patrick.net

Dipanjan, option premium is quite cheap now. IMO, puts are a better deal than shorting at this time.

(Not investment advice.)

oaktown girl Says:

For some reason, I have a Depression Era mentality towards finances (odd, given that I’m a GenXer). I save, plan and have an allergy to debt (and thus feel locked out of the leverage-mad economy of late; I’m a fixed-rate kinda gal).

I guess I lot of us really are in the same boat here.

------
Very true. Your story is a lot like mine. My only strategy to wait out the housing market is to save, pay off debt and well, wait it out. My husband and I do have some investments and of course the 401k. But we're conservative folk who don't like to take really agressive positions. I think people get into trouble when they want too much too fast. There's going to be enough fall out when the housing market collapses for those of us who waited to profit from it.

Just bought a place in SF at about average price for this town... decided it was the right thing because (1) I got a 30 year fixed (2) had money for down payment (3) love the place I bought enough to live in it forever (4) can afford the mortgage payments. No plans for kids, never wanted any. Never want to leave the city.
I bought believing that there is in fact a bubble and that the value of my place will decrease, perhaps significantly, in the next few years.

Kate, No matter where the market may be heading in the next 5, 10, 15 years, it sounds like you've considered the big picture, asked the right questions, crunched the numbers, and made a personal decision you're comfortable with. When all is said and done, that really what counts.

Although, I personally might have waited a couple more years (based on my own convictions about where the market is headed), you made the most conservative house purchase possible under current circumstances. You're a true home-buyer, not a speculator --sadly, a vanishing breed in today's RE market.

Then the next question on my mind is, was buying a home in this market a moral decision, or was my support of the crazy market damaging to others?

Moral questions about complex financial decisions are rarely black-and-white, but if I were you, I would sleep with a clean conscience. No matter how crazy/speculative the market is, at least YOU are not a speculator. If most new buyers were like you, this blog would probably not exist.

Rest easy and enjoy your house!

Interesting idea, Ha Ha.

For those who don't want to read the whole article, it mainly focuses mainly on discrediting the FED's policy of "too big to fail" by using the LTCM hedge fund bailout as an illustration/cautionary tale. Of course, a FED/taxpayer bailout of the GSEs (Fannie Mae Freddie Mac & Ginnie Mae) would make LTCM look like a pimple on an elephant by comparison.

I've been thinking for a while about starting one just on the GSEs and their effect on the Bubble via "privatizing" mortgage risk (by buying them up en masse from banks/lenders and then re-selling them as MBSs). IMO, this could be one of the biggest, but least recognized/understood causes of the whole thing. I posted this July 5th under the "Why" thread:

“The government will not let prices go down”

Anyone recent buyer who thinks the government will be there to bail them out should read these very carefully. A GSE default triggered by a spike in foreclosures is not an unlikely/doomsday scenario.

Ha Ha,

This topic is so big, so complex, it deserves it's own thread.
Therefore, I have created "Too Big to Fail".

Discuss, debate, enjoy!

Jack, I still do not understand how Bay Area desirability can be used to justify the bubble. If it is desirable rent will be high as well and it would not be a bubble.

You talk as if owning a home is the only way to enjoy the "intangibles". Tell me what is the difference between buying vs. renting here and buying vs. renting in Idaho. Prices will be higher here because it is desirable. But why should P/E ratio be higher here?

If what you say is correct Bay Area renters are getting a really great deal nowadays because they are enjoying the "intangibles" at half price.

Can we use Star Trek analogies instead? I guess we bubble-heads are Vulcans because we use logic to analyze the market.

BTW, other than the speculative premium, the benefits of homeownership over renting in the Bay Area is the same as that in Idaho. So they do not come into play in the "Bay Area desirability" discussion at all.

Anyway, we are having constructive debate... :)

I see the main benefit, other than vague psychic sense that “owning” is better, is the stable SFH lifestyle. That’s why the explosion in condo prices show the market is really out of wack, since the ready substitute of apartments is already there ...I just went to see my friends renting in Dupont Circle in D.C. Their 700 sq ft 2 bdrm condo is renting for $2,400 and their landlord has gotten offers of $800,000 on it.

Astrid, I think you've helped put the final nail in the coffin in the theory about owning "intangibles" explaining the crazy price-rent (P/E) ratios. While in some areas (though not all), it may be hard to find SFR to rent that's EXACTLY like the SFRs available to buy (yard, garage, pets allowed, etc.), condos always enable a direct 1-to-1 comparison. The P/E multiple for the Dupont Circle condo you described would be roughly 28:1. This is even higher than the 20:1 multiple reported by the NY Times reported for the D.C. area overall: http://tinyurl.com/9q8xy

With a condo, you all the downside of owning --risk, fees, taxes, etc.-- with few of the benefits, intangible or otherwise. Neighbors, above/below/either side of you, no yard (sorry kids/pets!), you don't actually "own" anything but the airspace in the unit, you can't renovate/change anything without committee approval, etc.

Fake P, the first paragraph of your post contains "California Association of Realtors". It is no better than Soviet-era propaganda. These people have a vested interest of a perma-bubble. We have no vested interest in either outcome of the housing bubble, although logic dictates that we support the bubble bust theory.

HARM, you gave a very good point. Condo is an owned apartment. Nothing more. Now, if condo P/E is too high (i.e. 35!), it is undeniable that not only a bubble exist but it is unsustainable and prices must mean-revert (i.e. crash if the P/E is 35!).

I talked to a friend who just sold a house in Vega. He said that the market is quite tough on the sellers. Houses sit on the market for months now and prices are way off from the peak.

ptiemann Says:

July 9th, 2005 at 3:45 am
@SactoQt

——————–
Ptiemann
The gals in my neighborhood all carry knock-off Louie bags.
——————–

you know it probably takes a woman to tell the knock-off from the real thing. Aren’t those knock-offs still very expensive like $500+ ? Personally I use linen bags from my socialist radio station (KPFA… check them out www.kpfa.org for another view on the world)

Anyway, what is your point.. are your neighborhood gals with their fake bags a good or a bad thing?

------
I wasn’t really into making any statement other than status is more about appearance than reality. BTW I don’t own a Louis bag, fake or otherwise, but I guess a fake one goes for about $250 vs. $1200 min for a real one.
Here’s a silly aside:
The only reason I know anything about fake Louis bags is because a group of women in my area were actually arrested for having parties selling knock-off products.

btw, even during a housing bubble burst, ppl are still buying and selling, I don’t see an issue with commission.

Have you ever seen what a downturn is like? It is like saying tech boom or not people still daytrade so there is no issue with stock broker commission. When volume is approaching zero and thousands of agents dying to sell homes, I do not think that it would be pretty.

Just spoke with a good friend who's been renting in Richmond for the last 12 years. He and his fiance just moved last month from their old 2200sft 2 BDM SFR (yards/garage/pets ok) to a another one in same area. The new place is bigger, better maintained, has new appliances and get this: his rent dropped from $2000 to $1260. The owner had been trying to rent it for months for $1400, but didn't get any bites.

My ex-sister-in-law has a very similar experience last year. She moved from her old 1800sft 2 BDM SFR (again with garage/yard/ pets ok) in So. San Francisco to a better/larger one a mile away. Her rent dropped from $2200 to $1600.

And yet the official stats are showing rents holding steady or dropping only slightly in most areas: http://tinyurl.com/bb697. Yes the above is anecdotal, but I think the official figures are either not fully reflecting current trends, or are being intentionally manipulated (am I just being paranoid here?) .

Official figures will do whatever necessary to smooth out any sense of volatility.

Some reports are even saying that rent is going up. What a big lie!

Ok. I'll probably make you a little ill. But I rent a very nice 3 bd/2ba duplex with a large yard, pets ok in a terrific neighborhood for $975 mo. There's no way I would buy in this market when I can rent so well.

Fake, Fake... calm down my young Jedi. (Hey, isn't inability to control one's emotions a sign of the Dark Side?? :-0 ).

I agree that Peter's comparison of CAR statements to "Soviet-era propaganda" was a bit over-the-top, but his point is still valid. Opinions/forecasts issued by an institution whose profits depend in whole or in part by the perpetuation of the bubble are best taken with a dose of skepticism. Personally, I tend to put more stock in the opinions of those whose income/jobs are not related to RE.

Yes, economic forecasting has always been more art than science. Yes, eliminating bias sounds easier than it really is, but when you have a large majority of NON-real estate/Lender publications and economists reading the numbers and saying pretty much the same thing, it's probably significant.

Buying a house is the biggest purchase most people make in their lives, and they have a lot riding on that decision. As a result, it's very hard for most individuals to separate emotion from fact and see the market from a totally detached point of view, bears and bulls alike. I'm not perfect/immune in this regard either, but I do the best I can.

Ok. I’ll probably make you a little ill.
Not at all, SactoQt --sounds like a great deal! I bet you're able to sock away a bundle, too. This to me is just more info confirming that current prices are not justified by area rents.

Now for an unhappy anecdote...
Another friend of mine here in L.A. just bought a "fixer-upper" in a not-so-great neighborhood on the West side. He paid $750,000 for an 1800sft bungalow that needs a LOT of work. Oh, and it doesn't have a garage. Like most new buyers, he "bought" using an I-O option ARM. UN-like most I-O buyers, he did put down $100K of his own (real) money.

Why did he buy using an I-O?
A: It was the only way he could afford the monthly payments (for now anyway).
Why did he buy now?
A: Intense pressure from his wife & fear of "being priced out of the market."

Safety 56,

Great story! Very eye-opening, especially how how your father (who got burned by the last bubble) did not learn from his past mistakes. If an RE developer can't learn from history/personal experience, then what chance is there for the rest of the population?

Jack,

Thanks --and good point about the hyperinflationary scenario. This ties into the bigger issue of the global credit bubble the U.S. and where the economy may be headed.

Are we gearing up for a period of rapid INflation, or DEflation? Or neither?
If we experince a period of hyperinflation, similar to Argentina/Brazil in the 1980's, then wouldn't that wipe out the value of EQUITY gains as well as mortgage debt & renter cash?
Is it possible that RE values could deflate, while prices for other assets/commodities could inflate (oil/gold/food)? If so, how does that impact housing?

Jack,

Never said it was a bad thing to own a house under all scenarios, which is one of the points I was trying to make (badly it seems).

If inflation impacts ALL asset classes/commodites equally (e.g., oil doesn't inflate more rapidly than RE, stocks or gold, etc.) then the person holding (uninvested) cash suffers. Under that scenario, if you're invested in ANY asset/commodity, then you're holding steady relative to RE.

If on the other hand, RE inflates more rapidly than all other asset classes, then RE owners benefit over everyone else. Of course, if you're holding a fresh NAVVLP(tm) with less than 0 equity, it could take a while for you to benefit personally.

If RE inflates more slowly than or stays flat relative to other asset classes, then RE owners suffer a little, regardless of equity position. The person holding (uninvested) cash suffers most, while holders of appreciating assets benefit.

If RE prices dip, but other assets rise, then RE owners suffer most, cash holders suffer a little, and other-asset holders benefit. Recent NAVVLP(tm) buyers will suffer especially, as equity is 0 or negative.

If RE prices dip, but all other asset prices hold steady, then cash-holders and other-asset holders benefit equally.

If RE and all other asset prices dip, cash is king and we have a true deflationary macro-economy.

I hope that made sense...

"What do you see from the plane when you fly over the Bay Area? (besides water I mean!)"

Row after row of houses and lines of traffic is what I see.

This sort of addresses the desirability issue of the Bay Area. I mean, how desirable is it really to live like sardines and sit in bumper to bumper traffic for hours on end commuting? How desirable is it to have neighbors and barking dogs so close you can't remember the last time you heard a bird or a cricket or peace and quiet? How desirable is to have children who can't even begin to hope for a decent education unless you go private and with all of the expenses of your house payment and tax payments, you can't hope to survive on one income. So daycare costs (not just monetary either) combined with all of the above - well, the sunshine premium can only go so far for some people.
Yes, equity increases are nice but so is quality of life. There are more important things. It's sort of a sad commentary on our society. I truly believe if it weren't for the speculation of a potential equity increase, many people would not stay.

I just reread my post and it sounds like I'm anti- CA but I'm not. It's just frustrating to me that so many people are being pulled into this idea of perfection and it isn't perfection. It's hard to see people so distraught and getting into bidding wars and paying outrageous sums for trashy fixer uppers in horrible neighborhoods. Or driving hours each way to work while their kids grow up parentless. I was born and raised in San Jose so I've seen firsthand the influx and changes and congestion.

It's also true I have young children that are influencing the way I feel. I want a better quality of life for them.

But, I don't hate the BA, I think it is pretty (ocean water's ice cold though) but there are many more beautiful places in the US and elsewhere. And everywhere has weather/natural phenomon events such as Florida, Vegas, Midwest and CA - we don't have weather issues or a lot of natural disasters ( well other than homes falling off cliffs and wildfires) but earthquakes are pretty daunting - 60% probability according to the USGS) so every place has something. And I don't see the BA as having that much more to offer than other places - not enough for people to possibly suffer financial ruin when they can't make their payments. But, for those happy there, best wishes to you. (Nothing like making oneself truly unpopular by bashing everyone's hometown :-)) So, I'm apologizing in advance if anyone feels offended by my somewhat jaded view of the BA.

Great Site Patrick...

Patrick, I moved to Phoenix about six and a half years ago from San Jose, California. The prices here in Phoenix have been taking off...

Would you be interested in coming on my radio show next Saturday, July 16th? I have a radio show on KFNX News Talk 1100 AM, Phoenix, AZ
from 11-12 midnight every Saturday.

You can hear it on the web by logging in.

Please e-mail me: radioholliday@yahoo.com.

I think it would be great for you to talk about all the crazy stuff going
on in the housing market, especially the West & Southwest.

Best wishes!

Michael Holliday

I mean, how desirable is it really to live like sardines and sit in bumper to bumper traffic for hours on end commuting? How desirable is it to have neighbors and barking dogs so close you can’t remember the last time you heard a bird or a cricket or peace and quiet? How desirable is to have children who can’t even begin to hope for a decent education unless you go private and with all of the expenses of your house payment and tax payments, you can’t hope to survive on one income. So daycare costs (not just monetary either) combined with all of the above - well, the sunshine premium can only go so far for some people.
Yes, equity increases are nice but so is quality of life. There are more important things.

Karrie, No need to apologize. I couldn't have said it better myself.
Jack/Fake, How about THOSE "intangibles"? Don't they factor in to housing prices too?

Maybe it's not the sunshine, just the dream of living in a Golden state of opportunity?

I'm just wondering about the volatility of the opportunities ..... I saw what happened to Silicon Valley.. I saw Cisco and I saw many fortunes wiped out and many families ruined .... I hope I don't see the same with this crazy housing market.

Jack, you are truly lucky to live where you live, if you don't have to commute and are surrounded by beauty - hey, what more could you ask for? I'm talking about the poor fools in the midst of chaos who don't even know what's going to happen to them.

Astrid, are you in Dennis' path?

But if our worthless, fiat currency crashes soon, wont that make all the holders of mortgges instantly smart? (At least fixed mortgages) Are you saying you WANT to be holding cash instead of real estate during hyperinflationary times?

Jack, there are many things we can hold instead of cash and there are many "debts" we can get ourselves into other than mortgages. The key is to use leverage to buy something that has more upside with great risk/reward ratio.

In almost every one of your rebuttals to my list of points in favor of owning, you used an APARTMENT as an example of how renting was equal to owning a HOUSE! In otherwords you only addressed the issue for someone who would be buying a condo, and otherwise pretended that apartments and houses are interghangable to make your argument. While some of your arguments do work for someone buying a condo, almost NONE of them make a case if you are comparing to buying a house.

Jack, do you at least agree that we have a bubble in condos and townhouses and that such markets are going to crash?

Also, renting a house is quite comparable to owning a house, right? I do agree that the "own vs. rent intangibles differentials" is greater in houses than in condos.

Peter= two sentences of facts. Jack= 8 pages of trying to define INTANGIBLES!

This is because you are trying to make intangibles tangible. :)

Bet #4 Black for me in Roulette. (Eventhough Roulette is a loser)

Sorry, I am back in the Bay Area already. Cannot bet anymore.

Jack I'm reading a little more between the lines now ( at least I think I am) are the intangibles you are referring to, the diversity of the SF BA, the acceptance of lifestyle choices and the broad array of different cultures? Things to that effect? If that is the case, you have a stronger argument as to why people will continue to choose to live in the BA. I think many people would make many sacrifices to live in an area that won't condemn them for their lifestyles and the Bay Area is famous for being accepting and welcoming.

opnr

Owning is at an all time high at about 70%, that leaves a much smaller pool of people to buy out the rest when the market crashes.

Have to agree with Jack here.

Yes, we're in a very serious national (and possibly international) housing/credit bubble right now. However, by making extreme predictions about doomsday scenarios without very solid evidence to back it up, you can risk undermining credibility on ALL positions.

I found the full CNBC Julian Robertson interview video: http://tinyurl.com/e3pbf
(can take a mninute or two to load).

Julian Robertson did acknowledge the housing bubble's existence and that American consumers are seriously overextended, and that he doesn't see "any easy way out." He suggested the Fed might try to inflate our way out. But, he did not rule out the possibility of a "soft landing" (though he didn't specically define what that would be).

IMHO, we will soon be entering a housing price peak/plateau, followed by a long period of slowly declining RE prices, much like the last cycle. Where Jack and I primarily differ is I believe this downturn will be more severe and could last longer, mainly due to the unprecedented use of NAAVLPs, and the national scope of the bubble this time. I see an imminent spike in foreclosures just about everywhere, followed by lender credit tightening, increased Congressional oversight/regulation (possibly a GSE or two entering receivership) and an end to those NAAVLPs --at least until the next cycle begins.

Rumors of the Apocalypse are greatly exaggerated.

Jack, future refinancing is not just an assumption, it also creates more future revenue for the mortgage broker. They do not want homeowners to pay off their loans, ever.

Jack Says:

There seems to be no dis-incentive to keep a lender from irresponsibly assuming that a borrower will easily be able to re fi again in a few years.

The more I think about Kate’s experience in the loan office, the more it DISGUSTS me!

----
I think there's a good possibility mortgage lenders are pushing the IO's just for possibility of future business.
Food for thought. My husbands has a co-worker who hit it big in the last few years in mortgage lending. His business was annualized at about $2 million about 2 years ago, now it's at about $600,000. (this is earnings) The guy still makes a lot of money but his business has seen a significant drop as the re-fi's have started drying up. I don't know how much of his business has been in NAAVLP's but his business has been steadily shrinking, not growing.

The guy still makes a lot of money but his business has seen a significant drop as the re-fi’s have started drying up. I don’t know how much of his business has been in NAAVLP’s but his business has been steadily shrinking, not growing.

No problem, SactoQT, you just tell your husband's friend about this new loan product: tinyurl.com/77fql
That should really pump up his earnings!

FYI: Patrick recently reinstated his Bay Area median rents tracking page (he had cancelled it due to lack of interest/clicks): patrick.net
There's also a link to it at the top of his main "Crash" links/Why? page: patrick.net/housing/crash.html

At the time of the last bubble burst, you were what, 14 years old? (You are 29 now I think you said…) Perhaps you have just never seen how these things play out, or you wouldnt make such apocolyptic predictions. You WILL live through this, even if you dont leave the country!

People in 1930 thought that the depression would not be worse than the one in 1920... they thought they they would live though that... many threw themselves off buildings... sad. :)

I am truly disgusted at the total lack of integrity of some of these bubbleheads. Don’t they know that every time they lie, their lives seeps away quickly because in the eyes of people who put their trust in their words, they might as well not have existed as their words account for nothing?

Point them out, I suggest. Lack of integrity can also be found among housing bulls, which in my opinion have more to lose if they are wrong.