patrick.net

I think "chartology" here is a mistake -- taking the map for the terrain.

The cost of production of existing housing stock approaches $0 -- just look at Detroit for how far prices can theoretically fall.

So housing valuation is dependent on all other flows households have to deal with -- gross income vs. disposable income vs. discretionary income vs. the cost of money vs. the overall lending environment (ie suicide lending) vs. the speculative premium (bubble) vs. area supply vs. area demand.

Chartology requires ceteris paribus thinking, but I see a world on the edge right now.

Give me $10 gasoline, 10% interest rates, +10% rise in income tax burdens and I think we'll see really cheap housing compared to the postwar norms as graphed in the C-S nominal chart.

Housing should drop, and wall street should get out of business of screwing people with housing.

Whats the point of living in a neighborhood where your neighbors will be swapped out every 3 to 5 years because that is what some very rich wall street guys want the system to be like? Out of most of my neighbors I only know a few. Most been swapping around every few years.

Real estate gambling casino (as it is only a casino since it makes no money but rather just shuffles it around) has been literally destroying neighborhoods and communities. It's a system where housing gets churned over and over for insane wall street profits at the expense of something much more important that can't be quantified monetarily. Real estate business takes soul away from the community and its wealth and slowly redistributes it to some very rich brokers out there.

please forgive any ignorance in the question i am about to ask.

if there is going to be runaway inflation in the economy soon, and housing usually tracks inflation wouldn't buying a house now be a good hedge towards that inflation? and with low interest rates, all the better?

it is a great time to buy a properly priced house
it is not a good time to sell a house
it is a good time to be in debt
it is a bad time to save money

unemployment is local
realestate is local
wages are local
prices are local
lending rates and practices are not local
taxes are local and not local
fuel prices are not local becaue they are out of this world!

The lower end market in my area has kinda settled down to a pretty good match to lower end home buyers. The mid market is still above the mid range buyer. The top end is still astronomical, but rich people are pretty stupid about value in this area of the planet. I say the middle still has a full 15% to fall in my area, and the top another 30%.

I guess I'm just not understanding inflation to well. its just I'm seeing gold prices rise and rise and I thought that means the dollar is losing buying power .
Buying gold is a hedge vs inflation but you can't live in gold.

Jeremy says

But the “hedge against runaway inflation” argument is outrageously silly!

Well, I wouldn't call it outrageous or silly.

The only way we're going to get J6P wage inflation is through cost-push pain. As the cost of living rises, it is entirely possible that the LL scum among us can ride along in that train.

Troy says

Jeremy says

But the “hedge against runaway inflation” argument is outrageously silly!

Well, I wouldn’t call it outrageous or silly.
The only way we’re going to get J6P wage inflation is through cost-push pain. As the cost of living rises, it is entirely possible that the LL scum among us can ride along in that train.

I'm lost what's j6p wage inflation and what or who is ll scum?

Vinyy141 says

I’m lost what’s j6p wage inflation and what or who is ll scum?

a) the general wage level

b) landlords collecting economic rents from site value

I've rented for all of my adult life, and most LLs have not been scum.

Going to school I rented the back room of an old house in Westwood. The LL had lived there since the 1920s, she was nice and the $90/week she was getting from me made economic sense all around.

Then a friend at work had an opening in his parent's condo. They had bought it for him a couple years back to basically manage and live rent-free. His parents were ultra ultra smart -- one is a nationally-known economist who's worked for government LOL. Again, this was a higher use of the land and all benefited.

Then I moved to 1446 Butler Ave in West LA. This was a nice garden complex and it fell under rent control. After a year there I told the mgmt I was moving out but they pretended to not understand that and charged me to move out, which also broke the rent control for that unit. Scum!

My apartment in Tokyo was in a residential neighborhood with the LL living on the first floor and his son living on the 2nd, with 3 other units paying the rent. Not a bad model to develop I guess. Not scum.

Now I'm living in a garden apartment in Sunnyvale. Rent jacked from $1300 to $1750. Place was sold a couple of years back for $90M IIRC. Place needs rent control, or at least rent taxes so the LLs aren't capturing all the site value.

robertoaribas says

rent control led to the worst rental market I have ever experienced

rent control has its downsides, yes. I prefer rent taxes over rent control -- coupled with a land value tax the two could work to incent redevelopment while limiting the economic rents LLs take out of the actual economy, thus mitigating the leechfuck nature of their parasitical rent-seeking activities.

Most J6Ps are don't have money to invest on gold. Gold investors are usually high income earners than our usual neighborhood J6Ps. They are doing quite alright even during the recession, while J6Packs become J2Cans. If the goal of housing market is to provide homes that J6Ps can afford, home price is still quite expensive in those city areas that haven't crashed.

It also depends on who really is J6P. With median HH income of over 100K, and the fact we have lots of lawyers, lobbyst and docs here in fairfax county virginia, being 100K'ers means nothing while it means something in somewhere else. Median SFH price of 650K seems ok for many people in the county though, certainly little too high for J6P to afford. 250~300K condo, that used to be 300~400K is something they can take a look when they're willing to pay 350/mo HOA. You won't see a picture like this in most part of Pennsylvania, Missori or Montana. But, they got more deers than people anyway, and who in Patrick net cares? We're mostly from big cities like LA, SF, NY.

1st chart now looks very different from Japan.
Reversion to the mean may have occurred if we were operating in a bubble with no government response but now with same policies in place that created the bubble in the first place market may even go up from here.
Rather than double dip we may have a double bubble.

"double bubbles" .... tech and gold and oil don't count?

Palo Alto has had a lot of homes added - there's been the tear down one house and build six on the lot and there's been the build on old industrial spots near the 101 As well as shut down Rickey's and develop it into townhomes - so that argument won't fly.

This post was in reference to the one above where the post has now been edited to say "Pennisula
" where before Palo Alto was directly cited.

some additional notes for clarification.

1. i said national prices will drop, not palo alto. not sure why PA is being referenced.

2. chart1 - the US vs japan comparison chart.

2.1 the chart is -not- used to predict where prices will head.
2.2 it's only used to show that it takes a long time for prices to deflate and even this is tenuous since it's only showing one country(japan). as i mentioned, it'd be better to observe RE bubbles in several other countries to see how long they took to deflate. from the papers and books i've read RE bubbles world-wide do take a long time.
2.3 from 2.2, odds are good national housing prices will continue to deflate in the near future since prices have been falling for only 4 years (this assumes no government intervention which i understand is a huge assumption).

3. chart3 - inflation adjusted national CS: is being used to predict price index direction (downward).

3.1 from 1890 to 1998 (108years!) the price was above 120 only 3 times in: 1895, 1980, and 1990.
eyeballing it, let's say 10 years out of 108 or 9% of the time it's 120 or higher. 91% of the time it's below 120. if you include the most recent bubble(1998-today), that number drops from 91% to about 82% which is still high.
3.2 we are currently at 133 (see red dot on chart3).
3.3 a 10% drop would put the price index at 120. reversion to the mean should easily revert the national price index to 120 or below - which is where the index is at 91% (or 82%) of the time.
3.4 i believe this is a conservative estimate. unless you believe there has been a structural change which would necessitate the real price index to remain higher than the nominal value over the past 100+ years. clearly i don't believe there has been.

4. if you look at the bubbles in 1980, 1990 and 2010 they are fairly symmetrical. the bubble in 1940/1950 was facilitated by the end of world war 2 and the baby boomers (structural change) and resulted in a permanent upward shift in the price index and is therefore asymmetrical (probably more accurate to say it's not a bubble).

chart3: inflation adjusted case shiller national price index

The sky is falling the sky is falling. In your own mind dude. In your own hopes.

Vinyy141 says

I guess I’m just not understanding inflation to well. its just I’m seeing gold prices rise and rise and I thought that means the dollar is losing buying power .
Buying gold is a hedge vs inflation but you can’t live in gold.

Anyone may live in gold and silver. Not sure why you can't. Anyone can barter in just about anything, Gold and silver included. Most people around me are in private residences. The commercial businesses are the minority, and they are the ones that force the public to use US dollars. Everyone else could exchange goods and services all day long, and keep it off the books.

Take a drive out into the country and you will find this has never stopped happening. People where I live raise chickens and repair equipment, and that sort of thing. All easy stuff to trade with. Gold and silver included. The trend now is that this is moving into the metro areas, albeit slowly due to resistance by the deniers.

SF ace says

2) wealth disparity/net worth is not the same. (So your Palo Altan probably gained 10X more wealth than someone from antioch over the same period of time.

Had it not been for the Tech Stock bubble on IPO issues back in 1998-2000, it would be doubtfull we would have seen PA prices rise as much or any wealth show up. But someone buying in Palo Alto with "Free Money" as we called it back than meant someone else overpaid for the stock and took a beating in their investment/savings account.

As Warren Buffett said about the tech ipo stock, calling it the greatest "transfer of wealth" he seen. He understood, or didnt understand Tech, and kept away from the insanity. He was the smart one!

Now you have to have a similar bubble in order for then buyers now sellers to break even.
And the hype bubble machine, in regard to Palo Alto, is at 100% ...
But who wants to sell their soul to the devil ? Any takers!

Lets all Buy up Facebook IPO stock at $300-400/share so a Palo Alto resident becomes rich!

No Thanks!

So you're looking to buy your first home in Silicon Valley. How do you get into the market?
"Stock options," says real estate agent Chuck Atwell dryly. "Being a multi-millionaire."

APOCALYPSEFUCK says

Me and the wife were training with tallow-dipped flaming arrows this weekend. The payload reduces the available range but may come in handy for close order combat.

LOL! your just too much! but you may wanna learn how to build wooden spears.

Very few people are going to become rich from the facebook IPO. The company has 2,000 workers right now and a market cap of about 50 billion. The last 1,000 or so workers will make some money but most likely will not become millionaires because of the high price on their stock options.

For 2010 the revenue of facebook is estimated at 1.86 billion and growing to 4 billion in 2011. Google is going to make around 28 billion in revenue for 2010. Now facebook has a market cap 1/4th that of Google and lets say 1/7th (4/28) the revenue. To get a similar valuation to google facebook would need to earn 14 billion to be a 100 billion dollar company.

fewy says

Very few people are going to become rich from the facebook IPO. The company has 2,000 workers right now and a market cap of about 50 billion. The last 1,000 or so workers will make some money but most likely will not become millionaires because of the high price on their stock options.
For 2010 the revenue of facebook is estimated at 1.86 billion and growing to 4 billion in 2011. Google is going to make around 28 billion in revenue for 2010. Now facebook has a market cap 1/4th that of Google and lets say 1/7th (4/28) the revenue. To get a similar valuation to google facebook would need to earn 14 billion to be a 100 billion dollar company.

I think it's more of a marketing hype. *Farmville* can't possibly bring that much revenue to justify the total price.

As was the case in the stock market boom of the 1920s the tech stock boom in the late 90s... many didnt look, or had access to the 'real numbers' but just bought into the "marketing hype" as Chris in LA states.

You are probably right SF Ace. Of course just a thought, if their stock price already accounts for all the new potential future farmvilles... it would mean there is no point to buy the stock since it would never appreciate as it's real value is already there or much below the price.

Can some one here explain to me why it is a good time to buy. I have heard this since 2007. If I buy now a $400k home, next year the same house will likely worth $350k. Why is it a good time to buy? To me it doesn't make any financial sense. I can buy me a new car instead of buying a house then next year I would be financially in a better position than the guy have bought the home. To me this is a no brainer. Every year since 2007, every one bought a home is either foreclosed, short sale or deeply under water. Is that good?

ltremai says

Can some one here explain to me why it is a good time to buy. I have heard this since 2007. If I buy now a $400k home, next year the same house will likely worth $350k. Why is it a good time to buy? To me it doesn’t make any financial sense. I can buy me a new car instead of buying a house then next year I would be financially in a better position than the guy have bought the home. To me this is a no brainer. Every year since 2007, every one bought a home is either foreclosed, short sale or deeply under water. Is that good?

good point, you should buy the new car.

ltremai says

Can some one here explain to me why it is a good time to buy. I have heard this since 2007. If I buy now a $400k home, next year the same house will likely worth $350k. Why is it a good time to buy? To me it doesn’t make any financial sense. I can buy me a new car instead of buying a house then next year I would be financially in a better position than the guy have bought the home. To me this is a no brainer. Every year since 2007, every one bought a home is either foreclosed, short sale or deeply under water. Is that good?

the major problem with your argument is you don't know if prices will continue to fall. we're all just making best guesses.

criteria-to-buy: if your payments are comparable to rent, you can afford them easily (ideally on a single income) and you plan to live there for 10 years, then it's not terrible to buy.

but realistically, as long as i see prices continue to fall, i probably won't buy as i believe housing prices have significant momentum meaning as long as prices are dropping, i expect them continue to drop until they don't. which also means at some point my prediction of a falling market will be wrong. i'm fine with that in fact that's my strategy.

i'd prefer to pay more to buy in a healthy market with lower odds of price decline than buy early in a sick market with higher odds of price declines.

once prices level off or increase for a year or three and the house meets my criteria-to-buy then i'll probably buy.

Noisy people, you all are.

Try this double hedge: Buy real estate now ONLY if you can buy it 15% below current market.

- Avoiding a real estate commission = 3 to 6%.
- Favorable seller financing saves loan costs and below market interest rates offset price.
- Deal points can make up the difference: Seller paid closings costs, rent guaranties, repair credits, long escrow periods, low down payments, etc...

"Until the 25,000,000 million jobless, and underemployed begin to earn again, housing prices can only decline".

I agree. I don't buy the inflation argument - that home prices will rise as the dollar weakens. Unless wages go up at the same rate, people will be struggling just to fill the gas tank and buy food. How in the world will they want (or be able) to buy expensive homes?

Compensating for Inflation only gives a misleading picture. Prices should also be compensated for Interate Rates, because at the end, for most buyers, it comes down to the monthly payment and not the principal. I know it shouldn't be like this, but most people buy with a mortgage.

Wow, now I can post. Patrick, thanks for this forum. I have been following your website for... well... too long, maybe 3 or 4 years, or more. Thanks to this website I saw for the first time the Case Shiller home-price-index-inflation-adjusted several years ago, but many months ago I decided to compensate it for Interest Rates (as I said before, for most buyers, it comes down to the montly payment and not the principal). What I found it that when including also the Interest Rates, the index shows that we are below the mean by ~4% already. Please take a look.

vrpirata says

I know it shouldn’t be like this, but most people buy with a mortgage.

? Sure it should. The alternative to not-buying is either renting or living in your car.

There is no way to prevent prices from rising in response to lower borrowing costs and more favorable lending terms.

That's the beauty of the land market, and something I wish I had learned about 20 or 30 years ago.

What I found it that when including also the Interest Rates, the index shows that we are below the mean by ~4% already

This is my understanding, too, and what I meant by "ceteris paribus" above.

http://research.stlouisfed.org/fred2/series/MORTG/

tells part of the story, but does not show the immense amount of price-pushing that happened due to the rise & fall of suicide lending, 2002-2007. In places like Salinas CA up to 40% of the home buyers were buying with negative-am loans, and the market as a whole was overrun with an army of Casey Serins each stringing 10 or more sketchy purchases into their new real estate empires.

The smart money was getting out then.

Once all that funny munny disappeared and actual underwriting returned, prices fell back to earth.

Looking over Fresno listings I'm beginning to see prices I haven't seen since 2002, and that's with interest rates several points lower now than then.

The Bay Area hasn't fully been hit with this revaluation, and maybe it won't -- it all depends on the jobs situation here. Maybe the worse is over for us and the fortress and its outlying areas will hold.

The index in chart 3 was seldom above 80 for most of a 25-year period (almost a quarter of the chart range). If we hope to even stabilize there, it'll require major wage inflation (3-6x, with no other inflation) and a dramatic increase in employment among those currently in their teens to 20s just to support present prices. Around here, this demographic, even if working, can't afford a low-end rental with a roommate. Considering this, effectively all real estate values are pure fantasy. Even the often-cited income:price ratio will probably be breached. We're talking the sale of half the residential property in the country over the next 20 years, on top of normal activity, combined with shadow inventory (small potatoes, but that alone scares people in real estate). Buying an average home in a nicer part of town for less than the price of today's new mid-range cars in 15-20 years is a near-certainty.

Could anyone recommend a mutual fund that heavily invests in retirement communities, nursing homes, and other end-of-life businesses? It's where the big money will be made for decades...

"Around here, this demographic, even if working, can’t afford a low-end rental with a roommate."

And that doesn't take into account quickly-rising healthcare and college costs, along with hikes in property taxes, wage stagnation, and outsourcing. How will a new generation afford to buy when prices are so out of whack with financial reality?

Mikejay says

How will a new generation afford to buy

It probably won't--at least comparatively speaking. That's the untold /story amid all of this. Currently, I'd venture most players are 2nd-, 3rd-, or last-time homebuyers. But give it 10 more years of "27 and still living at home", "graduated with $50k student loan debt w/useless master's degree and no job experience", and "the high-profile career I was entitled to doesn't exist anymore", and then guess whothehell is going to support the market anymore?? Most of the solutions are artificial and wealth-sucking.

Much of America seems content with this, BTW, or at least content to be willfully ignorant of it. It's fun watching the whole damn thing sink, though. Nihilism and all that. . . .