patrick.net

astrid Says:
If kidnapping and healthcare are not issues there, I wouldn’t say no to this.

Here's one of the "Special Features":

* There are 10-15 foreigners living within 2-km. radius.

Kind of funny!

This is OT for this thread, but has anyone noticed that CAR has stopped reporting the statewide affordability index as of last December (when it cratered at a record-breaking 14%)?

According to the L.A. Daily News, there is a perfectly reasonable explanation:

"Cool-down finally arrives as summer nears"
http://www.dailynews.com/business/ci_3820005

One thing that market watchers have not seen yet this year is the housing affordability index from the California Association of Realtors.

This week we will also find out how much tweaking was done with the release.

Golly, I see *no problem* with this business of "tweaking" the affordability index formula or CAR's stated explanation for doing so. Do any of you?

Disclaimer: I still believe in the Easter Bunny, Santa and the Tooth Fairy. I also believe that David Lereah and Leslie Appleton-Young have my best interests at heart.

Ryan says: "Why the angst?"

Using the term angst would imply that there is some tangent of the current housing situation that is salvageable. In the summer of "05" there may have been some angst on my part, but no more. Saying "then buy now" is roughly commensurate to saying "give me one for the road" and we all know where that ends up. One need not be a patrick.net regular to have had ample warnings.

On begrudging.

I don't want to start Monday off on the wrong foot but it really grinds me when someone dredges up a 1950's goldilocks scenario and tries to make applicable to 2006. My folks lived in the same house for the duration of their mortgage (at the time 20 years was the standard). They then stayed on another 10 years in the pusuit of perfection before finally selling at a RESPECTABLE profit. I don't think any rational person would "begrudge" them their rightful place in the sun. Fast forward to the bubble where homes have the potential to double in "value" in a two year period where's the motivation to make any real improvements? Why? Why would you bother? Where would you (as the seller) find the time? How can someone in HELOC heaven on vacation in Cabo be expected to make home improvements? When homes are sold through carefully orchestrated bidding wars it's hard for me to describe this as an innocent act. It's a malicious attempt to defraud another human being into a lifetime of indentured servitude so they can "make your retirement one mortgage payment at a time"*. Not cool.

*I believe it was either astrid or athena that originally coined that phrase.

Extra special thanks to the person that took the time to post that fabulous property right here on patrick.net! My wife grew up about 1/2 an hour from there. It just gives you the sense that all of the locals there that do subsistence farming (after laboring all day on the "sugar isle" in a form of legalized slavery) feel a swelling of pride each time they walk by! I think Imelda would have said that this display of wealth gives the poor something to aspire to!

…Leslie Appleton-Young, the association’s vice president and chief economist, said earlier that they were going to tweak the model to more reflect current market conditions.

And yet there are those who wonder why we dare to consider the "professionals" in this industry anything but. How about this for a parallel:

Daily closing figures for the NASDAQ don't reflect the current reality so the NASDAQ's chief economist has decided to implement a more accurate measure of index prices.

It's well past time that the real-estate industry is put on regulatory and certification terms at least comparable to the finance industry.

Randy H,

Exactamundo! At a time where the whole world is demanding "real time" data CAR has elected to take the low road by blissfully ignoring the trend and doing as they damn well please. It seems the "Santa Barbara Incident" set the precedent for not disclosing unflattering data.

Trading Skanky tastes for the Hills in Tennnesee? It's already underway. I had a conversation with my mom. She and my dad live in Knoxville. There was nothing special about it a few years ago. Just a smaller sized older city with the Smokey mountains 45 minutes to the east. Anyhow, there's nothing short of a rennaisance going on there as we speak. For example, they are getting two new libraries, one that's 3 stories tall, with a large fireplace, coffee shop and cafe out front. The old Tennesee theater was restored. Buildings on Gay street that sat dormant for 30 years are suddenly getting turned into nick-knack shops.There is a new urban development in the works for a chink of the town where residents can walk to work with old-fashioned houses with porches. Property is being developed on the lakes. New condos and high rises are being planned. The city now has a ballet, symphony, art museum, and several heritage centers for appalachian culture.The same can be said for most of the towns in Tennesee. She's concerned because as she relates it- people are just pouring in there.
At the same time, my wife is from Pennsylvania. A lot of the smaller former steel mill towns are getting redeveloped into qaint little villages for retirees, NYC mega-commuters, and young families. It's the same kind of rennaisance. Formerly dead areas being repurposed and propped up o their historical charm.
I see a pattern here. Ironically,I think that most of the young people I know, myself included, are tired of the stucco subdivisions. While I didn't grow up in one, most of my friends did. There is a desire to return to the small town that has character. Places like Alameda, Greenich, and Cambridge provide that kind of feel, but of course it's way, way too overpriced for 98% of anyone under the age of 45. So the next logical decision are these new alternatives.
Population shifts have been a normal occurance in this century, for diffrent reasons. I predict a shift of the older, retirement age population taking over the traditional metros, while the younger populations shift to places like Austin. This is good and bad. This likely means bubbles in these areas, but at the same time, there's a ton of business moving to these new areas. The unemployment in Knoxville and Nashville is 2%. That's lower than SF. It could be that while prices might go up in these regions, the real non RE related business could actually support it. It could also go seriously wrong. That's why I'm biting my fingernails. I would hate to see this thing take over another area. I don't see how though. Simply put- people in these areas make less, so there physically isn't the amount of money to throw at housing. Plus- places like Austin are having a firestorm of foreclosures just outside of the city limits. Over 400 and rising on Craigslist.
Most of these cities are populated heavily in the city proper, then peter out rapidly outside the borders. There is not the same population density. Thus if California RE investors are going there for a quick buck and expect rapid appreciation, then they'll lose their shirts, which might be the final nail in the coffin for the RE bubble... hopefully.

Sorry, off topic, but my gold bug friends, check the latest disintegration and sell now before you waste your downpayment and/or the college trust fund.

It is not a "buying opportunity"...

Surprise Surprise! I kind of figured the gold mania was a last-ditch effort for folks who don't know a damned thing about the stock market( if any of them do.)
I think the problem with stocks today are underlined by stories like these. Put simply, everyone from hairdressers to bankers "know" about stocks- enough to gain them access to a stockbroker. So what do you get with more dummies to stir the pot? faster and faster booms and busts.Let us hope this also translates into what might happen to the housing market.

Conor,
All I've seen in economic circles seems to be metals and oil futures. Not near as much petaining to real marketable companies, which is a concern. Buying metal seems like a ass-saving measure that people buy when there are threatened; suspect projected problems, like currency devaluation or for lack of a better word- a real economy to back up the standard. So the fact that gold made it to over $700 shows just how many people are worried about the economy, some for good reason, but in the end, just as speculative as buyinh RE in Idaho.

Gold and the other commodities, namely zinc and copper, are increasingly coming under micro economic pressures which have little or nothing to do with all the macro stuff people attribute to their rise (especially gold).

It's important to keep in mind that, as prices rise, the potential return on investment for producers to extract and refine rises. This often means that reserves which were not economically viable at lower prices become profitable to extract. There is a huge game that goes on in this regard because, as more production comes on line, supply increases and prices can quickly fall back below the profitable point for those "deeper" reserves. So producers are very slow and conservative about making the huge capital investments into mining and refining capacity operations every time prices jitter up.

However, this time around Hedge Funds are really skewing the price movements and volatility. Essentially, if you were a "genius" macro hedge fund, you could pile onto a commodity that's already rising for fundamental reasons (increased demand) like copper, further driving the price up, in an attempt to force the producers to increase capacity. That is exactly what is happening now, even in gold. However, as a macro HF, you're also betting on the draught to come after the industry gets caught with overcapacity; and you'll make even more $ on the way down because your HF activities have dramatically increased volatility and perhaps even added fuel to minor/major speculative bubbles.

The same is true in oil. If oil stays at too high of a level for too long then it will encourage massive investment in known alternative fossil technologies, like oil shale, tar sands, and coal liquification -- all of which are in use in parts of the world today (but either unprofitably or barely profitably). However, doing so will again overload supply, causing the very economic force that encouraged more investment to lower prices below profitability.

IMHO, this is why the commodities games is extremely hazardous. With stocks you can study fundamentals and technicals. With bonds you can study inflation/Fed signals and macro stuff. With gold you have to do all that plus study all the players in production, the major industrial consumers, and macro & arb HFs active in that sector. Oh yea, and you have to at least pay homage to the technical trading and huge derivatives markets which reflect back upon spot pricing, especially since the HFs are using the derivatives to do all their black magick.

Conor,

There have been bubbles in collectibles; quite a few of them.

I don't know if gold is or will become a bona fide bubble, but I do know that the history of gold is one which ebbs and flows without direct correlation to the macro factors you are describing.

There have been bubbles in collectibles; quite a few of them.

Does anyone remember Thomas Kinkade paintings a few years back?
I knew several people who, despite my warnings, spent $$ on these prints convinced they were investing in art. Just like realtors of late, gallery owners were actually telling buyers they couldn't go wrong with Kinkade.

Perhaps some N.Bay people also caught the article last Weds.(5/10) from our friends at the IJ under the header "Expert says most couldn't afford home here today"; excerpt below in italics.

I'm glad we can trust the IJ to keep us informed, but what caught my eye were comments made about Zillow.com:

(During a realtor meeting in San Rafael) Appleton-Young told Realtors their clients are using the Internet more, including looking at Web sites such as Zillow.com, where they can find the value and other information for millions of homes across the country.
"Zillow comes out and what did I hear from everybody, including myself? Not accurate," Appleton-Young said. "How many people are getting their 'zestimate' and saying, 'That is not what I thought?' They want to talk to a live body that knows the market."

"Buyers and sellers still need a Realtor who knows the area and can personally work with that client regarding market conditions, comporable home sales, contract negotions and so many other aspects of buying and selling a home," Schlegel said.

I cannot vouch for Zillow.com's accuracy, but I find their response interesting.
I'll take a guess that somebody was disappointed with their "zestimate"--buyer or seller?
If Zillow.com lowballs the price, why should the seller/realtor care--if they can get list price anyway?
Are buyers using Zillow.com to negotiate down on homes?
Once again, I see a vague accusation lacking informative details for the reader to make up their own mind.
But isn't that how Realtors and the IJ like to work? (smirk)

Maybe a good thread would be, “We’re all bearish on real estate. Where is everyone parking their money right now?”

@Conor,

We've actually had quite a number of recent-ish threads on this topic. The most recent one was Inflation and Interest Rates (and the dollar)

I caught that IJ article too. I think they can smell that change that's coming to their industry, and they're doing whatever they can to keep the music playing.

As for Zillow, I don't think it low-balls all the time at all. I've found about even examples of over/under estimates, and by pretty large margins. If you're familiar with Strawberry, Zillow a bunch of those homes and compare them to similar, say, Corte Madera or Mill Valley neighborhoods.

I think the Zestimate algorithm is using some proximity weighted averaging, probably segmented by valued attributes such as number of BRs. This could easily cause some areas to skew up/down depending upon the mix of old/new construction and the random geographic distribution of recent sales. I think in the real world, when there are not enough close comparables, the buyer/agent will increase their area of consideration and perhaps more heavily weight more macro factors.

Seems like we’re at the point now where the bears are convinced that the party is over, and are just waiting to see how bad things will get. Feels like everyone is just waiting, waiting, waiting for either prices or inventories to drop. Could be awhile.

It ain't over until sellers accept lower prices (in numbers large enough to move the averages). People hate my sticky theories, but I fully think we're well into the sticky phase now:

Seller: wait and see if prices come back
Buyer: wait and see if prices come down more

So now it's a game of what starts pushing either side out of inertia. Foreclosures and ARM resets? Or, wage and rent inflation along with headline inflation and low rates?

Just remember that things rarely play out like theory or models suggest or predict. I'm prepared for something messily in the middle of both of those scenarios, and a lot more price stickiness.

I'd have to say that at this moment the pendulum has swung, although I'm reluctant to say "it's a buyer's market". Far from it. Clearly though seller's are going to continue to be the ones under pressure. All a buyer has to do is sit on his/her hands and the snake fascination that drove the bubble will shift from getting a house, ANY house at ANY price to...... "this week my $'s can buy house X, if I wait another week will I be able to get a house just like house X but this time with a pool?" Start liking it!

@Kurt,

I tried Googling your headline, but didn't get any hits. Do you have a URL for the "IJ" article?

It feels like the calm before a storm.

CNN money has the "median home prices down 3.3%" story, and a smaller one on "chipping away at the 6% commission". Finally, there's an article mentioning the problem of inflation and a slowing economy.

I generally assume Bad Things wait for late Summer or Fall, but it's a bit odd seeing one of my accounts drop by 500 for each of the past 3 days. Sometime between now and then I'll probably dump SPY back into cash reserves.

DinOR,

I think you're right, but I think the decision will be toughest on the Bubblesitters or otherwise patient folks who are sitting on multiple HaHas to put down. I'd much rather be a first-time buyer because I tend to think that it will be the "starter-homes" that correct more quickly and cleanly. I've talked about our first start-home in Redwood City that cost around $300K back in 96 and now Zillows at over $1M. Those will come tumbling back to earth, in my opinion.

But as for the home with a view and a pool, I'm not so confident that they'll correct so cleanly. If for no other reason than the HaHa flushed buyers who could have easily bought all along, but refused to play the game. Since raw affordability isn't the sole important factor in this case, it's harder to predict where prices meet resistance on the way down.

I'm more in line with Peter P's thinking here: beware of flat-nominal prices and slowly deteriorating real prices, while other factors close the affordability gap ... at least for the above-starter-home tier of houses.

SP,

So basically all a seller needs is that one "special" potential FB?

@SP,

I agree with you to some extent. Actually, several of us old-timers have debated this point at some legnth. I think you're right that CA is not likely to ever approach the "affordability" numbers of most other states, largely due to its own NIMBY anti-development laws and high overall population density (as opposed to those fungible "intangibles" that bulls love to trot out). I also tend to believe that rent-vs.-PITI/carrying costs is a better yardstick to determine whether or not prices are in bubble territory.

Even so, I still believe that incomes are one of those "fundamental" supporting metrics that provide long-term support for housing prices. CA's long-term historical ratio is probably closer to 5-6X median incomes, vs. 3-4X elsewhere. And yes, there are going to be many more "non-participants" in such a region. Even so think whenever prices become so disconnected with supporting incomes and basically requires "exotic" financing for the vast majority of buyers, this is a huge RED FLAG that something's fundamentally out of whack.

SP,

Thinking about your post, I'm trying to get away from a "but it does measure affordability" response, since your last paragraph mentions that.

I think what bugs me is that as price P changes, the qualified participants N will also change. So, when you have 2xN buyers, the price would get bid up, at which point you are left with only N1 buyers again. Also, as P drops, more non-participants become participants.

Mmm... I think the greatest problem with using medians is that they can be skewed (e.g. only richer people buying pushing the median price higher.) More accurate might be calculations for separate income scales. That is, all home sales where the buyer's income is within X amount of the median/mean, or within a defined income range.

(Just rambling here)

Randy H,

O.K, I can go with that. What we're seeing to a large degree in OR is that while overly inflated "starter" homes 3/2 (remarkably unremarkable) tend to move more quickly. Particularly those at or below median price. It's getting to be a tough road for those looking to bail out from their older homes. It's hard for many of these folks that have older places that were built 25 or 50+ years ago. They can't compete with their 1 car detached garage, awkward laundry rooms, crowded floor plan and less prestigious settings. I fear for them, the window to "cash out" just closed.

HARM and SP,

Okay already! Next, Jack is gonna come back and tell me about all the positive intangibles I'm ignoring.

FWIW on gold, metals, energy and commodities in general, from the industry-insider folks. This is just one of the things that comes through my news feed aggregator on a daily basis, and I don't specifically track commodities.

This is from a bit from industry captains complaining about hedge funds causing bubbles:

Last week Lord Browne warned the continuing rise in the oil price was due to trading by hedge funds. "There has been no shortage and inventories of crude oil have continue to rise. The increase in prices has not been driven by supply and demand."

Soaring prices have intensified worries that the markets are due for a sharp correction. Mr Clemmon said: "The only certainty is that this is going to come to a catastrophic end. The question is when?"

I don't know enough about the mining or energy industries to tell you if these guys are wrong, right, or just spinning; or if the HFs are really causing any real damage or perhaps actually helping. But I do know that I don't know enough to bet my family's wealth on gold beyond a tiny portion etched out into a diversified portfolio.

I had an interesting evening this weekend that threw some light into my mind concerning the total opposite side of the spectrum most homeowners seem to be in. The neighbor had a BBQ and invited a lot of friends. Of the people there, only I and the neighbor rented. Most had droven in from far away places like Dublin and Pleasanton.
I tend to stay away from housing discussions with people. It is sort of taboo. Anyhow, the issue did come up, and what's more, every single one of the owners seemed to be on the opposite side of the issue that people accept on this forum. There was a sense that things had slowed, but that it was ok because in their mind, prices were up and here to stay, more people were surely clammering to get into the market, and with the massive plans for new residential construction in the works out in their neighborhoods, they were absolute certain that things were just going to get better and better.
So naturally after a few beers I spoke up. I spewed the basics: Inventory was up, foreclosures are up, sales were down, more people were moving out of the state than moving in, wages were down, and of the top 20 places to work and live in Forbe's this year, none were in California. I mentioned the 40% of the new businesses in CA being tied to RE, and that the construction business was tied heavily to this. I went on and on.
I was surely surprised when some of these people had NEVER heard of any of these facts. It was also offensive to them at the same time. They had this sort of Smug attitude that thank god- they were in, and had a house... in California for that matter. I don't think I've ever put smug and housing together, but it seems to me that many who I've met who have bought simply did so that they could say that they have a house- even if it is in a crappy part of the state- in california, of which they truly believed was the creator of mana from the heavens.
I'm reading a book from the library called " snobbery" and the author mentions California has a major case of it, that they seem to think that they have the key to understanding true happiness, that the 60 hr weeks the slug away for their modest homes with high mortgages is all worth it despite basic economic fundemental flaws. perhaps the secret to CA's high prices is the fervent belief that everything is better here, that the people are better, and subsequently, the risks are worth it.

Hey TOluker, San Francisco lots vary tremendously in size.

Here in Noe Valley, average lot size is 25X110 or 2750. I live at the outer edge, where the lots are a bit bigger and mine is 25X125 or 3125. Almost anyplace in the "core" part of San Francisco that was built pre-automobile is going to have a lot around that size. Even in the "prime" Marina area lots range from 3000-3500. I have seen lots as small as 2000 sq feet, probably even smaller, though this is rare.

In the west side of the city, lots are considerably larger, depending on the neighborhood. The wealthiest areas, with the detached homes, have lots of 5000-6000 sq feet.

In Pacific Heights, you can get 10000 sq ft lots, but these are on the site of double digit million dollar homes. There is even one home on the market right now for $65M! It sits on a 11,000 sq foot lot.

I know most people on this blog prefer large lots, but I do not like the resulting suburban feel. There is a produce store half a block away, along with a transit hub, where three major bus lines meet, a butcher store and a liquor store one and a half block away, Safeway and Rite-Aid three blocks away, a hardware store four blocks away and probably twenty restaurants within six blocks. It is really nice to have all this within walking distance. This is only possible because of the high density of the housing.

On the other hand, if I could get all that and still have a 7000 sq foot lot to myself, I wouldn't complain. It would be nice to have a bigger yard. Ever once in a while, I fantasize about buying one of the 1 acre lots that come up for sale near twin peaks. You wouldn't really be able to walk to things from there, but it would be nice to have some land smack dab in the middle of The City. I would be too poor to put anything but a trailer house on it though.. wouldn't that be hoot!?!

Conor,

Yeah, O.K I'm on board with you here. It's just that the seller had in mind not only be able to move it at the 600K level you mentioned, this way they can cash in their chips and buy a place in OR cash money and still have the bubble bucks to take the trip around the world they so richly deserve! I can hear the spousal arguments already. The "Bubble Blame Game" if you will. "If you didn't spend every Sunday watching the Niner's on TV we'd have that pergraniteteel installed by now!"

WWII,

I quite resent your description of the TriValley area as far away or crappy. It is neither. Pleasanton has a much higher median income than Alameda. It also has good access to Oakland and SF via BART and hwys. It is very NIMBY and snobby, but that's an entirely different problem

What's with all the damned Oil Shale adds now? Is it because I hit some keyword in my earlier post about hedge funds & energy?

LOL, now there's a speculative bubble starting in oil-shale extraction.

Conor,
7 years for me as well. Indeed, people everywhere, regardless of where they live have fears of the unknown. I'll be fair and say that people from where I came from think of californians as nutty and a bunch of crazy hippies. They also have a dislike of New Yorkers, who they fear are going to "East-Coast" the entire south. At the same time, I've been in conversations with fairly intelligent people from California that staunchly believe that everyone in the south, midwest, and even far north above them in Oregon are crazy conservatives out to turn them into god-fearing republicans. Sometimes I ask them if they truly believe what they just told me. I get some rather flushed faces at that point.Oh well- I'm glad I've been to both places so I can make a more accurate assumption. People in Boston, SF, LA, and TN all act basically the same. The cocktail conversation is a tad diffrent, but to me the only major turn off from for California is the prices, and that's it.

Astrid,
Not meant to offend. Pleasanton just isn't my thing. I go there for car shows and that's about it. Kind of has too much of that strip mall thing going on.Maybe if I lived there I would feel diffrent.

WWII,

You and I have found the quickest way to the "un-invited list". Yep, but with me it's not the beer though that I've had belly full of! It's the endless fawning and drooling over this neighborhood and that and have seen how much those places are going up? I usually get the gal/guy that's been in the mortgage business for years! (two years to be exact) telling me about how it's just going insane!

You can tell them their dog looks scruffy, you can tell them you've never cared much for corn-on-the-cob and you actually prefer beer made in Milwaukee but DON'T YOU DARE tell them their house isn't going to continue to do anything but appreciate!

WWII,

It's okay. I was joking. I feel the same way about Walnut Creek, but then my boyfriend pointed out the avg income and housing prices there were quite high, and I was like, "people pay that much to live there?"

Pleasanton does have a generic office park look to it. I actually like stripmalls, I always feel that's the heart of America, not the faux downtown areas with antique shops and overpriced coffee shops.

I usually get the gal/guy that’s been in the mortgage business for years! (two years to be exact) telling me about how it’s just going insane!

They're kind of like neighborhood Avon sales reps, only with solar calculators and a little table of rates.

Conor,

Housing snobbishness is everywhere. I lived a good chunk of my life in Shanghai and Norman, Oklahoma. So I pretty much know its everywhere.

Shanghai is 100F and humid for 3 months out of the year and 35F and humid for 3 months out of the year. The pollution is bad, the housing prices are astronomical, and traffic is terribly gridlocked for 18 hours a day. But would any of my relatives consider a retirement to a nice warm place like Haikou or Foshan? Hell no!

Also, just hear out WWII. He's convinced his own portion of Appalachia is the best thing since baked dough. :)

Conor,

"the finger gets pointed at Hedge Funds"

Is it just me or have issues that are normally quite docile (low beta utilities and such) have all of a sudden become volatile? A friend back east told me his firm uses some kind of "proprietary technology" to get what he described as "dividend capture". Once captured they sell off the position and move on to the next pay-out. While there's certainly nothing new about "buying the dividend" the application of a black box or trading program seems to be upping the stakes here. Anybody?

WW2,

Yes, that endearing smug, elitist "California = Promised Land" attitude. Right up there with "I got mine mine, so F--- you." Gotta love the 'tude, dude! Must be one of those charming CA "intangibles" I'm reminded of so often.

Btw, just curious --why did you change your screen moniker from nomadtoons2 to willywhopper2?