patrick.net

---3) How much debt has been created by real estate.---

Actually, insofar as mortgage debt, this is well known because of the complex debt tranching that goes on. Debt tranching also diversifies the risk across capital markets, which is why most people's "common sense" about how real-estate debt works is generally wrong. Of course, that doesn't mean there won't be a lot of defaults, but the effect will be less than the worst of the doomsayers hope for--at a macro level.

As to (4), it is quite possible to earn returns with debt. Being in debt doesn't automatically mean you're not wealthy. It all depends upon the relative costs of capital and exposure to risk.

...Jobs created by unemployment? If you're implicating sectoral restructuring, then it is undeniable that net jobs are created. It just sucks for those who are "restructured". (emperical evidence from Solow, et. al).

And again, so I don't get flamed: I am on the record as a BEAR on Bay Area & California general RE.

I know it was the last thread, but IMO the real thing to fear here is INFLATION. This will be the long-term, killer. It has the potential of _both_ helping pop the RE bubble and simultaneously preventing those on the sidelines from profiting from the correction (because of uneven inflation...stagnent incomes, rising energy prices, etc).

It has the potential of _both_ helping pop the RE bubble

Are we talking about general, across-the-board inflation here? If so, I'd like to know how this could prop up the RE bubble. In the absence of factors that propped the bubble sofar, rising inventory, etc, it seems that RE prices could easily drop--to what people are willing to pay, no?

What are your SOURCES for your inventory time Mr. Right? I don't buy that Bay Area inventory is exactly the same as one year ago because it's not - especially in the EAST BAY.

PS Even the DQ article in the Chronicle admitted that SF inventory is up between 10% and 15% from this time last year.

For "Mr. Right" Here's a RECENT article about Tracy. Tracy is about as close as you can get to Silicon Valley and not technically be in the Bay Area.

http://www.tracypress.com/local/2005-09-03-housing.php

BTW, this story of increasing inventory holds true for the Tri-Valley cities of Dublin, Pleasanton, Livermore and San Ramon as well.

"That’s true. My numbers are rounded to the nearest 0.5%, so a change from 1.9 months to 2.2 months (a 15% increase) would both show as 2.0 months."

Yes, but you are claiming that 2.0 is the number for the entire Bay Area. ALameda and Contra Costa has gone up much more than 15. More like AT LEAST 30%, if not higher, from this time last year.

Inventory seems to be rising fast though. There were 800 listings in craigslist between 400K and 600K right after July 4. Now there are nearly 1700!

(Well, craigslist is more of a psychological barometer, not a measure of inventory level)

There are LOTS of cities in Alameda & Contra Costa with current inventory levels that are over 100 (pretty much ALL cities except for the small ones) - numbers unthinkable this time last year. Do a search and see for yourself.

Does anyone know the percentage of homes sold to “investor” (speculator) buyers in the Sacramento area over the past few years?

I've read articles that suggest between 1/5 to 1/4 sales are to "investors" in the Sacto area. Another article said that a lot of these "investors" have been getting spooked and are starting to dump their properties in the Natomas area.

I should say the speculators have been selling off, most notably, in the Natomas area. I've been watching craigslist too, and Elk Grove seems to have a lot of activity too. Sacramento rental listings are way up on craigslist too.

Mr. Right:

Try adding in Contra Costa, Solano, Napa & Sonoma to give a better picture. Santa Cruz arguably isn't the "Bay Area", but Contra Costa most definitely is.

Does anyone know the percentage of homes sold to “investor” (speculator) buyers in the Sacramento area over the past few years?

Cindy,
I don't have any reliable numbers for CA or Sacramento per se, but accordingly to a frequently cite NAR survey, 23% of buyers nationwide in 2004 were speculators + another 13% bought 2nd homes (some of which could also have been for "investment" purposes): tinyurl.com/akxhn. That gives you a range of nearly 1/4 to over 1/3rd of all buyers.

Oh sure Harm, go and get all accurate and stuff. ;)

An interesting thing about the Alameda / Contra Costa data is that they track withdrawn / canceled listings in that region, and those numbers are increasing quite a bit.

Yes, people are putting houses on the MLS like daytraders are putting limit orders on the Nasdaq book. Listings are routinely canceled, replaced, and modified.

BTW, I am very wary of someone who says that his house has gone up X after Y months. Real estate is very illiquid. One cannot know the value until the house is put on the market and sold. There is no streaming real-time quote and one certainly cannot "hit the bid" and sell a house immediately.

Not only that, but people tend to ignore the huge costs in selling their home and buying another - commissions, closing costs, etc.

Even more funny, they try to become realtors and mortgage brokers themselves.

LOL

“Given how closely that industry is aligned with home prices, economists wonder how the labor market will fare if the upward spiral in real estate ends."

It would be interesting to find out... let me guess, downward spiral in the labor market and housing prices?

It would be interesting to find out… let me guess, downward spiral in the labor market and housing prices?

These two sectors are going to feed off eachother in a negative way when things start on a downward trend. Can you imagine how many new homes have been purchased by those in the contruction/RE/mortgage industries in the last few years? Once those job markets start taking a hit and those people don't have any other immediate job opportunities, there are going to be that many more homes being put on the market.

Yes, If only you could place a stop order on your house and pay a $9.99 commission.

Perhaps a mental stop triggered by the "comps". ;)

Can you imagine how many new homes have been purchased by those in the contruction/RE/mortgage industries in the last few years?

Interesting...it could be easy to underestimate the scope of an RE crash's effect. Here's another "what if": if/when realtors' jobs go sour, how many "investment properties" do we think they'll offload?

Peter did you catch the action in the builder stocks today - a few of them undercut the August lows and the inder I use of builder stocks (TC2000) was down 2.5%.

I missed the action. However, the market has yet to discount the extend of the bubble bust. The bear market for these stocks will be long and drawn out IMO.

BTW, NEW is a stock that I follow. ;)

I agree - when people look like they want to puke when you mention real estate - you are getting close to the bottom. Not until then

Yes. I think the market is discounting a growth slowdown or slight decline in the sub-prime lending business.

Looking at the steady decline of FNM, do you think mutual funds are slowing unloading it ahead of the restatement?

And since you own puts in that train wreck, you must be a happy camper

I have a tiny position. Looking to increase exposure though. Deep in-the-money puts are pretty good for shorting. For around $720, you can buy a 55 Jan 06 Put (100 shares) with very little time decay. Even if the stock stays at the current price level (48.26) the option will still worth about $670 at expiration.

(Not investment advice.)

Pretty good deal. Peter. Less of a premium for an option with that much time remaining then I would have thought.

A 50 Put with the same expiration will cost around $3.5 per share. Deeper in-the-money options carry less time premium.

Most people buy very cheap out-the-money option and they usually get what thay pay for - nothing. :)

---Sillicon Valley ranks last in quality of life among major U.S. high-tech regions

The authors of this report would have done better to have bothered to do some preliminary research and read Easterly and King & King before making generalizing assumptions. Some geographic areas achieve virtuosity loops which are difficult, if not impossible, to synthetically replicate; conversely some areas become poverty traps. Regardless, if you compare absolute numbers (firms incorporated, licensed professionals, median education levels, etc.), you'll see why the BA is so far askew.

Again, I'm not trying to debunk justified bearishness on the BA RE market, just keep things in reality-check. This isn't going to be the end of the world as we know it, just a pretty big correction.

Again, I’m not trying to debunk justified bearishness on the BA RE market, just keep things in reality-check. This isn’t going to be the end of the world as we know it, just a pretty big correction.

Most here are looking for a sane housing market, not a collapse of the economy. I would hate to see the doomsday scenario occur because no one would benefit and most of us could end up really hurting.

That said. I'm going to have a hard time feeling sorry for all the smug RE and mortgage brokers who've been in our faces for the last few years boasting about their brilliance and foresight when they get smacked in the face by reality.

Sillicon Valley ranks last in quality of life among major U.S. high-tech regions

But Silly Valley ranks first in silliness!

Most here are looking for a sane housing market, not a collapse of the economy.

Of course. If the financial system collapses there will be no way to profit from the bubble bust or to preserve the profit. ;)

It is not the end of the world. We can resort to cannibalism if everything else fails.

SQT, you’re so eloquent even when dishing out those harsh verbal assaults!

Journalism! ;)

By the way...the end of the "bond ticker" excerpt I quoted...it mentions disappointing #'s from UofM consumer confidence...maybe it's me, but I didn't see any headlines about this...*almost* conspicuously absent...? I know I often see headlines about that metric when it comes out...maybe I just wasn't browsing enough today. (shrugs).

---I know I often see headlines about that metric when it comes out…maybe I just wasn’t browsing enough today. (shrugs).

It was on the front page of the FT. Maybe the WSJ just was too busy figuring out who's going to jail next.

It was on the front page of the FT. Maybe the WSJ just was too busy figuring out who’s going to jail next.

I love FT. When you can have pink newspaper, why settle for anything else.

Ahhh...thanks for clearing my conspiracy delusions...not reading any financial pubs here. Just casually browse generic websites for headlines (yahoo finace, marketwatch).

SQT, you’re so eloquent even when dishing out those harsh verbal assaults!

Awww shucks..
Really I'm just trying to soften the cattiness.... a little. ;)

Housing market is a bit different from the stock market. BA is in fact made up of many micro-markets. In the last housing recession of the early 90s, some small West Valley communities actually went UP slightly (around 5%) when some East Bay communities dropped as much as 35%. Therefore, although I am bearish on BA as a whole, I do think some areas will hold up exceptionally well because everyone with means would want to move in regardless of good or bad times. It is the marginal areas that will suffer the most.

That being said, my biggest fear is exactly what Randy H pointed out, inflation, not hyperinflation, or deflation (which would have awesome for me), but inflation running around 8-15% a year. This seems more and more likely as the bubble inflates because this is the path of least resistance and minimal damage to the entire economy if Fed can help it. The government/s of the world are all aligned in their interests of assuring a soft landing of the US realty market, because if we vanish, many other countries will perish, at least in the short term.

Now my question to Randy H is, how fast do you think that USD will go down to help ease the soft landing, or does the USD need to go down at all? It is obvious to me that we will print lots of greenbacks to ensure a soft landing, I am just not sure how the other currencies will react to this, since as of now, if the market correctly reflects the USD value, we should have been at least another 50% down already.

---Now my question to Randy H is, how fast do you think that USD will go down to help ease the soft landing, or does the USD need to go down at all?

I'm not a FOREX expert by any measure; I only know macro stuff and currency hedging. My best guess is that the USD needs to fall signficantly vis-a-vis the EUR and JPY, but with some caveats. First, the USD is still the global reserve currency. They EUR has made inroads, but because of the failure of the EU Constitution and persistent fiscal/monetary misalignment in EU member states, the EUR may not be able to displace the still safer USD as a reserve. Secondly, US current account deficits and trade deficits put downward pressure on the USD, *but* there is a very good argument that as the CNY (China) liberalizes the USD/CNY rate will rise over the long-term. This forecast is based upon estimates of restricted capital flows within China. Something like this: Once China has a more convertible currency (one not managed by the Chinese Central Bank, and restricted in conversion) there will be significant capital outflows from China because investments can earn far better risk-adjusted real rates of return elsewhere.

As to deflation being "awesome" for you...be careful what you wish for. Deflation is generally not good for anyone except far-left and far-right agitators.

*correction*
The USD/CNY rate will _FALL_ over the long term. (Less dollars to buy a Yuan)

although I am bearish on BA as a whole, I do think some areas will hold up exceptionally well because everyone with means would want to move in regardless of good or bad times. It is the marginal areas that will suffer the most.

Perhaps, even for "people with means", it will still be a question of value. And, to the degree prices there are driven by speculation, there's long-term instability.
As a real example, I don't see many homes my local "prime" areas selling, such as Belvedere, Ross, etc. These homes are priced between $2-4M, and they've been sitting for up to six months. Btw, a lot of people with borderline incomes overleverage themselves just to live in "status" areas, so there's instability from that too.