patrick.net

Ha Ha,

Liz Pulliam-Weston wrote a companion article based on Alicia's research and it's pretty chilling. They also did a piece on how 401k's are failing most Americans, equally disturbing.

I’d be content to buy a house that appreciates at the same rate as inflation, IF I could get back into the market at a rational price point. Alas, I cannot. I am dumbfounded by the fact that my wife and I make $300k/year in combined household income and can’t afford a decent house with decent schools in the Bay Area. I hate being a renter, but I do it because I’m pocketing about $2k/mo.

pa renter,

I'm in more or less the same boat as you financially. I think what irks me the most about all of this is that the kind of house/neighborhood we can pay for comfortably with a standard FRM, 20% downpayment sucks. Friends of ours have done this, and not to sound elitist, but they live in neighborhoods that until recently lawyers, doctors, financial types never even drove through much less lived in. Clearly, if you or I wanted to, we could ARM it up and get a place we found "acceptable." But then, what would be the cost, being house-poor and with an ARM reset looming a few years down the line.

Also, not to be nosy, but one thing I must comment on is if your family nets over $300K, you should be able to save more than $2K/month easily (unless I misread, and you're just saying you net a $2K difference between renting and mortgage).

“In a true free market, renting is supposed to be more expensive than buying because you preserve the option to move and because the owner of your property wants to see a reasonable ROI after PITI.”

Eh, this point is debatable. My landlord makes a ton of money on me because he bought this place when it was built in 1972. It prints money for him now. The market sets the rate.

Several people here with considerable experience in RE investment have debated this point at length (see Zephyr's comments above). I don't know much about markets outside CA, but I do know that renting being cheaper than ownership's monthly carrying costs ( roughly PITI -tax deduction +HOA/Mello-Roos +maintenance ) is a relatively rare occurrence here. The last time this was broadly possible in CA was probably close to that last market bottom in 1997.

As Zephyr pointed out, ownership costs generally start out a bit higher (though not the exorbitant 100-200% premiums we see today), then gradually diminish, assuming PITI is fixed (not an option-ARM) as inflation gradually raises rents and the cost of everything else.

I, like Randy H, am willing to pay a reasonable premium for ownership for my primary residence, assuming my monthly carrying costs can be fixed and I plan to stay in place for a while, because I know that inflation will slowly erode the relative burden of that cost over time and eventually provide me with below-market rate shelter. Each individual might define "reasonable premium" a little differently, depending on what Randy likes to call their ownership utility value. For me it might be, say 10 or 20%, but it's certainly nowhere near the average 100-200% we see today (in bubbly markets like CA).

OTH, if one expects to have to move frequently, buying may not be a good idea at all, because transaction costs will chew up considerable (~9%) equity each time. You can usually (though not always) find an equivalent house to rent in a desirable neighborhood if you don't like apartment living or need a yard (pets, children).

Also, if one is buying solely for investment purposes, then it's completely reasonable to seek out properties that provide positive cash-flow immediately. In this case, you should not expect to pay any "ownership premium" at all, as this defeats the whole purpose of an "investment".

Ha Ha Says:

> I am thinking of buying Garmin Nuvi 660 GPS.
> This costs around $750. Should I apply for a
> 3/6 month no interest and then pay it off?
> I can pay it off right now but still I want to go
> for easy credit ….

It is not worth risking your credit score to save less than $10 in interest, pay cash for the GPS.

One more thing to add to the list of ways to get ahead in 2007 is “Figure out how to pay less taxes”. There are hundreds of legal ways to pay less taxes including getting an employer to pay as many of your expenses with pre tax dollars as possible and starting a company to not only make extra money but gain the ability to write off a lot of expenses on a Schedule C.

If you folks have a few minutes and want a good laugh, check out David Lereah's powerpoint presentation from last month:

http://www.realtor.org/Research.nsf/files/06NovResForum3.ppt/$FILE/06NovResForum3.ppt#883,1,The Road to Recovery

This thing is so chock full of laughable stats, mis-conclusions, realtor spin and platitudes, I can't even begin to list them here! Lemme just start by saying, I'm not sure if he meant the reference or not, but with a title for the talk "The Road to Recovery," the first thing I thought of is a housing sector drunk on easy credit joining a 12-step program...

3. Don’t buy crap.

Amen. Take a nice vacation; your joy/memory/stress relief per dollar is substantially higher (higher still if you like camping).

PA Renter, color me a little dubious. Either you were insanely leveraged with your 2004 property (which is quite insane if you're grossing $25K/month) or else you're quite the speculator/flipper. You argued about the intangibles of home ownership before but now you state that you called the peak by selling your "it's not a house, it's a home".

It's not impossible that you're on the level (in which case, accept my congratulations on your market timing); Randy did something similar although his hand was nudged due to job migration. Nonetheless, as I see it, you can afford a decent house on a fixed-rate with your combined salary and yet you choose to rent to save an extra 10% of your salary. If your situation has been fairly described by these facts, you are a very curious bear. Can you provide additional details to assure us that you are not in fact a bull in bear clothing?

Whisper the camoflaged bull: "Watch out, there are $300K/year couples among you renters! Better get in now before things get out of control when they start plonking down their bull-run house winnings!"

The salaries aren't unbelievable, as Haha points out. It's the tactics that are far more suspect than Patrick's frugal house search in the late 90s.

“Until you truly comprehend the disconnect between $5000-$6000 PITI vs $2300 rental prices here in the Bay Area, you will remain vulnerable to catching the falling knife.”

I understand this concept well. I rent, remember. I believe it’ll revert to the mean. I do worry that it’ll take five years to play out and I’ll be stuck in this crappy rental, but what can you do?

palo alto renter,

Most regulars here agree --based on previous cycles-- that the correction will take several years to fully play out. 5 years is as good a guess as any. If your current rental is truly "crappy", then I'd recommend moving to a better one.

If you cannot find a rental house equivalent to the kind of house you eventually want to buy, then you might want to broaden your search radius. Most cities, unless they have extremely draconian anti-rental ordinances, have such plenty of homes on the market today. In fact, the specuvestor glut is increasing that inventory every day.

Remember, we must always compare apples to apples, not apples to oranges when we calculate the Rent vs. Buy numbers. Rentals properties must be EQUIVALENT to the house you want to buy, or the cost comparison has no value. The fact that I can rent a cheap 500 sft apartment in the 'hood means nothing if I want to buy a 2500 sft house in the burbs.

Why is my 10:55 comment in moderation? No links, and no bad words that I know of

FAB,

Sound advice. Randy H and I have been advocating that for some time. For those like myself that have pretty much exhausted Schedule C there's a strong temptation to start a "new" business. 3 years goes by awfully fast.

For the record, I consider myself to be Patricks doppelganger -- our situations are slightly different, but I decided to buy at the same time Patrick got out of the market. The winter of 1999/2000 was brutal as inventory was seasonally low but the same number of buyers were scrambling to make bids on places. After seeing that "cattle drive" I can understand why Patrick decided to head for the sidelines. I bought "unconventionally" in the spring and am glad I have my own place with reasonable payments. I do feel somewhat bad for Patrick as I am sure he could have had a 2/1 in Berkeley for the payments he is currently paying for his PA place, but then again, in PA, he gets to miss out on things like Traders Joes protests....

And here's a subtle sign of bubble collapse from the edges of the BA. You need to read between the lines.
Wilson said that to rent a house or larger apartment in Berkeley would have cost $800-to-$1,000 more than he had been paying to rent the flat at 2217 Roosevelt Ave. Wilson said it was important for him to move to a community with good public schools. He looked in Albany, but it was also too expensive.

The three-bedroom house he rents in Hercules costs less than the rent he paid for the smaller flat in Berkeley, Wilson said. According to Rent Board records, Wilson had been paying $1,800 per month for the two-bedroom flat.
http://www.berkeleydailyplanet.com/article.cfm?issue=12-22-06&storyID=25923

Palo Alto Renter wrote:

> My landlord makes a ton of money on me because he
> bought this place when it was built in 1972. It prints money
> for him now. The market sets the rate.

Odds are the landlord is actually making a relatively low cash return on equity if they own a Palo Alto rental home free and clear (take your annual rent - $4K /Home Value to get the return on equity)

HARM Says:

> Several people here with considerable experience in RE investment
> have debated this point at length (see Zephyr’s comments above).
> I don’t know much about markets outside CA, but I do know that
> renting being cheaper than ownership’s monthly carrying costs
> ( roughly PITI -tax deduction +HOA/Mello-Roos +maintenance )
> is a relatively rare occurrence here.

Since the bubble started…

> The last time this was broadly possible in CA was probably
> close to that last market bottom in 1997.

From the late 60’s to the late 80’s my parents bought rental homes (and apartments) on the Peninsula and every one had positive cash flow from day one (at times with as little as 5% cash down).

As a student of real estate history I can tell you that there only have been a few times when it cost much more to buy then rent (when you put at least 20% down).

In the San Francisco Bay area there is a “Crazy” disconnect from real estate fundamentals where as I posted a week ago a home in Jordan Park/Laurel Heights sold early this year for $3.8mm (with a new monthly property tax cost of ~$3,600) on the same block as a nice (but not remodeled) home renting for $4,400 a month. If the “owners” put down 20% (who doesn’t have $760K in cash sitting around) they will be paying ~$18K a month (over $200K a year) more than the people renting on the same block (plus they won’t be getting any return on the $760K that would kick off enough cash to rent a decent home a few blocks west of Laurel Heights in the Inner Richmond)…

When I bought my house on the Peninsula almost 10 years ago my (after tax) cost to own per month was less than I was paying to rent a similar house (until I went nuts remodeling like I always do)…

HARM,

I'm more than just a little doubtful where the "crappy rental" stereotype is concerned. I forget exactly who said it but one poster from the Topanga Canyon area said there all kinds of nice homes for rent well below cost of ownership and was actually having difficulty making up her mind which one to "upgrade" to!

What doesn't get said nearly enough is that for many years rental=apartment. Period. You had your choice of apts! I've NEVER seen so many homes for rent before! That's where specuvestors are perhaps being put over a barrell. Their flip/2nd home gone bad simply isn't located in an area that people normally associate with having "rentals"?

Uh, like Bend, OR? Fabulous place, great views on a golf course just ZERO employment and a "little" tough to commute to Portland. I realize this is an extreme case but most fence/bubblesitters that work downtown probably weren't thinking "Topanga!" when they were looking for a rental?

Personally, I plan on becoming a "rental snob". One that turns their nose up at FB's in "exclusive" areas and is always seeking the status that comes with an ever more prestigious rental! I may even get one at the beach AND in Bend where I make disparaging comments about the riff-raff that thought they could afford to live here and now spoil my view with their endless "For Sale/Price Reduced" signs!

FAB,

Wow, I can't believe I'm actually on the (sort of) "bullish" side of a debate for a change. Feels... strange ;-) .

Anyhow, I wasn't trying to justify the insane "ownership" premiums people are paying nowadays. Just conceding that a small premium might be justifiable under some circumstances --and only for a primary residence you intend to be in a long time, not investment properties. See my last paragraph from the same post:

Also, if one is buying solely for investment purposes, then it’s completely reasonable to seek out properties that provide positive cash-flow immediately. In this case, you should not expect to pay any “ownership premium” at all, as this defeats the whole purpose of an “investment”.

@DinOR,

Yes, as FRIFY and others have pointed out, I too smell a stealth-troll in PA renter. The timing and figures look very suspicious, and the language is rather Realtwhore-ish ("stuck in crappy rental", etc.).

I suspect we will be seeing much more of this as the correction gets underway. The tactics and tone frequently shifts, but the message always stays the same: renting = bad, mortgage debt = good, never a better time to buy, etc.

Personally, I plan on becoming a “rental snob”. One that turns their nose up at FB’s in “exclusive” areas and is always seeking the status that comes with an ever more prestigious rental! I may even get one at the beach AND in Bend where I make disparaging comments about the riff-raff that thought they could afford to live here and now spoil my view with their endless “For Sale/Price Reduced” signs!

"Rental snob" :lol: Classic! This one is destined for the Bubble Glossary.

Another rocket scientist on Clark Howard's Message Board:

"Ok... Heres my plan. I want to, over the next year and a half to two years, save the 15 to 20 grand to for a down payment on an apartment building. My Credit sucks now. its geting better, all bills on time, two credit cards, no balence. i'll be debt free in about 6 months. What can/should i be doing in the next year or so to get ready for this?? As in my credit, eduction in real estate, or any thing else. I'm Single, 55 grand a year, in Atl."

1) Credit sucks
2) Makes $55k/yr (probably closer to $30k)
3) Clueless

But, he wants to buy an apartment building.......

Being a sole proprietor and filling out a Schedule C is hardly anything new. Even if you're not sure if your new "consulting" practice will ever sprout beyond a moonlighting gig, the experience is invaluable. It's how we learn. If we want to 'break out' these tools are among the most basic.

While it is true that "the service" is looking long and hard at Schedule C, I wouldn't let that stop anyone from pursuing their dreams. If you can't show a profit after several years you CAN always claim it as a hobby.

I don't advocate doing anything that won't stand up to the scrutiny of an audit but the fear of one shouldn't stop you from growing and learning. We all have friends that are in a constant "start-up" phase or are "idea junkies". You can fill out a "C" yourself, it's not that big a deal.

theotherside,

DUDE! You have so TOTALLY CONVINCED ME! What, like with my concern that I save in 529s for my kids and fully contribute to retirement programs and that I keep 6 months reserve of cash around on top of the cash saved for a house downpayment, I now see it dude - TOTALLY OLD SCHOOL!

Damn, man, what I need now is to get a peni$ extender so I can keep up with these COOL CATS who have PULLED $500K OUT OF THIN AIR! So what if I have to risk my entire equity on an obviously peaked investment, I am TOO RISK ADVERSE! I need to PAY A LOT MORE THAN WHAT IS REASONABLE!

For the record, 401Ks, 529s and IRAs are all fully invested in the stock market. Yes, most of cash downpayment makes a stinking 5% pre-tax, but that's better than any paper equity in a house has done over the past year. Are you ready to roll the dice again DUDE! RISK! PARTY ON!

theotherside,

Ok, thanks for the great article - seriously, it is very interesting. If you really want a rebuttal to your world view, read the whole thing. ;-)

Summary:
Their simplistic model can't account for the recent surge. They look to two main explanation:

"This time its different - A" - Subprime mortgages have shot through the roof. 60% of these mortgages are due to reset over the next two years

"This time its different - B" - Second home purchases as investment. 20% in San Diego and Sacramento. What happens when the stock market / cash become preferred investments?

I look forward to combing it through in more detail later. Cheers.

FRIFY,

Exactly. Overall the paper was very bearish. "The Other" simply gleaned what few positive observations there were to be had and inadvertantly made a bearish case. Weren't the "Smith's" the nut jobs that bought a 1.3 mil place in July 2005 in LA? Or am I thinking of the wrong nut jobs?

Nice work "The Other"!

DinOR,

Maybe theotherside is a Stealth Bear. ;-)

ubermonkey,

Additionally TIPS don't have a vacancy rate!

Some might argue that cash, cash equivelants, money markets and CD's to be less risk but given your explanation (and application) I'm willing to consider it!

What "The Other" further fails to realize is that for the immediate future the avg. American is going to be much better served devoting his/her time toward getting a better understanding of his/her tax position and maximizing their investment options rather than playing "flip this house" with their weekends!

Watch for home improvement projects (and many TV shows) to drop off the radar in 2007. Looking back, our obsession w/RE will look about as cool as getting caught at a stop light blasting 80's "big hair" bands on your radio. Nuff said.

tinyurl.com/y4ddra

Less than 3% of California makes 200K or above, so riddle me how the fuck the other 97% can afford a 700K stucco $hitbox without funny money loans. That's right HaHa, you are in the 3% provided your wife works a little.

sorry, it's actually 3.3%, contrary to what Fucked Rectumlicker has to say, it is "not common". But hey, party on.

Less than 3% of California makes 200K or above, so riddle me how the fuck the other 97% can afford a 700K stucco $hitbox without funny money loans.

What if that stucco comes with a Sig Saucer?

Odds are the landlord is actually making a relatively low cash return on equity if they own a Palo Alto rental home free and clear (take your annual rent - $4K /Home Value to get the return on equity)

FAB,
Just curious, how likely is it that folks like this will sell during this cycle? Are LLs any more rational than the rest of the lot, or will they tend to ride the sale price down like everyone else?

I'm pretty sure these are the correct "bubble deniers" from Pomona College Dept. of Econ.

http://www.collegenews.org/x5508.xml

Aren't Gary & Margaret Hwang-Smith the same couple that said "Damn the Bubble, full steam ahead" and bought a ridiculously overpriced POS very recently? Some of the quotes in the article were just hilarious! It's the 3rd. of April 2006 and there are some places in SoCal that are still UNDER-valued.....? Yeah, there's some real credibility for ya'!

1- I beleive that we will surely see a drop (20%-30%) from all time high of mid 2005. Buying today is crazy, but not selling one’s primary residence bought a long time ago is NOT

Translation - I own a house and I want to justify not selling it.

Analysis - If you can afford the PITI and you plan on retiring here, I agree that's the right call (mainly because of Prop 13 and 6% exit fee). If your retirement depends on your home equity, you might want to rethink that as future reverse mortgages might be less favorable than they have been or are currently.

2- I beleive that it will take a lot more time that is widely assumed (5-7years)…
Translation - I have numbers in my a$$. They hurt, so I pulled one out.

Analysis - 60% resets for the subprime market over the next 2 years will definitely produce some interesting fireworks. If interest rates drop, maybe it will follow the classic pattern that you suggest. If rates rise, not a chance. It's all guesswork. Either way, we agree to wait on buying a house.

I also believe that people who are trying to time the market will have the WRONG timing.

Translation - I bought a house a long time ago. Patrick and the rest of you didn't. Suckers. You'll keep sucking because you suck.

Analysis - At least we'll sleep soundly in our rentals. Better than living with the night sweats like the FBs or cursing the drip-drip-drip as our paper wealth oozes down to the Bay.

8.9 million U.S. households have a net worth of at least $1 million, not including equity in a primary residence.

Things are not very dire.

However, many of these households will enter some form of retirement soon. 1M 2006$ is not a lot of money to "burn" for the next 30 years. That is less than $35K a year. Now property tax will be at least 10K a year for a 1M home. It leaves less than 25K for other expenditures. Food for 2 can be more than that.

It is pretty common in the areas where people on this blog actually want to buy, but certainly not everywhere in CA.

The majority of my friends have superpowers, so it stands to reason (well at least using FR logic) that the majority of people also have superpowers. I believe superpowers are much more common than everyone realizes.

Face Reality,

Here's a more interesting income breakdown (albeit 6 year old):

http://www.census.gov/prod/2003pubs/p70-88.pdf

It looks like there are lots of retirees looking to Social Security or home equity to save them in their bronze years...

Who are they gonna sell to? Gen-X? Children, can you say "supply shock"?

FRIFY, come on now, mostly everyone with the exception of nearly everyone in the Bay Area makes 200K plus. Mostly everyone is at the top of their respective game, be it software/hardware architect or any other flavor of tech professional. Why at Genetech alone over 90% of the staff makes 300K plus. Why the statistics alone show that almost 8% of US households have 1mil in investments. Those other 92% let them eat mother fucking cake.

The slight increases in sales were not enough to halt a slide in home prices. The median price for an existing home sold in November dropped to $218,000, down 3.1 percent from the price a year ago. It was the first time on record that sales prices compared to a year ago have fallen for four straight months.

Whoooooooops. Well at least a record has been set.

FRIFY, come on now, mostly everyone with the exception of nearly everyone in the Bay Area makes 200K plus. Mostly everyone is at the top of their respective game, be it software/hardware architect or any other flavor of tech professional.

A few hi-tech coworkers and I were talking about this a while back. While it's crazy to think that every -one- in the BA makes 200k+, it's not insane to think that many couples make 150k+.

2 YHOO/GOOG/MSFT/DNA/EBAY could easily reach that.

According to Salary.com:

Benchmark Job Title: Web Software Developer
Work Location: Mountain View, CA 94043
$61,418 $110,699
Local Low Local High

If you do a simple search on Google, you can find Microsoft's pay scale. (Irony.)

Now, of course a lot of people don't have husband/wife working - and a lot of people aren't in tech. But a lot of people are also sitting pretty in PreProp13 houses - or heck, even 1996 era houses. Those folks only need one income.

I need to have some kids and get them to start knitting rugs so I can afford a house in Mountain View.

X,

What I'm trying to square is this tidbit from the Census bureau's report (page 11):

Fifth (highest) quintile:
Households: 20M
Median Net Worth $185K
Excluding Home Equity: $98K

...against Face Reality's CNN figure of 8.9M households with $1M or more, excluding home equity. Presumably, these 8.9M are in the highest quintile above. So, in the highest quintile, the median household (the poorest of the richest 10M (1/2 of 20M) households in the country) has $98K in non-house assets and yet somehow by the time you've removed another 1.1M households on your ascent to Bill Gates, you've jumped to a MINIMUM networth of $1M.

It seems highly suspect, but I'm sure it's an error in the Government's Census bureau report and not an error in CNN's "Key Stat" (references uncited).

Then again, DOW 11,000 in 2000 has jumped to DOW 12,500 in 2006. Maybe that explains the disparity.

FRIFY, the Feds? Surely CNN wouldn't skew the data to paint a rosy picture. Now that would be just plain bad journalism, and I just cannot see how an industry with such high standards would succumb. The Bay Aryans are just plain ballers. Shit, if you want to make money, open a rim shop and put 24"s on AMG Mercedes.

EBGuy Says:

> FAB, Just curious, how likely is it that folks like
> this will sell during this cycle? Are LLs any more
> rational than the rest of the lot, or will they tend
> to ride the sale price down like everyone else?

Almost all the rental homes in the US and at least half the apartment units in the US are owned by “Mom & Pop” investors (like me and my parents). Most (but not all) small investment property owners follow the “buy and hold” strategy and rarely sell investment property. Here in California with Prop. 13 that keeps property taxes low there is a real incentive to hang on to property (my Parents own some homes in San Mateo where they are paying under $400 a year in property taxes when the people that bought last year are paying $15K a year).

It will be interesting to see if the bigger numbers get more investors to sell this time (especially the large numbers of boomer age investors who don’t want to do maintenance work in their 70’s). When S. Cal rental homes went from ~$300K to ~$200K and apartments went from~60K/unit to ~$30K a unit owners were looking at less than a $1-3K per month decline in value. If N. Cal prices drop 50% from current levels more owners may decide to cash in on the way down as they watch values drop by $10K to $20K per month (over $100K a year)…

theotherside Says:

> On the surface, the growth of the US economy
> has been impressive since 2002.

The problem is that the economy didn’t actually “grow” by much in the traditional sense… In the last few years we had millions of people go deeper in debt than they were ever allowed to go in the past maxing out credit cards and pulling out cash with HELOCs.

Securitized lending has allowed millions of stupid people get more debt than they can ever realistically pay back (go to http://iamfacingforeclosure.com/ to see just one example of why the economy has “grown” so much over the past few years)…

My point is that people who are trying to buy in desirable areas (such as much of the Bay Area) are competing mostly with the top 10%-20% of US households, and these are doing quite well these days.

Sorry Face Reality, let me explain the disconnect a little more clearly. The Fifth (highest) quintile IS the top 20%. To repeat, the poorest of the top 10% is this guy (in 2000):

Median Net Worth $185K
Excluding Home Equity: $98K

For the sake of your employees, I hope you hired some smart math folk to help you run the numbers in your business.

I agree with your second paragraph. I part ways with most of the libertarians on this board by advocating progressive taxation to address the inequal distribution of wealth.

Sorry Face Reality, let me explain the disconnect a little more clearly. The Fifth (highest) quintile IS the top 20%. To repeat, the poorest of the top 10% is this guy (in 2000):

Median Net Worth $185K
Excluding Home Equity: $98K

Aren't those national stats?

It may be different for the Bay Area. Heck, just look at the median income stats:

http://money.cnn.com/magazines/moneymag/bplive/2006/snapshots/PL0617610.html

Cupertino, CA
Median family income
(per year) $123,320 (Cupertino) $76,893 (Best places average)

As my earlier comment noted, it's not out of the question to have a median family income of this level. All it takes are 2 tech workers.