patrick.net

"I think the ratio of price to the income and wealth of an area is a lot more important than the ratio of price to rent."

The standard deviation of both ratios are important. We are experiencing a high-sigma event.

Very smart, Netrugu.

Y2K is not a financial event and there is no reflexivity between market and participants. In short, its outcome is independent on expectation.

A bubble bust is *always* a self-fulfilling prophecy.

I mean that Netrugu is smart about posting an argument to protect ourselves from it.

1-2 price % declines are significant. What we have in SD and OC is a steep run-up thru the end of 2004 followed by flat or decreasing prices. If prices continue to be flat, as they have been since December, it won't be long until the yr/yr goes flat as well...just takes time to reflect in the numbers (lucky for the Realtors who can continue to misleaded people by quoting yr/yr statistics).

Prices in SD peaked in December 2004 in the 490's, they have been slightly down since then.

If you rent, you get the same "low crime, very diverse population (very little racism), good schools, good weather, significant job opportunities, excellent weather, etc"

What premium are you talking about?

We are not talking about the premium of buying here versus buying in Tulsa, OK. We are talking about the premium of buying versus renting in the same good old Bay Area. This is what P/E ratio is all about.

Jack, we are not talking about whether investing in BA RE for cashflow.

A desirable P/E for cashflow-based RE investment should be less than 10.

A P/E of 15-20 suggests that it is not a good investment unless there is high expectation of rental growth. Historically, Bay Area fits in this category. It is desirable, so it can justify some premium.

A P/E of 25 and above is speculative.

A P/E of 35 and above indicates a severe housing bubble. That and lower sales volume indicates a climax top. We are around here.

"Also, renting isn’t much of an option for people who aren’t willing to put up with the limitations of renting."

I never deny that there should be a premium of owning. I will accept a P/E ratio of up to 20. This ratio already implies a lot of premium.

"Highly desirable assets which are in short supply aren’t likely to crash."

Even with a soft-landing and appreciation drops to 5% a year, do you think that housing will still be a "desirable assets"? It is desirable only because of the high expected appreciation.

Face Reality, if you are saying that there is no bubble for 3M+ homes in Los Altos Hills, I may agree with you. Those homes are not closely tied directly to the credit market. They are more like rare collectibles.

I think homes above 2M have decreasing coupling with the housing bubble. However, their values can still be affected by wealth destruction caused by a recession, but this is outside the scope of our bubble discussions.

It seems to me that fear is a greater driver than greed, and many people are actually “playing defense”.

When it is the seller's turn to play defense, watch out.

Perhaps you are right about some who buy for appreciation, but you may also have simply underestimated how important it is for people to own what they live in.

More likely they overestimate how important it is to own. Or you might have misunderestimated me. :)

Obviously many people will pay a higher premium to own vs rent in the Bay Area than what you will accept as reasonable.

Exactly. A classic financial mania. P/E ratio for housing *always* mean revert.