Housing Crash Forum
Posted for Jas Jain
Is no secret at all! They are highly correlated with the stock market, in general, and the prices of the leading local tech stocks, in particular. Attached is a graph of the relative prices in the greater SF Bay area to the greater LA Area (ratios of price per square foot). The relative prices in the Bay Area bottomed recently exactly in the month that the stock market bottomed, March 2009.
If the stock market makes a new low, most likely within the next 6-18 months, expect the Bay Area home prices to make new lows (lower than the recent lows during March 2009). Some people have claimed that the home prices in Bay Area reflect great weather, hiking trails, windsurfing, etc. That is an amazing level of ignorance.
The general prosperity in the Bay Area has been a function of the stock market and when that old cow stops giving milk you can say goodbye to the latest Land of Milk and Honey. People forget that home prices in Detroit area used to be higher than in San Jose area. Lakshmi, the godess of wealth, does not stay put!
Jas
PS BTW, the unit in this graph is a ratio of PPSF. The Case-Shiller is an index not based on PPSF, but the most accurate gauge of home prices over time. To normalize this with the PPSF, I use Radar Logic data on PPSF differentials.
66 comments on “The Secret to the Home Prices in SF Bay Area”
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Joined: 16 Jun 2007
Posts: 7
Comments: 2349
Since you have all the data: How about scaling NASDAQ index to the same peak value and show how well it fits.
I mean, CS(SFBAY)/CS(LA) is interesting, but how about CS(SFBAY)/NASDAQ? It should be flat, per your thesis.
Joined: 4 Dec 2008
Posts: 20
Comments: 148
So everyone is able to afford these high home prices because of stock gains? Salary has generally not much to do with it?
Joined: 8 Jan 2008
Posts: 5
Comments: 259
This thesis is wrong - at least compared to the Nasdaq. Nasdaq peaked in 2000. Housing in BA peaked in 2006-2008 depending on your area. Nasdaq is still less than half of its peak. In crappy parts of BA, it may be down that much, but in better areas, we’re no where close to 50% off peak.
Joined: 18 Nov 2009
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Bellingham, WA
The Bay Area was red-hot a year or two before LA was heating up — as a new arrival I was priced out of the market in 2000 but saw that Irvine was still in my range.
But in 2001-2002 prices stalled here in the BA and there were some YOY declines in the wake of the tech recession.
Then as Greenspan brought rates low, the 2001-2003 tax cuts gave everyone $50,000 or more in debt service capability, and of course lending limits were thrown out completely, allowing anyone to buy as much real estate he wanted at any price without any regard to ability to pay.
That line may be sarcasm but it is not far from the truth. Any real estate market is going to go up if you pump $5T of borrowed money into it.
Joined: 16 Jun 2007
Posts: 7
Comments: 2349
Camping is right, and if the original author would make the graph I asked for it would be obvious.
Joined: 11 Jul 2007
Posts: 1
Comments: 734
Also, Fortress neighborhood prices are held up by wealthy immigrants.
Joined: 2 Feb 2010
Posts: 0
Comments: 2
Bay Area housing in the “nice” areas didn’t go down yet mostly because most people in these areas have Option ARMs and so have been insulated from payment shock. Their day is coming and I’d say it will happen later this year. The big Option ARM adjustments (”recasts” in the parliance of mortgage brokers) is scheduled for Q1 2011 and will run for 1.5 to 2 years. However, most Option ARMs carry a 115% cap on principal so that unpaid interest and principal accrued to the loan balance may not exceed 115% of the loan principal. As far as I know that cap is written into the prospectuses for RMBS offerings and so I don’t think anybody can change that. It would skew the risk profiles for every tranche of a given RMBS offering.
In short, if you are paying $2,500 a month on a $1 million mortgage, there’s little reason to feel pressure and there’s no reason to walk away. But when that loan recasts so that it’s at 7% and the entire 115% principal balance is amortized over 25 or 27 years, that monthly payment is going to go to $7,000 a month and perhaps $8,000. That’s quite a big difference.
Finally, and I’ve been arguing this for years, baked into home prices is the expectation of future appreciation. Nobody in his right mind would pay $1 million or $1.5 million for a house on the Peninsula, or in SF or in Marin when he can rent it for $2,600 to $3,600 a month (and that’s how much it costs to rent such houses — I have myself done it for years). The only thing justifying the prices is the expectation of a return on investment.
Some people claim that “People just don’t want to be renters and throw away money and lots of people just want to buy a house because it’s the American dream!” That’s a lot of crazy nonsense. While Americans are notorious for an inability to do basic math, over a relatively short period of time, word is going to get out that people who are paying $7,000 a month to carry a $1 million tract house are eating out of cans while their neighbors who rent the same exact house for $2,600 a month are living quite comfortably, saving money, vacationing, etc. Even if you can get a jumbo at 5%, you have to assume that prices are going to rise faster than 5% a year to make up for the interest charges, property taxes, maintenance, etc. With rents falling and the unemployed doubling up, leaving the state, etc., I don’t think it’s going to get better soon.
NUMMI is closing April 1. That’s 4,700 workers out of a job and an estimated 18,000 to 20,000 more that have jobs supplying that plant in California. Then there’s Sun. Oracle’s merger passed EU approval and so probably this year Oracle is going to savage Sun’s workforce. Sun does a lot of stuff and Oracle wants Sun to do just one thing: make servers for Oracle software. My guess is that Sun loses half of its workforce. Oracle isn’t known for compromising its bottom line. If ever a company did whatever was required to maximize shareholder value, Oracle is that company. They are freaking ruthless.
In short, there are probably enclaves in Palo Alto far west of University Ave and parts of Atherton and Hillsborough and Seacliff and Kentfield and maybe a few spots in Mill Valley where people write checks for $4 million or $6 million for a house and it’s really pocket change. But those are really tiny places and most people living in $1 million to $2 million homes in the Bay Area are going to be ruined in 2010 and 2011. California is getting hit hard and the whole justification for paying that much for a house is that it provides a return on investment. We have friends who bought a place for $1.25 million five years ago. It’s allegedly worth $1.25 million today. The problem that they are probably learning now is that their monthly payment is $5,500 (they made a huge down payment) and their property taxes are $14,000 a year. There are similar houses for rent for $3,000 a month right next door. Doing the math, we see that the difference each year of $14,000 in property taxes plus $2,500 in carry costs each month is $44,000 a year, or $220,000 over five years. So they paid an extra $220,000 over the past five years to live there than a person living next door renting the same place.
I didn’t add in the mortgage interest deduction and the deduction for property taxes paid, so let’s assume in the 30% tax bracket they get to shave a third off of that and they lost only $145,200 over five years. That’s still a lot of money to get the same exact thing as someone else.
And look at the risks! If they get laid off and find fantastic jobs somewhere else, they can’t move without a foreclosure. If they want to sell, even if they can sell at the same price they bought the place for, they have to shell out $75,000 in real estate agent commissions (3% buyer’s agent 3% seller’s agent and the buyer pays both commissions because real estate agents are so corrupt they don’t want anyone to get how expensive it is so their “fee” comes out of the proceeds of the sale).
There’s the uncertainty with California’s day-to-day operations, tax policy, even the possibility that Proposition 13 will be repealed once people start seeing serious problems right in front of them from the state shutting down so many operations (47% of state spending is the schools, so I imagine a lot of people will freak out when they see their kids having really serious problems 50 kids to a classroom, increased crime, shortened school hours and the need to pay for daycare, etc.).
If people separate out the investment aspect of a home (because they tend to be poor investments), and just look at the inflation hedge (homes do tend to be a good hedge against inflation), prices are still way, way to high in SF and most of the peninsula.
If you live in an $800,000 condo that appears to a normal person somewhat ordinary, or a $1 million or $1.4 million tract house that has “granite countertops” but is on a 6,500 or 7,500 square foot lot and is really an ordinary suburban tract house, ask yourself one question: is this house likely to appreciate at 5% a year or more for the next ten to fifteen years?
I think the answer is no. If it is yes, a tract home selling for $1 million today will sell for $1,628,895 in ten years. A condo selling for $800,000 today will sell for $1,303,116. Now think about this. Will entry level wages at Apple, HP, Cisco, Oracle, etc. support a young person, or a young couple buying a condo for $1,303,116? Will second, or third year software engineers be paid $275,000 a year in ten years? Software engineers today are paid about the same in the Silicon Valley as they were ten years ago — maybe 10% more. Not 250% more.
It is possible that we will have a great inflation within ten years, but for inflation to work, the money has got to get to ordinary people so that they can foolishly bid up prices. Everything about this country and the people who run it (Democrats and Republicans alike) suggests that the last people who are going to get any money at all are ordinary people, and ordinary to these oligarchs means anyone who makes less than $1 million a year.
Add to this that the next ten years will witness the first big wave of baby boomer retirements. Studies show that retirees are net sellers of real estate. Many will downsize. Many will move into retirement homes. Lots will die (especially with the penchant for obesity, prescription drugs and alcohol in the United States). That’s going to unleash quite a lot of surplus houses on the market and boomers are much richer and hold much more wealth than the generation that followed them. This dynamic alone would make me super nervous to have a lot of my wealth invested in real estate — at least until there is more visibility.
Finally, while the Valley is a special place, there has been nothing but offshoring for the Valley in the past ten years. There’s been almost zero job growth outside of construction and real estate and most of my friends who have good jobs in the Valley periodically fly to India or China to train lots of workers who replace Bay Area jobs when there are layoffs here and those jobs never come back. Americans in the Valley are fond of saying that the real “creative” work has to be done here and will never be outsourced. Even if I did agree with this view, and I don’t, I bet you could boil the really creative jobs down to 50,000 in the Valley and everybody else could be offshored. That means that the well paid “creative” workers probably wouldn’t be able to support home prices in San Carlos even if every single one of them moved there. The math of the whole thing is off.
Anybody who doesn’t see what’s going on isn’t using a calculator.
Joined: 20 Nov 2007
Posts: 8
Comments: 186
Sunnyvale, CA
I think its half-baked graph to declare based on one incident. As Camping said, if you put NASDAQ(which BTW would closely associate Bay area, coz of tech companies), the chart will not even come close.
Joined: 2 Feb 2010
Posts: 0
Comments: 2
I will add that the connection of stocks to home prices in the Bay Area is a little half baked. I do agree that buyers here are more stock market sensitive than ordinary Americans and while only some have lots of wealth tied up in stocks, most view stocks as a metric for the health of the broader economy. That said, I do have friends who put off home buying because their “portfolio” was hit and they are now looking at houses because their “portfolio” has recovered a bit more than half of its losses. I don’t know if that is common to Bay Area home buyers, but I will bet that it is not.
I also thought of another super bad harbinger for Bay Area home prices: interest rates. Rates are 5% now. That’s near a 100 year low. Average rates for the past 100 years have been around 8%. If rates rise to 8%, assuming everything else stays the same, all buyers across income groups from the poorest to the richest will be able to afford about 35% less than they can now — they will qualify to borrow 35% less with the same income whether it’s $50,000 a year, or $2 million a year.
The Fed can try to hold rates down for a long time, but the cost to the country of doing that will become quite painful eventually. A lot of retirees have been forced to speculate in the stock market because their CDs were returning 1% and that wasn’t enough to live on. When the next down leg comes, the 65 to 85 year old crowd is going to lose a lot since Tim Geithner and Ben Bernanke decided to pressure them into the market. That means the average age of beggars is going to skyrocket.
Rates have to go up. Maybe not this year, maybe not even next year, but they will have to go up eventually and I can’t imagine that they won’t go up by early 2012. For home prices to be in a safe zone where a rise in long rates back to the historical 8% area, they have to rise 30% to 40% over the next two years. That is clearly not going to happen.
There is a lot going against housing. The only thing going for housing is the possibility of wild and uncontrollable inflation. That would benefit housing perhaps more than any other asset class and it certainly is possible. But again, for there to be real inflation, a lot of freshly printed money has to flow to ordinary people — not borrowed money, but transfers like wages and capital gains, government payments, something.
Money is a relative thing. It’s not worth anything except with regard to how much of it you have compared to someone else. If you have $10 and someone else has $20 and you want the same thing, you aren’t going to get it, or it’s going to be more painful for you to get it than the other person. The same thing occurs in the broad economy. And this means that if ordinary people gain a lot of money, rich people have to gain the same or more as a percentage of their wealth to be in the same position with regard to ordinary people. That’s a tricky thing to pull off and unless the ratio of the average rich person’s wealth can be preserved in that process, it will never be allowed to happen. I don’t think they are going to do it, but they could.
Joined: 2 Feb 2010
Posts: 0
Comments: 1
“Man Who Uses Calculator” apparently has done his homework and he is right on his fundamentals. Ever since I moved to the valley, I have been always amazed by people (esp. salesman, real estate agents, and such) who “throw” some marketing talks, and slip away from talking fundamentals. I am even amazed by some of my colleagues who bought homes paying such huge down payments. Although I don’t know their incomes I have an idea how much it could be. Finally, it was shocking to see how innocent households lost their homes in the heist that happened. Every thing around is run like a “ponzi” scheme a few ‘insiders’ profiteer and the racing rats loose and move away. Interestingly, there is another new ship load of people ready to move-into Kalifornia and story goes on.
Joined: 11 Nov 2008
Posts: 0
Comments: 20
Redwood City, CA
“Man Who Uses Calculator”, after two ridiculous losses on the soccer field tonight, you just made my day. You’ve clearly laid out all the things, and more, that I’ve been trying to enunciate to the group of co-workers I frequently lunch with. The problem with me is, I don’t know where to start as my brain begins to melt when I hear the absurd talk of how “house prices are great; they’ve come down so much!”. Amongst the people I’m friends/associates with, I continue to be the cassandra. I’m left to end every inevitable disagreement with, “Ok, time will tell.”
Joined: 18 Nov 2009
Posts: 5
Comments: 1371
Bellingham, WA
Man Who Uses Calculator says
I have no idea what rates are going to do. If it were in the PtB’s hands, we’d have 2% mortgage rates like Japan has had for a while.
We need to remember that the nation made a $5T leveraged investment in homes, 2001-2008.
Man Who Uses Calculator says
not only that, but other must-pay household budget items — taxes, food, energy, health insurance, education costs — have to NOT rise for this “inflation” to result in increased buying power & thus higher home prices.
ACORN’s communist they put into the WH last year wants to let the Bush cuts on the top marginal rate expire. It’s my thesis that these cuts fueled the price rise of 2002-2004 . . . if taxes go up on the well-to-do then that can’t be good news for the higher end markets.
Joined: 2 Feb 2010
Posts: 0
Comments: 1
As a bay area Native, I have been living in Montreal for the last 5 yrs, the market has steadily climbed 4%/yr and is still very strong. Surprisingly there are NO 30 yr mortgages here by the banks, only 5 yr plans, forcing everyone to get a new loan and keep up with the temepered market. We are considering moving back to the BA but with all the issues its really a tough call.
A home is worth only what someone will pay for it.
To often people buy homes because they cannot save otherwise, and they want to use it as a bank.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
Calculator, the biggest problem with your great analysis is you are referencing million dollar homes with what I think are irrelavant facts. (Option Arm, renting vs. buying in this class of homes, Nummi layoffs, starting salary?)
Not disagreeing with your thesis completely, but hate to take it too seriously as well.
I think most Patrickers are not in the million dollar homes market anyway, so maybe an outlook of 500K to 800K homes will be more helpful to the majority of us. Thanks!
Joined: 17 Sep 2009
Posts: 0
Comments: 133
Campbell, CA
Oh no not again.
So you’re only using gas to determine inflation? Really? 5% max based on… what exactly?
Rubbish.
Inflation since 1997 is around 30%, so your 300K house should be worth just north of 400K.
http://data.bls.gov/cgi-bin/cpicalc.pl
Joined: 22 Sep 2009
Posts: 3
Comments: 1479
Troy says
That’s not how it works. Home prices will rise with inflation even if buying power stays the same. That’s basically what inflation is…
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
Rubbish.
Inflation since 1997 is around 30%, so your 300K house should be worth just north of 400K.
http://data.bls.gov/cgi-bin/cpicalc.pl
WOW! I cannot believe you actually believe that.
Joined: 17 Sep 2009
Posts: 0
Comments: 133
Campbell, CA
Not necessarily, but 30% is much closer to being accurate than the 250% Tom is suggesting.
http://www.shadowstats.com/imgs/sgs-cpi.gif?hl=ad&t=1263566168
Even SSG doesn’t suggest a 250% increase in inflation.
And *clearly* housing hasn’t tracked inflation. News flash: we’re just coming down from the largest housing bubble in US history.
Joined: 2 Feb 2010
Posts: 0
Comments: 1
Man Who Uses a Calculator is right on the money! I lived in the SF Bay Area for 10+ years — through the dot com bubble and beyond. I never bought a house, and got out at the right time. California is a mess. Anybody who says that innovation will save CA or the USA is deluded. As was mentioned previously, only a small percentage of people contribute to that innovation, and they outsource their manufacturing offshore (i.e Apple).
One thing people haven’t mentioned … the impending earthquake! With few houses insured, it will drop prices way below the predicted bottom.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
CrazyMan says
If I read shadowstats correctly, the rate of inflation is about 5% higher every year than what is reported by the government CPI. In 1997 300,000 is about 413,553 in 2010 @2.5% average, if inflation is 7.5% as Shadowstats suggest, then 300,000 is 787,327 in 2010.
2.50% 7.50% 5.50%
1997 300,000.00 300,000.00 300,000.00
1998 307,500.00 330,562.50 316,500.00
1999 315,187.50 355,354.69 333,907.50
2000 323,067.19 382,006.29 352,272.41
2001 331,143.87 410,656.76 371,647.40
2002 339,422.46 441,456.02 392,088.00
2003 347,908.03 474,565.22 413,652.84
2004 356,605.73 510,157.61 436,403.75
2005 365,520.87 548,419.43 460,405.95
2006 374,658.89 589,550.89 485,728.28
2007 384,025.36 633,767.21 512,443.34
2008 393,626.00 681,299.75 540,627.72
2009 403,466.65 732,397.23 570,362.25
2010 413,553.31 787,327.02 601,732.17
personally, 7.5% is too high, especially considering recent events. But in any case real rate of inflation is probably somewehere in between. (5%-6%).
But do remember that mortage rates in 1997 was 7-8% vs 4-5% now. Inflation and interest rates do explain why housing price are what they are now.
Joined: 8 Jan 2008
Posts: 5
Comments: 259
SF ace:
If you use mortgage rates to justify current prices (specifically 7-8% then versus 4-5% now), then you also need to agree that if rates increase to 6-7% over the next year, prices will drop to maintain the same balance of inflation coupled with the current mortgage rate. If that’s the case, it’s clear that buying with rates as low as they can go is a bad idea.
Joined: 2 Feb 2010
Posts: 0
Comments: 5
=======================
There are 10 people waiting for a home purchase, but only one property is available in certain period of time, of course high bid win, that’s what happened last couple of years.
Now, unemployment rate hit hard in Cal about 17%, that’s mean 4 people got eliminated from the line and 6 people are remain and waiting for a home, also more house owners forced to lose their home, now 3 properties are available instead of one. But still not enough to make everybody happy.
Bottom line is, demand always there no matter what, the fact is land and properties in BayArea are limited resources, people from other States, Immigrants, Aliens, H1B, Martians are keep coming that make BayArea so special, especially in Peninsula.
=======================
So a 2:1 home demand to supply ratio? I guess that explains why homes are selling so quickly these days. And why there isn’t a vast shadow inventory of foreclosed homes sitting on bank balance sheets.
And you’re right, Calculator’s logical and well reasoned analysis of Bay Area real estate is silly in view of how “special” it is to live in the Bay Area. Houses in this area will continue to appreciate at 2-3 times the rate of inflation - - - indefinitely!
Back to reality. As any student of economics knows, all systems return to fundamentals over time. And no matter how “special” you think the Bay Area is, the simple fact is that Bay Area real estate is still far overpriced from historical Bay Area norms. Read the news - - - Californians are moving to other states, not the other way around. Many international immigrants move to the Bay Area, and many of those (like yourself) are drunk on real estate kool aid. Others realize they can make a much better life for themselves in other, lower cost, locales.
Lots of folks have made huge money on real estate in the Bay Area over the past few decades. Unless younger buyers pony up for a *massive* transfer of wealth to older owners, those times are over.
For the record, I make more than $200k/year and I rent a house in a great neighborhood for $2100/month including utilities.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
camping, agree to a certain extent,
If interest rates increase to 6-7% over the next year, prices will be devasted and we will see another significant down leg. In the short term, the market as it currently stand is too weak to absorb the impact of higher interest. It is pretty clear where the US stands with regards to interest rates polocies
However, interest rate rarely exists in a vacuum. When we see interest rates rising to 6-7%, I suspect the economy will shows signs of hiring, creditors are lending again, and wages increasing.
It is clear that buying low is better than buying when interest rates are low, Patrick explains that very well already. We don’t know how that interest rate and improved ecocomy balance out. There is no reliable indicator that tells me, or anyone when interest rate will hit 6-7% again. So the decision to lock in an interest rate and housing price is actually not as bad as what everyone here says/thinks.
Joined: 2 Feb 2010
Posts: 0
Comments: 5
=======================
Your tone sound familiar, it remind me back to year 1998~2000 when people start to talk about “Housing Bubble”, people just cannot accepted it and against it with the similar tone. Same in this year, it is hard to make people believe that the Bubble is almost over, or we are at the bottom, or no way the R.E. price will fall another 10% to 20%…
=======================
There was a housing bubble in 1998-2000. It just took several more years to reach the breaking point.
Everything goes back to fundamentals, and in many areas of the U.S. (including the Bay Area), fundamentals are still out of whack. The large wave of Alt-A and Option ARM resets starting now and continuing into 2012 will be very telling for the Bay Area. That, combined with higher interest rates, retiring or laid-off baby boomers leaving the area so they can afford retirement, and tighter lending standards do not bode well for housing prices.
Joined: 3 Feb 2010
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Comments: 1
To Man Who Uses Calculator:
Your post says everything and more of what I’ve thought for the last six years living here. When my hubby and I arrived and a 1200 square foot three-story slim job “luxury” condo in Dublin was $650K plus $400/mo HOA, the sales agents at those places literally laughed at my hubby and I when we asked questions like, “Gee, so you think this place is going to be $800K in five years? Who can afford that?” We knew it was all a house of cards and so we continued to rent, now and then almost getting sucked into the vortex.
Now we’re (and others with some logic) vindicated but I feel cheated. Lots of folks who did the wrong thing are getting bailed out and my hubby and I still rent a very small place. I know a couple friend of ours lived for free in a very nice house for a year while the bank tried to foreclose on them. I don’t blame them but it’s not fair to folks like myself and hubby. It’s also very demoralizing and makes me think our world is just now so dog eat dog.
I totally agree with you on offshoring and I see more and more professional jobs going overseas, leaving the folks behind with a goofed up overcomplicated process to get even the most simple things done. Yet executives who continue this path get more and more money. Where do they think their kids are going to work?
Anyway, thanks for your thoughts! Very thoughtful!
Joined: 20 Sep 2009
Posts: 1
Comments: 11
Calculator,
I agree with most of what you wrote.
However, can you post some examples of $1.5 million dollar houses that have $2,600 monthly rents? Are there many nice examples out there? Can someone post some?
Joined: 3 Apr 2005
Posts: 429
Comments: 1230
Menlo Park, CA
Here are some examples from my “Landlord’s Bargain Finder” service, though of course this is sort of running it in reverse, finding bargains for renters:
The service is here: http://patrick.net/forum/?cat=3
Joined: 2 Feb 2010
Posts: 1
Comments: 798
scrocker1 says
The absence of IPO bubble stock also will motivate some to move. That game ended 10 years ago. It took some nearly 10 years later to figure it out it wont happen again.
Joined: 2 Feb 2010
Posts: 1
Comments: 798
SF ace says
Yes, we had inflation, but the fact is we had not had wage inflation where organized labor demanded increases in salary/wages as we saw in the 1970s. I dont know of too many employers except east bay Chevron or Clorox which had the pricing power to actually adjust wages based on inflation. Most local tech companies are infact deflationary when it comes to pricing power, thus they seek lower expenses due to shrinking revenue per unit of goods produced. Thus they always have cost containment programs in place. Inflating home prices only accelerates the process of cost cuts. Not good a good thing.
Joined: 22 Sep 2009
Posts: 3
Comments: 1479
thomas.wong1986 says
The price of the good sold has no relation to the ability of a company to pay market wages and give good raises. You have to look at a company’s profit or earnings. Tech companies continually find ways to lower the costs of production–economies of scale–and advancements that allow them to continue to make profits even as the selling price of their good decreases.
All companies have cost containment programs in place. That’s just good business practice…
Joined: 2 Feb 2010
Posts: 1
Comments: 798
Tomrisk says
Well 7% inflation didnt happen. You can see for yourself what inflation has been for the past 10+ years.
2009 -0.34%
2008 3.85%
2007 2.85%
2006 3.24%
2005 3.39%
2004 2.68%
2003 2.27%
2002 1.59%
2001 2.83%
2000 3.38%
1999 2.19%
1998 1.55%
Total 29.5%
Joined: 2 Feb 2010
Posts: 1
Comments: 798
tatupu70 says
You, I and everyone else would pay extra to have a browser on their PC to surf the web, Netscape and MS charged $50. So what happened when MS gave it away free, bundled with their OS. Netscape ability to exist as a going concern vanished along with its ability to pay its bills. The same is true today as MS and Google are dropping prices on their ad prices. Intel and AMD, etc etc. Ability to pay operations expenses hinges on gross margins (REV-COGS).
tatupu70 says
Profits and Retained Earnings are a component of shareholders claim. They are not used for operations. Sadly many non-finance
employees think somehow they have claim or ‘wet their beaks’ on retained profits as if its their own. Not even management can dip
into RE. Else you have shareholder lawsuits and SEC investigations.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
scrocker1 says
The most fundamental issue I think many people tend to overlook (and confirm what I think what Tomrisk is trying to express) is that the most desirible areas like San Francisco and the Peninsula have always had shortages of available housing for future development. This is particularly true for single family homes in Palo Alto, Cupertino and/or San Francisco. These areas are always in high demand and getting in was always constrained by price, which is a byproduct of supply shortages.
Think of it this way, around 60K new households are created every year in the bay area, perhaps 10% desire to live in the above-mentioned area, so around 6000 in new household demand. But supply only increased by 1,000 yearly. This supply/demand inequality helps explain partially why home prices are what they are in certain region.
This to me is the true meaning of “prime” property. To me it is not about how expensive the property is, but a function of demand and a corresponding diminishment of housing supplies which always results in price pressure.
Joined: 22 Sep 2009
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Comments: 1479
thomas.wong1986 says
Yes–I believe that’s what I said… And gross margins don’t necessarily decrease even if sales price decreases.
thomas.wong1986 says
Not sure what you are trying to say here. First off–not every company is public. But more importantly, profitable companies can afford to give raises. That’s the point.
Joined: 3 Apr 2005
Posts: 429
Comments: 1230
Menlo Park, CA
thomas.wong1986 says
Yes, I can vouch for that. Google ads pay much less than they used to. Either Google is keeping more or people are simply bidding less for the advertising. Most likely all the real-estate related businesses are not avertising much these days.
That is probably impacting Google’s profits, but then again, maybe they are still expanding enough in other areas to make up for the lost real estate related ad money.
Joined: 7 Jul 2009
Posts: 7
Comments: 261
SF ace says
Does it help to explain the appreciation in seven years? I don’t think so. Yes, for certain segment of people Palo Alto was/is always more desirable compare to Sunnyvale. It was true 10 years back, it was true 20 years back and it was true 30 years back. And it was reflected in the price accordingly. But it does not explain “why home prices are what they are in certain region”, as you claimed.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
P2D2 says
yes, it does. Over the past seven years, there was around 420,000 (60,000 * 7) in new households created, if even only one % of new household target specifcally Palo Alto. 4,200. We have 4,200 in absolute demand. If only 400 homes were added to meet that demand, there is price pressure. Inflation, interest rates are across the board, but location and demand creates the premium.
Joined: 7 Jul 2009
Posts: 7
Comments: 261
SF ace says
I am curious where you got 60K household increase figure. Is it for only bay area? How does it compare to other decades - like 90s or 80s? Do you think there were more household created in last seven years than past?
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
It was on top of head on something I read from the past. But something like this can be easily “googled”
I think expressed in%, the population descreased, but as an absolute number, the population has increased.
But another way to express supply and demand. If Palo Alto doesn’t add a single unit of supply (for whatever reason) in seven years, the premium relatively to others areas must increase as well. (everything else being constant)
Joined: 7 Jul 2009
Posts: 7
Comments: 261
BTW, I just google and found following data about Santa Clara County.
According to 2000 Census, the number of household 565,863.
According to 2006-2008 estimate, the number of household 585,364.
That’s 19501 increase in 6-8 years. Definitely lot less than 60,000 per year.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
thanks for the info. after looking it up, household additions is around 25K for the entire bay area per year. I say bay area because I don’t think Palo Alto demand comes from other counties as well.
Joined: 7 Jul 2009
Posts: 7
Comments: 261
SF ace says
Well, I googled and provided the information in earlier post. It does not match with your numbers. I always get puzzled when people throw numbers and calculations based on something “top of head”, although it can ” easily googled”.
SF ace says
You are missing the whole point. Unless number of household increased in bay area dramatically in last seven years compare to priors seven year timeframes, it does not explain the price. Let me rephrase the question again: Do you think the increase of household in bay area in last seven years is dramatic compare to earlier decades? Palo Alto was always more desirable compare the other cities in South Bay and Peninsula. And it’s true for last 50 years. And number of household also increased in bay area in 50 years. But home price in Palo Alto did not increase in past the way it did in last seven years.
Joined: 15 Jul 2007
Posts: 3
Comments: 399
Patrick says
I think that Google does get reports on conversion after clicks. Real estate advertisers may have found from log analysis that clicks on ads displayed on patrick.net are less likely to generate a lead. Just a thought.
I also use Adsense. There was a drop in 2008 but 2009 paid as good as 2007. A friend of mine has observed a similar pattern for her web sites.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
“Do you think the increase of household in bay area in last seven years is dramatic compare to earlier decades? ”
No, but this is where we disagree. You think the relationship is constant while I think the relationship is not constant. In an exaggered example, if Palo Alto does not increase one unit of supply, you think the ratio is constant, or you think the ratio will diverge?
Joined: 2 Feb 2010
Posts: 0
Comments: 5
==============
thanks for the info. after looking it up, household additions is around 25K for the entire bay area per year.
==============
If Santa Clara County family growth was about 3k/year between 2000-2008, how do you get 25k/year for the entire Bay Area? Given your earlier 60k/year off the top of your head post, you don’t have much credibility without posting where you got the 25k/year data. Also, if Santa Clara County growth was only 3k/year during a period when the economy was growing, what do you think is going to happen with the current high unemployment rate? The cash burn rate for this area is high, and when people lose their jobs, many don’t stick around.
==============
But another way to express supply and demand. If Palo Alto doesn’t add a single unit of supply (for whatever reason) in seven years, the premium relatively to others areas must increase as well. (everything else being constant)
==============
Not unless the new households being created can afford to buy in Palo Alto and other supposedly prestigious communities. A recent news article reported that the number of relatively high paying tech jobs in the Bay Area is substantially lower now than at the peak of the dot-com era almost a decade ago. And note the above comments re layoffs at NUMMI, Sun, etc.
That being said, if older homeowners in these areas can find buyers gullible enough to pay huge sums of money for their 60+ year old houses, more power to them.
Joined: 2 Feb 2010
Posts: 1
Comments: 798
P2D2 says
No it certainly does not. Not for 7 or not the 12 years ago. Supply and Demand is two dimensional. There are multiple factors impacting prices ‘in the long run’. Demand was highly inflated with dollars flowing from rich IPO shares in 1998 and then again ARM loans a few years back. Neither were sustainable in the long run.
The BA population has been flat for the past 10 years. Equal coming in and leaving. The real damper on demand today is jobs.
Joined: 2 Feb 2010
Posts: 1
Comments: 798
tatupu70 says
Public or not, profitable or not, they are runned by financial metrix. This is what I deal with day in day out.
Your comment was…
“Tech companies continually find ways to lower the costs of production–economies of scale–and advancements that allow them to continue to make profits even as the selling price of their good decreases. ”
Fact is local employers have no control over their COGS becuase its outsourced to parties like Selectron Flex and other Contract manufacturers. You get their bill which is your cost of sale and you deal with it. Im talking about everthing from Intel, Sun, Apple, etc etc. What you have left is cost control over your operational expenses. R&D GA and Sellling and Marketing. Of which 75-80% is Compensation related. Factor in shared expenses facilities, etc… what do you have left to cut?
Joined: 2 Feb 2010
Posts: 1
Comments: 798
P2D2 says
In the 80s we had a rich internally driven booming economy, yet prices did not skyrocket as we saw in recent decade. Today we are no where near the dynamics we saw before. The difference are vast.
Joined: 7 Jul 2009
Posts: 7
Comments: 261
SF ace says
There is a big IF in your question. Palo Alto indeed increased supply.
According to 2000 census data, housing units in Palo Alto 26,048.
2006-2008 estimate, housing units in Palo Alto 26,960.
That’s more 100+ units increase per year. And it would very apparent if you drive around in Palo Alto. There are new constructions. I am even not counting the inventory of existing homes.
Having said that, this is not where I disagree with you. In your initial argument the sole factor of price increase in last seven years you identified as the increase of household in bay area (and that is of course with bogus number of 60,000 per year). I disagree. There are other factors - primary one is easy credit. Easy credit no longer exist today.
Joined: 22 Sep 2009
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Comments: 1479
thomas.wong1986 says
Wong—not to beat this point into oblivian, but you don’t really believe that, do you? That companies have no control over COGS? That is just silly. The mere choice to outsource is made to lower COGS. The outsource contract is negotiated–again the company has control over the price. Those companies you mention also have research and development departments which work on cost reduction programs. Finally–Intel, Apple, etc. etc., all use their size to hammer their suppliers on price. I’ve worked for a couple of companies that sold to Intel and I can assure you that they negotiated very hard. Further they expect price reductions every year from their suppliers.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
Unfortunately, chips and hardware that used to be cutting edge are more of a commodity type business today. (Of course, it is not a true commodity yet, but trending that direction) In a commodity type business, cost and economies of scaling are too important to ignore. The only real value the companies has is their portfolio of patents either in design or manufacturing method to reduce costs.
As an once investor of Micron and others, you learn that the semi-conductor industry is hopeless. It is a never ending cyle of capital expenditure, once it is profitable, expansion from particularly Taiwan, Japan and Korea drive the price down where everyone loses money, mergers and consolidation happen and the cycle start all over again, without fail. You will never see any meaningful dividends and totally understand why.
Silicon IT professionals did not enjoy much wage inflation the past ten years (of course from lofty levels relative to peers in other industry) and may be more competitive going forward.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
P2D2 says
PD, if you read my post carefully, I only brought up that supply within a particular area is one of the fundamentals. It is generally known that SFH in San Francisco and parts of Peninsula are under-expanded the past decade, and these are the areas that hold up the best thus far. 100+ housing units a year is not that much, especially considering that we have 7+ million in the San Francisco bay area alone. I bet the stock of single family homes, not rentals or condos/townhouse is a lot less than that.
The census is actually a great tool to explore the city, for example
Family income in 2000 is about 117,574 vs. 166,063 in 2008. Whites and Asians make up 68.2 and 23.9 repective in 2008 vs. 75.8 and 17.2 respectively(i bet under the 2 or more race category, the majority is a white or asian is involved)
http://factfinder.census.gov/servlet/SAFFFacts?_event=&geo_id=16000US0655282&_geoContext=01000US%7C04000US06%7C16000US0655282&_street=&_county=palo+alto&_cityTown=palo+alto&_state=04000US06&_zip=&_lang=en&_sse=on&ActiveGeoDiv=&_useEV=&pctxt=fph&pgsl=160&_submenuId=factsheet_1&ds_name=ACS_2008_3YR_SAFF&_ci_nbr=null&qr_name=null®=null%3Anull&_keyword=&_industry=
Joined: 7 Jul 2009
Posts: 7
Comments: 261
SF ace says
I am convinced that you are pretty bad in numbers. The number of household in Santa Clara county is half million. Add another half million in San Mateo. Where did you get 7+ million? Adding Marin and Napa county? Well, a household in Mill Valley does not add demand in Palo Alto.
Now you don’t want to count condo/townhome. Well, if 7+ million population adds demand in Palo Alto market, could you tell me how many of that 7+ million is adding demand in SFH and how many of them adding demand in condo?
Joined: 2 Feb 2010
Posts: 1
Comments: 798
tatupu70 says
Guess I will be burning my BS Degree in Accounting and CPA license. Quit my corporate accounting gig and join a monestary.
Joined: 11 Jul 2007
Posts: 1
Comments: 734
Guys,
Housing prices in The Fortress are probably held up, and keep going up, by the demand from wealthy immigrants. Maybe they don’t pay cash but they can make a heckuva downpayment, and maintain the housing cost with the fancy imported cars, private tutoring and lessons for their kids, expensive colleges for the kids, every-other-year (or so) trips “back home” during times when it’s expensive to travel. That is not a sustainable lifestyle for the tech workers with the tech salaries you are describing, I know, I am a tech worker, married to another one, and I sure can’t as heck afford all that stuff. But I am not tapping a family dynasty nor a dowry.
Joined: 22 Sep 2009
Posts: 3
Comments: 1479
thomas.wong1986 says
lol–if you’ve got somebody willing to pay you, I wouldn’t give it up….
Joined: 2 Feb 2010
Posts: 1
Comments: 798
Yes, we certianly did see increases in supply in recent years. There will additional supply hitting the market soon. Drove by a former shopping center site off Alma (Central Exp Way). The buildings were boarded up and saw a sign about future townhomes.
I find satellite maps useful as it clearly shows lots of empty land available for new development. As for Santa Clara on the whole, we certainly see further down south on 85 lots of open land, not to mention employers. As previously state in different post, Santa Clara has lots of unused former R&D parks wasting away. Last I saw near 1st and Tasman, a former R&D building was torn down to make way for Condos. Go figure…. No more land ? Think again….
Joined: 2 Feb 2010
Posts: 1
Comments: 798
SF ace says
Much of that income includes interest and dividends from investments. The investments came from cash out of Stock IPO winnings of late 90s. You will find real incomes absent of stock lottery winnings much less prior to 1998.
Joined: 5 Sep 2007
Posts: 2
Comments: 58
This attempt to measure supply and demand by estimating the desire of people in the Bay Area wanting to live in Palo Alto by counting the number of households is too circuitous.
There is a direct measure of the appeal of living in Palo Alto and that is the rents that residents are willing to pay. Based on this measure, as rents in Palo Alto are lower than rents in the year 2000, Palo Alto is not as sought-after as at the end of the last decade.
Home prices are not as good measure of the desirability of a neighborhood because they include both a rental use component and a speculative component. If you wanted to live in Palo Alto for just one year you would be likely to rent. But if you believed that prices would rise 25 percent by the end of that year, you would be inclined to buy because you could always sell it for more and cover transaction costs.
Joined: 2 Dec 2009
Posts: 11
Comments: 566
San Francisco, CA
thomas.wong1986 says
Joined: 18 Nov 2009
Posts: 5
Comments: 1371
Bellingham, WA
thomas.wong1986 says
Yeah, here in my apartment in Sunnyvale a previous tenant got lucky with YHOO apparently. The annual report from his PE fund comes every year, and he had a million dollar balance, or did until last year when he was down 20% or so.
Looking forward to this year’s report. Oh, he now lives in SPA btw.
Joined: 18 Nov 2009
Posts: 5
Comments: 1371
Bellingham, WA
gavinln says
plus a cost-of-money component. If the gummint offered 0% APR 100-year loans, prices might go up a bit, LOL.
Joined: 2 Feb 2010
Posts: 0
Comments: 5
=======================
Average Palo Alto family income in 2000 is about 117,574 vs. 166,063 in 2008.
=======================
And what kind of residence can you buy in Palo Alto with a family income of $166k/year?
It would be very interesting to take a survey to determine what percentage of Bay Area home owners could afford to buy their current residence (at current market value), assuming they had enough cash to cover a 20% down payment and had to make mortgage payments off of job income. But these same people expect housing prices to increase at some multiple of inflation for the forseeable future. Very odd logic.
Joined: 18 Nov 2009
Posts: 5
Comments: 1371
Bellingham, WA
scrocker1 says
Bulk averages of zip codes don’t matter due to the lock-in nature of housing costs and low turnover of the area — I see lots of old people in PA whenever I’m there. What does matter is the average household incomes of hopeful buyers, vs. the supply, and the cost of money.
Joined: 2 Feb 2010
Posts: 1
Comments: 798
SF ace says
It depends on what kind of investment they bought + actual income.
A cash out from Yahoo stock, or any other tech IPO say 10K shares, if fully vested, at peak around $300 late 1999 after stock split, comes in at say $6M gross $4.5M net less purchase of home $1M, leaves $3.5M…
In a simple MF or MM account earning 1-2% gets you to 52k, which contributes to your current earned income.
Isnt that what people put on their IRS forms and surveys anyway.
What im saying is actual earned income from salaries can be much lower then what people throw around regarding PA household incomes.
It is difficult to say what their stock base purchase was or what they bought, may not have been NASD but rather J&J or Coke in 2000-2001.
Joined: 2 Feb 2010
Posts: 1
Comments: 798
scrocker1 says
I would first breakdown the source of their income, not to mention their employment history and draw some comparisons from prior decade or so.