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We are not completely balanced, although we do welcome reasoned counter-arguments. I am going to miss Face Reality. Hope that he will be back soon.
The sad part is that those clueless people refuse to project into the future. To them, the boom will continue indefinitely. They keep looking for excuses why historically abnormal appreciation can continue. But reality always asserts itself over wishful thinking.
Fake P, I am now "Peter P"! :)
Yes, I also think that inventory is more current than sales. However, I would use higher inventory to confirm slower sales. The sales number in still looks respectable, so perhaps the DC market is not stagnating yet. In terms of the bubble timeline, I think DC lags SFBA a few months.
Nevertheless, remember your mouse trap analogy? If one market goes down all markets will crash soon afterwards because of the sudden "risk discovery" in the mortgage industry. I think the "Las Vegas mouse trap" is being "touched" right now...
Hmm, it should work. BTW, it is the "Top 10 Reasons Why the Northern California Housing Bubble Wonâ€™t Burst" link in housebubble.com.
It is a very quiet night. Perhaps it is the calm before the storm?
Jack, you need to understand that in a bubble we do not predict the market, we predict how people predict the market. As a result, we must not overlook the smallest details in both numbers and sentiment.
When this higher inventory number is reported by the bubble media (our friends for now), it is going to have a multiplier effect.
The way a bubble works is that it requires ever hotter markets. If the market even returns to normal, speculators with negative cashflow will start to panic.
Finally, we are not here to make knowledge. We are here to speculate. We cannot afford to make calls only after the fact.
Bubble is not rational, we can only apply so much rationality to analyse a mania.
Talking about context... we are seeing increasing inventory and declining sales number year-over-year while the media indicates a remarkable chainge in sentiment. There is more confirmation than we need.
Jack, the media never has any credibility. I use it only as in indicator of public opinion, because it tends to "trend-follow" sentiments.
Bubble is all about herding and herding requires a communication mechanism. Minions of life are not looking at Bloomberg machines, they obtain "information" from mainstream media (and also from people around them.) I speculate that media has played a major role in the inflation of this bubble and I also speculate that it is now working in reverse.
The bubble is more than an assumption. We have the preponderance of evidence that it exists.
"I am not making a case for anything. "
We know you. :)
One significant thing is that we are anticipating a record year nationwide while the Bay Area appears to be losing steam in terms of sales. It looks like "hot money" is leaving the Bay Area for other "hot areas". As hot money moves around, the market will lose breadth as speculators have to take increasing risks on decreasing quality to make profits.
This is the way the world ends... "Bubble World" I mean.
Face Reality, bug us after October.
I don't know why I am constantly being "lumped" into the crowd who have been predicting a crash for years when I did that just a month ago.
(Before, I predicted that a crash is inevitable, but bubble can grow longer than expected. Now, I predict that a crash is imminent. There is a big difference.)
Again, I do not care about making knowledge, so assumptions should be accepted.
(Don't get me started on pointing out the "assumptions" we take in making sciences.) :)
Jack, I really enjoy your presence. It will becoming boring otherwise. :)
Face Reality, let's be more specific.
I am predicting that a financial event in October will make a soft-landing scenario unbelivable. I am merely saying that by the end of October, fear will take over in the credit market and the housing market.
In effect, I am predicting that before November you will start to agree with our views about the crash because of the economic atmosphere and other undeniable evidences.
If I am wrong, I will give you credit. :)
I am actually more interested in the credit bubble than the housing bubble.
For the credit market to boom, there must be rapidly increasing asset values. Rising collateral values fuels the credit boom. A feedback loop is formed until the sentiment changes markedly, then a credit bust follows.
The credit market is very prone to boom/bust cycles. It is just that this time the "asset" is the housing market.
West Coaster, the situation is slightly different because Americans tend to run for the exit while the Japanese would like to keep mistakes private.
The mechanism for the credit boom/bust cycle is the same though.
Live rich and die broke. Perhaps people are trying to carry debt into the coffin. What a great way to socialize the cost!
Just one thought, with P/E ratio above 30 in the Bay Area, it is quite difficult for prices to stay flat. Even if rent increases 20% while prices stagnate, the P/E ratio will still be 25 - a rather high number to justify without expected appreciation.
Fake P, it is all relative. I agree that there should be a premium to own. The question is how much premium. If prices are to stagnate, a P/E of 15 is already a bit high as an investment. Now, paying a P/E of 25 (or higher) to own is quite a bit of premium if there is no expected price appreciation.
The rule-of-thumb is that a good real-estate investment should not cost more than 100 times the monthly rent, which translates to a P/E of 8.3.
Jack, you are assuming that the current housing boom in the Bay Area has nothing to do with the credit bubble. :)
I surely remember 1999! Back then, I actually thought that real estate was a great investment in the Bay Area because of the rental growth and P/E ratio! Too bad I was still in school. :)
I hope that the economic environment here can justify steep rent increases. This way, the P/E ratio will drop (hopefully) and I will feel better.
"PeterP is the one who has predicted an October crash time frame. He gets all the credit for that..."
... but gets laughed at when it does not happen ... :(
Anyway, I still think it will.
BTW, IMHO, Netrugu's posts are the most informative. I really learned a lot from them. :)
Fake P, if you can make people remember me for a thousand year I do not mind. You will have to make me more famous than Irving Fisher though.
Historically, October is a volatile month for the financial industry as money managers re-position themselves near the end of their fiscal year.
This year, several developments are of particular concern, in particular:
* Exceptionally low implied risk-premium in both derivatives and debt instruments
*The FED has been raising interest rate but the bond yield is not responding.
Such developments suggests that the industry (esp. hedge funds) may be resorting to excessive risk-taking in order to maintain return.
When the re-positioning occurs in October, the extra volatility may just be the trigger that causes liquidity to dry up. This will start the nuclear reaction.
Face Reality, the internet bubble bust actually helped this housing bubble if you believe for a second that it has nothing to do with the underlying demand for housing as a sheltor (as opposed to housing as an asset).
We will see. :)
One note about the internet bubble and the housing bubble in the Bay Area:
It has been said that the housing boom did not end even after the internet bubble bursted in 2000. There are several possible explanations:
1. The housing market in the Bay Area is robust enough to withstand the shock of the internet bubble bust.
2. The internet bubble bust helped inflating the housing bubble
I argue that (2) is the likely scenario because:
1. Housing P/E shot up only after the internet bubble bust. Until 2000, this housing bull market was accompanied by increasing rent.
2. As an asset class, homes compete with stocks for capital. With excess liquidity created by the FED, stock market money find its way into the housing market after the internet bust.
If (2) has been the reality and (1) has been the psychology, this bubble can be perfectly explained.
I would say that a P/E ratio of 10 is marginally doable for investment and a P/E ratio of 20 is very high. Such high ratio is usually associated with highly desirable areas with expected future appreciation.
Any ratio higher than 25 is a red alert for speculative activities.
Face Reality, do not confuse the ratio of price/income and price/rent. The first one is tied to a very complex political/cultural system and the second is tied only to expected appreciation.
Both London and Hong Kong are notoriously speculative. They are no very good "role models" for us.
According to your logic, Salt Lake City is a super bargain! At least they are growing their tech industry and we are shrinking ours.
And Tokyo crashed big time, by the way.
When I was small my Dad taught me that the ratio between mortgage payment and rental payment is almost entirely about anticipated future appreciation.
If prices are anticipated to be flat our current ratio of 30+ will be ridiculous and it will revert to a reasonable level below 20. Unless rent goes up big time, prices will have to drop at least 30%.
The current ratio can be justified *only* if _expected_ appreciation remains high while prices _actually_ stay flat for years. I do not know how this is possible at all.
AFAIK, North Bay is not nearly as bubbly as South/East Bay. If you compare the mortgage-payment/rent ratio the change will be even less because of lower interest rate.
I do think that North Bay is not going to drop nearly as much as South/East Bay.
What does â€œcomplex political/cultural systemâ€ mean?
For instance, half of Hong Kong's population live in government housing. Most people do not own cars. There is no sales tax and no capital gain tax. The income tax is closer to 15% than 35%. These all contribute to a higher median home price to median income ratio.
What do you mean by making serious money? Does it mean making 500K in home appreciation or 500K in stock options? Salt Lake City does have a lot of high-tech opportunities and it is still growing.
If you ask people in Hong Kong or Tokyo they will say that their prices are higher than SFBA because they perceive more opportunity to make money there. Thinking that SFBA can be as expensive as Tokyo before it crashes is absurd.
Also, do you know what is the rent in Tokyo for the $1M apartment?
"IF rents go up by 10 per cent a year for several years, you probably wont really leave,it will be because it will be WORTH IT to renters to pay that much to live here."
Only if every comparable rental goes up 10% as well. This would require a complete rebirth of the Tech/VC/IPO industry. But if people realize that easy money can again be made in the stock market, won't they pull money out of the housing market?
People may be able to pay the premium for fixed rate but they may not be able to pay down the principal. IO loans are more of a problem than ARM loans.
"Things are not out of balance. This IS the balance."
I do not blame you. One camp believes that market is always right. The other camp believes that market is always wrong. I belong to the second camp.
"Rents are around $5K-$6K for a $2M apartment.
Salaries there are pretty similar to salaries in the Bay Area, so if you think lifeâ€™s hard here, just try to imagine what itâ€™s like to make it there. "
The P/E ratio in Tokyo is still very high, so it will continue to drop for many more years. Families there do not have two SUVs. Most of them do not even own vehicles.
I never said that Bay Area is hard, but I refuse to buy when the P/E ratio is 30+.
It does not take much turnover for prices to tank. Old-timers can stay in their houses. They do not care and they will not be affected.