patrick.net

Palo Alto is still very hot though. Mountain View is at least semi-hot.

Buyers are after schools and proximity to employment. Do upper middle class people care about those?

As a side note, I now feel a lot “poorer” than I did an hour ago.

Feeling poor is good motivator to make more money. ;)

Perhaps even Bill Gates should feel poor when compared to JDR.

Outside high-cost areas, even upper class people may live in 2.5M "palaces".

007,

I have a friend who bought a house for about $2.2 million in November. The house is almost 10x her husbands income, she makes a tiny bit of money as a (you guessed it) Realtor (TM). They put almost 1/2 down (inherited), so the mortgage is 5x their combined income. Property taxes hit them hard.

She told me that they are OK as long as they don't need a new car. They give only a tiny amount to their kids schools' annual fund (yes, that means other people are subsidizing their kids' tuition). They can't afford to vacation or even go to high end restaurants the way they used to. I'm watching the money stress help their marriage to unravel.

I asked her 'Why are you buying now???" She said that she has to live in a single family house in a nice neighborhood or she doesn't think the family will be happy. I said "Why don't you wait a bit and see what's happening with the market?" She owned a lovely, large apartment that they were living in. "It can't go down here, we can always sell it at a profit if something happens."

She bought her previous place in 1989, a few weeks before Loma Prieta, but the Real Estate Industry Kool-Aid has apparently wiped out her memory of the six years of depreciating prices her old place went through.

Some of the 'upper middle class' that are buying now aren't that economically savy, and are living on borrowed time.

Also, +1.5% increase in prices in luxury houses is actually a real loss when taking inflation into account. They never seem to mention this in the articles.

Patrick

You should stop renting when it’s cheaper to own.

Not to pick, but you have to be careful about that statement. It is historically always more expensive in nominal terms to own than rent. The exceptions are usually short periods of economic distress, or longer periods in severely depressed areas (think rust belt).

The cost of owning will generally always exceed the cost of renting over the long term by:

psychological premium + utility premium + tax benefit

Psych premium is the "everyone owns" or cultural effect;
Utility premium is the net value one gets from owning over renting. Renting is more flexible, owning is more stable, etc.
Tax benefit is real and powerful, and creates a subsidization of leverage.

News,

That is a downstream effect. I agree that subprime failures will ripple through the economy, mainly as hedge funds fail I suspect. But the real question isn't why hedge funds are investing in junk bonds, but why municipalities are investing in hedge funds.

Randy H,

Not to nit pick but calling these "at least I got paid" MBS junk bonds is frankly..... well an insult to junk bonds!

News,

What made the $6 bil loss "stunning" was that it happened in (one) day. Yikes! :)

In addition it's my understanding that San Diego could ill afford that kind of a hit.

SFWoman,

The very situation you describe is why I (and a handful of others) firmly suspect that defaults will bleed over into the Alt A paper and beyond. Here are some otherwise reasonable people that, again.... leveraged their FICO to the hilt.

"they are o.k as long as they don't need a new car"? You mean all it would take to derail their well laid financial plan is add'l $247.81 on a car payment?

I doubt $300 or even $1,000 a month would break many $2.2 Million house families. Divorce, loss of employment, or an ARM jump are much more likely culprits.

After factoring in, going over miles on the lease and/or negative equity on your trade-in and paying off your old auto loan your *new* payment will be $247.81 HIGHER than your old payment? I mean counting the undercoating and extended warranty, right? Or something like that.

I just can't believe anyone would take a small inheritance, put HALF down on a house and STILL be in a financial bind! Had it been me I'd have found something I could just have paid off or banked it but then again I'm not a realtor so I don't need or want a "showcase" home.

What kind of car can you buy with $247.81/month car payment. It would be 10 K car. Do you really think people who buy 2.2 million dollar house, will buy a 10k car?

$247/month can get you a lease on a 20K car.

Sam Walton drove a pick-up truck.

Hedge funds regulation is necessary but a bit too late.

Hedge funds regulation is completely unnecessary. They are just private investment ventures and they should be able to operate freely.

Casey Serin is in the Wikipedia but Patrick Killelea has not made it yet.

http://en.wikipedia.org/wiki/Casey_Serin

Well, I don't want to speak for others but 6 bil is 6 bil (no matter you pee'd it away).

For those bored enough, a great description of "fiduciary responsibility" is on www.fi360.com. Perhaps the good folk in San Diego should have read it first.

FAB,

You do realize that anyone can write their own Wiki entry I hope. Maybe I'll go create a Randolph entry when I get some free time.

But seriously, we should consider making Patrick Killelea Wiki, x-refing the housing bubble entry, and then we can all link our own sub entries off of there.

Any takers? I'd start the process but I'm bogged down again between real work and not learning my lesson starting blog fights with people who buy cartoon real estate and pay for cartoon sex.

There, I started it in a minor way. I added this blog to the external links reference of the Real Estate Bubble wiki entry.

http://en.wikipedia.org/wiki/Real_estate_bubble#External_links

Maybe I should run a thread that shows everyone how to go contribute to wiki. There's all kinds of bubble and reic stuff out there that could use our love.

Maybe I’ll go create a Randolph entry when I get some free time.

We should write an entry for King Randolph. Long live the King!

I wouldn't recommend spending the time to write entries on Wikipedia. Those guys are extremely narrowminded about what's acceptable knowledge. I put up an entry on a rather innovative and popular humor blog and they erased it because they thought it was irrelevant.

At the very least, I'd recommend proposing Patrick's name and then get a wiki "editor" behind the entry, otherwise, any entry you put up is likely to be deleted very soon afterwards.

Patrick is already on the US bubble specific wiki

http://en.wikipedia.org/wiki/United_States_housing_bubble#External_links

astrid,

My stupid critical article about Second Life landed me in the "mainstream press coverage" wiki on Second Life, which is heavily monitored by the company itself.

I thought they'd delete it, but it seems to have survived. So I'm mainstream now.

Then why have I only earned $2.12 on my blog ad revenues? lmao

I like Wikipedia a lot as a resource, but it's controlled by a bunch of pinheads. They totally do act like the Encyclopedists from Foundation. Great for finding all the alternate universes in the Marvel/DC Comic canon, less good for current events coverage.

Wikipedia is a great thing.

Great for finding all the alternate universes in the Marvel/DC Comic canon, less good for current events coverage.

An encyclopedia for current events?

astrid,

I'd recently read one school is no longer accepting papers from students using wiki as a "reference".

I would preface my argument on the basis that no comprehensive coverage of the bubble is complete without THE NUMBER ONE bubble site (and of course our good friend Casey!)

I don’t understand why people finance or lease cars, to tell you the truth. I have never owned a vehicle I didn’t buy outright, new or used. If you drive your car to death, you can easily save the cash for a new car.

Huh?

Leasing makes sense because you are paying mostly for the depreciation, which is going to cost you regardless.

Why would anyone ever want to drive a half-dead car? Is it even safe?

007 Says:

> Long time lurker, first time posting,

Welcome, you are probably the only poster with a “License to Kill”…

> I have a question for the group here. Why is it that people in the
> upper middle class seem to be willing to keep on buying in this
> obviously inflated market? I haven’t seen any pull back in the $1.5
> to $2.5M price range, either in the bay area, Los Angeles or North
> County of San Diego. In fact recent figures in SD N.County prove
> out that since the beginning of the year the market is better than
> it was in the same time period for 2006 in houses $1M+.

Many of the $1.5mm - $2.0mm homes selling today would have sold for $1.75mm - $2.25mm last year. If you get details on the new SF condos most are selling for less than comparable units sold for last year even with the HOA fees paid for a year and many upgrades.

Today SF gate had an article about how high end homes were holding their value and I laughed when I saw that the article had a photo of Andre Agassi and Steffi Graf’s house in Marin that sold late last year for $3mm less than they paid it for (after a long time on the market and many price cuts).

> I would make the assumption that people dealing in these price
> ranges have to be somewhat savvy buyers and aware of the
> economic and housing environment. So why would they be buying
> now?

Most people that make enough to buy $2mm homes are “smart” but most are not “savvy buyers”.

Peter P,

I'm saying that if you buy a new car for cash, drive it until it's pretty much at the end of its useful lifespan, then buy another one for cash, you're saving money over borrowing money to do the same thing. And if you can't afford to buy a new car for cash, buy a decent used car.

I've never understood making payments on cars. They drop in value the second you drive them off the lot. They drop A LOT. Yet people still pay, say, 20k for a car, promise to pay another 5k in interest charges over the next 3-4 years for a car that will be worth at most 10k. They're throwing away 5k, given that they decided that it was worth 10k to drive that car for 3-4 years.

However, for 20k, they can drive that car for 20 years. Sure, maintainance eventually catches up and it's cheaper to get a new car and start the cycle over, but certainly not every 3-5 years.

Leases were invented for people who like to do that sort of thing, but don't pay cash up front. Personally I don't like leases because I don't want to have to worry about violating a milage clause and paying extra when I turn it in, etc. But if you get a good lease it can be cheaper than 'owning' a car outright if you plan on swapping soon.

My main point was being flabbergasted that somebody in a 2.2 million dollar home could be worried about a new car tipping them over the edge.

Peter P

Leasing often does sound good, but if you buy a second hand car (1 to 2 years old), then most of the depreciation has already been paid for by the previous owner/leasee - besides if it's my car, I won't get it in the neck so much from hubby when the kids put a dent in it or spill a drink!

SP,

Definitely the "high gloss" stuff! LOL!

I guess what I was trying to say was that it wasn't some big production. A 6' ladder handled most of it. People seem to love vaulted ceilings but somehow forget that a wall of equal height must be on the exterior?

However, for 20k, they can drive that car for 20 years. Sure, maintainance eventually catches up and it’s cheaper to get a new car and start the cycle over, but certainly not every 3-5 years.

I cannot find a 10 years old car with all the must-have safety features:

1. Front airbags
2. Side airbags
3. Side curtain airbags
4. Traction control
5. Stability control
6. Good frontal and side impact scores
7. Good realibility

The closest one would be a 1997 Lexus LS400. But I believe it does not have side curtains, which are IMO more important than front airbags.

SFBubbleBuyer,

Well, we're all flabbergasted. But that doesn't mean that people aren't stretching that much to make the numbers "work"! THIS w/half down!

My hubby keeps pointing to the local BMW and Mercedes dealerships that are offering leases in the $240 pm range - however, I keep telling him he needs to bring me the small print before I'll ok one of those!

I think the next time we buy a car, we will look to see if there are any 0% finance deals, otherwise it will be another second hand car for us - I haven't done the math, but unless their financing is virtually free, I can't see any reason to buy a new car (because of the depreciation incurred just driving it off the lot).

My hubby keeps pointing to the local BMW and Mercedes dealerships that are offering leases in the $240 pm range - however, I keep telling him he needs to bring me the small print before I’ll ok one of those!

Just ask the dealership to give you a *tax-inclusive* number with

1) zero money down (cap-cost reduction does not make sense)
2) realistic mileage restrictions

$240 may jump to $400, which may or may not worth it.

DinOR - I would love to know how many people are stretched at the top end, that might give us an idea of how big the crash will be - everyone in this area says the housing won't be affected here (we're different don't you know) but if they stretched to get in their 1.5m house, then I would think that they are just as likely to have problems as the sub prime not so good areas.

Everyone says MV is different, but I just don't think it will be - maybe I'm wrong - some arguments either way would be helpful. By the way, why aren't there many decent rentals out there at the minute - and the ones that are are asking pie-in-the-sky rental prices(or so it seems to me)? I was hoping there would be a lot this year! Looks like we will have to stay put for now!

Upper-middle class wage earners is what we’re talking about. Very few of them can even count to 5M, let alone pay that much.

Upper-middle class are all "wage" earners in some sense because their own time is the real money maker. If they have enough passive income they would be in the upper class.

SP,

Excellent summation. We could write an entire book on "that" crowd and I applaud your keeping it on point.

"never even heard of M2 or the yield curve"

"one could argue that he may be better off banking the cash in a more diversified portfolio"

Recently Phil Knight (Nike) began selling out of a fair amount of his company stock. Being at the end of a truly remarkable career, it was well deserved (and necessary). My guess is that PK *wasn't the driving force behind those decisions. In fact I'm willing to bet his financial team had to beat him half to death over it! Great guy though.

The big deal was the fact that insurance companies, pension funds, and mutual funds had stakes in this venture. That’s the part which is shocking. Only silly rich people: Oil Sheiks, Trust Fund babies, Bling-Bling financiers, etc should be in such a high risk game. The conservative institutional investors are suppose to mind where they put their eggs.

The whole San Diego pension fund/Amaranth hedge fund blow-up seems to be validating my original contention that Wall Street would try to engineer ways to stick ordinary retail investors with the bill for their subprime MBS/CDO "creativity". I took a considerable amount of flack for that, with most of the finance types here saying I was flat-out wrong.

And now there is evidence my original position was right after all....

Claire,

So would I, so would I. Well the MB's that wrote those loans would certainly have a pretty good idea but they've been oddly mum here lately. Like I've always said, I'm sure there are those that can well afford and it will truly NEVER be an issue for them.

It's just funny that there's ALWAYS been such a huge turn-over in Lake Oswego, OR (the closest thing we have to Beverly Hills) b/c so many move there in the hopes that the address alone will drive business their way. Shortly there after they figure out they *can't afford it on a veternarian's/teacher's income, put it up for sale only to be bought by the next wannabes. It's so...... old.

HARM,

Sandibe (among others) assured us there was some sort of "Chinese Wall" between rank and file investors and big bad HF's. My point has always been that once the sell off in MBS begins in earnest, credit quality won't matter nearly as much as some would like to pretend. Now we're finding municipal employees are out about $85 mil. in their pension fund. Back to work fellas! :(

Great for finding all the alternate universes in the Marvel/DC Comic canon, less good for current events coverage.

hmm, I've noticed that. Why on earth have they documented every manga series, TV cartoon series and comic book character in such excruciating detail? The Britannica entry on manga or anime would probably be about 1 paragraph long in total...

Further, was wiki seeded by any particular encyclopedia text at inception, or has it all been written from scratch by enthusiasts?

Land Rovers and Range Rovers are no longer "British" - they were bought by Ford a few years ago.

Need I say more about their reliability now?