patrick.net

Hi,

I have been a fan of your site.

This survey tells the reality behind the bay area housing bubble.

People bit up the price of houses in here believing;
"We make $250,000 as a family. We CAN AFFORD
4X house = $1,000,000 easily, right?"
"There are plenty of families in bay area who make
more than that. So $1million house price is sustainable,
at least in our neighborhood"
I heard those arguments so many times.

The reality is, they are one pink-slip away from
foreclosure if they defined "affordability" based on that logic.
Because given the high cost of everything else, not that many people can accumulate much surplus.
The famous two-income trap

Back in good old days, they could still say;
"Well, if something happens, we can just sell the house
and still make money thanks to price appreciation."
Not anymore.

I always wonder how come so many of my educated
friends cannot see the simple reality.
They think they know the math,
without doubting "4X" magic number.
To me, that is brainwashing.

But I don't say that at parties because
I am a polite girl.
People love to be in denial. :P

Tude says

When you are spending $3000++ a month on your housing and you lose your job, that's a lot of money to have to come up with every month.

I don't know how people can handle the stress. My PITI is around $1700 a month and I hate it.

Brudda, you left out the other, concomitant expenses that come with The Fortress Life: the expensive models of cars, the private lessons and "summer at Stanford" for the kids, the every-other-year or so jet setting to "back home" during peak (expensive) travel times.

I don't get it either. So it is how I came to the conclusion, they're all loaded. Money from back home. Kind of makes sense anyway, you have to be from elite back home in order to find your way to grad school in the USA.

When people say 2.5-4x income for a house do they mean purchase price of home or mortgage size? Coming to the table with 30% down vs 3.5% down would mean you could buy more than 3x your income somewhat safely. Also if you are married its safer to stretch how much house to buy if your are buying based on one income vs both incomes.

Also interest rates and age should play a part of the equation. If someone bought a $130k home in 1983 at then 13% interest rates. Thats about the same monthly nut as buying a $300k home at 4% today.

Its seems apparent that interest rates are going to be kept around 4% or lower until some new innovation starts spurring the economy forward. If that innovation doesnt come... Then we will all be screwed by a depression or hyperinflation or new world war and civil unrest.

These Asians from China and India must be SUPER RICH to pay the outlandish prices for real estate here. I make six figures and cannot afford a home here.

SJ says

These Asians from China and India must be SUPER RICH to pay the outlandish prices for real estate here. I make six figures and cannot afford a home here.

Yep. It is the only rational and logical conclusion.

Well I did the open houses just out of curiosity and yep, it was 99.99% ASIANS looking to buy- mostly INDIANS and CHINESE. What I have noticed is HERD GROUPTHINK mentality with these groups. Look at Japan and the lost decade and the current property bubble in China and India.

Real estate is still all the rage in China. I am Hong Kong right now, and from reading newspapers & talking to a few folks, RE is still "the easiest game" for making money by "investing." I have been explaining what is going on in the US and some parallels I am seeing in China/HK, and it seems that I am one of very few people with this position.

As far as "investing" in US property, it sounds like they are well aware that prices have been falling. I think that they think that it might be temporary, and possibly a sign that now is the time to buy before prices "appreciate again." Generally, the idea is to buy, hold for a while & sell to gain on the margin rather than use properties as rental cashflow vehicles. This is in HK of course, and a lot of wealthy mainlanders probably have other ideas. I am certain that mainlanders know what is coming for China's economy as the world economy tanks, and their US properties are probably their "plan B" when it comes time to escape China. Still, if a lot of foreigners are buying because they think that price drops in the fortress are temporary, soon to be replaced with wild appreciation, I think that some may tire of waiting & losing, and cut their losses at some point.

China is odd with housing.

The one child policy combined with a preference for males leads to more of the country being male.

Unlike western countries it is seen to have a house BEFORE getting married.

So in a sense you have millions of men trying to compete with one another for wives by having the best house on the block. Since there are now

This article was written in '04 and had prediction in 8-10 years of 40 to 60 million extra guys.
http://www.msnbc.msn.com/id/5953508/ns/world_news/t/china-grapples-legacy-its-missing-girls/

40 million people buying homes (or things that are considered to them as homes) certainly has potential to drive prices up. Now the sad thing is they won't be able to technically marry unless maybe polygamy is legalized but I highly doubt that..besides that is usually associated with multiple wives, not husbands.

Some have suggested that the past 10 years in china have been like the 1950's in the USA. I believe we will see a situation like the 1960's in China..it might not be pretty..I don't mean democracy but social structures are going to change.

SJ says

These Asians from China and India must be SUPER RICH to pay the outlandish prices for real estate here. I make six figures and cannot afford a home here.

It may be more obvious since they cant take out more than $5000 USD out of China.

http://www.bbc.co.uk/news/world-asia-pacific-13813688

Chinese officials stole $120 billion, fled mainly to US

Thousands of corrupt Chinese government officials have stolen more than $120bn (£74bn) and fled overseas, mainly to the US, according to a report released by China's central bank.

Thousands of corrupt Chinese government officials have stolen more than $120bn (£74bn) and fled overseas, mainly to the US, according to a report released by China's central bank.

Between 16,000 and 18,000 officials and employees of state-owned companies left China with the funds from the mid-1990s up until 2008.

The officials used offshore bank accounts to smuggle the funds, according to the study posted on the People's Bank of China website this week but which has since been removed.

It said the officials smuggled about 800 billion yuan into the US, Australia, Canada and the Netherlands through offshore bank accounts or investments, like property or collectables.

The stolen funds were covered up by disguising them as business transactions by establishing private companies to receive the money transfers.

The study said corruption inside China was severe enough to threaten the nation's economic and political stability

Wow that would explain the inflation in real estate prices in the bay area- now I understand who I am competing against!

bmwman91 says

Still, if a lot of foreigners are buying because they think that price drops in the fortress are temporary, soon to be replaced with wild appreciation, I think that some may tire of waiting & losing, and cut their losses at some point.

they've done research (might've been shiller) which showed foreign investors are usually the last to be informed so they are not a good indication of whether something is a good investment or not.

I keep reading post after post about foreign buyers in the ba, but no one has actually provided any documentation of this alleged buying.

SJ says

What I have noticed is HERD GROUPTHINK mentality with these groups.

Correct. All of them think that RE a best investment at any time at any price.

SJ says

Wow that would explain the inflation in real estate prices in the bay area- now I understand who I am competing against!

LOL! it may be one possibility. In the case of SF, many foreign governments have made purchases of homes/re property that double as consulates in the City. So a RE agent may hype that " rich foreigners" have purchased homes in prime areas for millions, without stating that it was actually purchased by the government. There are currently some 250 consulates in SF today. I dont think we had that many in prior years.

Need to look at all the possibilties...

South Bay Also had inflated prices dating back some 12 years now due to stock options. Say back in 1998-99, recent IPO employee sold their stock that had a inflated prices say Ariba for $300 per share and purchased a home in PA.... it actually did happen. On the other hand the purchaser of the stock saw a 90-95% decline in value. Turned out to be a scam....like facebook valuations today.

bob2356 says

I keep reading post after post about foreign buyers in the ba, but no one has actually provided any documentation of this alleged buying.

Agreed. Whenever I look at actual data, it tends to disagree with this lore.

Last few offers were kicked out by CASH offers again & again, some people are so rich now, easily with $725K cash to buy RE... :(
Too bad I don't have that much cash: http://www.redfin.com/CA/Castro-Valley/18849-Cindy-Way-94546/home/35657549

CashOffer says

some people are so rich now, easily with $725K cash to buy RE... :(

Two months to close means it probably wasn't cash. Cash should close very quickly generally.

Any idea what prices this house went pending at before? I wonder what they were asking originally.

Another thing I want to note:

Bay Area RE, even in the fortress, is CHEAP for Hong Kong business folks. A 600SF flat can easily run you $millions (US) on HK Island. An hour drive / bus ride from the Island has these sorts of flats priced in the $400k-$500k range (mid-range, not dumpy, not super nice). I guess prices have effectively doubled in the lower- & middle-class areas since ~2006, and there is a great deal of anger among the working class at foreigners and, mainly, wealthy mainlanders that are pricing them out of their native home.

Anyway, you could have all the money in toe world and NOT get a SFH in HK (the supply is insanely small, and I sort of doubt that these estates in the hills ever go up for sale). So, to someone making money in HK, a $1.6M Palo Alto HOUSE is cheap as shit. For your money you get a place to send your kids to "world renowned" schools and weather your wife probably prefers. It is 7AM in mid october, 82F and ~88% humidity. This is GREAT weather compared to the summers I have been here (particularly when I was at Flextronics & Foxconn...add in ridiculously low air quality and you REALLY love it!). I think that folks in SE Asia appreciate BA weather much in the way that people in the northeast US do.

So, while some foreigners might be dummies for trying to use BA RE as quick money investments, others are wealthy and taking advantage of cheap high-end RE. There is a LOT of money here, and I suspect that a lot of wealthy folks are buying & really couldn't care less if prices move down. Now, the more middle-class / upper-middle class folks that are buying overseas DO care how values move since it is not an insignificant financial move. If prices do go down, I imagine that they will bail out.

bmwman91 says

For your money you get a place to send your kids to "world renowned" schools and weather your wife probably prefers.

And be subject to US taxes...

No one doubts that this happens occasionally. It's just a question of how often that really seems to be at issue.

Now day, money can buy GREEN CARD via RE...It looks like more rich Chinese is coming to US with $Y$Y$... What about all the JOBS??

CashOffer says

Now day, money can buy GREEN CARD via RE...

Not easily. If you're suggesting an investor visa, buying yourself a house won't count.

bmwman91 says

Bay Area RE, even in the fortress, is CHEAP for Hong Kong business folks. A 600SF flat can easily run you $millions (US) on HK Island.

That would be 1995-1997 before it was handed over to the mainland. Yes, many left HK, but that didnt exactly help prices in the US. Again, you can make the same argument regarding Tokyo... and again, if anything the Japanes were skinned when prices fell.

bmwman91 says

This is GREAT weather compared to the summers I have been here (particularly when I was at Flextronics & Foxconn

The choice is this.. bring them over and incur higher salary and tax costs, or keep them overseas at lower costs where they are needed... no brainer... keep them overseas.
Talk to your CFO, he will give you the same run down.

Hey Thomas, sorry I guess I missed your argument's point (no sarcasm or anything). Are you of the position that wealthy foreigners do not really have much preference for RE in the SF-BA for RE investment thanks to tax disadvantages? I saw you mention Chinese officials buying it for plan-B escape purposes.

I always thought the funny thing about HK was that the currency is called dollars. Nothing like getting a bill for 60 dollars for one beer! It's worth about as same as the mainland which means prices are naturally lower but HK is still without a doubt the most expensive part of China.

Shanghai can get up there but it still has awhile to go. I have no clue about Macau. I guess one could say that if Hong Kong is NYC, Shanghai is LA then I guess Macau is Staten Island.

I think that if it's a 2 earner family, it is prudent to buy a house where u can make minimum monthly payments with 1 income. And, while both people are working pay extra $600 - $800 a month if you can towards principal. If you do this consistently, you can save around $150,000 in interest costs based on Bay Area's pricing. Don't listen to those who tell you to invest in stock market and instead put money down towards principal (banks want you to make minimum payments so you pay more interest, thus they spread the propaganda). Don't invest more than you need to get full company match. This will all be worth it once you pay off your home 12+ years ahead of schedule and get that monkey off your back.

$HK60 for one beer?! Where/what were YOU drinking?!

bmwman91 says

Bay Area RE, even in the fortress, is CHEAP for Hong Kong business folks.

Do all bay area residents really believe the bay area is the center of the universe? That everyone on the planet is waiting with baited breath for the opportunity to relocate or at least buy there? Trust me, it ain't so joe. There are 10,000 eb-5 investment visa's with automatic green card for investor and family available for issue every year since 1992. The most ever issued in any year was under 4000. That means less than 4000 people in the whole planet were willing to put down cold hard investment cash to live in the US (not just the bay area, I know it's hard to believe but there is an entire country surrounding the bay area) in any given year. L-1, E-1, and E-2 visa's don't have any better numbers. So much for the millions of rich HK investors clambering to get here.

Why wouldn't the Hong Kong business folks just go to one of the many places on the planet that are just as nice while being both cheaper and without all the hassles of dealing with the US and the state of CA? Oh that's right, they do.

bob2356 says

The most ever issued in any year was under 4000. That means less than 4000 people in the whole planet were willing to put down cold hard investment cash to live in the US (not just the bay area, I know it's hard to believe but there is an entire country surrounding the bay area) in any given year. L-1, E-1, and E-2 visa's don't have any better numbers. So much for the millions of rich HK investors clambering to get here.

Yeah, exactly. Most people who say this stuff have no real knowledge about it. Here are the EB-5 visa numbers for the last few years:

* FY 2007 - 806 total EB-5 visas were issued
* FY 2008 – 1,360 total EB-5 visas were issued
* FY 2009 – 4,218 total EB-5 visas were issued

The FY 2010 number is estimated at 1886. The 2009 number was artificially high because there was a sunset clause which would have ended the EB-5 program on Sept 30, 2009. Congress extended this sunset by 3 years, but it pulled the demand forward.

Slightly less than half of the FY 2009 EB-5 visas were to China or Hong Kong -- other countries with a lot of people were South Korea and the UK:
http://www.travel.state.gov/pdf/FY09AnnualReport_TableV_3.pdf

Quote from a USCIS doc:

Between 1992 and 2004, 6,024 EB-5s were issued, which averaged approximately 500 per year. Government Accountability Office, Immigrant Investors: Small Number of Participants Attributed to Pending Regulations and Other Factors, p. 2 (Apr. 2005) (GAO-05-256).

For a while, EB-5 approvals were well under 50%, although there were some law changes around then that have raised the numbers more recently.

There are certainly other places to live with lower taxes and lower cost of living.

For comparison, Canada's numbers were above 4000 between 1998 and 2007 except for 2003, peaking at about 9500 in 2005, and that's partly because all it requires is to pour money into Canadian government-backed securities.

The EB-5 wasn't always an automatic green card either. Although recently only 15-25% of people have been getting their I-526s rejected (for 2010, only 11% were rejected), the number was almost 50% in 2006.

bmwman91 says

$HK60 for one beer?! Where/what were YOU drinking?!

It was a guiness..maybe it was 40 it was hard to say. Tasted exactly like from home though..from the tap.

bob2356 says

Do all bay area residents really believe the bay area is the center of the universe?

Definitely not. Personally, I think that the BA is way overrated. My only real reason for sticking around is having most of my immediate & extended family in the area. Beyond that, if I could convince my fiancee to pack up, move somewhere where the cost of living is 50% less & take jobs that pay 50% less, I would leave. The pay is not REALLY worth it in the BA, at least as long as buying a house is something we ever plan. We would be living paycheck to paycheck on a combined $200k gross income, or living with reasonable payments in a shitty wood-frame condo with exorbitant HOA dues. That is completely idiotic. Why so many people are desperate to get into the BA is beyond me.

The visa issuance info is interesting. Perhaps I made my argument out to be more than it actually was. I wasn't trying to indicate that folks from HK are flocking to the BA. RE is cheap there in comparison, and people I have talked to here (in HK now) seem to be paying some attention to BA RE prices. As previously mentioned, there are other, more fiscally advantageous places to go, and they also know that. Despite this, a LOT of Chinese/Taiwanese people do have a great deal of interest in the fortress based on what I have seen myself back home, and many of them seem to be able to afford it. Perhaps more of them are wealthy citizens (naturalized or born) than immigrants. Who knows, maybe the whole "rich foreigners buying everything up" idea is just white people trying to cope with the fact that a large non-white segment of society is taking (or earning, rather) their place as the dominant upper-middle class demographic (in the BA anyway). Maybe it is none of the above, I don't know! I don't particularly care either, but it does make for interesting discussion.

bmwman91 says

Perhaps more of them are wealthy citizens (naturalized or born) than immigrants.

This is probably the case. A large percentage of Asians in Cupertino, for example, have been here for a long time -- more than 10 years. There is census data to show this, and I have demonstrated this on Patrick.net before.

There are also lots of H1-B folks in the Valley and southern East Bay, but those people are not the ones buying expensive housing. Why would you buy an $800K house if there's no guarantee you might be able to stay longer than 3 or 6 years? And how the hell are you going to buy a fortress house on your lower-than-market H1-B salary after you made 1/5 of that back in your home country prior to that? Some portion of these H1-B-enabled people will get sponsored by an employer, but that's after they've been here for at least 6 years typically, maybe 7 if they get the one year extension while adjustment is pending. Even some H1-B people do buy houses despite not having a guarantee they might stay here, but typically it's in a much cheaper neighborhood than the so-called fortress pricing.

bmwman91 says

maybe the whole "rich foreigners buying everything up" idea is just white people trying to cope with the fact that a large non-white segment of society is taking (or earning, rather) their place as the dominant upper-middle class demographic (in the BA anyway).

That honestly seems to be the best explanation for "Asian hordes are taking over our real estate," attitude, I'd agree. Many of those rich "foreigners" speaking funny languages at open houses are permanent residents or citizens, not the fabled rich people fresh off the Boeing that our bailing out our housing woes.

SJ says

These Asians from China and India must be SUPER RICH to pay the outlandish prices for real estate here. I make six figures and cannot afford a home here.

Most people from China and India are savers. And not the oh I'll save 5% of my income for a rainy day fund. They save a good 30 to 40% of there income, before other expenses. They may live 4 to a room for several years, over time that kind of saving really adds up. They know the value of money, and how lucky they are to be earning a decent living. As opposed to the Americans who believe they are gods gift to the world and deserve a BMW, Iphone and to eat out every night of the week.

I firmly believe that anyone can save a good portion of there income if they really examine what they are spending there money on. Instead of shopping at the GAP for clothes, go to Goodwill. Instead of eating out 3 nights a week or getting that starbucks latte eat at home, brew your own coffee. Coupons are your friends, I read of extreme coupon stories where people are getting a month worth of groceries for under $100 and so on.

bmwman91 says

Who knows, maybe the whole "rich foreigners buying everything up" idea is just white people trying to cope with the fact that a large non-white segment of society is taking (or earning, rather) their place as the dominant upper-middle class demographic (in the BA anyway).

The flip side of that is the native middle class former homeowner (seller ) now has the $1M in cash because he sold at peak inflated prices, to the rich (now former rich) foreign buyer.

Who is the dominant upper-class now ? Someone is $1M poorer.

When people talk about the shift of wealth distribution today, the above certainly had an impact of enriching some due to high inflated prices of homes.

TechGromit says

As opposed to the Americans who believe they are gods gift to the world and deserve a BMW, Iphone and to eat out every night of the week.

After a couple of BMW break inspections at $2-3 a pop.
They will think otherwise.

thomas.wong1986 says

The flip side of that is the native middle class former homeowner (seller ) now has the $1M in cash because he sold at peak inflated prices, to the rich (now former rich) foreign buyer.

Who is the dominant upper-class now ? Someone is $1M poorer.

Yes, this is a very good point. Some people like to say, "the people living in [area] are much richer than the people who used to live there." And I like to say, absolutely not -- the people who live there now just gave a huge windfall by buying a house for an inflated price, and the prior owner is now the rich one.

thomas.wong1986 says

The flip side of that is the native middle class former homeowner (seller ) now has the $1M in cash because he sold at peak inflated prices, to the rich (now former rich) foreign buyer.

Who is the dominant upper-class now ? Someone is $1M poorer.

Sure. Still, prices in the "nice" areas are still largely inflated, and the native with $1M in cash from a sale will have to spend most of it to get into comparable house in a comparable area, or use it as a down payment and borrow even more to "upgrade." They have even less if they still owed the bank for the original purchase.

bmwman91 says

the native with $1M in cash from a sale will have to spend most of it to get into comparable house in a comparable area

Not necessarily. A condo in Florida goes for much cheaper, with no state tax and better homestead and pension protection. Win-win! Or maybe a ranch in Montana. The possibilities are endless.

The people who sold their houses at inflated prices have real hard money. A lot of other people have debt, not wealth.

corntrollio says

Not necessarily. A condo in Florida goes for much cheaper, with no state tax and better homestead and pension protection. Win-win! Or maybe a ranch in Montana. The possibilities are endless.

Oddly enough Billionaires Tomas Siebel and Ted Turner live in Montana.

> Job Loss Could Put One in Three Out of Their House

A little misleading title. This would imply that 2 out of 3 people have the financial resources to survive indefinitely without income from a job.

This reminds me of the movie "The company men". People who appear to be quite wealthy often have a lot of debt and no plan for what to do when the big paycheck stops rolling in.