patrick.net

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.

BA looks like a 3rd world country compared to select pockets in Shanghai, Bangkok, most of Hong Kong, Singapore and any reasonably large city in Japan.

Most recent FOB immigrants from Asia are not impressed by the BA infrastructure at all. Even a not-so-FOB immigrant like myself sometimes need re-adjustment time coming back from Australia on annual parent visits. Why did the FOBs stay? USD. If USD tanks by half, many FOBs will actually head home, which is good for both the natives and the FOBs.

But the landscape and weather of BA are absolutely unsurpassed, probably the best that I've seen in my life. The run-down infrastructure? It takes a little effort to get over that.

"The prettiest places in BA are all in Marin county."

Absolutely, the drive to Point Reyes is breathtaking all the way. The Sonoma coast north of that is pretty amazing too.

Absolutely, the drive to Point Reyes is breathtaking all the way.

Highway 1? My ability to breath was almost taken away.

breathe

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

More oysters for me, then! Have you had the popovers at the Station House Cafe? Excellent.

"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?"

It went out with taste and either came back. Modern China is very gauche.

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.

Exactly, that is why people like me won't have much competition when making offers to the desperate sellers, auctions and banks. I am very far from broke.

BA weather is amazing, but I still think the Four Corners area is better on beauty.

Also keep in mind that very few literati actually went to the mountains. The closest most of them came to that is building a Suzhou estate with a lot of Swiss cheese boulders.

NV,
That part of my comment was meant as sarcasm. Sorry you didn't get it. Who the f$%k would be comforted by anything having to do with Cupertino's sprawl? It's soul-crushingly bland there.

New thread: Patrick Killelea & Ben Jones: Psychics or Super-Geniuses?

Heart's Desire beach on Tomales Bay is where you'll often find me and my family on warm Marin coast Sunday mornings. The water is warm, the view is incredible, and no one bugs you too much. And you can get there the back way without fighting tourists on hwy 1.

wait at least 3-5 years?

markets can correct swiftly.. I would not rule out withing 36 months or much more sooner.

SFBubbleBuyer, home price to median income is the wrong metric, it should be percentage of gross income as PITI. That is what has inflated housing, the cost of the first P is down due to low interest rates.

SFBubbleBuyer, home price to median income is the wrong metric, it should be percentage of gross income as PITI.

Very true. It should not exceed 28%.

PAR stated :
"MarkOfArk, according to your logic, if I’m reading you right, there will never be any event that could ever dry up demand to the point where there’s a sizable correction. I understand your position but it also defies about 400 years of economic history. The logic breaks down too. It’s like saying that pets.com stock will never fall below $100/share because once it gets to $95, someone will step in and snatch it. Read the Shiller quote above about"

My logic is based on the fact that a house cannot have a zero value unless it is physically destroyed somehow. A stock on the other hand CAN have a zero value. There was a time when pets.com was being snatched for certain prices and would not fall below a certain price because buyers would step in. But I dont think comparing stock investments to the housing market is straight because even if a house is vacant and noone wants to buy it - it still could be bulldozed and scrapped for a few bucks. It can also sit there a few years and still be there when someone finally wants to buy it.

1. Prop 13 has been around since 79. Since then we had two real estate bubbles, early 80s and then in early 90's. Prop 13 is not a factor.
2. Forget goverment. Not a factor. Local employers (mainly tech) have come out and are against high home prices. It forces them to pay more for salaries in a already highly competitve global market. This should be a no brainer for anyone working in SV. Afterall we make deflationary products and no unions forcing wage inflation. We do have out of control spending which always destroys employers at the end. Plenty of example of that in SV. Local CEOs have always complained there is plenty of housing but affordable housing forces job to migrate to cheaper cities. That did happen when all MFG was shipped in 1980s.
3. Tax is not a factor. Tax codes come and go as they did with the Tax act of 1986. Flat tax proponents would do away with mortgage deductions.
4. You havent been keeping up with the accounting irregularties of the GSE.
Again GSE have been around for a long time, including 3 past RE drops.
They were just warned by Congress and FED, not to consider them self as Goverment Backed.
5. They did not save the stock market. Several governers from the FED already said thats not their job. You should already know this if you studied anything about the FED. They have never in their history ever supported inflated asset prices.
6. That was already tried like Cupertino, Santa Clara and Los Gatos in the 1980s. It failed. As you can see from San Francisco to East Bay to SouthBay there has been more construction over the past 7-9 years then any decade prior. With labor and material prices falling and margins growing there is more incentive for inventories to go on market.

MvRenterHopefullyBuyer burst his own bubble and wrote :

"1) Supply and demand
2) Buying advantages with 7+ year horizon
3) Bay Area opportunities/salaries versus other parts of US"

I think your article made sense on why Palo Alto and Mountan View prices wont fall . However, these things you mentioned dont occur in certain sections of the country which is where the bubble really is. For instance , the Central Valley in California -- What is the reasoning for the inflation out there ? You might be right as far as Palo Alto or Mountain View but I cant see a place like Lathrop or Tracy being desirable long term. Those properties are wildly overpriced when you look at quality of life ( stinky smell, flood plains, commuting 3 hours a day, etc ) but hey they dont have earthquake faults out there maybe that is why they cost so much.
One thing about incomes / house price. Many people go to other parts of the country because the housing is so much cheaper even when you factor in lower incomes --- but everything else costs the same or even more.