patrick.net

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

But at some point the diminishing ROI makes it pointless to buy in

RE is a timing game, too. If you can see 5 years ahead, you can adjust your portfolio.

But the trend is their friend.

The System simply has to do the helicopter-money thing into the economy again, to keep the game going another decade.

Can't raise taxes. Can't cut spending.

http://research.stlouisfed.org/fred2/series/W068RCQ027SBEA

There's no other option.

And the landlords are waiting, patiently, knowing they'l exact their cut of rising nominal wages, as they always have.

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

housing / nominal wages

20

JH 2014 Feb 22, 9:08am

this market seems shady and there are a lot of sensible people staying out of the buying side and I really think that the loss of the prudent middle class as buyers will show in the overall numbers

It's weird by me too. Flippers bought older homes for $500-600 last year and are trying to flip them for $800+. Meh.

I went to some open houses a couple weeks ago. The realtors were in my face...the selling realtors. In the past it has been a mix of sellers and other realtors making connections. These idiots were busting veins in their heads to try convincing me to buy THIS house TODAY. It was gross. To me it signals desperation. Could just be seasonal, though, with this cold weather and all in socal. hehe

21

Bellingham Bill 2014 Feb 22, 11:54am

and didn't want to deal with renters

property managers cost a fraction of the rent. Dunno how many properties one can sanely manage, but 30 doesn't sound outlandish, and $200/mo per would work out to $70,000 for the manager, a perfectly decent income.

My rent in Sunnyvale rose $200/mo on more than one occasion, LOL. Hell, it's up $1000/mo compared to what it was 8 years ago.

22

Bellingham Bill 2014 Feb 22, 11:56am

but granite and tile do not cost 300k.

your competition isn't the seller, it's the next bidder(s).

23 Carolyn C 2014 Feb 22, 11:58am

Another house in Los Gatos we were looking at sold yesterday for $677,000

hrhjuliet, I am curious why you are looking at homes since you have stated that buying a home in this market is for fools?

24

Bellingham Bill 2014 Feb 22, 12:11pm

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

I don't think it's going to be a massive bubble this spring, but I doubt there is going to be the usual spring rise. I am not an expert, but this market seems shady and there are a lot of sensible people staying out of the buying side and I really think that the loss of the prudent middle class as buyers will show in the overall numbers.

yeah, certainly something can snap deep down in the economy and only become apparent months or years later.

I had a funny feeling about the economy in the 2004-2005 period, reading the same stories about rising cash buyers etc, but it was only when the Casey Serin story broke in late 2006 that I fully understood how much outright fraud had been going on, fraud that was the main driver of prices being bid up to where they got 2005-2007 (the calm before the storm).

My analysis now is difficult.

is not what I was expecting to see in 2014 (blue is nominal Case Shiller, red is 2009-dollars), though in real terms we're not much above 2010 still.

Here's my prior opinion from 3 years ago:

This is going to be the year that breaks or makes the trend I guess.

HAVE the greatest fools been found again? Is this 2005 again?

Dunno. Corporations are still doing great:

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

but the rottenness underneath is visible if you know where to look:

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

As for the Bay Area -- fortresses especially -- all bets are off. Supply is minuscule and the number of google / apple / social media millionaires being minted is no doubt MUCH greater than the dotcom good times, and the area still has those 1990s OG dotcommers still around taking up space for that matter.

I visited the Goog campus this week and boy the amount of building going on was comical.

http://research.stlouisfed.org/fred2/series/CASANM0POP

the spirit is willing, but the space is weak.

25 Carolyn C 2014 Feb 22, 12:12pm

Call it Crazy says

Carolyn C says

hrhjuliet says

Another house in Los Gatos we were looking at sold yesterday for $677,000

hrhjuliet, I am curious why you are looking at homes since you have stated that buying a home in this market is for fools?

I think she stated it here:

hrhjuliet says

We have been watching the ups and downs for 15 years and things seem so odd lately.

I didn't ask you.

26

Bellingham Bill 2014 Feb 22, 12:13pm

Carolyn C says

I am curious why you are looking at homes

"were looking" is the past continuous/progressive tense, implying actions completed in the past.

27 Carolyn C 2014 Feb 22, 12:16pm

Carolyn C says

I am curious why you are looking at homes

"were looking" is the past continuous/progressive tense, implying actions completed in the past.

Thank you for that.

28

hrhjuliet 2014 Feb 22, 12:37pm

Carolyn C says

hrhjuliet says

Another house in Los Gatos we were looking at sold yesterday for $677,000

hrhjuliet, I am curious why you are looking at homes since you have stated that buying a home in this market is for fools?

My cousin from Los Angles would like to be here where the majority of her family lives. It is foolish, but my grandma is getting harder for my dad to take care of on his own, and my cousin can help. Her job is more flexible than mine. My grandma lives in Santa Clara and Mandy's brother lives in Los Gatos, my sister lives in Aptos and my brother, who I also help take care of, lives in Morgan Hill. Her only other relatives live in France, and that is not an option. She wants to buy here, and I want her to live here. I am stuck here for various reasons and it would be a huge plus to have my cousin close; we are like sisters. I also keep my eye on the market in hope that things will go down for my former students just starting their lives. My poor students feel like they are in exhile from their hometown because they can't afford the rent or to buy a home. It would also be very reassuring to see the market go down. It would be a sign of a thriving middle class and a future for my students and other young people, including my own children.

29

hrhjuliet 2014 Feb 22, 12:53pm

BTW - My cousin does a lot of her own research and then sends it to me. She is (now don't go off some of you) a realtor. She works for a very small firm out near Canyon Country. I don't know much about LA, but she thinks says she is in the best spot in LA, but she is there alone and recently divorced. If any of you need a good and honest real estate agent, she still lives there and she is amazing.

30 Carolyn C 2014 Feb 22, 1:00pm

hrhjuliet, thanks for the explanation. I also think that lower home prices are better for society as a whole. My children will also need to buy a home someday.

31

hrhjuliet 2014 Feb 22, 1:17pm

Carolyn C says

hrhjuliet, thanks for the explanation. I also think that lower home prices are better for society as a whole. My children will also need to buy a home someday.

I think that's the hardest part watching prices go up. I would love for my family to all live here, and I would love for my boys to be able to move home after college and settle near us someday. My family has such strong roots here. I would also love to see my students be able to move home. One of my students, who danced for Ballet West, and went to school for chemical engineering at BYU wanted to move home to Gilroy, but can't. Now she is stuck in Oram, miles from her really large family. That's one story of many. It's sad. I have been hosting an alumni barre at Christmas for all the college students who come home for 15 years and each year their stories seem more hopeless and more discouraging. Pretty soon I will be hosting my little alumni barre tradition to an empty studio. No one will be able to come home. The Bay Area children of the middle-class are in exhile, and not for a crime they committed.

32

Bellingham Bill 2014 Feb 22, 2:03pm

http://research.stlouisfed.org/fred2/series/SANJ906INFO

the Bay Area is for investors collecting cool places to own

even with billions of Chinese and Indians, that's not that big a supply drain. what is happening though is that the bay area is like a rich person roach motel, they check in but they never leave.

Say 2% of techies each year win the dotcom lottery and are set for life. After 25 years, that adds up to ~50% of the tech population.

throw in the health care sector also getting fat fat fat:

http://research.stlouisfed.org/fred2/series/SANJ906EDUH

be in tech or health care, and you can make it in the valley.

or some other professional position:

http://research.stlouisfed.org/fred2/series/SMU06419406000000001A

meanwhile, new supply is measured in the hundreds:

http://research.stlouisfed.org/fred2/series/SANJ906BP1FHSA

this is why it's screwy there.

33 Carolyn C 2014 Feb 22, 2:17pm

Another sad aspect to the housing dilemma is the length of time it takes a family to save for the down payment. My oldest was 14 yrs of age before we purchased our first home. Half of my kids childhood was spent living in small cramped apartments. It has not been healthy for them constantly coupled up indoors. Too many families live in small, unsanitary, dangerous neighborhoods subjecting children to play out in the open accessible to child predictors. Meanwhile the wealthy hoard land to the detriment of our children.

34

JH 2014 Feb 22, 11:41pm

Supply is minuscule and the number of google / apple / social media millionaires being minted is no doubt MUCH greater than the dotcom good times

But are these kids millionaires on paper or have they cashed out? And if it is MUCH greater than 2000, then is it more sustainable this time?

35

JH 2014 Feb 22, 11:49pm

I have been hosting an alumni barre at Christmas for all the college students who come home for 15 years and each year their stories seem more hopeless and more discouraging. Pretty soon I will be hosting my little alumni barre tradition to an empty studio. No one will be able to come home. The Bay Area children of the middle-class are in exhile, and not for a crime they committed.

Are you talking about the very pricey BA? Like Palo Alto, for example? Or simply somewhere moderately expensive like San Jose?

If the former, well, that happens in fancy cities everywhere. If the latter, it is very sad. But I don't think the latter can be sustained. If NOBODY can come back home and live where they grew up, who is going to buy those homes? The market will have to reset to a price that the average Gen X and Y can afford. There will be neighborhood exceptions, of course there always are. But I don't believe people who say cash will rule and to hell with the next generation of 99% of Americans. That's not how it works. Gen X and Y need roofs with a couple of walls. As boomers retire and die, housing demand will drop and kids will start moving out of their parents' houses. What sucks is they will be 40!

36 CDon 2014 Feb 23, 12:29am

I would love for my family to all live here, and I would love for my boys to be able to move home after college and settle near us someday.

Most people would, hence, we eventually have a math problem here. Consider - you your husband and boys constituted one household. If they come back (with wives and kids in tow of their own) you now need three households (one for you, one for each of them).

Now take this (I want them to live nearby) dynamic, and multiply it by say 100,000 households. In one generation, you need 300,000 houses in an area that was considered "built out" when 100,000 were there. Where are you going to fit those 200,000 other households? You either need to build upward, (which most people deem inferior to SFH living), or keep building further and further away (i.e. Tracy, Stockton).

So at the end of the day, your boys (along with everyone elses kids) do this to one another. They compete (via price) with one another for the ability to live just like you do. And at the end of the day, the math doesn't add up - some will have to lose.

Granted, not "everyone" wants to stay here, some will want to move away. But again, others will want to move here from elsewhere (east coast, china, etc) such that at the end of the day, the math simply doesn't add up end up with a fundamental imbalance - and the only way to satisfy that imbalance is price.

If you really think about it, you will see it too. Its not fun, or "fair" or whatever, but again, it is what it is.

37

SJ 2014 Feb 23, 12:52am

Problem with expensive places like Cupertino and Los Gatos and Palo Alto for me is that traffic is HELL to get to Santa Clara in the work day commute. It is a parking lot. That is why I will never buy in Los Gatos, the 85 is a nightmare traffic jam daily.

38

Bellingham Bill 2014 Feb 23, 1:54am

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

But are these kids millionaires on paper or have they cashed out?

I don't think the present tech boom is as ephemeral as the 1990s.

back then there was a lot of outright fraud and the booming 90s irrational exuberance.

Now it's more cautious exuberance about the Valley's success in remaking tech again. 10 years ago today's tech and social media successes did not exist; 10 years ago all the best (and best-selling) phones were designed in Europe and Japan.

Now, the place is selling a billion phones a year (!) and has also incidentally kicked Microsoft in the balls. There was no money in selling pet food online, but search, advertising, and connecting people is apparently money.

As for "sustainability", it doesn't matter. A retired engineer with FU money in the bank is still going to occupy space in the Fortress.

Redfin has 24 listings for Palo Alto currently. That's not enough for one subpopulation -- Health Sector, Chinese, Moneybags, Professionals, Tech people.

PA is still housing retirees from the 1960s tech boom, let alone the 70s, 80s, 90s . . .

I don't know what the wider picture looks like, but I suspect the state will continue to rally around the bay area.

High housing costs repel some industries, but a lot of people with a lot of money living here attract others.

39

hrhjuliet 2014 Feb 23, 3:11am

re you talking about the very pricey BA? Like Palo Alto, for example? Or simply somewhere moderately expensive like San Jose?

They would be happy to live anywhere near home. Some even look in Hollister and other outlander towns. My students span a big area, from Salinas to San Jose. I even have some Campbell and Santa Clara students, but my students are mainly from Morgan Hill and South San Jose.

40

JH 2014 Feb 23, 5:17am

My students span a big area, from Salinas to San Jose

Can I ask where you teach?

41

JH 2014 Feb 23, 5:28am

CDon says

In one generation, you need 300,000 houses in an area that was considered "built out" when 100,000 were there. Where are you going to fit those 200,000 other households?

That's an interesting perspective that I haven't thought much about. Where I grew up in Chicago nobody is returning. Thus homes are cheap. Nicer areas of the city are not the same story.

Fullerton is a different story. My wife's dad and aunt both bought homes for their families in Fullerton. Three of their kids now live here (out of 5). So we have demand for 5 homes rather than the original 2, where not much has been built since the 70s. By the time our 4 kids grow up, if any wants to stay local, we get more demand.

But I'm not sure how the numbers work out in the long run. If I had grown up here, then it would be the merging of 2 family's kids into 1 home. By the time my kids are through college, there is a good chance their grandparents will be in very high density housing, if you get my drift. So maybe one of them will occupy the grandparents house.

CDon says

So at the end of the day, your boys (along with everyone elses kids) do this to one another. They compete (via price) with one another for the ability to live just like you do.

So I feel like this is a skip-generation idea. The boomers expanded us into a suburbia car culture, especially here in CA. Their kids are not able to occupy their homes yet (with some exceptions), because they are still alive. But once they go, I think we will see a trend toward greater inventory. Unfortunately, this will not help Gen X/Y but will help today's elementary-age children in about 10-20 years when boomers are gone.

Do you have any thoughts on this?

42

JH 2014 Feb 23, 5:32am

Now it's more cautious exuberance about the Valley's success in remaking tech again.

I could see this... A tech boom 2.0 should be designed more carefully...

There was no money in selling pet food online, but search, advertising, and connecting people is apparently money.

...but this is what I find intriguing now. Did we realize in 1998 that pet food online was silly? Do we realize today that Whatsapp is silly? Advertising has been big for decades, so it could be a long-term success...that's what I keep coming back to. Ads seem so silly, but they have been around for a long time in a variety of media. Will something come along that makes internet ads obsolete?

43

hrhjuliet 2014 Feb 23, 5:43am

hrhjuliet says

My students span a big area, from Salinas to San Jose

Can I ask where you teach?

Morgan Hill

44

hrhjuliet 2014 Feb 23, 6:01am

We span such a large area because the Valley has a million competitive jazz studios that offer ballet, but they are usually all the same; trophy studios that offer ballet to get parents who don't know a darn thing about dance to sign up their little girls who dream of tutus but end up dancing like hookers instead for plastic trophies. My studio is a true classical ballet studio, and we attract men and women serious about technique. I have trained many professional dancers and I have taught Olympians and sports professionals who wanted to cross train. There are only a few ballet studios like ours in the Valley, that is why we draw from such a large range

Leave it to the Bay Area to have thousands of dance studios teaching young women how to dance like whores for trophies, and only a limited few teaching an art to men and women who admire discipline, technique, modesty and are not motivated by meaningless awards. You can add this to the list of why I wish I could move.

45

hrhjuliet 2014 Feb 23, 6:27am

Hmmm, come to think of it, maybe they are just training their daughters for the only job that will help them buy a home in the Bay Area.? I guess I shouldn't judge, their daughters have to find a way to eat someday, and clearly a college degree will not guarantee food on the table, and an honest trade won't help them either.

46

JH 2014 Feb 23, 12:17pm

Morgan Hill

So I posted earlier my analysis of Fullerton 1980s vs. today, right? I did the same on Morgan Hill. It was tougher because it's a newer area...but I found several homes with purchase histories in the 1980s.

Overall, it's the same story. Monthly payments for a home purchased today are comparable to monthly payments in 1980s. Crazy, I know. For example, a 1700 sqft home purchased in 1988 for $210k with 10% down carried a monthly payment of $2066 (a pretty standard size/sale price for the area it seems). This required an income of $88k, while the national median income at the time was $26k. Only an upper middle class family (or better) could afford this.

Flash forward to today, and that monthly payment with inflation is $4068. If someone put down 10% and pays 4.4% interest with that $4068 payment, they are purchasing a home that cost $660k. This payment requires an income of $174k, while the national median is ~$50k. (Incidentally, the national median has tracked with inflation in the long-term for the past 30 years although it's falling today.) Again, the family that purchases that home today has to be well off...just as their parents had to be 26 years ago!! Homes have simply increased in "value" because of inflated wages and lower interest rates.

A couple of caveats. First, I was shocked when I ran these numbers in Fullerton and discovered it wasn't as unaffordable as I thought! Yet I think housing is overpriced. haha. Second, my numbers don't work with existing list prices. They are about 20% over what they should be based on monthly payments. That is because cash has been king for about a year now and propped up the market 20% over where it should be. So that home in Morgan Hill would actually list for, say, $750-800k.

So homes are in line with historical (at least one generation historical) plus a little blip from all cash buyers in 2013. Bottom line: if kids today were doing as well as their parents a generation ago, they would be fine. They could live where they grew up. BUT here are the two biggest problems: First, a 10 or 20% downpayment costs a lot more today because home values have increased beyond just inflation. (Notice that 3.5 and 5% downpayments have been en vogue although harder to get in 2014...) Second, today's buyer cannot refinance in 10 years because interest rates will not be multiple percentage points lower.

Now, in Palo Alto, for example, this is not the case...homes disconnected with monthly payment values with the tech booms because people are making large downpayments (or all cash) and demand is high. Mortgages don't matter.

47 cloud15 2014 Feb 23, 12:24pm

I would be extremely surprised if something sold for 677K in Los Gatos. Can you please paste the address ?? Highly unlikely that this could happen.

48 cloud15 2014 Feb 23, 12:24pm

Hrhjuliet can you please paste the address ?

49

hrhjuliet 2014 Feb 23, 2:02pm

cloud15 says

Hrhjuliet can you please paste the address ?

20155 Thompson Rd, Los Gatos, CA 95033

50

hrhjuliet 2014 Feb 24, 12:10am

cloud15 says

I would be extremely surprised if something sold for 677K in Los Gatos. Can you please paste the address ?? Highly unlikely that this could happen.

I really don't bother posting highly unlikely numbers.
Zestimate: $1,746,086
Beds: 4, Baths: 4.0
Sqft: 2,757, Lot size(acres): 5.37
Type: Single Family
Year Built: 1995
Last Sold 2/5/14
For $677,000

Enjoy.

51

bubblesitter 2014 Feb 24, 5:44am

tvgnus says

California home sales, prices dropped in January

Good. This will only attract more rich Chindians!

52

hanera 2014 Feb 24, 6:02am

IMHO, the young highly paid tech employees especially those from newly IPOs that are driving the prices in Bay Area up. Only need about 5-10% of the buyers to overpay RE. And every sellers would take reference to these higher prices. I believe these tech guys comprise more than 5-10% of the buyers.

53 corntrollio 2014 Feb 24, 8:20am

Another house in Los Gatos we were looking at sold yesterday for $677,000, and it was listed at a million.

That sale looks extremely sketchy. I have a few theories -- although it sounds like you've seen the house, so maybe you can refute them:

1) it says one of the sales in the past was a multi-unit property -- maybe they split up the acreage. What if they did that again this time, and the data is showing up wrong?
2) it was apparently foreclosed before. Maybe it's in really crappy shape and needed a cash buyer because it's technically uninhabitable?
3) it's some intermediate transfer that got reported as a sale?

The sale history is interesting nonetheless. Odd that MLS data still shows it as pending, which adds some credence to #3.

It's weird by me too. Flippers bought older homes for $500-600 last year and are trying to flip them for $800+. Meh.

I went to some open houses a couple weeks ago. The realtors were in my face...the selling realtors.

I've seen some of those near me too. Almost all of them are foreclosures in crap locations (often on busy streets) that were bought for about $600-700K. A good percentage of the sellers are real estate agents selling their own house. They are trying to peddle them now for about $200K higher.

It's often working, but it's largely because there is so little inventory right now. It's not even clear the owners did much to the places in the meantime -- large portions of many of the houses look original. Good houses going for high prices isn't so strange, but this sort of stuff where crap houses are going for the price of good houses is bubble-mentality.

hanera says

the young highly paid tech employees especially those from newly IPOs that are driving the prices in Bay Area up

Doubt you're even able to name many of these companies without looking it up. The thing that differentiates the more recent IPOs from those of the dotcom boom is that the shares are often concentrated in the founders, investors, and key personnel in the recent IPOs compared to the past. More of the rank and file employees benefited from IPOs during the dotcom boom, but most of them have had fewer shares in the more recent IPOs.

Some of these rank and file employees ended up with reasonably health down payment money for sure, but they aren't typically all-cash buyers, certainly.

The reality is that the private buyouts have probably been more influential than IPOs, if I had to guess, although those are even more likely to be concentrated in founders, investors, and key personnel.

54

JH 2014 Feb 24, 9:07am

corntrollio says

Almost all of them are foreclosures in crap locations (often on busy streets) that were bought for about $600-700K

Yes, and shorts. IMO, it's too bad the distressed inventory didn't hang out long enough to be purchased by owner-occupied buyers. It would've put more downward pressure.

The busy streets thing is crazy, right? I see so many of them flipped. And I've toured those homes, too. So, so, so noisy. Of course, people just close their windows and ignore it. In SoCal, even, where you should always have your windows open. I've noticed though, when those are open houses, the windows are closed and the backdoors are locked.

55 corntrollio 2014 Feb 24, 9:19am