patrick.net

I am speechless.

http://www.forbes.com/free_forbes/2007/0226/110.html?partner=yahoomag
Don’t buy it. For months now the debate has been over whether America will have a hard landing or soft landing, the answer hinging on how big 2007’s housing disaster turns out to be. Well, there won’t be any housing disaster.

Pure bogus!

First of all, they are talking about national inventory which includes the bubble areas and the non bubble areas.

Second, they are not taking into account the fact that many had taken their houses off the market thinking that all the (nonexisting) buyers will be around in the spring when they will be able to list fresh.

Third, what about all the ARM resets that will be taking place and all those who HAVE BEEN going into foreclosure AND all those that will soon join them.

Fourth, what about all the subprime lenders that are dropping like flies and the fact that lending standards will be tightening; thus severely limiting how many CAN borrow and HOW MUCH.

SFWoman Says:

> I think that the Ken Fisher article is written for a national
> magazine and it’s more about the national housing market
> than real estate in any particular location.
> Don’t forget, there are huge swathes of the country where
> real estate barely keeps pace with inflation. You probably
> don’t live in one of those places if you have wound up here.

It is going to get ugly in every part of the country due to the “creative” financing. I was just talking to the owner of a 150 unit apartment north of Cincinnati, OH about defeasing his current loan and putting a new 10 year fixed rate loan on the property. The area around Cincinnati has had real estate go up LESS than inflation but he told me that he expects the home prices around his property (that are on average well under $100K) to drop even lower since many of his same tenants that moved out (with a no down neg am voodoo loan) are moving back after giving back their homes when the payments reset. He said his leasing staff has been getting a lot of calls from people asking about how a foreclosure will impact their ability to rent an apartment.

P.S. A 150 Unit apartment complex in Ohio would sell for around $4.5mm about the same as a nice 2 bedroom view condo on Russian Hill…

I keep hearing people say that Long Island will remain strong as long as New York City is strong; even though that is total bullshit:

Foreclosures in city jump 18%

In the end, I simply expected better of Forbes.

There have been thoughtful pieces on the broader implications of a housing and credit slide even in the foreign presses. But Forbes published this.

I'm startled when journalists treat the housing decline in isolation. Probably I shouldn't be.

OK, my bad. I didn't realize that the bad money practices had gone outside of bubble areas.

I guess everyone wants their slice of the American Dream (TM), and you get a bigger slice with voodoo loans regardless of where you live.

For Michael Shedlock's/Mike Morgan's survey of the South Florida 2007 peak RE sales season, there's:

http://globaleconomicanalysis.blogspot.com/

Is it a harbinger of Spring in the BA? Don't know, can't say.

SFWoman

I don't think he was arguing about large parts of country not having bubble. Even then, isn't it the case that bubble has happened where majority of the population lives ? So the impact will be on a national economic scale even when it may not be spread geographically all over the nation.

When every economist of any repute is debating how hard or how soft the landing will be, he is instead saying ...
Right now the U.S. and global economies are both accelerating.
You can see right through the housing crash story by looking at the prices of housing stocks.
...
We're accelerating, not landing.

I am all for contrarian thinking, but statements like these fall under DinOR's "Dude, whatever" category.

So you have to decide if it is worth it to scrimp and save every penny for a decade and life like a college student to be able to buy a home. The Bay Area and in fact all of California has deliberately made it hard on newcomers to the state. The Bay Area is especially bad. You *can* show up here with nothing and end up a home owner and successful, but the bar is higher here and the competition tougher.

But it's so special here, that no matter what, people will keep moving here.

Like this quote:

http://www.insidebayarea.com/business/ci_5206472

Janet Fouts bought her house two years ago “and gained enough in the house not to be too worried about the changing market,” the San Jose resident said. “I think it’s just an overall adjustment, not a downhill trend. This is the Bay Area. It will always be a place where people want to live.”

But in all seriousness, I truly believe what Guy Kawasaki (famous guy) has to say here:

http://blog.guykawasaki.com/2006/06/how_to_kick_sil.html

High housing prices. If houses are cheap, it means that young people can buy housing sooner and have kids. When they have kids, they can’t take as much risk and don’t have as much energy to start companies. (I have four kids—I barely have the time and energy to blog, much less start a company.) Also, if houses are cheap, it’s easier to “make it big,” and you want it to be hard to make it big.

If Silicon Valley weren't so expensive, it wouldn't be so successful.

Imagine if everyone had a house - they'd have families, home theatres, etc. They wouldn't be working so hard.

I have the odious obligation of warning good family friends against buying a $1.7M 1,500 sq ft POS in Palo Alto. There's just so much wrong with the picture. Highlights:

The wife is a patent attorney and the primary wage earner. But she's working in-house and doesn't make big firm partner level money.

They're selling a $850K, 3,000 sq ft house in MD in a very good school district. They might be able to clear $350K from the sale (if the prices don't drop further this spring).

Very high spending habits with two grade school age kids. One of whom suffers mild autism. Both are bright and well mannered, but neither would be described as *gifted*.

They are absolutely convinced, even though their own house *value* dipped $100,000 from the peak last year, that BA is special and prices will only go up.

Usually, I'm too lazy to convince people who've made up their mind. But I'm quite close to this family and I really want them to do well and be happy long term. Any advice about websites or approaches to convince them to wait a couple years before very likely making the biggest financial mistake of their life?

astrid,

Extremely difficult situation. I can't say that I envy you there! It just sounds like they've had just enough success w/their current house to pretty much convince them this is a "can't lose" scenario?

I wouldn't describe this so much as you're being "lazy". Hell, we've all tried and where does it get you? Even if you did talk them out of it all it would take is for ONE home there to sell above asking and you become the bad guy. They are looking at a "can't lose" situation (and you can't win).

StuckinBA,

Even early on (when things were still rockin') we were fed a steady diet of "no national RE market" Itulip ran a great piece they called, "YES (it's a housing bubble!" Realtors were quick to point out that outrageous appreciation was "only" occuring in densely populated coastal areas! Yeah, uh where like 70% of the U.S population lives!

NEW continues to take a severe butt pounding. :)

Satellite of Love! LOL!

You mean Tom Servo and the boys are still in orbit somewhere?

Craigslist FB Index Reaches new Milestone

For the past couple of months I have been doing a highly scientific survey of the Bay Area housing market. Here is my methodology:
1. Go to sfbay.craigslist.org->Real Estate For Sale
2. Type "reduced" in the search field
In the past, this would return several days worth of entries on a single page (each page has 100 listings). On Feb. 10, the search produced two days of listings (around 50 listing on each day, Feb. 9,10) on a single page. For as long as Craigslist has existed (do we really remember a time before Craigslist?), we have never had so many homes "reduced" (some even on "one day special" :-)) If we ever hit over 100 listings in a day, then we will know things are really cookin'.

EBGuy,

Have a little faith. In no time at all it will seem like getting a drink of water from a fire hose! (You should zip over to Sac. they broke a hundred over a year ago). Geez it's a mess.

astrid :

I have repeatedly said here that I refrain from giving a dose of reality to people who are buying a house. They are so emotionally attached to the process of buying that they are already well into the dreamland and rational arguments don't bring them back. You are getting in their way of happiness.

On occasion I have directed people to this site, Ben's blog and to Randy's bubblizer. Didn't have ANY effect.

"It doesn't make any financial sense to buy right now, but I cannot wait forever."

DinOR :

NEW continues to take a severe butt pounding. :)

Man those puts are so expensive ! Seems like the bankruptcy fears are controlling the sell-off, which seems like never ending now. I was hoping to buy a put after a sucker's rally, or a short squeeze based some guidance from company/analysts that it's not as bad as it seems to be. Didn't happen yet, so my gambling money is still on the sidelines.

Jimbo Says:

It actually might make more sense to buy now than rent, depending on what you think inflation in rent, salary inflation, home price appreciation and interest rates are going to do, but you will have a tough time finding anyone here who thinks that."

Ok, since when did Jimbo --the long-time poster who once, as I recall, attended more than one Patrick.net NCAL blog party at Marin Brewing Co. and met Randy H, Peter P, Jack & Kurt S in person-- suddenly morph into a troll? And where exactly, aside from a few pockets of the midwest or south, does it make more financial sense to buy vs. rent today?

I don't deny that if we really do have "a decade or longer of zero nominal price gains" combined with fairly high inflation (incl. wage inflation), that real house prices can correct entirely through inflation alone. However, this would virtually require require a Japan-style ZIRP policy to keep the easy-money spigot wide open for many years. And come to think of it, it didn't go so perfectly well for Japan (Tokyo house prices are approx. 60% off late-1980s peak). It would, however, drag out the correction over a much longer period and prolong the pain --for debtors and wanna-be buyers alike.

What the hell happened to the old Jimbo? Was his blog personna hijacked by MP?

Culture driven, or "cult" driven? Hmm :(

"It actually might make more sense to buy now than rent"

You can buy if you want to, but it probably won't make a lot of sense. Every calculation I've seen that works off the "push the earth under the bubble" scenario leaves craters everywhere. Watch your step!

"harshing their mellow" :( LOL!

SP, but I can understand why *astrid feels that way. Who needs more "house poor" friends? Maybe (and I'm just thinking out loud here) just maybe she could say, I think it's a great idea! BUT why don't you use some of that equity from your sale and buy a SECOND home as well! Maybe that'll put the fear of God in 'em?

StuckinBA and DinOR,

Yeah, I know it's probably futile, though I have to try. A 20% drop on a $1.7M shitbox is $340K --- about as much as I'd ever want to pay for a 1,500 sq ft shitbox anywhere. I just can't fathom how a nice and otherwise rational family could court financial ruin so unthinkingly.

astrid,

SP is right. I know of very few examples of where family/friend pre-buy counseling did any good. And those are far outweighed by examples of it having no effect and even antagonizing your loved ones. As strange as it seems to us, most people really do not expend much time or thought on what could be the single largest purchase decision of their lives, other than "how should we decorate/furnish it?"

Most Americans today are simply not accustomed to deferred gratification, and do not want to be told that it might be in their best interests to place their "dream" on hold a few years. In the unlikely event that they do listen to you and see (NAR-reported) median prices in their neighborhood continue to go up, they will blame you for for being "wrong" and "preying on their fears" by talking them out of their "dream". If they don't listen (very likely) and get foreclosed on or have to short-sell a few years from now, they will *not* remember your good advice. If anything, they will see you as a jealous, bitter, mean-spirited person who "wanted them to fail", and may even blame you for wishing it upon them. Among the general public, selective memory and blame-avoidance is just as common as mental accounting.

astrid,

There was a time when families of 5 or 6 lived in 1,500 sq. ft. homes (and smaller). I just can't figure why anyone, given today's standards (w/2 smaller children) would want a home 1/2 the size? Is this a "prestige" thing?

DinOR,

I think $1.7M is the maximum amount they can afford. And $1.7M buys you a tiny 60 year old place in Palo Alto.

I need to at least talk them into not taking a second mortgage (they have enough cash on hand for that, at least). That way, at least they have the option of signing the house back to the bank if thing get bad.

astrid Says:

> I have the odious obligation of warning good
> family friends against buying a $1.7M 1,500
> sq ft POS in Palo Alto.
> Usually, I’m too lazy to convince people who’ve
> made up their mind. But I’m quite close to this
> family and I really want them to do well and be
> happy long term.

As I have said before one of the reasons I like this BLOG as it gives me the opportunity to vent since I’ve decided that I’m not going to give Real Estate advice to friends unless they specifically ask.

They can put their $300K in to HSBC Direct and lock in 6% for the next year and get $1,500 a month and pay an extra $900 a month out of pocket to rent the place in Palo Alto below for a total housing cost of $10,800 a year).
http://sfbay.craigslist.org/pen/apa/277161549.html

Or they can “buy in to the American Dream for just over $1K/sf” and put their $300K down on the $1.7mm POS and get a 30 yr fixed loan at 6.25% with a payment of only $8,620 a month ($10,441 a month with impounds for taxes and insurance). If you add in a little rehab cost and typical maintenance their total housing cost will probably be just under $130,000 a year.

It makes a lot of sense to buy in to the American Dream today since the price of Palo Alto homes are sure to go up by over $100K a year (10% appreciation per year is probably the minimum according to most REALTORS).

If they rent and invest $120K they save for the next 10 years at 6% they will “only” have about $1.8mm but the home will be sure to triple in price since it tripled in price over the last 10 years (ask any REALTOR who will tell you that all Bay Area homes will triple in value since “everyone wants to live here”).

Anyhow, antagonistic as might be, I have to at least try to get them to hedge their bets. They had a bad rental experience about 8 years ago, so now they feel like they must "own" their house and won't consider the possibility of prices going down.

I hope BA prices crash this spring before they move, so at least there'll be a wake up call. You'd think the DC market and the Shanghai market and the Tokyo market would be a warning to them...ugh!

astrid,

A couple friends of mine bought a house in a really good school district in the east bay last fall for ~7 times household income. They got the house for 15% off asking so that got them really excited. They were pretty gunho about the housing market overall and just couldn't see what downside there was.

I suggested that the market is adjusting as they saw with their house so they shouldn't count on any appreciation. Thus, they need to make sure they can actually afford the fully amortized payment. They both have government jobs so the income stream is fairly stable.

The loan they ended up with was a 10/1 payment option arm and they planned to make at least the fully interest payment. I haven't asked how they're doing with the loan since then, as that kind of subject is always a bit sensitive.

That's probably the best I could have done w/o alienating my friends. Hope that'll give you some ideas.

astrid,

Maybe try walking 'em through FAB's suggestions above? Perhaps by explaining to them that with all that cash from the sale they might want think about creating different accounts for max FDIC coverage! (What is the max. anyway?) Could that get them thinking that indeed 300K+ is actually quite a bit of money?

Yeah, that's actually a big concern. The reason they want PA is for the PA schools. But there's no indication the kids would do will in the cut throat PA schools. If I could persuade them that the kids are better off in private schook, maybe that'll help convince them to take a relatively safer course.

-will
+well

-schook
+school

uck

Gondo,

I'll definitely check it out! They got good at doing the only thing you CAN do w/low budget movies, make fun of them!

CB,

People with $1M but $10,000/yr income still can't afford a $1M house. Maybe the best way to find affordability is to include potential capital gain of the money on hand when calculating income.

FAB, you're right overall but you haven't paid attention to numeric details. E.g. HSBC only pays 6% for the next 2 1/2 months and the interest is taxable, so the real cost of renting is considerably over $10.8k. Similarly, you've ignored deductibility of mortgage interest and taxes for the buyer, so the real cost of buying is probably closer to $100k. I agree that it's still a ridiculous differential.

I too have given up trying to save people. The behavioral investing gurus have documented across wide swaths of the population what they call confirmation bias, which basically means deciding first and then paying attention only to information which backs up the decision while discounting any information that points the other way. (This blog is no different BTW. Signs that the bubble is not bursting are routinely dismissed here.) I'm beginning to believe that you can't teach adults a damned thing. They have to learn it themselves and sometimes they have to be nailed to a cross in order for the lesson to sink in.

(This blog is no different BTW. Signs that the bubble is not bursting are routinely dismissed here.)

Such as...?

Punchbowl,

I can get on board w/the bias thing (b/c I see it every day) but for the most part the "evidence" being posted here falls under general cheerleading and I think that's why it's so quickly dismissed.

"We're having our 3rd best year EVER in_____"

There's so much momentum now the MSM is starting to pick apart bull cases as quickly as we can here. If we'd hit bottom and been there for awhile, ignoring well made cases would be done at your own peril. Now? It's just so much noise to me. IMHO.

A press release, a website, newspaper articles that say places are selling or prices are going up is dismissed as propaganda, statistical manipulation, or an outright lie. I am not saying that such conclusions are incorrect. I am saying that the information is routinely given short shrift because we pay less attention to information about "how the world is" than to information that contradicts "how my model of the world is". It's natural, it's human nature, it's common as heck.

Why would this place be any different?

Astrid,

Don't get involved too much with them, it's a real quick way to destroy a friendship! I have told several people years ago not to buy; the ones that did as well as the ones that didn't continue to let me know how much the houses appreciated.

Best thing to do is to point them at some good bubble sites and if they still buy, let them! You have tried and that is all you are required to do as a friend.

I need to at least talk them into not taking a second mortgage (they have enough cash on hand for that, at least). That way, at least they have the option of signing the house back to the bank if thing get bad.

I think that is an excellent strategy as people are inclined to HELOC, get a second, or refi when they are in trouble. The only problem is they just gave away their "get out of jail free card" (I like the term purchase money mortgage put). I haven't found any great articles referring to non-recourse loans in CA, but this one is decent (I'm sure we'll be seeing more in the future). I wish I could remember my mortgage brokers response when I brought up "non-recourse" while doing the refi (probably something like, "but real estate always goes up, no worries").
http://www.ocregister.com/ocregister/money/homepage/article_1206268.php
"If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck."
That oughtta wake 'em up!

This is what I have been looking for. I am beginning to like Reuters. Eventually, the non-subprime sector will show some trouble too. In my mind subprime is now becoming totally passe.

http://tinyurl.com/22evg7

Countrywide Financial Corp. (CFC.N: Quote, Profile , Research) and New Century Financial Corp. (NEW.N: Quote, Profile , Research) led shares of U.S. mortgage lenders down for a third trading day as a new report suggested that even U.S. homeowners with good credit may be defaulting more often.
...
Moody's said delinquencies of 60 days or more on securitized prime "jumbo" mortgage loans rose to 0.323 percent in November, the highest in 2006.
Such loans are made to borrowers with good credit, but are larger than limits set by Fannie Mae (FNM.N: Quote, Profile , Research) and Freddie Mac (FRE.N: Quote, Profile , Research) so they usually carry higher interest rates.

Spring bounce is here!

http://www.housingtracker.net/askingprices/metro/California/SanJose-Sunnyvale-SantaClara/