patrick.net

Well, psychology is some interpretation of the *perceived* reality. You may call that fundamentals.

Without some notion of objective, fundamental reality, everything is just all some postmodernist nightmare. And that can't be true because I hate postmodernism. q e d

I don't think anybody seriously thinks 350k is going to be the median sfh price for the bay area.

I expect median prices to eventually drop to 3.5-4 times the median household income, which is about right for 'premium' locations.

Rightnow we're at 6-8 times, which is unrealistic unless you assume that everybody is buying with IPO money, which will never dry up. And given that 20% of the loans in 2006 for the bay area were 0% down, I don't think IPO money was paying for them.

What would be a REALLY good tracking set would be house price vs. household income vs. downpayment. Sure, we can track medians, but at least 30% of the people tracked for income purposes didn't buy. A direct comparison of how much a household makes, how much it paid, and how much it put down over the last 10 years would be VERY useful for showing how far out of the 3x salary 'comfort level' the bay area really is.

In fact, it'd be a smart thing for the government to require Freddie and Frannie to do from now on. If you REALLY want to find a way to offer mortgages to marginal buyers, (what those two institutions were created for) educating yourself and the buyers on the risks would be a good start.

I would execpt SFHs to get down to the 400-450 neighborhood in SV, and 600s in Cupertino/etc. But that could take several years, by which time salaries will have increased, say 10kish, which would make the 400-450k of today be 450-500k.

The fact that the biggest crapbox in SV sells for 600k+ is plain lunacy. The automechanic supporting his family has no chance at buying anything anywhere right now, and a good automechanic makes decent money. Hell, any SINK household would have a very hard time buying any of these properties. When the crapboxes go down to 250-300k, the median will still be 400-500k.

The Bay Area has a weird distinction of having a very narrow gap between most expensive and least expensive houses in cities. Take for example, Cupertino. The absolutely horrible 800 sqft 2/1 teardown sells for 650k, and right next to it the 2600 sq ft brand new McMansion sells for 1.2 mil. Over 3 times the house, if you even want to consider that people are buying the tiny house to live in, for twice the price.

The expensive houses prices are coming down, but not the crapboxes. Median 'sales' stay relatively up even as housing prices slide because people are buying an extra 300 sq ft of house instead of buying a cheaper house even as they watch housing prices slide, hoping they're hitting 'bottom' and buying the most house they can afford (still doing it 0% down!)

I've gone to a TON of open houses. Yes, there are swarms of people at some of them, with bidding wars ensuing. With almost no exceptions, these houses are the good condtion, good neighborhood, good school houses being offered at 'below' what people feel is the existing market, which brings in a lot of the fence sitters who see their chance to FINALLY get a decent house.

You can walk literally a block away and see other houses that have sat on the market for months because the sellers set a 'wish' price and not a 'bargain' price.

So people who figured they could super-duper stretch and pay for a 850k house are not buying 800k houses that have been price reduced from 850. They're bidding on 850k houses that have been price reduced from 900k. They don't see the risk, they see the bigger house.

I know this, because I see it happen in myself. My wife and I have a limit on how much we can spend on a house, and without fail, we tend to like the houses right on the edge of that limit. It's 'more house'. And if the price is down from 50-100k from above that, it feels like a steal, even if I KNOW housing is overpriced.

I just do not like the sound of web 2.0. Numeric versioning is no longer apealing. Call it "Web XP" or something like that and it will have more kick.

the sense of community in the South Bay is nil…so overrated, I’m so glad to be moving—

But... but... but... this site says Silicon Valley is the bestest place in the world:

http://www.paulgraham.com/siliconvalley.html

But Randy, reality is what mind creates. Fundamentals are driven by psychology.

I don’t think anybody seriously thinks 350k is going to be the median sfh price for the bay area.

I expect median prices to eventually drop to 3.5-4 times the median household income, which is about right for ‘premium’ locations.

Um, 3.5-4x $97k is about $350-400k.

So, something's got to give in your claim: you either need to raise the min price, or drop the ratio.

Somehow, I think you're going to need to raise the min price.

The automechanic supporting his family has no chance at buying anything anywhere right now, and a good automechanic makes decent money.

Firefighters in Mountain View make $100k. They all live in the Sierra foothills. On the same block too. They have like 3000k houses or something. I can't find the article in the MV Voice anymore.

SFBubblebuyer,

I know of the $1.2M brand new SFH in Cupertino you talked about, I drove by that place a week ago. It is right next to 85, in fact, it is almost situated at the entry of 85. I was actually a bit confused if I had to drive through that development to get to 85.

If someone is ok with paying $1.2M to live next to a freeway entry, may da force be with them.

Awhile back you said side curtain air bag was important to you, you had me all worried, today I just bought a car with side curtain airbags. I got $7000 below invoice, that tells me the valley’s economy is nowhere near 2000

Congrats! IMO side curtain airbags are more important than front airbags. There are just too many red-light-runners in the area.

IMO Front airbags are very important if you drive on undivided roads a lot.

$7000 below is really something though.

May I ask which car was that?

What I like about the Bay Area (outdoors stuff to do, food, friendly people) is being slowly choked off by people who have no interest in these things and are here for the lure of making money.

Heh, ironically that's my beef, but in the opposite direction.

I don't like outdoor stuff, and I spend most of the daylight hours at work. I even work weekends more than sometimes. Who doesn't? This is Silicon Valley. That's what tech was based on - people who thought tech was so cool that they would give up their personal lives.

So needless to say, I'm not very impressed with when Realtors and others justify the insane house prices with "Great weather! You can go to the beach or Tahoe!"

Who cares? I'm outside my apt/car/office for 5 mins a day during weekdays. On weekends, it's only a little bit more.

I guess great weather would be more attractive if I was born the right time and was a PreProp13er.

(BTW, for friendly people, I'd cast my vote for people in Seattle metro. Even the airport workers are pretty friendly.)

MarkOfArk said :
"If you can afford a house and you know what the expectation is, then you would be more of a fool trying to wait for the magic low-ball day — aint gonna happen. If the price goes down to 250,000 I will gladly step in and bid up to 300,000 — and the cycle continues. Thank you for this web site it makes for fun reading."

Allah asked :
"What if you don’t have a job?"

If you dont have a job, then even if the price falls to $1.00 you still will not be able to afford it. CORRECTION : if you dont have a job then you could qualify for a "stated-income" loan where you could just tell them a story and get a bunch of money. Heck, you could still outbid eveybody even being unemployed !!!

Lexus is a great car.

My only regret is that I should have bought a more-used one for less money.

Please stop envying the people in the startups. Their lives are not necessarily happier despite some hitting the jackpot.

I have absolutely no envy for them. I just think the whole thing is not any better than Web 1.0.

You think it’s bad here, you should see Boston! There, a “red” light means you have 10 more seconds to make it through the intersection, “yellow” means accelerate NOW,

You should go to Baltimore or Houston. It's even more flagrant in those places. I think I once red that there's a strong correlation between red light running and crime rates. Something about the general beliefs in the rule of law (or lack thereof).

You think it’s bad here, you should see Boston!

I have driven there. It was pure madness.

MarkOfArk Says:

> One thing I notice never discussed in bubble
> discussions is the value of housing as an inflation
> fighter over the long term.

Then skibum Says:

> This issue in fact has been discussed here
> many times before.

If you make a 10% down payment and prices drop 10%, but we have 2% inflation you have “only” lost 80% of your equity

MarkOfArk Then Says:

> but the Bay Area is a desirable place in the world and in the
> end that is what counts. So by THAT psychology, the prices
> will not fall far.

Mark might be right and since the Bay Area is a “desirable place” people will just find a way to come up with a $1mm cash down payment and make the $30K a month PITI payments to live in the area I grew up in. The Bay Area was still “desirable” when homes in my old neighborhood were selling for $200K down and $6K a month in 1997, but since almost everyone in the Bay Area is making at least 5x more than they made in 1997 who wouldn’t want to “lock in” a low low $30K a month mortgage payment…

Actually the low wage makers are having good deals. If you make less than $85K household income for 4 persons (Los Gatos), then you are qualified for affordable housing to buy SFHs speicifically developed for that purpose. A 3-bedroom condo under such program sells for $300K in 2006.

There are programs like that in all cities, the threshold is around $75K-90K for a family of 4.

Who cares? I’m outside my apt/car/office for 5 mins a day during weekdays. On weekends, it’s only a little bit more.

If only they could take everything having to do with the high-tech industry here and transplant it to somewhere else with lower cost of living, then everyone would be happy! (No personal offense intended, eburbed). It's just a shame that so many of the people here are merely in a rat race working under fluorescent lights 7 days a week when you could be outside skiing/hiking/biking/surfing or whatever for at least part of the time.

FWIW, I am with DinOR on this one - it's not the jobs, it's the easy credit. Although I am not so sure about rapid declines as FAB says.

To counter OO and Randy, the job market euphoria can be very easily wiped out by difficulty in obtaining cheap credit. All my friends openly admit that they cannot afford their house at the current valuations. Even when they bought it, NO ONE took a 30 yr FRM, they needed an ARM. They also work in IT and have got raises as much as any other person. So I interpret this as another support for saying that salaries have not kept up with price increases, and the pay raises will not stop the decline.

If the rates go over 7%, what will do to this market even with good jobs ? The bond market is keeping the yields low because of fear of recession. If the economy remains strong and everyone gets raises, will the rates remain low ? Doubt that scenario.

But as has been mentioned, the credit related problems are happening precisely in this strong job market. Defaults, foreclosures etc are up. And except the true prime, other mortgage markets are in trouble. Very soon BA folks will feel the pinch due to this.

Employment is not necessarily a leading indicator in all scenarios. It's a lagging indicator in this cheap credit world.

Randy H,

My guess would be that the very fact that more than 30% of purchase and refinance loans are negative-amortization is evidence of overoptimistic buyers (a combination of desperate and naïve). The fact that you have loan delinquencies without a recession implies that the buyers were over confident about future prospects.

The very fact that so many buyers choose negative amortization loans does not inspire confidence that these homeowners plan to stretch their finances in order to making ends meet _just a little longer_ (unless they are sophisticated buyers, which you have ruled out)

Also, if the economy is so good why are fewer people buying homes than during the recession of 2001? Current home sales in the Bay Area are the slowest since 1996.

I would argue that the market psychology in real estate currently is not based on the fundamentals of jobs and income but on expectations of future price growth.

The prevailing ethos has changed from “buy now or be priced out forever” to “do I want to pay twice my rent to live in an equivalent home that isn’t appreciating? Let’s wait and see”

Eburbed :
I was only 'guestimating' what the 2007 houshold income for SV was, as I remember seeing 97k quoted as 'single' income and 110k as 'household' income for 2002ish. I could be wrong on the dates, but I don't think guessing a household income median for SV at 120-130ish was hugely off given those 'pulled out of my ass'umptions I made.

My point was that 3xhousehold income is pretty historically supported. Dual income households can inflate houseprices when you compare individual median income vs. house price. Household income is a better measure, and it has grown faster than inflation as more families become dual income in at least some small way, even if both parents aren't making equal salaries. Typically, one partner makes significantly less, but it still raises the household income substantionally.

Also, bay area/LI/Manhattan/etc all traditionally have housing prices higher than the 3x historical average, so assuming 3.5-4 times median household income for median household prices once things 'settle down' might not be unreasonable.

Peter P Says:

> IMO side curtain airbags are more important than
> front airbags. There are just too many red-light-
> runners in the area.

Side curtain airbags will probably reduce the injuries in a roll over or a minor side impact accident, but if you get T boned by a red light runner bad things will happen (Former State Senator Jackie Speier’s first husband Dr. Steven Sierra, chief of emergency medicine at a San Mateo Hospital died soon after a guy in an old Camaro ran a red light and T boned him in his Lexus LS)…

Employment is not necessarily a leading indicator in all scenarios. It’s a lagging indicator in this cheap credit world.

Stuck,
Precisely. Where do you all think much of the VC funding comes from? Cash from large corporations, hedge fund wealth, institutional investor cash, private equity funds, individual wealth. How much of this cash comes from easy credit? A fair amount I believe.

I expect a half-life of about 9 months for these radioactive turds.

SP,
Now that's a keeper! My sentiment exactly, but I couldn't express it quite so eloquently.

Side curtain airbags will probably reduce the injuries in a roll over or a minor side impact accident, but if you get T boned by a red light runner bad things will happen

True enough. Speed (35mph+) and T-bone is a bad combination.

I am a huge supporter of red-light cameras.

A couple of guys in the next cubicle are visiting from our Bangalore office and are really looking forward to getting the hell back - they find it extremely boring here. I didn’t expect that.

I love boring but pretty places. Sunnyvale is ugly though. The prettiest places in BA are all in Marin county.

Allah asked :
“What if you don’t have a job?”

If you dont have a job, then even if the price falls to $1.00 you still will not be able to afford it. CORRECTION : if you dont have a job then you could qualify for a “stated-income” loan where you could just tell them a story and get a bunch of money. Heck, you could still outbid eveybody even being unemployed !!!

Stated income loans will cease to exist at that point! When we are in a full blown recession and jobs are very scarce, at some point the desperate sellers will agree to sell at a normal price and only those of us that have a positive net worth (real savings) )will be able to buy. In fact many more will lose their houses because they won't be able to make the payments anymore.

Really FOB Mainland Chinese are not impressed by the US. BA (and even NYC) looks pretty run down compared to the gleaming Pudong skyline. The only place that really impress them is Las Vegas.

FormerAptBroker read a post and said
"Mark might be right and since the Bay Area is a “desirable place” people will just find a way to come up with a $1mm cash down payment and make the $30K a month PITI payments to live in the area I grew up in. The Bay Area was still “desirable” when homes in my old neighborhood were selling for $200K down and $6K a month in 1997, but since almost everyone in the Bay Area is making at least 5x more than they made in 1997 who wouldn’t want to “lock in” a low low $30K a month mortgage payment… "

Who cares about income ? You dont need it to buy a house these days. The bay area housing market is like a boat with a leaky hull. you know the boat is sinking but all you need to do is just buy a pump to get the water out. Do that for a while and if more water comes in the boat and it looks like it may sink, well then you just get a bigger pump. That is the way I see the housing market specifically in the bay area. The main thing pumping the water is a diverse economy. Around 15 years ago we lost the Alameda Navy base along with 60,000 related jobs . did we start to sink, yes but only a little. Many other parts of the US would not survive that kind of Job loss from one entity. To me that is why the Bay Area is desirable. Some housing markets are completely off-the-hook when you see there is nothing but one factory driving house prices. those places will fall harder than the bay area. And permanently. Putting the fabulous bay area weather aside of course

The only place that really impress them is Las Vegas.

LV is better than SF but it is too crowded now.

I need to visit Sedona and experience the vortex.

Las Vegas makes me ill. Seriously. I always feel a little grossed out after leaving Las Vegas.

Victoria, BC is so pretty...

The prettiest places in BA are all in Marin county.

I agree. Point Reyes is beautiful.

Prostitution is legal in Nevada.

LV makes me sick. My boyfriend and I usually pass it once a year on our roadtrip to Utah/Arizona, and I always approach it with a sense of dread. We had one of the worst nights of our relationship due to my LV induced antipathy.

GC,

Well, maybe not *always* Close friends of my family runs vacation/education packages for PRC cadres and this is what they say.

The only place that really impress them is Las Vegas.

This might explain why recent (and not-so-recent) Chinese immigrants love Cupertino, Sunnyvale, parts of SJ. Aside from the "excellent" schools, the sprawl and man-made nature of it may be in some way comforting.

What ever happened to the living-in-harmony-with-nature ethos like you see in all those Chinese paintings of the little mountain villas in Guilin or whereever they are supposed to be?

Point Reyes is beautiful.

I like Point Reyes, even though I do not eat oysters.

Who cares about income ? You dont need it to buy a house these days. The bay area housing market is like a boat with a leaky hull. you know the boat is sinking but all you need to do is just buy a pump to get the water out. Do that for a while and if more water comes in the boat and it looks like it may sink, well then you just get a bigger pump.

Until one day when you are deep out in the sea and the pump blows up.

Allah looked in his wallet, realized he was broke and said:
"Stated income loans will cease to exist at that point! When we are in a full blown recession and jobs are very scarce, at some point the desperate sellers will agree to sell at a normal price and only those of us that have a positive net worth (real savings) )will be able to buy. In fact many more will lose their houses because they won’t be able to make the payments anymore."

If the economy gets so bad with jobs scarce, how many people will have "positive net worth" ? Less than in a good economy. A bad economy preventsa people from being able to use their savings for new houses -- they have to use their savings to eat. There is no "normal" price if you are broke.

Prostitution is legal in Nevada.

It is legal and highly-regarded in the future.