patrick.net

tannenbaum,

”Because there’s excess inventory, there are still significant concessions,” he said. “We expect that will drop considerably later in the year. In other words, now is a great time to buy.”

If you have the time to read the link I posted, you will see how ridiculous this statement is. Based on multiple indicators (housing permits, housing starts, inventory), we are nowhere near the "bottom" of this housing cycle. There will be realtors (TM) and MSM calling the bottom periodically all the way down. By the time we reach the true bottom, the cheerleaders and pundits will have long stopped calling the bottom, because frankly, at that time, housing will not be a "hot" investment.

SFWoman,

As I understand it, there was massive fraud and loose lending standards in the late '80s, particularly in Boston. They suffured during that housing crash more than most other places. What's "humorous" is this Boston realtor's web site and his "market analysis" reassuring us that the '80s disaster won't be repeated:

http://www.richhaen.com/market_update.php

Conversely, the debacle of the late 1980s was unfortunately fueled by speculation with Boston's occupancy rate at an all time low of ±60/40 heavily laden with "investors" versus "homeowners". In addition, mortgage lenders at that time were allowed to offer these same investors little or no cash down financing, appraisals were not required and the validity of the Purchase and Sales Agreements were not verified. Many transactions went unregulated with falsified documents and inflated cash down payments. When the real estate market crashed in 1988, these same investors bailed out of the market, allowing their units to be foreclosed upon by numerous lien holders. In the condominium market, this surely had a major impact on the City of Boston's real estate values. Unfortunately, these foreclosure numbers became the most recent "comparable sales figures", leaving the homeowners in a very precarious situation with devalued properties. The first thing to be sacrificed in a downward spiraling economy is speculative real estate investments. Again, the laws of supply and demand could not be more clearly outlined! Ask any financial advisor, tax accountant or lending institution, the last thing people walk away from is their primary home mortgage.

Doesn't this sound familiar? Hmmm.... "investors" rather than "homeowners" in the market, little or no down payment required, little or no documentation required for loans, investors bailing out of the market...

Surely that's not the situation we're in today! I guess we won't see foreclosures increase, comp sales prices decrease, and devalued properties this time around!

Randy H,

True, sometimes we wonder just how many financial web sites we really need? One of the few things I HAVE enjoyed about this bubble is the birth of a bear voice in RE! Prior to this, only bulls had any rights.

This weekend I intend to pick up Sell Now! It wasn't that long ago a publication of this sort was unthinkable! It's the equivalent to "The Satinic Verses" that got that Rushdie fellow into so much trouble. Ha Ha inspired me to fork over the coin.

This weekend I intend to pick up Sell Now! It wasn’t that long ago a publication of this sort was unthinkable! It’s the equivalent to “The Satinic Verses” that got that Rushdie fellow into so much trouble. Ha Ha inspired me to fork over the coin.

Maybe the NAR will issue a fatwa calling for the death of the author of "Sell Now!"

SFWoman Says:

> FAB, I remember there was a large condo and apartment
> below market and subsidized development built in Boston
> when I was in college (late 1980s). At the time it ended up
> costing $600,000 per unit to build. I had friends who were
> buying condos in Back Bay for about $350,000 at the time.
> The whole thing was a giant boondoggle for someone.

The “someone” are the “campaign contributors” who get paid back for their donations with government contracts. I met a Bay Area real estate developer once who tracked his campaign contributions like his other investments and said that no other “investment” has as high a “return” as his campaign contributions. If you dig down to the key principals who have made millions on the Third Street Rail project/boondoggle (and who will make money on the SF “Big Dig” if the Chinatown subway starts this year) almost all the names will be on the friends and donors to Willie and Gavin list…

What percentage increase is 1.6% to 5.6%? The actual percentage might still be low, but it looks like there is an almost 200% increase in the number of people who are losing money nominally (not even inflation adjusted or counting Realtor(TM) fees) when selling their houses in Marin in the past couple of months.
Is this drop enough for Randy to start writing more "This-is-my-final-offer" Offers? I got the feeling from reading his latest Shiller analysis that he may be sitting tight for a while longer. I am also curious to reconcile this statement:
Long term, in the Bay Area and Southern California, housing appreciates only 3.5 percentage points a year over the rate of inflation with Shiller's numbers (even with inflation). Anybody know if Shiller broke out the numbers for CA?

"The law, if passed, would make France the second European country to guarantee the right to housing, after Scotland which adopted similar measures with its 2003 Homeless Act.”

The Soviet Union had this right guaranteed in their constitution.

Does this mean there are no homeless in Scotland? If you own a home, are you required to take in strays? Or just those owners with spare bedrooms?

Is this drop enough for Randy to start writing more “This-is-my-final-offer” Offers?

We're planning to start trying again in February. *But* we're skeptical enough so as to hold onto our rights to keep renting here for another year.

A lot of stuff here in South Marin (in our price range at least) seems to have been pulled for the winter. *Quality* inventory has shrunk considerably. The crapola that's languished for months is starting to sell for what I consider healthy price reductions. For example, a $1.9m in Corte Madera seems to have sold in November for $1.7m. That's not huge, but it is $200K, which is real money. Just not enough real money to get me to bite.

I don't know who's still buying. Well, actually I do in some cases. Colleagues of my wife -- executive types generally making $200k minimum base -- were buzzing around at their xmas party about how this is "the opportunity of a lifetime". Crap like "I grew up in Marin and this is the first time prices have ever gone down! Better buy fast!".

I didn't bother to point out any data, out of respect for my better half's career.

I do see stuff movin' that I thought wouldn't budge. Two knock-down McCraftsam rebuilds down the hill from me in Mill Valley, one started at $2.8something and the other $1.6m, both sold in December after over half a year on the market. I have no idea for how much or if the sales were even legit or just some tax-transfer hoohaa.

The Soviet Union had this right guaranteed in their constitution.

As did many other old-line Social1st and Commun1st countries from the previous era. It was a "constitutional" right in the DDR. Probably so in most other Soviet satellites. I'm pretty sure there were some in SE Asia and Latin America as well.

...actually, I happen to be working with "Kati", who grew up in the DDR, today. She says they taught her in school that the fences & walls were to keep out all the oppressed homeless from the West who knew that in the East they had a people's constitution that guaranteed things like food and shelter to all people. There were so many the guards often had to "unfortunately" shoot them to keep them out.

She also said by her generation no one believed it either.

She says they taught her in school that the fences & walls were to keep out all the oppressed homeless from the West who knew that in the East they had a people’s constitution that guaranteed things like food and shelter to all people. There were so many the guards often had to “unfortunately” shoot them to keep them out.

Interesting... so they were teaching them about Malibu, CA and Sugarland, TX?

don’t know who’s still buying. Well, actually I do in some cases. Colleagues of my wife — executive types generally making $200k minimum base — were buzzing around at their xmas party about how this is “the opportunity of a lifetime”. Crap like “I grew up in Marin and this is the first time prices have ever gone down! Better buy fast!”.

Exactly. This is why jumping in too early would be foolish.

As RC often reminds us, the only buyers during the first few years of the dowturn will be clueless knife-catchers and capitulating bears. You don't want to be either one. However, we must be grateful to these (lesser?) fools because they are the ones setting the market comps... all the way down to the bottom. Without SOME sales, there would be no sales DATA proving the market is actually falling.

We should light a candle for the knife-catchers and include them in our nightly prayers.

Totally OT, but I'm considering getting Vonage (because I despise my local phone co., Verizon). Anyone out there currently using it?

“Well, if you buy a house, you’re still throwing away money, it’s just called “interest” and “property taxes” instead of “rent”. Even the principal, while nominally going right back to you, can’t be realized until you sell or borrow against it at high rates. Real estate over the long term underpeforms the stock market, and that’s even dismissing that you should demand a premium for investing in an illiquid asset.

I tell that to my parents who keep insisting I buy now that it's a buyer's market.

Unfortunately, there's two things they say that really weaken my argument:

1. "At least after 30 years you own something."
2. "Lucent, 1998" (ouch.)

I've been futzing with the Rent vs Buy calculator on Dinkytown - and I just don't get it. If you expect inflation to be high moving forwards like I do, then the breakeven point on renting vs buy isn't that bad.

Right now on Burbed.com I have a house that's $2000 a month to rent, or $699,000 to buy.

Using this calculator:
http://www.dinkytown.com/java/MortgageRentvsBuy.html

Price of home: $699,000
Interest Rate: 6.50%
Property Tax: 1%
Loan Origination: 1%
Other Closing Costs: $800

Cash on hand: $140,000 (20%)
Term: 30 years
Home Insurance: .25%
Points paid: 1

Monthly rent: $2000
Income tax rate: 35%
Home appreciation: 3%

After-Tax investment return: 5%
Inflation Rate: 4%
Future Sales commission: 6%

Calculate:
Your home purchase breaks even after 8.0 years.

That doesn't seem awful. I don't see rent going down. I don't see a huge Job Bust in the Peninsula/South Bay. Granted the monthly payment is $4576 which would be a bit tough.

Heck, even if home appreciation were only 2%, then the break even would be 16 years. Still not deadly.

Am I worrying too much about inflation?

eburbed

I thought property tax was actually 1.25%?

Also, not included in your calculations is the cost of upkeep, renovation or fixing of the home that we do not have to worry about as renters.

eburbed,

Questions:

-Is the 3% home appreciation rate on top of inflation, or nominal?

-What is meant by "breaks even" exactly per this model? That "ROI" for the down payment cash surpasses that of investing it in other vehicles?

-Does this model include the monthly cash differential between $2000 rent and $4576 in PITI that can be invested?

I guess one thing we do not calculate is that in fact that most people would be more likely to spend the $2576 difference rather than save it - or perhaps a portion of it. So, it is not completely realistic to calculate the lost return on investing it instead of ploughing it into a mortgage.

el HARMO I have Vonage, I would rate it just about as good as regular phone. Email me if you would like more info.

Also, not included in your calculations is the cost of upkeep, renovation or fixing of the home that we do not have to worry about as renters.

When I run my models, I use 1% of the cost of the house per year for upkeep. Does that change the number of years?

You didn't mention how that $4576/mon affects your standard of living. After the monthly nut, will you still be able to adequately save for retirement, college for your children, vacation, car, etc?

HARM, let me know if you do the Vonage thingy as there are some "special" deals if a current customer refers you.

I went to Vonage because I too despise Verizon.

MtViewRenter -

That's what the bank gives you a HELOC for? :-)

Skibum,

Good points. Although the Dinkytown Rent vs. Buy calculator is a good little tool, it does have some built-in assumptions and limitations. Aside from the ones you've mentioned, it also will not accept a negative number for "appreciation", which we are now seeing in many regions. That alone would dramatically alter that "break-even".

A better, more precise tool would be the Great Randini's Bubblizer tool: http://randolfe.typepad.com/Resources/Bubblizer.xls

MtViewRenter

I'm also priced out in Mountain View, which area are you keeping an eye on?

eburbed - what type of property is it? Does it have any HOA dues?

Aside from the ones you’ve mentioned, it also will not accept a negative number for “appreciation”, which we are now seeing in many regions.

HARM,

Tsk tsk. You should know better than that. Home prices ALWAYS go up!

Thanks, Mr. X. I definitely am switching to Vonage and am interested in any referral deals. Will email you.

eburbed,

The other factor to consider, in the price range you discuss, if it is a SFH, it will inevitably be an older home that will require significant updating. In the areas and price ranges we're looking at (significantly higher - not trying to one-up you or anything), the vast majority will need you to immediately sink $100K-200K for updating, much less customizing.

Sure, you could buy a McAlbatross and be done with the upgrades, but then the place will fall apart in 15 years.

eburbed :

It is a stretch to expect house prices to go up 3% per year FROM THIS POINT onwards. Try the model with 0 or 0.5% appreciation.

SP - it's nice to know that flipping is going on adn flopping in this area, I was concerned that it's not so prevalent and thus less likely to have any fallout on the housing prices in this area.

-Is the 3% home appreciation rate on top of inflation, or nominal?

-Does this model include the monthly cash differential between $2000 rent and $4576 in PITI that can be invested?

Those are all very good questions that I don't have answers too. I look at the detailed numbers and my eyes get blurry. I provided the data in hopes that someone else would try it and let me know what they think. :)

That said, I do think they look at the investment model. Here's some of its calculations:

Year: 8
PITI: $4,506.03
Payment After Tax Savings: $3,293.55
Rent Payment: $2,631.86
Value of Investment: $316,675
Home Equity: $325,916

Year: 30
PITI: $5,326.40
Payment After Tax Savings: $4,839.16
Rent Payment: $6,237.30 [Wowsers! 4% inflation is bad!]
Value of Investment: $860,927
Home Equity: $1,594,857

Looking back, I guess it's idea of appreciation is that over inflation. If you enter 0, you don't break even - but the delta isn't that bad:

Year: 30
PITI: $4,338.66
Payment After Tax Savings: $4,127.98
Rent Payment: $6,237.30
Value of Investment: $678,879
Home Equity: $657,060

Person :

I hear you. I have not spoken a word against RE in last 3 years. Once I did, 3 years ago, some got angry and most thought I was an idiot. So I gave up.

I also remember arguing about why AMZN (hardly anything more than a bookstore at that time) should not be valued TWICE that of Sears in market cap. People thought I was nuts.

Expressing contrarian feelings to people drunk on kool-aid is often just not worth it.

Person,

But it was admitted that the payment would be a bit tough to make, therefore, if it was my case, I would not be saving it all. Certainly I find in this area that even though I automatically deduct money from our account every month for savings, I invariably have to dip back in for unexpected expenses. However, I have a feeling that eburbed has a higher salary than us, so maybe he could save.

And I am talking from the layman side of things, and pointing out that for most people, they really wouldn't be saving all of the extra money (got to have that iPod, new car, fancy holiday, food). Stacked comparison or not!

eburbed,

If you don't break-even after 30 years assuming zero appreaciation above CPI, then what is this telling you? If apprecation is a negative number (which the Dinkytown calculator can't handle), then how would that change the delta?

Of course, either assumption is wrong for the full 30 years anyway, as we are likely to see several years of flat-to-falling prices, followed by another up-cycle, followed by another down cycle, etc...

Regardless of fuzzy assumptions about future appreciation, a lower entry price-point will *always* save you big in interest, prop. tax & insurance, plus reduce the % of HH net income that must be devoted to housing, providing you a critical safety cushion. Also, it greatly reduces your downside risk and increases your potential upside. By buying close to the bottom of a market-cycle, if you really need to move, you won't have to bring $tens of thousands to the table or beg the lender for a short sale, as many a flopper will.

And I am talking from the layman side of things, and pointing out that for most people, they really wouldn’t be saving all of the extra money (got to have that iPod, new car, fancy holiday, food). Stacked comparison or not!

Claire,

You're probably right (look at the national savings rate - hint, it's the same as the title to a bad 1980's movie starring Robert Downey Jr.).

To be fair though, the same holds true for homedebtors. In fact, it's worse. To buy those things, they take out HELOCs instead of using cash-in-hand. Worse yet, the only way this can factor into eburbed's cited calculator is to eat away at the calculated equity (vs. investment return from cash).

Skibum,

I know, I know, hence today when I heard StreetSigns report that the housing slump is over as home builders will be building 110,000 to 120,000 houses in CA this year, I decided that I probably won't ever buy a house in CA.

Unfortunately the UK are only just starting to introduce dodgy loans and are just now increasing income to loan multiples - so that market is also just about to go crazy for a while and we are priced out there too!

2. Buy a home and rent out most of the space to total strangers = “smart way to afford that starter home!”

Have you ever seen the movie, "Pacific Heights"???

eburbed Says:

> I’ve been futzing with the Rent vs Buy calculator
> on Dinkytown - and I just don’t get it. If you expect
> inflation to be high moving forwards like I do, then
> the breakeven point on renting vs buy isn’t that bad.

I don’t have the numbers in front of me but on average over the past 50 years homes in CA have gone up in value a little faster than inflation.

The question you need to ask yourself before playing with the Dinkytown model is “if homes on CA have gone up 10-20% (many times more than the inflation rate) per year for the past decade will they continue to go up at or “above” the inflation rate or will they drop in value as things revert to the mean.

I’m renting right now since I’m sure that home prices will drop (can you put a negative number in the model) even if the overall “inflation rate” doubles.

And there was the case not so long ago in SF where the renters killed the landlord (I think a famous Jazz musician) and his dog and left them to rot in the basement while they lived rent free (at least for a while) in the rest of the house.

Claire,

StreetSigns? You might as well listen to the NAR's take on the housing market if you're going to believe the cheerleading outfit over at CNBC. Check out the graphs at the link I referred to earlier (755am today) if you want to see where housing starts are likely headed. I don't know which talking head on that show said what you mentioned, but I can't see how they can say that given all the write-downs the HBs are doing as we speak.