looking for the
> kudos of the zip codes (I think).

The problem for most people is that they can’t get their kids in to good private schools, but if they can afford to buy in an area with good public schools the schools have to let the kids in. A middle class white family that decides to save money buying a home in Daly City and paying the $50K a year they are saving in mortgage payments to send little Brittany to Burke and little Spencer to Town in San Francisco will be very disappointed that there kids have close to zero chance of ever getting in…

In the long run paying extra for a home in a good area with good schools is always a good investment since prime areas appreciate more than regular areas (as long as you can afford it with a fixed rate loan). Actually prime anything appreciates more that regular anything. Compare the current price of a ’68 flat roof apartment in Sausalito with a ’68 flat roof apartment in San Leandro or even a ’68 Camaro with a ’68 Ferrari or a ’68 Timex with a ’68 Rolex, or a ’68 Bottle of George de Latour Cab with a ’68 Jug of Gallo Hearty Burgundy…

I’ve got a lot of people that agree with me ready to invest in prime apartments in prime areas (taking lower than average cash on cash returns going in) hoping to get above average appreciation when we sell at the top of the next cycle…

"a ’68 flat roof apartment in San Leandro or even a ’68 Camaro with a ’68 Ferrari or a ’68 Timex with a ’68 Rolex, or a ’68 Bottle of George de Latour Cab with a ’68 Jug of Gallo Hearty Burgundy…"

That's a false dichotomy. The cheaper car, wine and watch were never engineered to be collector's items but practical items - that's why they were affordable in the first place. Their value didn't lie in the investment aspect but their functionality for their 1968 buyers. Furthermore, there are other sectors where expensive things greatly depreciated in value, like all consumer electronics. Lots of people owned Lucent and Enron in the belief that they are bluechip companies and lost it all.

As for real estate, what's prime and what's not prime is fluid. Harlem went from middle class housing (early 1900s) to ghetto (most of the 20th century) to yuppie colonies (today). Ditto the East Village. A lot of the prime BA properties of today were not especially prime 20 years ago. The fact that they appreciated so well is in part because they went from sub-prime to true-prime in the intervening years.

But more generally, our perceptions are molded on the American post-WWII experience AKA best of times. There's no guarantee that values of any property, prime or ghetto, will hold up if the macros weaken for good.

Mercury News Saturday Reality section

Mercury News Saturday Realty section

Can I buy a vowel?

Mercury News Saturday Reality section

About $250K a year will put you in the top 1% of all “households” (most with more than one income) in the US and about the top .00001% of households in the world (I used to have the URL to a site that would show this).

Living in San Francisco many people really feel “middle class” (since half their friends will be doing better) when they make “only” $500K a year and have a new worth of under $20mm…

FAB is dead on. It is all too easy to lose touch living in the Bay Area. It's almost tragic to hear a friend bemoan their measly $300K/year single income household as "middle class" and then travel home to the midwest where a family of four is getting by as "middle class" on dual incomes totalling $70k, most of which is eaten up by daycare and debt payments.

Muggy,

I didn't mean to ruin anyone's weekend, lol. Remember, all real estate is local and many areas will suffer very hard landings, even if the overall national market lands more softly. A lot of my comments are somewhat specific to the Bay Area, where I think there's a generally higher and more diversified income base to power a few more refis than the general 1-company town.

I’d say most of the families that live in my neighborhood here in Sac are living on $70k a year or less. I often feel as if BA people are either very rich compared to everyone else or just seriously out of touch.

I would say they are seriously out of touch.

On the other hand, the economy appears more and more to be a zero sum game.

Remember, it’s not all or nothing. The bottom can come up even as the top is coming down.

I'm sorry Randal H. Esq., but did you mention "top", "bottom" and "SF" in the same sentence?

’68 Camaro with a ’68 Ferrari

Dude, come on now. '68 Z/28 convertible, one made, priceless, '68 SS/RS 375HP convertible, also very high priced. It's all relative.

But more generally, our perceptions are molded on the American post-WWII experience AKA best of times. There’s no guarantee that values of any property, prime or ghetto, will hold up if the macros weaken for good.

Do you have a sister that's around 35? If so I need a fast car and an alibi.

Just like the FBs, banks are willing to lend these sums based on the assumption that “real estate never goes down.” But they think they are more sophisticated than FBs because they build into their models the possibility that some RE markets could “temporarily” decline by 15 or 20% or defaults could rise as high as they did in the ’80s or ’90s.

Most banks have not adequately reserved for the possibility that RE prices could decline by 25 or 30%..."

Glen,

I truly believe most banks and other mortgage lenders are not run by self-deluded idiots. Lenders are by and large rational, profit-driven actors trying to maximize profits while minimizing risk. The reason they continue to lend absurd amounts to obviously credit-unworthy borrowers for ridiculously low interest rates is because these loans are typically SOLD OFF by the banks as soon as they're originated.

The magic of MBS (mortgage backed securities) and CMOs (collateralized mortgage obligations) means the banks can instantly unload this toxic crap on investors, foreign central banks, and pension & hedge funds all over the world. Once the loan ownership is securitized (either by a GSE or private entity) and sold off, the default risk to the bank is GONE. Yet the bank has already pocketed origination fees, points paid by the FB and any profits realized by selling the loan.

Hence, one of my all-time favorite catchphrases: "privatize profits, socialize risk." If there truly was a genuine "new paradigm" anywhere in the current bubble, it was this explosion of MBS/CDO risk-offloading by the banks.

Used to be banks might actually *gasp* HOLD a loan on the books after originating it. If the borrower defaulted, they might end up having to eat the resutling loss. This bizarrely "quaint" alignment of risk & reward produced lenders that actually CARED if the borrower could afford to repay the loan.

Soooo old-fashioned, I know... :-)

I'd recommend browsing a couple classic threads on the subject from the Patrick.net archives, in case you're interested:

Too Big to Fail?
GSEs too Socialistic for Red China

I said:

That prime items from about 40 years ago tend to appreciate than non prime items and gave examples of a ’68 flat roof apartment in San Leandro vs. a ’68 Sausalito apartment, a ’68 Camaro vs. a ’68 Ferrari or a ’68 Timex vs. a ’68 Rolex, and a ’68 Bottle of George de Latour Cab vs. ’68 Jug of Gallo Hearty Burgundy…”

Then astrid Says:

> That’s a false dichotomy. The cheaper car, wine and
> watch were never engineered to be collector’s items
> but practical items - that’s why they were affordable
> in the first place.

None of the examples I gave were items designed to be collectors items and all just cost a little bit more in 1968, but are worth many times more today

> Furthermore, there are other sectors where expensive
> things greatly depreciated in value, like all consumer
> electronics.

Take a look at the value of a ’68 McIntosh Stereo or a ’68 Gibson Les Paul and you will see that even prime consumer electronics appreciate more than non prime items…

> Lots of people owned Lucent and Enron
> in the belief that they are bluechip companies
> and lost it all.

I just want to compare how completed items (like homes, apartments or consumer goods) appreciate. The value of any company with poor or criminal management will eventually drop like a rock…

astrid wrote:

> As for real estate, what’s prime and what’s not
> prime is fluid. Harlem went from middle class
> housing (early 1900s) to ghetto

Can anyone name an area that was prime post WWII prime that is not nice today.

> A lot of the prime BA properties of today were
> not especially prime 20 years ago.

astrid said "a lot" of BA properties became prime since 1986. I can't think of one.

surfer-x Says:

> Dude, come on now. ‘68 Z/28 convertible,
> one made, priceless, ‘68 SS/RS 375HP
> convertible, also very high priced. It’s
> all relative.

I went to three auctions in Monterey last month so I know that people have done very well holding on to rare Camaros, just like the guys that bought San Leandro apartments have done real well. My point is that the guys who bought Ferraris and Sausalito apartments have done many times better. As far as I know only one Camaro has sold at auction for six figures (the amazing '69 ZL7 that was restored in the South Bay), while almost all Ferraris from the 60's sell for six figures or more with rare ones selling for seven figures...

"Can anyone name an area that was prime post WWII that is not nice today."

As a guess I would say Detroit would be a winner :-)

Prime/Non-prime:

Chicago's near west side went from Prime, to so feared that even cops and firemen wouldn't enter, to Prime again, all post WWII. Wiki Cabrini Green.

Jeremy,

Those arguments are certainly popular and repeated as if they are gospel. There is some truth in them. But, unless you put them to the mathematical test, it's all just rhetoric. Luckily, I've done that for you and you can download it for yourself here: The Bubblizer Model.

Is jeremy a realtor?

Well, it looks like they just don't know what to ask for the houses now - it's getting stupid - one house in Los Altos Hills - 23000 sq ft lot, 4 bed reduced to 1.49m (can't afford those prices but I like looking) from 1.69m, one in Los Altos just put on market - much smaller lot and only 3 bed, put on for 1.5m. And then there's the one that's just been listed as a new listing, which in fact was put on the market at the beginning of the month - has now dropped $101,000 in 15 dom - now 1.2m (still too expensive)! Where as there's one in Mountain View, that they decided to reduce by 32K from 1.05m - 24 dom so far.

It will be interesting to see what they actually sell for....mind you I keep thinking - if we lived anywhere else these houses would be in the 200 - 400k range - if that!

newsfreak

oh gawd, don't even go there...you have to wonder what on earth prompted him to say something like that, at this particularly voltile time in our history.

While I have no time for crazies from any religion, i can understand why the average-muslim-on-the-street is getting more and more pissed with the West's attitude. Despite the Pope's insistence that he was 'only quoting' you really have to wonder why his speechwriter didn't cut that particular paragraph as being superfluous and inflamatory.

I'm sorry, but homeowners don't win if they have an interest only loan - which a lot are starting to resort to in order to afford a house.

Instead of paying the landlord rent, you are paying the bank rent, for the priviledge of paying property taxes and for all the upkeep of the house - no I definitely have the better deal as a renter.

Especially as a mortgage in my area would be twice to three times more than I pay rent!

Rentingisdumb Says:

Homeowners continue to win, and renters continue to pay the wealthy class mortgage and make them rich. Renters lose 100% YoY Sorry suckers.

I smell fear in your post. Face it - prices are going down.

Check out this columnist from the NAR trying to get sellers to "get real":

http://realtytimes.com/rtcpages/20060915_marketmoves.htm

What sellers say: "There's one special buyer out there … ."

The truth is: Most sellers using this line mean they have their house overpriced and will die in it rather than drop the asking price.

Hilarious.

There’s one special buyer out there

So special = stupid

When someone says I am a special person... :(

Surfer-x,

Sorry, spoilt only child here.

FAB,

For post WWII prime  sub prime. I was thinking of Detroit and a large stretch of the rust belt. Around DC, white flight had made DC and Prince George’s County much less prime (though that trend has quickly reversed in the last 5 years). Ditto New York City, white flight was a major problem in the 1970s.

For BA less prime  more prime, I believe places like Berkeley, Dublin and SJ were much less prime than they are today. I thought my observation coincided with yours, that relatively desirable BA areas mostly became more desirable. Furthermore, I agree with your general observation that prime property generally holds up better in a down turn, but I wanted to add a note of caution – investment and savings should be forwardlooking, we can’t merely rely on past history to see us through.

Since SHTF has been out for a while, I’ll take up his argument and say that I don’t think there’s assurance that the BA will outperform places like Tennessee or Austin in the long run. SF has a lot of similarities to Detroit 40 years ago. Detroit had and still has fancy suburbs and nice middle class areas, and the suburbs have very good public schools and some excellent public universities. In Detroit, there were a high concentration of engineers, management personnel and high paid union workers, they can leave.

BA has a goodly number of lawyers and financial firms, but not nearly so many as New York. We’re talking about Hartford, CN or Maryland levels here. Furthermore, the VC and HF funds are relatively small operations that can be here today and gone tomorrow. But mostly, BA is about technology firms that have many long term incentives to outsource or at least insource to another state. The jobs are here today, but there's no guarantee of a permanent job base. (it is in fact much shakier than Detroit's job base, which took decades to shrink down)

Then we look at the downsides. The cost of living is extremely high, the schools are poor on average, Cal state government is dysfunctional and the BA lifestyle resembles a hamster wheel. And the area is really on the verge of being too diverse. What do I mean? Let’s face it, most middle to upper middle class professionals do not want more diversity (out side of restaurant selection) in their lives. Even if they like their Asian or black coworkers/friends/neighbors, that’s usually because those Asian or black coworkers seem to share a similar work ethic and educational background as they do.

If SF gets too (esp. economically) diverse for diversity sake, the middle class will orchestrate another white flight – first into exclusive enclaves and then onto greener pastures in a different part of the country. As you SF folks mentioned, an SF family can make $500K and feel like they’re not getting ahead and are forced to spend most of what they make. These families can move to the SE and make $150-250K and feel comfortably well-to-do.

SP,

I left a reply to you at the end of the last post.

The agressively-smiley-using troll is back. Maybe some troll-be-gone would be a good idea?

Gotta love it. :)

SQT,

I think leaving her troll post here is useful. I like the low-key, rational reaction people have to these kinds of trolls. It only helps to spotlight their growing desperation.

Astrid,

Very succinctly, comparisons between Detroit and the Bay Area are inherently flawed. If for no other reason, than because Detroit is an order of magnitude smaller than the Bay Area MSA.

And then there's the history of continual death and rebirth of the Bay Area, Boston, NYC, London, etc. I'm not aware of Detroit proving anything beyond a one-trick performance.

Home prices in the Bay Area are much more sensitive to interest rates and other market factors than the in early 1990s because of the following reasons.

1. Home prices in San Jose boomed after the dot-com bust even though it had the worst recession (measured by percent of jobs loss) of any major city since the great depression. The explanation given is the drop in interest rates. The 1980s boom was tied to the growth in the tech industry. A housing market tied to interest rates is more susceptible to downturns than one linked to income growth. The most common models of interest rates I have seen are mean reverting with no difference between the rate at which interest rates increase towards the mean and the rate at which they fall towards the mean. Models of income growth have incomes increasing smoothly but being sticky downward.

2. At low interest rates, house prices are more sensitive to changes in rates than at higher interest rates. When we were pricing interest rate derivatives we had many problems working with Japanese derivatives because of the low rates there and volatility appeared to increase as rates dropped. Himmelberg, Mayer and Sinaii have an article in the Journal of Economic Perspectives where even though they claim house prices are not in a bubble say that at lower rates they are more sensitive than at higher rates.

3. When nominal rates are low, inflation does not reduce the burden of debt as fast as when rates are high.

4. With interest rates lower than in the early 1990s the Federal Reserve cannot reduce rates are much as during the last down turn in prices to cushion the fall.

5. The transition to two earner households with the entry of women to the workforce was complete by the 1990s. Households now do not have the luxury of sending a second earner into the workforce like they did then.

6. The prevalence of higher risk loans (interest only, negative amortization, no-doc, stated income) is higher than in the late 1980s so even a mild slowdown in the economy rather than a full-blown recession could cause a downturn in the housing market.

7. The boom in real terms was larger this time than during the 1980s

Here is an article about Sydney, Australia where the housing market I think is similar to San Francisco. It is one of the few cities in a developed country outside the U.S. when the price-income ratio approached 10:1

http://www.smh.com.au/news/national/bought-for-262500-in-2003-sold-for-95000-last-week/2006/09/16/1158334735688.html

A one-bedroom apartment that sold for $262,500 in November 2003 sold for $95,000 in September 2006. It is expected to rent for $130 a week or $6760 a year. The current GRM is 14. Even if rents were stable the GRM in 2003 would be 38, a number in the same ballpark as San Francisco levels.

GRM - gross rent multiple - price/annual rent

RC

But some of those dead urban cores have reemerged as ultraprime real estate after the removal and destruction of those policies.

"there is no way the bank would give me $1 mil. loan to speculate on stocks"

Glen, I hear with my bad ear!

Well, why not?

Well, b/c "sometimes" stocks go down too ya' know!

Oh, is that right?

What if I could come up with say....... a couple of points and pay for an appraisal on the "portfolio"?

People, how is loaning out 500, 800, 1 mil. to an FB any different than giving a monkey a loaded M-16?

Woo-hoo! Just stand back and let 'er rip! Won't this be some fun?

Oh and count me in for a big a$$ "smoking hole" where housing lands! (The only thing HARM's graphic is missing is that the wings are perfectly horizontal to the ground). I've seen a few pilots have to eject in my day and trust me, the bird is usually "corkscrewing" plenty by the time it meets "terra firma"! Oh, and holes in the water don't smoke (for those who's market is within an hour drive of a coast).

Randy,

Yeah, I know that the BA/Detroit comparison is flawed. BA does have better weather and a culture of innovation going for it. Nevertheless, BA's tech and finance firms seem the sort that can easily relocate, and CA's dysfunctional government shares some similarity with MI's union captured government. Maybe BA could continue to keep these businesses and keep up a functional government, maybe BA could experience a rebirth (MV based pirate based anti-global warming technology?) even if the businesses leave, but just maybe, the BA will shrink a bit in importance and be less of a powerhouse than it had been for the last 30 years.

You're right that BA has inherent advantages over Detroit and it's unlikely to ever fall so low, but right now, those advantages do not justify the high cost of living. BA is not the only special area in the US, and right now, places like Austin or Phoenix or Charlotte seems to offer a lot more, esp. for families with children.

SFWoman,

Yeah, those centuries stump me too, along with the 3 digit English counting system (I learnt the 4 digit Chinese counting system and occasionally misreport house prices by one order of magnitude).

I agree that demographics will certainly be something to watch closely. When people talk about BA diversity, they usually speak of it as an unadulterated positive, but I think most people prefer to live and work amongst their own kind. While there may be less prejudice on skin color, people will still prefer to be amongst their economic or educational equals. Right now, BA has a pretty good mix, but the high cost of living could eventually drive much of the cream away and drag BA back to average. I don't think BA would ever be a Detroit, but I don't think its in the league of New York, London or Paris.

I'll also file a second report on wild pawpaws. I just came back with a bunch and this batch was quite good. Mango size on many and the flavor has grown on me. It's kind of like a melon/banana custard flavor overlaid by a sharper tropical note.

Trolls and Legitimate Questioners:

a) Not everyone here believes housing prices will "implode", myself being one. We all do think prices will broadly decrease, however. Over how long and by how much is open to debate (and is debated lively here daily).

b) Current prices in many areas of the country, even unlikely parts of the Midwest and Southeast, but certainly the coasts have become unhinged from underlying fundamentals.

c) The main fundamental driving house prices is income. Period. Other fundamentals are important: tax policy, interest rates, local factors. But the purchaser actually being able to afford the purchase is a prerequisite.

d) (c) above has been violated, severely. Starting in about 2002 prices in many areas doubled or more. Incomes did not, and may not for a very, very long time.

e) Reversion to the mean. It always happens, in every market and in every case. How quickly it happens may be different each time, but it will happen, make no mistake.