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2005 Jun 12, 3:14pm   16,831 views  62 comments

by Patrick   ➕follow (55)   💰tip   ignore  

Sorry I've been remiss in setting up threads. Job and family take priority.

I see that Wordpress (this blogging software) has a provision to allow registered users to post blog entries. If you care to register, I'll grant permission to post. I don't care about your real name or any other personal info. If you're relatively well-behaved, I won't intervene, but rudeness, spamming, or plagiarism will get you removed.

If you can't figure out how to register and then how to post, say so in a comment or email me (p@patrick.net) and I'll be more descriptive. It make take a day for me to approve you for posting, because I work on this only an hour or so at night.

Patrick

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1   Peter P   2005 Jun 13, 12:43pm  

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...

2   Peter P   2005 Jun 13, 4:18pm  

It is a very quiet night. Perhaps it is the calm before the storm?

3   gabby   2005 Jun 14, 1:59am  

I saw this on an Australian real estate site today (ljhooker). This is a big dose of reality as the realtors are usually the smoke and mirrors 'It's all rosy' types so this has to have an affect on sales. I have an investment property there and if it weren't so well setup I'd sell. The tax hit will be too high for us so it's not really worth it. I think...

Residential sector

* After the very strong price growth across Australia's capital cities over the last two years, signs of slowing in the pace of price rises occurred in some capitals (particularly in Sydney and Melbourne) through 2003. Price data for March quarter 2004 across all capitals suggests that sentiment more broadly has been affected by the 0.5 percentage point rise in interest rates in November and December 2003.

* However, we do not expect any “bursting of the house price bubble” in the short term. Despite reduced demand from investors and first home buyers, underlying demand remains fundamentally strong, and the market will continue to be underpinned by improving economic growth and employment prospects over the course of 2004/05. After the strong rises of recent years, price growth is expected to weaken in all capital cities, although those markets that will have a rising stock deficiency, or declining excess stock, will continue to experience more solid price growth. Further out, our forecast is that rising housing interest rates peaking in excess of 9.5 per cent in 2006 will bring about a market downturn, halting price growth across the board, and resulting in declines in some cities in 2006/07.

4   gabby   2005 Jun 14, 2:11am  

I've been watching the pattern of media coverage about the housing bubble (I enjoyed the posting on the increase in coverage as I'd been wondering the same thing), and thought there might be stages people go through that indicate the state of the market and the bias of media coverage.

For example; in times of trauma and grief humans go through:

Shock/denial; bargaining; guilt; fear; depression; anger; acceptance/resolution

Perhaps bubble markets go something like (open to ideas here):
* Need,
* Greed,
* Fear (of missing out),
* Fear (of losing savings),
* Paralysis (sell and lose possible money, don't sell and lose savings),
* Anger (the market crashes),
* Blame (lenders, government),
* Acceptance

5   Peter P   2005 Jun 14, 2:52am  

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.

6   Peter P   2005 Jun 14, 2:55am  

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.

7   Peter P   2005 Jun 14, 4:29am  

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.

8   Peter P   2005 Jun 14, 4:38am  

"I am not making a case for anything. "

We know you. :)

9   Peter P   2005 Jun 14, 4:43am  

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.

10   Peter P   2005 Jun 14, 4:44am  

Face Reality, bug us after October.

11   Peter P   2005 Jun 14, 4:47am  

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.)

12   Peter P   2005 Jun 14, 4:54am  

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.) :)

13   Peter P   2005 Jun 14, 4:56am  

Jack, I really enjoy your presence. It will becoming boring otherwise. :)

14   Peter P   2005 Jun 14, 5:12am  

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. :)

15   Peter P   2005 Jun 14, 5:31am  

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.

16   Peter P   2005 Jun 14, 5:44am  

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.

17   Peter P   2005 Jun 14, 5:53am  

Live rich and die broke. Perhaps people are trying to carry debt into the coffin. What a great way to socialize the cost!

18   Peter P   2005 Jun 14, 6:16am  

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.

19   Peter P   2005 Jun 14, 6:41am  

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.

20   Peter P   2005 Jun 14, 6:56am  

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.

21   Peter P   2005 Jun 14, 7:29am  

Jack, you are assuming that the current housing boom in the Bay Area has nothing to do with the credit bubble. :)

22   Peter P   2005 Jun 14, 7:53am  

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. :)

23   Peter P   2005 Jun 14, 8:32am  

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.

24   Peter P   2005 Jun 14, 9:22am  

"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. :)

25   Lisa9   2005 Jun 14, 9:34am  

While we are doing predictions, May dataquick numbers will be out soon...any predictions? Out of the two areas we are looking at for first signs of a boom (SD and LV), I think...

SD will be slightly up over last months average (484K). SD is a big family place and May is the last big month for families that want to get their kids enrolled in the local schools in time.

I hear some LV data is in that shows prices up, but that's according to an Assn. of Realtors. I think May salestrak data will show new and resale prices down for the first time in recent history.

I think No. Cal will still be going up but with a slight % decrease.

Now you have someone to make fun of in a few days if I'm wrong ;)

26   Peter P   2005 Jun 14, 9:36am  

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.

27   Peter P   2005 Jun 14, 10:15am  

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.

28   sobs   2005 Jun 14, 10:30am  

Peter P - Thanks for clarifying your prediction for October. I'll wait for the cataclysmic economic event in October which will herald a crash in Bay Area residential real estate.

My prediction is similar to that of Jack. For the next 3-4 years, I don't predict anything worse than low appreciation in most areas and maybe minor drops here and there. I don't see a crash happening in the Bay Area. I said many times that if the bursting of the Internet bubble, and the loss of 200K jobs didn't do it, then it would take something really exceptional to bring down the real estate market here. Some over-extended buyers getting into trouble just isn't going to make that much of a difference here.

29   Peter P   2005 Jun 14, 10:41am  

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. :)

30   Peter P   2005 Jun 14, 11:13am  

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.

31   Peter P   2005 Jun 14, 11:18am  

If (2) has been the reality and (1) has been the psychology, this bubble can be perfectly explained.

32   netdance   2005 Jun 14, 11:49am  

I find myself in the strange position of agreeing with both Peter and Jack.

I think that we're certainly in a bubble - the disconnect between rents and purchase prices defies any other explanation (nor have I even *heard* an explanation in this thread for that fact by any but the pro-bubble camp). Presumably, the only alternate explanation would be "rents haven't caught up yet". O really? When are we going to see 10% year over year increases in rent? 'Cause right now they're still generally trending down.

On the other hand, I don't think the current numbers show anything other than a market that's gone from white-hot to just red-hot.

33   sobs   2005 Jun 14, 12:03pm  

With the exception of the peak of the Internet bubble (and arguably even then), house prices have been out of whack with rents in the Bay Area for decades. It's nothing new. It doesn't make sense to own a house in the Bay Area for the purpose of collecting rent. It doesn't make sense now and it didn't make sense in the past as far back as I can remember, but so what? This is not the purpose of owning real estate here, and it's not how you make money here.

34   netdance   2005 Jun 14, 1:04pm  

In speaking with "old timers", I've been told that in years past, the "renter's discount" was on the order of 20% - higher than most areas of the country, to be sure, but still within bounds of some other areas of the country.

It's now about 60%, based on my recent (abandoned) search for a home purchase. (Note, this is south bay. east bay is mysteriously more balanced, for some reason.)

C'mon. SIXTY FREAKING PERCENT? That's GOT to have unbeleivable expected appreciation factored in, or it doesn't make sense.

Rents have to MORE THAN DOUBLE to make up the gap. That's over seven years of 10% year over year rent increases with 0% housing appreciation, for those of you without calculators.

35   Peter P   2005 Jun 14, 2:18pm  

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.

36   Peter P   2005 Jun 14, 2:31pm  

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.

37   Peter P   2005 Jun 14, 2:32pm  

And Tokyo crashed big time, by the way.

38   Peter P   2005 Jun 14, 2:48pm  

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.

39   Peter P   2005 Jun 14, 3:04pm  

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.

40   netdance   2005 Jun 14, 3:10pm  

Interesting. As I said, not so bad as in the South Bay. (Though I wonder about your $600k figure. How big a house? Have you checked prices recently?)

In Campbell/Cupertino area, a $700K house will rent for as little as $1650. Don't beleive me? Check Craigs' list. I was stunned as well. Prices about the same in San Jose, they're more in line in Fremont.

All that tells me is Marin isn't the bubble the south bay is - but Marin is quite possibly one as well - check out your "little" difference:

$235k / 12k = 19.58
$600k / 23.4k = 25.64

That's a 25% increase in price/rent ratio. Hardly small, though you're easliy forgiven for having thought it so - I thought it was small too until I worked the numbers.

BTW for Campbell:

$700k / $19.8k = 35.35

Ouch.

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