patrick.net

Punchbowl,

I've been making reasonable bids, well above the most likely "real" market value, for quite a while now. The problem is those are still considered insanely insulting joke lowball offers, even by equity rich retirees looking to move to the community.

Psychology is very strong. All that mental accounting stuff. Framing, perception of losses versus gains, etc. Ethel wants $1.5m because Edith got that last summer. The fact Ethel and her late husband paid $185K for the place decades ago, and haven't put a penny into it since, is irrelevant. She perceives a $1.0m offer as a $0.5m loss, not a $815K gain. And don't even think of factoring inflation. Ethel still thinks paying the neighbor boy $5 to mow her lawn is overly generous.

Randy H,

You are a lowball pioneer and I salute your balls of steel for jumping into the (still) shark-infested waters.

However, as you say, greed, denial & MA still hold sway over most sellers and will continue to do so for a very long time. Personally, I don't plan on making any serious bigs until I see ~50% drop in real prices. Which, based on previous cycles, won't be until 2010-2012 at the earliest.

Seller psychology may be a powerful force right NOW, but as Peter P used to say, "reflexivity works in both directions". Fear is the powerful filp-side of greed.

Randy - This sounds like my friend who finally sold her place for asking price in Cupertino. She actually turned down an offer that was just $3k under asking. The house had been on the market for months. And she really wanted out of this house for lifestyle reasons, though she could afford to stay there indefinitely.

Harm - I'm with you on rents. And if somehow the gap between rent and buy remained the same as it is now, I just wouldn't buy. For me, it is that simple.

Punchbowl,

(d) above (for me anyway) is absolutely paramount! My sense for the last year at least has been for us to look at absolutely NOTHING that has been built or refinanced since 200_. I leave the last digit blank b/c I keep moving it back. If all goes well it might shift to 199_!

Over the weekend the wife and I looked at a 1995 built, 1,500 +/- single story in a very quiet neighborhood. At $215k I'd have to say price wasn't really the issue. It belonged to a retired college prof. and you just knew with all the "research" she'd done she wasn't going to budge an inch! The flooring was showing it's age and it's been FSBO for almost a year. Given all the research most of us here have done does it make sense to buy any home where you aren't getting a real bargain? The place had changed hands a surprising number of times in those 11 years and yet everyone will have made money on it, except me? I don't think so!

Michael Holliday,

I actually used to subscribe to Brinkers newsletter, many years ago. He's kind of a self styled value investor who also thinks he can time major market cycles. He hasn't done all that bad, although I think most of his gains came by calling the great bull market of the 90s and riding up some good mutual funds and MSFT and others.

A lot of people made huge gains riding up the 90s bubble, and then getting out before the stubborn retail investors. I'm not so sure that makes them geniuses, but then I'm not really in a position to criticize. They did better than I did.

I could launch into a much longer conversation about why there is a reasonably logical value-based argument that can be made that this real-estate bubble appears larger than it really is. I've made a lot of those points before. Global growth, corporate growth, etc. There really is a ton of good news which a lot of people on this blog tend to wave away. And some of this is relevant, and will serve to blunt the correction. It's already happening, and expressing itself as price stickiness in the stronger economy bubble markets, like the Bay Area. There's enough good happening here to gum up prices.

But even all that still won't stop the correction from occurring. I've said before, no one here really knows how much, long, or deep the correction will be. For every claim it will be [only 5%; greater than 50%] an equally credible criticism of that prediction can be found.

Heard the latest NAAVLP wonder ad on the radio this morning. The highlights:

--$20/month payment per $100K of mortgage ($200/mo. for a $ million loan).
--this neg-am period is locked-in for 10 years
--requires minimum 60% owner equity (good luck finding CA loan-owners with that)
--requires FICO of 668

They seem to be done chasing after the Casey Serin no-money-down types, and now they're heavily going after the few equity-rich idiots left who haven't already HELOC'd/refi'd themselves to death.

End game is nigh.

SP,

Agreed. Any time I watched a movie where the birds in the canopy were disturbed, something truly awful was sure to follow! And yes, without a rope, belt or bedsheets it must be difficult to hang one's self.

1. What is the percentage of investors who bought in bay area in the last 2 years?

@Hi_there,

Here are some links that quote the NAR & NAHB saying that up to 40% of surveyed purchases in 2005 were for speculation. They distinguished between admitted specuvestors (28%) and people buying "second homes", many of whom are probably small-time speculators. Either way, this is way above the historical averages, which is normally single-digits.

http://www.usatoday.com/money/economy/housing/2006-04-04-real-estate-usat_x.htm
http://www.freerepublic.com/focus/f-news/1556456/posts?page=4

This statistic also does not inlcude address people who bought only ONE home, but could not truly afford it. According to PIMCO, 82% of new-purchase loans at the peak (late 2005) used I/Os and neg-ams in California:

http://www.ocregister.com/ocregister/money/housing/article_902994.php

I could launch into a much longer conversation about why there is a reasonably logical value-based argument that can be made that this real-estate bubble appears larger than it really is.

Another logical explanation of illogical human behaviors?

If you read one link today, read this one:

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2007/01/housing_fetish.html

One of Jim's best pieces ever. The irony of spending so much on housing, when all we do is work to pay for housing, and sit in traffic.

Great blog - add it to your list.

Michael Holliday Says:

> I heard financial radio guru Bob Brinker on the air yesterday.
> Basically, his position was that if you’re in the “there’s a housing
> bubble ready to explode” camp, then you’re some kind of
> “the-sky-is-falling” nut.
> I wasn’t impressed with Brinker’s weak analysis of the situation.

I’ve been catching a little bit of Bob’s radio show on KGO most weekends for almost 20 years and he did seem a little out of it yesterday when talking about Real Estate…

> And his attitude was, as usual, on the arrogant side.
> What’s with Bob Brinker? Is he just another oblivious,
> squawking pudit out of touch with reality, or are we the
> outcasts from reality?

Bob has been a little arrogant the last few years, but he was the only guy with a national radio show to go on the records and tell everyone to liquidate their stock portfolios in early 2001 and get back in a couple years later…

I wonder how many people in the BA who got some money from stock options and used it to help buy “that slightly more than they can really afford house” are now going to be hit by back-dating problems - how much extra tax will they have to fork over that they weren’t planning on?

I don't think it's that many. Most of those were executive - I doubt they had a problem affording a house to begin with. Most certainly, they're not the ones inflating condos in San jose.

Hi_there :

I asked similar questions when I discovered this blog 1.5 years ago. I understand relatively more about this RE bubble now.

Yes, there are many high-income families, who spend an enormous amount of their income on their housing costs. IMO, they will feel a whole lot poorer when it's time to send the kids to college or when they are going to retire. But they will definitely survive the RE crash.

On the other hand, they cannot control the housing prices. Their purchases are now past history, not guarantee of future prices. These will be controlled by the marginal buyers of past and future. NOT ONLY INVESTORS AS YOU CLAIM.

Buyers who overbought using exotic mortgages will find trouble as the rates start to reset. Due to credit crunch that's happening slowly, new buyers will not have as much freedom. The rising foreclosures, reducing buyer pool will result in higher inventory and slow price erosion. This WILL change the psychology. There will be false bottoms along the way. But the downward path is certain.

Not a single soul on this planet knows how much and how fast. But there is no debate on the direction.

Hi_there said
Price will definitely fall when there are speculators who are trying to bail out . Is that the case for bay area?

No. That IMO is not the case for BA. But SP answered this question succinctly.

Even the greatest of fools can’t hang himself if he can’t find a rope.

The 10 Yr touched 4.9 today. And 30 Yr is pushing 5. The BA market needs as much funny money as any other in US. Take that away, and the debate is over.

Back dating options does not affect the employee's taxable gain on an option transaction. Employees with back dated options will not have issues with the IRS. The back dating lowers or eliminates the charge against earnings the employer has to take for issuing the options. It's as if the employer paid the employee $10K higher (and put the $10K on the employee's W-2) than the employer recorded in it's books. The employee's taxable income isn't changed by the fact the employer incorrectly accounted for the compensation expense.

@eburbed :

Regarding your mention of the open house. I am NOT surprised at all. 595K for a 1321 town home is at current market level. Hence it seems reasonable to many. I think it will generate multiple bids. Smart Realtor.

I believe that 600K is a MAGIC number for many buyers. It does not matter to many what they get in that price. It does not matter what price it sold for 3/4 years ago. This is why median price is not a good indicator.

Silicon Valley booming again after 5-year slump

If rent goes up 30%, it may not take much more than a mild correction over a few years in the housing market for prices to "reasonable" again.

SP,

Got Rope?

The Silivalley bounce is interesting. the gold rush stink never seems to leave that place. a corollary: graduation rates are down 3% yoy for the area (I believe this is correct). not exactly a lot of families moving in.

"the speculator that doesn't know he is one"

Exactly. In a way it's fitting that the very buying demographic the equity deep owners were cheering on from 2003-2005 will be the same ones that unravel their well laid plan. These "weak hands" ensure plenty of turn over and will crush "their" comps.

The same goes for things up at Lake Woebegone where foolks (TM) that "probably" were o.k to have a primary home but had no business in a vacation home are mucking things up in that market as well.

Randy’s post about a spring bounce reminds me of the solid late spring bounce that that NASDAQ had in 2000. In Feb. of 2000 when the NASDAQ was at 4,600 I had been telling people that I thought the bubble would soon burst for “two full years” and felt like the only one in N. California who was not expecting the NASDAQ to hit 6,000 by summer. When the NASDAQ dropped to 3,400 by May I figured that it was on it’s way back to “normal”, but the late spring bounce pushed it up to 4,200 (before it fell to about 1,200 in Sept. 2000 officially ending the “dot com bubble”).

Back in 1999 a friend from HBS gave me the e-mail address of a classmate named Whitney Tilson who like me has the crazy idea that “maybe” the NASDAQ is overvalued (and companies like “50 Pound Bags of Pet Food dot com” may not be worth 1,000 times next years “projected” earnings). In early 2000 Whitney wrote a great column called Valuation Matters (Google "Whitney Tilson" "Valuation Matters" to find it.

The column started with a great quote from Buffett:
"The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

In 2001 Whiney wrote a great follow up column called Valuation Still Matters (Google "Whitney Tilson" "Valuation Still Matters" to find it). The NASDAQ may hit 4,200 again before I die (remember from 1971-1991 it only went from 100-450 or 175 points per DECADE), but then again it might not just like I think there is a good chance that I never see another home in Marin sell for $2,000 sf (the high price that some tiny POS tear downs hit in 2005)…

FAB,

I wish I could find the sound bite but in the Fall of 1999 I was watching a Monday night game w/ Al Michaels and Boomer Esiason. Al somehow in the middle of a football game worked in the topic of "trading tech stocks on-line" and asked Boomer if he was trading on line as well. Boomer just LAUGHED! He said "Al, I have a guy that gets me bonds and annuities, stuff like that" and laughed again. Al said "Well I'M trading tech stocks!"

If the shoeshine boy and cab driver didn't scare you off the "jock sniffer" was your final warning!

Vacant homes up 34%

http://tinyurl.com/25ce4b

I'm with you Wood River.

Okay, I forgot to account for the $300-500 HOA fees, but it doesn’t affect the end result in my example - just pushes the household income to about 150K, which is still in range.

The HOA for the TH featured on burbed was only $240 a month.

That's an interesting way to think about things: working backwards from a typical income.

That reminds me of DinOR's thought piece: A corvette = 1 year of Plumber's salary. A 911 = a medicore lawyer.

So will a 1300sqft TH in Sunnyvale stick at 2 middle income tech workers salaries?

Sounds like $600k is a pretty sticky number. :(

I went to an open house yesterday here in Chicago. The house was packed with people. When we left the place, my wife said "wow the buyers are really out in force". I replied, "what makes you think some of those people aren't getting ready to sell their house and wanted to see the competition"? As for the property, I would say it's nice to see some improvement in the quality and a bit lower price in the listings. However, while it's much cheaper than CA, It's still overpriced at over 2 times rent.

FAB

Thanks for the great post.

I remember reading both of those articles. The first I read while I was a CTO of a dot-com. The second, after I'd bought all the company's servers, the $3,500 white boards, a conference table, some kind of super fancy copier machine, a cool old fashioned Coke vending machine that spun cute little bottles around, a Foosball table, a designer dog bed, and some quite comfortable chairs for about $0.10 on the dollar (less for the Foosball table), assumed half of their leased space, and started a business doing stuff businesses really get paid to do.

eburbed says :
Sounds like $600k is a pretty sticky number. :(

Based on current rates. Don't forget that. As long as rates remain what they are, BA market has a strong buyer pool around that level. When the downturn speeds up, people will buy better houses around that price range. Median will hardly be affected. I will pay more attention to price per SQFT. But this is a very slow process.

Things will get far more interesting if the 10 Yr hits 5.5. The bond market is coming to its senses. So it might actually happen.

DOS attack on Ben.

Wow. Someone out there is obviously scared --and highly motivated.

Hopefully we're doing something to help inoculate. I really expect Spring to be a full-court press. Like FAB reminds us, Spring 2000 was a very hard time to be a dot-com doubter. For a few months there it was very hard to not wonder if it really was going to turn around and start heading back up again.

It's like that last wind part of a roaring late-night binge drinking party. Everyone knows its over, and they're going to feel like holy hell in the morning. But a few guys won't let it die and manage to somehow get most everyone back up and dancing for a few more songs.

I guess my problem is I tend to leave parties early.

DOSers are out en force. I got DOS'd twice in the past 4 days. But that was for pricking an altogether different bubble, which oddly enough, includes "virtual real estate".

@charlie :

Apparently, it’s war. :-)

In more ways than one. Whenever Patrick.net becomes slow, DOS is the first thing that comes to my mind. Since this blog is mainly about BA, I am pretty sure we have made enemies with a few tech savvy bulls. I would have given more odds to this blog being target of DOS than any other.

People seriously dislike housing bears. There is a reason why I keep my mouth shut when my friends discuss their equity wealth.

DOSers are out en force. I got DOS’d twice in the past 4 days. But that was for pricking an altogether different bubble, which oddly enough, includes “virtual real estate”.

You have desecrated their holy world. I am not surprised. :)

So will a 1300sqft TH in Sunnyvale stick at 2 middle income tech workers salaries?
Sounds like $600k is a pretty sticky number.
Let us not forget the marginal tax rates on our Silicon Valley couple are anywhere from 33-37%. Yes, they are still throwing out money if they buy, but the "premium" is not horrible (conservatively less than 10% of income).

You have desecrated their holy world. I am not surprised.

That I most certainly have. No one ever accused me of not being evil enough.

That I most certainly have. No one ever accused me of not being evil enough.

Randy, you are not being evil enough. :twisted:

SP says :

Another way to look at it is that this market is ‘priced for perfection’. Easy credit, low interest rates, scared buyers, decent job growth, AND price appreciation. As one or more of those factors start buckling, or go negative, the prices will ratchet down to another, lower sticking point.

The rates are still at historic lows, the job market (at least in BA) is still strong and stock market has done quite well. Everything that is need to keep the housing market strong - according to RE experts - is still in place.

Then WHY IS THE MARKET STALLING/FALLING ? I have challenged the bulls to answer this, and haven't heard any good answer except denial that the market is actually strong.

We of course know the answer. The market did not advance due to traditional factors, but it was actually the credit bubble that morphed into this mania. Now that bubble is bursting, so will this.

Hasn't 600k been the entry price for a sfh in the east bay for quite a while? The outer edges of the east bay is already starting to go down in flames....

I would argue that the vast majority of ppl that can support 600k homes have already purchased a place. Those that will buy at 600k in the future are newly minted 2 middle income tech worker households, which, according to many accounts, are growing at a snail's pace.

Personally, I can't comfortably afford a 600k place anyway, so it's a moot point.

Your tax dollars at work: http://www.msnbc.msn.com/id/16874155/

I'll provide translation for those who don't speak LA corruption and incompetence.....

"I think it's more class than anything, but there's racial issues associated with it also," Nagin said.

Translation: If you are as stupid as I am, always play the race/class cards

"As of Jan. 18, the Federal Emergency Management Agency has agreed to pay for $334 million for infrastructure repairs in New Orleans, but the state only has forwarded $145 million to the city so far.

State officials have said city leaders failed to provide required documentation, which Nagin called cumbersome."

Translation: Receipts? We don't need any stinkin' receipts. You can trust me; just check my track record.

________

With Dems in control of Congress billions and billions more will be funneled into the bottomless pit. Without the historical Dem vote in N.O., Landreiu cannot win re-election and the state will not go "blue" in '08.

New Orleans is the only city I know where the home inspection includes a annual sink rate for the foundation. A "stable" home sinks about 1 in/yr....some as much as 6 in/yr.

Randy, Former Apt.:

Good points. Thanks.
_____

SP Says:

"...Even the greatest of fools can’t hang himself if he can’t find a rope."

_____

Ha, ha! Brilliant!