patrick.net

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.

aimee,

Thanks for the kind words. When we hear we had some small part in helping someone avoid making an ill-timed purchase, it makes everyone here feel good.

Your patience will be rewarded, even if you only wait a short while.

Gavin and cajun100,
Nice posts.

Why is it that most trolls on this board (San Francisco, for our most recent example) can't seem to spell or use proper English grammar?

Para ejemplar:

I read allot of articles that states places like San Francisco will not be impacted the housing bubble.

I have been following articles on housing Panic
but I do not see any evidents that the bay area prices will fall.

I don't even know where to start on this one. His/her writing is even worse than Fake P's.

Most lovingly I love the bubble because it will absolutely remove the carpet baggers from the natives. Fuck you, California is the only state that could secede and pull it off. Fuck the rest of the USA. I only care about the California Republic. Mrs. X, normally not affiliated with the HARM-X mafia, had this to say, "I’ll rent for the rest of my life before moving". Fuck you fucking fucks, move back to the fly over states and enjoy you 590 FICO. Me? I'll be enjoying a Ca Bungalow and surfing while you're wondering how you could have gotten it so wrong. Yes, there is beauty to a perfect margarita.

Surfer-X,

HARM has expressed some interest in moving out of CA so native Californians aren't immune from the siren calls of cheaper housing and decent public schools.

I don't wish gloom and doom on CA. After all, I like it here and plan to stick around until Australia or Canada wants me. However, I did want to present a counter argument to BA invincibility.

However, I did want to present a counter argument to BA invincibility.

Bay Area is a very special place... to its residents. There is no need to present counter arguments. Many people in Asia do not like the Bay Area because of earthquakes and its proximity to San Francisco demographics.

I even heard of international students declining admission to Stanford after they found out it is so close to San Francisco.

Yes, there is beauty to a perfect margarita.

Especially with the perfect mac-n-cheese.

HARM has expressed some interest in moving out of CA so native Californians aren’t immune from the siren calls of cheaper housing and decent public schools.

Ah yes, as so have i, but talking and putting your shit in a truck are two different things. Besides, it's albacore season.

Did you see the new high tech weapon we will use in Iraq? Moats.

and where there's moats, there's drawbridges... pouring boiling oil on the enemy is pretty effective too...

the norman french took castle building to a whole new level when they took on the british isles -- particularly in wales -- they upgraded quite a few existing castles as strongholds...

Do the moats come with hungary crocodiles?

Will the enemies counter with dead diseased sheep and siege engines?

What kind of snake are we using for the snake pits?

The snark possibilities here are just about endless.

heh, lobbing diseased sheep over the wall with a catapult to give everyone plague inside...

Or the heads of your enemies, like the Celts did...

I have argued that Bay Area incomes are strong, which not everyone here agrees with. But I think the data shows some solid, quarter over quarter income growth in the BA.

Less than 10%, to be generous.

Meanwhile, homes have increased over 100%.

I highly doubt that even in "your company of 2,600" you've enjoyed 100%-150% salary and bonus increases in the past 3 years. If you have, then please share your company's jobs URL with the rest of us.

As cool as gastrophetes, trebuchets and ballistas are...

Nothing beats having a friendly local population which believes in your cause.

Where are you getting that homes have increased by 100% in the past 3 years?

Lots of places. For anecdotal evidence, just look at the sales records on Zillow or Redfin. My wife and I were just looking at a home in Mill Valley yesterday. Owner is asking $1.98M, bought it in 2004 for 895K and maybe (I stress maybe) put $250K into it to be very generous. There was another in Corte Madera. $1.6M, owner bought for $785K in 2002.

My income since 2003 has definitely more than doubled. 2002-2003 was horrendous, and i thought i was going to get fired.

According to the US BLS, you are not typical for this area then. My guess, you're either young, lucky, or brilliant. It's not atypical for young folks to double the income a couple times in their early career years.

But young, lucky and brilliant people aren't enough to prop up an entire region of hyper-inflated properties.

I believe this so much I'm banking 10 years worth of equity gains on it by sitting out before reentering. If you're right, I lose 5-6%. If I'm right, I get a multi-million home debt-free.

whaddup Says:

My income ref wasn’t used to justify homes going up. It was a response to Randy’s question. Many people have had their income rise by more than 40-50% since 2002-2003, and homes are only up up 40-50% since then.

You are comparing anectode ("many people have had their income rise by more than 40-50% since 2002-2003") to actual data ('homes are only up up 40-50% since then.")

Sorry, that doesn't fly. Median income has not increased in the BA by anywhere near 40-50%. Good for you and your examples of BA residents, but that doesn't make for statistical significance.

But muggy,

Even according to the (crappy) NYT, which you referenced, part of the reason for rent increases is reluctance to buy and the glut of condo conversions.

You can always blame the media for the bubble crashing, too, if you're a realtor:

http://www.nytimes.com/2006/09/17/weekinreview/17bijaj.html?ref=business

More NYT housing related stuff from today:

http://www.nytimes.com/2006/09/17/business/yourmoney/17view.html?ref=business