patrick.net

Picking samples out of realtor.com is useless and misleading unless FAB is willing to apply statistical rigor to that sampling, and present the data to us in aggregate with methods & descriptive figures.

Randy H,

StuckinBA and myself are erecting a shrine to "Saint Shiller" so no need to sell US on the validity of his data! Good man. That isn't to say that I dismiss FAB's version in an off-hand fashion either. Afterall his direct involvement goes back to around 1975 as well.

Thank you Randy.

Let me use my own apartment in downtown Boston as an example (if I may be so bold).

Rent = $2400/month

Sale price = $700,000 (my estimate)

P+I = $4200/mo (approximate 30 fixed, neglects downpayment)
T = $600/mo property tax - $1200/mo interest deduction
I = $200/month

PITI = $3600

Ratio = 1.6

I can then comparing this to the historical values for Boston from your HSBC chart?

sorry, PITI = $3800, ratio = 1.6

(we rent this place by the way, couldn't afford to buy it)

It's good that "it's different here" in the Bay Area because otherwise this chart would scare me...

Oh ... interesting sentence in DQ's release.

adjusted for inflation, current payments are 14.2 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 9.9 percent below the current cycle's peak last June.

Are they admitting that there is a cycle (as in up-down vs a plateau) and last June was a peak ? Meaning we are past the peak ... meaning price are declining ?

>Shoot me a line, DUDE!

Huh? If you want to contact me - my email address is on the front of my blog.

It’s good that “it’s different here” in the Bay Area because otherwise this chart would scare me…

Only 56%?

I wish it had been higher.

I just saw that Hilary Clinton, the pro-choice neocon, has a plan for helping people who have gotten in over their heads with their mortgages. What the exact plan is...well, I'm sure they aren't finished with their polls yet.

She also has a plan to get us out of Iraq by leaving large numbers of troops in Iraq to 'hunt Al-Queda and protect Israel'.

Does this woman do polls and then come up with policy the minutes the poll comes in? Gee, some people are against the war, and some people are for it and I'm being lobbied by PACs to stay hawkish, so we'll leave Iraq by staying there. No one will notice I'm sure. And hmmm, people seem a bit spooked by their debt, we'll have to talk about that a bit....

I am not even pro-choice.

Hello Kitty,

Even in 1996, 20k was NOT that big a deal!

I guess the way some people "win" is that if they *can't win.... well then they just don't play! I know "I" always take a special shine to "those" kinds of "winners"! Man, the slightest headwind and they're throwing in the towel?

Okay folks, here is how HSBC gets their rent data and adjusts it in an attempt to compare the "same" 3 bedroom rental to a 3 bedroom house. Personally, I think they spit out a good metric for a region (as in -- if the ratio is within historical norms, time to start thinking about buying). I feel less confident about applying the ratio to an individual home/apartment (like Boston Transplant is trying to do above).

From:
HSBC Global Research
A Froth-Finding Mission: Detecting US housing bubbles
Appendix C
Adjusting for bedroom size
Because we utilized the HUD’s rent-data for two bedroom units, we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised the level of all rents by 30%.
Adjusting for utilities
Since the HUD’s data are estimates of gross rents, which include the cost of utilities, we also needed to make an adjustment in order to only reflect the
shelter component of the rent costs. We reduced the level of rents by 10% to strip out the utilities component of gross rents.

DinOR, I am handling Shiller's beatification process (please let me know if he appears in the waterspot on your ceiling :-) )

SQT,

Funny! Any MB that comes out on the other side of this after 2 or 3 or 5 years of sucking it up can THEN tell me they're a MB! Thus far they've had nothing but the wind at their backs and fair sailing.

Short sale? Foreclosure? Rent2Own? I hate to say it but I see very little distinction there. It's just various stages of gangrene. Uh.... does it smell like "almond"? MEDIC!

The SF Chronicle had a pretty good article on non/recourse loans. Not sure it really clears up the refi issue.

A recourse loan generally means the borrower is personally liable for repayment. If the lender takes over the house that is worth less than the debt, the lender can go after the borrower's other assets to pay the difference.
A home equity loan or line of credit is a recourse loan. So are consumer loans secured by your house.
In most instances, if you refinance your house, the new loan is a recourse loan, says Michael Pfeifer, a real estate attorney with Pfeifer & Reynolds.
However, Roger Bernhardt, a professor at Golden Gate University School of Law, says there is no California case law that definitively establishes this as fact.
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/06/05/BUGG5D3FNS1.DTL

EBGuy,

Well.... yes, YES! Now that you mention it there does appear to be a scruffy beard and dominant brow!

SFW,

Wonkette can be priceless! The comment by "Your Future Landlord" about keeping enough in the kitty for "crime scene cleaners" (after FB blows their brains out in desperation) well..

Well, Greenspan the mouth, is still talking. Now he is saying the subprime market problems will spill over to the economy. He hasn't admitted his part in this fiasco . He has no shame.

Now AG feels the need to chime in about the subprime meltdown:

http://money.cnn.com/2007/03/15/news/economy/greenspan_subprime.reut/index.htm?postversion=2007031515

BOCA RATON, Fla. (Reuters) -- Former Federal Reserve Chairman Alan Greenspan said Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.

Separately, a survey found that most economic forecasters think subprime woes will spill over into the broader mortgage market, adding that they expect a corresponding fall in home prices in 2007, The Wall Street Journal reported on its Web site Thursday afternoon.

Property managers will bankrupt you so dont think thats viable from CA.

Are property managers that evil?

I was always intrigued by rental properties as a business, but I don't have any handyman skills.

@Boston Transplant,

As EBGuy stated, be very careful when doing direct comparisons between aggregate data (macro) and specific instances (micro). The trick is matching the house you're trying to compare to the method for aggregation -- that is, whatever their "averaging" to. The HSBC is far too macro to do a very specific comparison. I was using it merely to defend my statement that by and large ownership is historically always more expensive than renting, from as a purely financial analysis.

One thing you left out in your comparison equation was holding-cost risk for ownership. You need to discount the risk such that renting is lower risk-reward and ownership is higher risk-reward, because owning an asset called a house is not risk free, and is more risky than renting. Similarly, you forfeit capital gains in excess of risk-free returns by renting. (As we discussed in the last thread, you could also carefully engineer a portfolio in which you invest your saved-PITI over rent that roughly mimics the return and volatility of housing prices. Good luck with that.)

Let me use my own apartment in downtown Boston as an example (if I may be so bold).

Rent = $2400/month

Sale price = $700,000 (my estimate)

P+I = $4200/mo (approximate 30 fixed, neglects downpayment)
T = $600/mo property tax - $1200/mo interest deduction
I = $200/month

PITI = $3600

Ratio = 1.6

I can then comparing this to the historical values for Boston from your HSBC chart?

HelloKitty,

I agree with your analyses, including the Prop 13 one. Note to everyone, this is *not* going to turn into YAP13T (yet another prop13 thread) ...

The real rent yields in the inverted own-to-rent areas are very low, or even negative in some cases (like rural Indiana). The reason is these areas, even though rents are higher than ownership costs, are afflicted with regionally depressed incomes and a regional inflation phenomena (these areas fail to inflate along with the rest of the country, effectively weakening their purchasing power compared to ours).

As to rental yields, this implies much larger scales of operations to create profitability, because many things are priced nationally, not regionally. And thus the higher rents as a factor rental property ownership being comparatively more expensive (even while it is absolutely less expensive).

And residential rental businesses don't scale well, as a general rule of thumb. It is possible to do it in certain areas like big cities, but there is no way to pull it off in rural Indiana -- it's not worth the cost of scale and you'll never be able to attract quality management for what you'd be able to pay them to run the business. Of course, never say never. Someone could ostensibly create a "Wal-mart of rentals" business and spread it across Wal-mart country.

If someone here has a couple billion sitting around they're looking to put to work, I'll even volunteer to move somewhere like Evansville to head the thing up. $2bn ought to be a reasonable seed round.

$2bn ought to be a reasonable seed round.

Can't you buy like the whole state for $4B?

No, the big race track is kinda pricey. But that's kind of the point. You'd have to buy a reasonable chunk of the housing stock to gain enough market power to make such an operation worth while at scale. But like I said, Wal-mart did it in retail when no one thought such was practical. Never say never.

Randy H Says:

> I cite my data here. The last time FAB and I had this argument
> he failed to produce contrary data. That ownership is more
> expensive than renting in equilibrium is widely accepted and
> well established. FAB may be implementing his own form
> of hedonics.

Then EBGuy Says:

> Haven’t we already been around this mulberry bush a couple
> of times? Randy’s HSBC data is aggregate for an area.
> FAB is talking about like to like comparisons (renting the
> SAME house versus buying it). Both are useful for showing
> how out of wack the market is.

I forgot that we debated this data set before and I now agree with Randy that the multiple of renting in the Tenderloin vs. buying on Nob Hill or renting in Shoreview vs, buying in San Mateo Park or renting in North Fair Oaks vs. Buying in Emerald Hills will be well above 1.0

Since there is no accurate source of “average” or “median” home rents HSBC “utilized the HUD’s rent-data for two bedroom units (AKA Apartments), we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised the level of all rents by 30%.”

P.S. I just went to the link and the HSBC data includes a lot more than just PITI in the “cost” of owning that push the multiple even higher…

When will the market rebound?,'’ Toll said at a conference in Las Vegas today. “Who knows? The Shadow knows. I have no idea.

Unreal!

As somebody who grew up in a resource town that has been shrinking since the early 80s, I can tell you that when things go bad, and lock boxes sprout on a lot of working class houses, devastation is wreaked on the valuations of all the housing stock in the area.

Anyone care to agree or disagree?

I see a lot of working class housing pain on the way, that would seem to be a bad thing for housing in general - check your local market in two years, maybe Toll will have disappeared by then, like "The Shadow".

Can’t you buy like the whole state for $4B?

I know you're being sarcastic, but that's a bit Kali-centric of you. I'm not an expert, and I know Indiana has had hard economic times, but it is the home of two very large medical corporations, Eli Lilly (market cap around $58bil) and Guidant (market cap around $180bil, now part of BSC).

Skibum,

So... what... $8B then?

I grew up in Montana, and in the late 80's and early 90's there were a bunch of Californian's moving there, and it pissed the locals off to no end when they'd come in and drive housing prices up by 10-20%. Or buy two houses and build a huge eyesore of a house.

I wonder where the 2000 'wave' went, and I wonder where the 2007-2010 'wave' is going to go? (Pissing off the locals in the progress, of course.)

I know you’re being sarcastic, but that’s a bit Kali-centric of you.

I apologize if I offended any folks from the mid-west. The only excuse I can offer is that my bosses (one for home & one for work) don't let me get out much.

Oh, my comment on the whole GOOG valuation thread:

Go to

http://www.smartmoney.com/pricecheck/index.cfm?story=worksheet

and put in GOOG.

This puts Google at about the correct valuation, but that is assuming 33% profit growth for the next 5 years. I personally do not find that unreasonable, considering they have a huge portion of the market for internet advertising and consumers and advertisers are still moving to the Internet.

I would buy GOOG if it ever dropped to 300, but that looks unlikely.

SFBB,
We had a thread a while back called "Equity Locusts" addressing this issue. Maybe HARM can direct you to the proper link. I doubt there will be any upcoming "wave" as the wave depends on actually having equity. Those Kalifornians are stuck in their McMansions in the Central Valley HELOC'ed up the arse.

MtViewRenter,
I wasn't offended personally - I'm not even from the midwest...

Jimbo,
33% annual growth seems a bit optimistic, doesn't it? Did you catch CNBC last night (Fast Money, I think) with their cheesy NCAA-like tourney for publicly traded corporations? They had EMC "beating" GOOG in a head-to-head - all their talking heads have a consensus that GOOG is overvalued and due for a dip. I wouldn't argue with that personally.

I don't think so. Google has grow faster than that in the recent past, and while they have to slow down a bit as they grow larger, Internet advertising growth is expected to grow about that fast and Google should be able to at least hold their own.

On the other hand, these projected increases depend on advertisers going where the "eyeballs" are. More and more people are spending their time online, instead of in front of the TV set and advertising money hasn't followed suit.

Google could also have their lunch eaten by a new upstart, but this seems less and less likely.

Jimbo,
You forget about one thing - the advertisers are large corps subject to market-wide forces like potential recession or a dip in the stock market - there goes the ad money. If the economy hums along through this year, I might buy your prediction, but if not, I doubt GOOG will grow at 33% while the Dow or NASDAQ stay flat or go in the other direction. As a result of their success, they are now nearly just as intertwined with the rest of the economy as other large corps.

HelloKitty,

I remember that after the realty bubble popped in Texas, they raised the property tax to 3% to cover short fall for the local schools and amenities etc. I am wondering how they did that.

Here is a thought re: prop 13. When things get really ugly here in CA, local property taxes will take a BIG hit, because the current prop 13 lets homeowners argue for re-assessment temporarily if their home value falls below what they bought it for. While we generally agree that the posher neighborhoods are going to retain their value better, there are far more bland neighborhoods, particularly those on the fringe of BA that are currently selling for at least $500K-700K, IMHO they can easily fall 30% or more.

I once heard that about 1/4 of the homes in older BA neighborhoods are entirely paid off and have a ridiculously low tax base. I sort of believe that just by randomly spying on my neighbors on zillow, out of a sample size of about 20, 4 of them pay less than 1000 a year on property tax for a home valued at $1.xM. In essence, we have the classic 80/20 situation - 20% newcomers that paid $1.xM in the last few years are carrying 80% of the load of the property tax for the neighborhood.

Such a model works fine in good years, at least these 20% morons feel pretty good about the "appreciation". What if the market turns sour and they cannot afford the payment, let alone the property tax?

In my zip code, there are already 146 tax liens, and based on the amount owed, they are most likely the new kids on the block (old timers are unlikely to run up thousands of property tax bill in 2 years). I am not sure how this will play out eventually when 20% of these newcomers eventually cannot shoulder 80% of the load, I wonder if prop 13 is still a political taboo in such a situation.

Apologies to Randy if this becomes another YATPOP13.

I am not sure how this will play out eventually when 20% of these newcomers eventually cannot shoulder 80% of the load, I wonder if prop 13 is still a political taboo in such a situation.

It will always be taboo because the #1 voting block is always senior citizens.

40 years from now, the people bitching about prop 13 will be defending it to the death!

40 years from now, the people bitching about prop 13 will be defending it to the death!

Yeah, and who would blame them (us)???

Rental yield in BA is very difficult to assess, because most rental SFHs (until recently) are just pieces of crap that get almost no maintenance. If they were to be listed on the market, they would be sold "as-is" and only considered for its land value.

My wife and I looked up and down the west valley for rental when we were considering bubble-sitting about 4 years ago (yeah, I called the top way too early). The problem was, there were almost no decent rental stock in the areas we care about.

The rent-vs-own formula didn't become meaningful until a couple of year ago when the FBs are forced to rent their recently updated homes for cash flow. Now we are seeing a lot more *comparables*. You can look at a house and say, ah, if I were to buy this house today, how much would it go for. Before that, you would look at a rental home and say, WTF, what kind of idiot will buy this piece of crap?

This home, for example, gives a good comparable between rent and own. 1/2 acre land, completely updated, near Saratoga downtown, Saratoga school district, is about worth easily over $1.5M (just for that 1/2 acre land!) but currently is asking for rent of $3400. Zillow has it for $1.2M because zestimate doesn't know jack about homes without recent transaction record. Based on the fact that this home's tax assessment value is only about $100Ks, it must have been owned by an old timer.

http://sfbay.craigslist.org/sby/apa/293517910.html

If I didn't have a home, had enough cash to buy, I'd be thrilled to rent this house for a few years. What a steal.

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/03/15/BUGK4OLR5F16.DTL

Real estate agents say that sales are down in part because there simply aren't enough homes for sale and the usual increase in listings that comes with spring has yet to start.

The lack of inventory is evident in a weekly printout the San Francisco Association of Realtors puts together of all the homes for sale in the city that are open for agents to tour. By the middle of this month the packet typically starts to grow, as new homes hit the market, said Rick Turley, president of Coldwell Banker's San Francisco-Peninsula division.

"There were 28 pages of property tours in San Francisco when we would have expected 40 pages," Turley said. "Pages are shrinking at a time in which they should be going the other direction."

Is that Realtors making stuff up?

Or are listings not that strong? I would've thought there'd be more by now. It's way past superbowl sunday...