patrick.net

I can’t tell you how many people I still hear telling me that they want to get into fixing up/flipping houses!

Pretty amazing so many people consider it "easy money", considering the potential headache with contractors, inspectors, local govt. I'm guessing most people buy, improve modestly and sell vs. the a complete rebuild.

I'd love to somehow pull together stats of speculative RE activity for the SF Bay, and get a better picture of how much this has driven prices. Given the "easy money" angle, I suspect speculation has driven prices far further than portrayed by mainstream media.

I don’t understand the speculation in the Central Valley AT ALL

From the news on speculation I've read, my guess on the buyer psychology is this: many bit by the RE bug, have truly bought into "it can only go up" mantra. Therefore, they want to be one of the first to buy into untapped opportunities to realize bigger gains for a resale. Basically it's a pyramid scheme, and is a plausible explanation for the sales/price spike in places like Far north CA, Idaho, Arizona, Texas tumbleweed areas, etc. Not too surprisingly, many of these areas face a rental glut of homes--and very cheap monthlies.

Actually, I’d argue that the local economies of places like Boise and Phoenix have, historically, been far better than the Central Valley

You're probably right. In the eyes of many investors, I doubt they care about those details, only that they get in "at the bottom".

PeterP, did you take my advice?

No. I will only take a flat or short position in FNM at this point.

My MLS search list is still growing steadily. I thought this is not normal well into September.

Perhaps it is a ...

Spring soft patch
Summer slowdown
Fall pause
Winter break

Off subject slighty here... but...
I'm going to play devil's advocate here and put
in the perspective of someone not from
California, and thus perhaps shed some
alternative views of the housing "problems" in the
state. I'll start by first saying that yes, like
most of the people my age and income(
middle class) and late 20's, early 30's, I too
want to get started and own my own home.
As evidenced by the exsitence of this forum, it
is a severe problem. The problem is both
socialiogical and geo-political in nature.
I came here 5 years ago for what I percieved
would be an opportunity to develop my
creative skills and take advantage of the higher
salaries. I wasnt aware of the high
costs of housing. I grew up in Tennessee, and
have lived in Boston,MA, NYC, and now here
in the Bay area. What I've wittnessed in each and
every one of these locations, even in
TN was that the attitude of many was that they
were living in the absolute best part of
the country. New Yorkers thought NYC was the ONLY
city worth living in. Same with Boston.
My experiences there was that it was expensive
and fucking cold in the winter. If you
asked any of these people if they would consider
another part of the country, I'd get
these amazed looks. What? leave their precious NY
for some unheard of flyover state? Good
god I must be crazy for even suggesting it!
The same attitude exsists here in the Bay.
People move here because they percieve it as
a creative, forward thinking world class city
with a perfect climate. Is it? well, in
some ways it is pleasant. It has it's perks ,
don't get me wrong, but it is similiar to
just about any other city across the country. The
majority of the ethnic classes are
shoved into ghettos and the worst part of towns.
Their schools, and even the public
schools are propped up on barely neglible
budgets that make most 3rd world country schools look great in comparison. My conclusion is that California
simply has a SHITLOAD of really Uber-Wealthy
people. They are also the reason that the
prices are as heavenly as they are.
What bothers me and perhaps many others here is
that the class diffrences; the
diffrences between the poor and the rich are
extremly apparent. That's true in most
places, but here you now have severe and
noticeable diffrences between the middle and
upper class. When I moved here I was astounded at
the amount of $70,000 bimmers on the
freeways. Enter the housing market, which since
the time of Benjamin Franklin has been
the bastion of middle class and their redeeming
proof of middle class entitlements. In
select major US cities, this entitlement has been
stripped bare either for the remainder
of the boom, or perhaps for the decades it may
take, if ever, to restore that status. If
we work hard, got our educations, and make decent
wages by national standards then are we
not entitled to our piece of the pie? When you
get told no, and see that perhaps you
aren't in the same financial standings as someone
living next to you simply because they
got there 5 years ago, then of course it makes
one extremly confused and irratated, as I
surely am.
What I see on this forum is a lot of
frusturation. People, like myself, fruturated that
on some levels, we are sucessfull. We have
attained all that we have wanted, and work
hard to save our money and yet the financial
extremes needed to procure something as
simple as a tiny house in a not so great
neighborhood is out of our reach, and in some
ways makes us feel substandard. I had the same
feeling when I got here when the first
boom- the tech boom was fizzling out. I knew
people who made MILLIONS off of the dot com.
Then I knew people who lost their shirts as well.
But I'd gotten here too late for that,
and now that Ive finally gotten somewhere with my
job, I'm too late for the 2nd boom.
Sort of feels like I struck out again.
Unlike some of the people Ive heard mention
that they love california and would never
move to any of the so-called flyover states, then
perhaps the problem here is more
complicated. Is this a national housing crisis?
No. In fact, my parents just bought a 3
bedroom rental home in Knoxville( population
650,000) for 48k. My best friend who lives
in North Carolina bought his home for 82k, a breath-taking
property in the blueridge mountains. Still
another relative of mine bought a 2 story home in Austin,
TX for 136k; Austin another great creative and open minded city. You have to ask yourself a
serious question. Is owning your own home and all
it brings mean that you HAVE to live in
california or New York? If so, then you need to
realize that if this be your only option,
then house prices may ALWAYS be too high for you
to ever afford. Why? Because it is the
millions of people just like you who help fufill
this prophecy of the "perfect location".
The wages, houses, climates, and even politics
of the bay are somewhat exlusive. The
same can be said for any given number of unique,
interesting, and diversified locations
throughout the country. Thus I will step out and
say that if you want to have the life of
what many see as non-exsistent here in CA, then
you CAN have it. For me personally, I
have been giving some serious considerations to
other locations that Ive found actually
pay the same wages, thus my entire lifestyle
would be elevated immediatly. I'm sticking
around for the same reasons that perhaps many of
you are which is A: I've established
myself here and dont want to have to start over
again. B:I have a severe desire to prove
myself against the odds, and that I can beat the
current system. C: I'm getting married
and want to start a family in an area I am
familiar with.
Ironically, to conclude, I've pretty much
determined that after my travels, experiences
in these "models of progressive america", that I
would have actually been way better off
had I stayed in Knoxville, TN. Instead, I've
pretty much wasted 10 years of my life
paying way, way too much for the roof over my
head. There. thats my 2 cents worth.

If we work hard, got our educations, and make decent wages by national standards then are we not entitled to our piece of the pie?

a-fucking-hem! Well yeah, that's what I thought also.

Nomadtoons,

I concur with most of what you've said, the process gets a bit more tricky however if you've lived your whole life here, especially if you've spent your life on the Ocean. You simply, well at least in my case, can't leave and expect to be any more than miserable most of the time.

It does not matter something has potential, if that potential is already priced-in or is already overpriced. It is very important to understand what the market has already discounted. Excess return can be made only when you are in disagreement with the market and the market turns out to be wrong.

Buffett cann be more right... be fearful when others are greedy and be greedy only when others are fearful.

I'll pass this story along, because I think it's indicative how some BA investors might be sensing a market change... (Credits to Jack, I believe)

"...[SF] is full of a lot of early boomer code-monkey-tech-types who fashion themselves as real estate barons on the side...

That's very new language around here. More are "in the know" every day and there's probably some denial. It's just going

Btw, that's "news to my ears" too. That RE-investing coworker is nothing but upbeat (when questioned), but he's been gloating noticeably less of late.

Does that include buying FNM while others are selling? Nah. Just kidding. :-\

Maybe. :)

But I thought he raised concerns regarding OTC derivatives years ago. To him, an entity with such exposure is like a time bomb.

Jim A,

once the Chinese decide it’s time to stop bailing and get into the lifeboats, considering the huge current account deficit. So everything imported goes UP in price, and assets go DOWN in price when all the FEDs free money dissapears. With some prices going up, and some down, would we be suffering from inflation or deflation?

First, I insist the Chinese won't do this. They simply cannot afford to. Run a macro model for what would happen to their economy if they "bailed". In short, it would result in catastrophic slowdown of their great industrialization/modernization "the long march". And, it would hurt them way worse than us. Compare the percentage of US GDP derived from Chinese trade versus vice versa.

Second, although the initial shock would cause inflation in both economies, the effect would force capital out of China which would cause a rise in the dollar vis-a-vis the RMB, over a longer term. My guess is they'd suffer depreciation against the JPY and EUR concurrently as capital flees.

Instead, the Chinese--which are well known to practice long-term, strategic policy and planning--will very slowly diversify out of USD and into EUR and JPY. This is already happening. But they will still buy US debt, just in every slower amounts as a percent of the total.

To those waiting for China to commit economic suicide: don't hold your breath. (For reference, only roughly 20% of the total US GDP is derived from all global trade, so the US is in the best position to go-it-alone if things go to hell).

All that said, I still see a correction in RE. It just won't be because of China.

To clarify, the China-syndrome scenario assumes two things which are false:

1) That US does not have monetary control, and cannot set nominal rates regardless of real rates in the rest of the world. This is untrue. The US has extrodinary power to set nominal rates, and since our currency floats at market, monetary power.

2) That China does have monetary control. They simply do not. They have forfeited all monetary control to managing their currency. This is true for all pegged regimes. If China looseened or floated, then they'd lose control of capital in/outflows. This would free captial to search for better returns outside of China, which wouldn't be hard to find.

All that said, I still see a correction in RE. It just won’t be because of China.

Exactly. A bubble is mostly psychology. However, I do think mortgage rates will go up when the bubble is bursting. This may happen because of the sharp increase in risk premium.

When this thing turns there will be many things to reinforce a new trend. Reflexvity at work.

But Randy, China can and do implement policies that would be considered politically impossible here. So I think China has a lot more policy control.

China can and do implement policies that would be considered politically impossible here. So I think China has a lot more policy control.

Explain how these controlling policies would work if they loosen or float their currency. There is no free lunch. Either they eat it as hyper-inflation, they fix the RMB, or they allow free flow of capital. They can't just manufacture preferential trade without cost.

HZ,

You are correct about China running current account deficits. Also, this would help solve a lot of these problems naturally, particularly in the US.

Your second point assumes that the US and other countries allow China to play the FDI game asymetrically. I have at least enough faith in the policy makers to not allow this to happen. It is already apparent in the recent CFIUS activity relating to China. Again, if they appease CFIUS by opening restrictions in China, they'll lose equivalent capital controls. The EU has been particularly harsh on China, and I don't see them allowing the Chinese to buy real assets in the Eurozone unless China reciprocates.

H.Z,
I believe you missed my point. The point is that there are areas that are just as pleasant and unique as the SF bay. I feel a real sense here that most people just assume that " the bay area is the best" and therfore there is never any discussion about other potential opportunities. if I moved, I wouldnt feel that I was losing out on some great thing. I could easily invest my hard earned money somewhere where it actually goes somewhere, as in about 90% of the country. For now I rent because it's super cheap. But if the crash occurs, better count on those rents going through the roof. Then I'm outta here.

HZ,

I agree with your analysis. Hopefully you agree that, although there will be signficant changes afoot, the "China Syndrome" meltdown discussed here and in the pop press won't be the result. More likely there will be long-term restructuring via capital markets. Further, the contries which are free of FDI restriction in the US, excepting the EU, are also all directly impacted by US nominal rates and US monetary policies, so we have a lot of levers to pull in that regard (assuming those at the switch are smart enough to know it). As for the EU, they can't even figure out what their monetary and fiscal policy is, so I'm not worried about them in the short/mid term; anyways barriers are rising between the US and EU, not falling at the moment.

I love the negative reviews of the book that complain that Kiyosaki doesn’t give them specifics

What troubled me about his book is that, although it is correct from a high-level perspective, it lacks actionable advice. It is extremely difficult for the "common dad" to find income generating assets that produce positive FCFs, *and* are fairly priced. That is why RE is so hot. That and entreprenerial ventures are the mainstay of common investment vehicles which have the potential to produce _real_ (not just nominal) positive FCFs in excess of diversified market return. Of course, both come with extreme risk.

Further, many of common-dad have generated substantial wealth through income-driven activity. Often, a well directed career choice into a field that has barriers to entry (licensing, certification, etc.) can produce returns in excess of what is available to that individual through pure investment. Kiyosaki oversimplifies his treatment of this.

Explain how these controlling policies would work if they loosen or float their currency. There is no free lunch. Either they eat it as hyper-inflation, they fix the RMB, or they allow free flow of capital.

They will not float their currency completely. They can even have simple policies to curtail excess consumption if necessarily, by simply disallowing them. They can do incredible things that are unthinkable.

People who think it is great have obviously not travelled much.

I have travelled quite extensively, and lived in many US and foreign cities. I find the BA to be among my top 3 choices for many reasons. In the end, though, it is a personal choice. Some people prefer Evansville, Indiana; more do not.

I have travelled quite extensively, and lived in many US and foreign cities. I find the BA to be among my top 3 choices for many reasons.

I have to say that there are only 2 places that I would like to live all year long: British Columbia and the Bay Area. I cannot stand heat and humidity.

BTW, discussions are still going on in The Social Effects of the Bubble

http://patrick.net/wp/?p=87

It has 645 (!) comments though.

Given the premium one pays to live in the BA, I find it the most overrated place to live in the world.

You will be surprised how overrated many other places are.

have to say that there are only 2 places that I would like to live all year long: British Columbia and the Bay Area. I cannot stand heat and humidity.

Second that, although you'll get humidity in BC, but it just doesn't feel like the gulf coast.
I'd consider moving back up there if I didn't have family ties here.

You call that a discussion?

What would you call it?

I seriously think I’m going to buy a town home in a prime SF neighborhood at the next price trough.

Good idea. Something with a nice view. :)

Looks food fightish.

Huh? The pumpkin-pie-in-the-face kind?

The last time I checked, it is japan that is holding the majority of USD treasury. Why is everyone fearing China so much? China is extremely f*cked up in its financial system (think 60% bad debt for its banks and bad debt in the making every day), so I won't count on them becoming any substantial world power in the next 20 years at least. I have done business here, let me put it in this way, they can use a bit of basic human ethics and honesty. That's why they can ONLY compete on price, and price alone.

As of Sept, 2005, Japan still holds 600B+ USD treasury while China only holds 250B+. This is one thing that completely baffles me. Why do we keep hearing about China while in sheer economic size and prowness, it is not even close to Japan? Name a Chinese brand that you can 't live without and name a Japanese brand for that matter, it's just so crystal clear to me.

Anyway, I concur with Randy on China's action, even if they are as important of a player as the Japanese. A fast devaluating dollar will hurt China much more than us. What do we lose? A bunch of green paper, who wants more?

Most people moan and bitch abut BA simply because the cost of living is so high. If I were to pick the best spots in the world, price not being an issue, it would have been: Switzerland (plus the Italian lake district), BA, Sydney. I lived in Seattle, BC and Seattle are spectacular in scenery but just rains too much. The first year I moved to Seattle I almost sank into a depression, and mind you, that place has the highest suicidal rate in the country, not a joke!

That's why the smart parents like ourselves need to move out of USD before it crashes. There are two big bag holders called Japan and China who will continue to hold the bag for a while.

Frankly speaking, I don't give a damn if China goes belly up carrying the bag. I do feel sorry for Japanese though, hardworking people, good ethics, they don't deserve this.

For China and Japan, it beats their next best alternatives…

For China, supporting the dollar is not only their best option, it is the only viable option.

China is addicted to US sales. By selling to us they accumulate dollars. They are lending those dollars back to us at cheap nominal rates, and ultimately at negative real rates. This is a great deal for us. But they do this to meet their own needs. They MUST continue their rapid growth to avoid massive unemployment and civil unrest.

Peter P,

“It does not matter something has potential, if that potential is already priced-in or is already overpriced. It is very important to understand what the market has already discounted.”

Yes, but the prevailing assumptions change with time, so the discount changes. This creates the opportunity (at selected times) to buy cheap when the crowd is selling…
“be fearful when others are greedy, and be greedy only when others are fearful.”

The tide is shifting…

Randy H,

“I have travelled quite extensively, and lived in many US and foreign cities. I find the BA to be among my top 3 choices for many reasons.”

What are the other two?

ScotC,

Interesting mix of people. Some good and some of them were cheats and scoundrels.

One need not cheat to get ahead, but some choose that path. I find the lack of ethics of several of your charactors to be disturbing.

But I agree with you about learning how to make money. Most people never get off their asses to make it happen. …even when opportunity stares them in the face.

It really is true (at least to some extent) that you make your own luck.

What are the other two?

For me, personally:

1) Mougins, France. In Provence, near Nice.
2) Marin, SF BA.
3) Heidelberg, Germany (slightly outside, on the Neckar river). If I were to become a "rich-dad", then in a restored feudal castle.

I too, have travelled all over the world and have lived in Wyoming, San Diego, North Carolina, Montana, rural Northern California and the Bay Area.

This is the place I choose to call home, even though I could live anywhere.

There are few cities I would live in: Amsterdam, New Orleans (okay not right now), San Diego, Jerusalem and here. But San Francisco is my first choice.

It is amusing to me to see people claim that the non-whites live in "ghettos" here. That might be true for blacks and latinos, to a lesser extent, but it is not true for Asians.

Are The Richmond and Sunset ghettos? I think not. They might be a bit foggier than the rest of the city, but they have lower crime rates and better schools.