patrick.net

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/

CB,

Good point. Let me clarify. The price for the house, as well as the mortgage, was 7 times their annual gross income. It's not that they can't afford it, strictly speaking. Just that they will be eating ramen 3 times a day for the next decade or so.

In general, I think the rule is mortgage = 3x income. But that's taking into consideration that you're putting 20% down, so the purchase price itself isn't that far from 3x income.

@StuckInBA,

NEW shares are still "easy to borrow" if you elect to short as opposed to purchasing puts.

-Not investment advice

New thread: Wells Fargo’s COO: “we never get into the chain of ownership”

eburbed :

Are you pointing to that 5K increase ? Isn't it still the same as what was in Dec ? BTW, DQ is ahowing a -3.5% for San Mateo and -1% for Santa Clara in YOY median prices. I know it's a lagging trend v/s leading housing tracker, but it's a trend of confirmations not wishes. I fully expect to see a -ve YOY through the end of summer.

Can we still post to this thread?

ajh Says:
It’s not just Fairfax, the front page of today’s Daily Telegraph also takes the same line.

Yeah, I know -- I just wonder who is feeding them the stories, and whether it's a genuine 'conspiracy' of the REI, or just the media panic of the moment. I wouldn't put it past them to fabricate a crisis then twist the papers' arms to run a story -- based on heavy RE advertising expenditure with the media...

Funny thing is, at the same time tonight’s MSM news is talking about the rise in mortgagee auctions, especially in the outer suburbs of the major cities (’except Perth’). That means problems for people who bought a year or 2 ago.

My take is that the low-end rental shortages are real, and may well be due to the speculation of the last few years. The new owners are now, even applying the absurd rule of a thousand, asking for considerably higher rents.

Yeah, what worries me is that recent 'investors' who bought at the top will jack up rents, which raises the bar for the whole of the 'market', so longer term LLs are then entitled to follow suit to make even more profit from a place perhaps already paid off.

In fact, where I live in Canberra I suspect that a lot of the new luxury apartments bought by investors are not being actively marketed for rental at all. Tenants are ‘too much trouble’, and why bother when the capital gain dwarfs any rent and you can claim all your expenses (which you can in Australia)?

You can offset the losses you incur against your income, which includes rental income. If you kept the place empty, but insisted it was an investment, then you could claim all your expenses without much offset, being mortgage interest, rates, strata levies, depreciation, etc -- but if you did it for a long while, the Tax Office on an audit might ask the question 'why can you not rent this place out?' and disallow the whole lot. When you do your taxes, it's not worth fiddling it if it won't pass an audit -- and the ATO has been increasingly auditing 'property investors' lately and disallowing a whole lot of bloated depreciation schedules and other deductions. People who cheat on their taxes or can't substantiate major deductions and think it's 'free money' are just idiots -- they may as well just hold up a 7/11 or something in front of the in-store camera, as the ATO runs frequent 'exception reports' on large or unusual deductions and conducts frequent audits.

The capital gain is not dwarfing any rental returns at pleasant, the market has been plateauing for a couple of years now, and a heavy loss is a heavy loss every year you are running with it -- you can't be bleeding on mortgage payments with no offsetting rents unless you really are mega-rich -- and if you are mega-rich and believe 'it only goes up' you clearly didn't make your money out of your own brainpower or business acumen...

If you check my blog, ajh, there's a slightly older set of articles on much higher (record) foreclosure rates for the last 2 years, and the fallout in the western suburbs from all the people who bought investment properties at the top of the market cos they went to the seminar -- all the richie riches in the east and north suburbs timed it much better, buying at the start of the boom and unloading at the top... plus places selling for 1/2 or 1/3 of their 2003 prices...

Ben's blog also has some remarks on international trends on f/cs, I flicked him the stats for Oz to round them out, not sure whether he has amended...

Interesting news -- nobody buying houses and yet rents are going up:

Knocking the wind out of sales

http://www.news.com.au/dailytelegraph/story/0,,21205901-5006007,00.html

Housing Industry Association figures show the number of new houses sold in NSW over the past 10 years has slumped by 50 per cent.

The trend continued last year with 14,121 new homes sold around the country, compared with 14,175 the previous year and 39,860 in 1998/99.

Half-empty streets and rows of for-sale signs are common at some of the multi-million-dollar estates in outer Sydney as developers turn to lavish gifts and no-deposit finance to attract buyers.

Some estates are offering cash incentives of up to $10,000, no-deposit finance, fixed interest rates or free extras such as air-conditioning.

Simon Tennent, executive director of housing and economics for the Housing Industry Association, said Sydney prices were driving young couples and families out of the homebuyer market.

"I'm not surprised (at the fall in NSW), with the price of land in Sydney's growth areas,'' he said.

"And at the end of last year, the three interest rate rises and nerves over other prices, like petrol, just took the wind out of the sails.''

HIA figures show the median block of land in Sydney costs about $325,000 while a similar-sized block in Melbourne costs only $150,000.

"I'm not surprised that some estates are struggling,'' Mr Tennent said. "These are great quality homes on excellent estates, but do the simple maths and you can't afford them.''

The Sunday Telegraph visited several major developments last week. One street in Prestons has 19 houses for sale. At another development site, only 32 of 54 lots had been sold - five in the past four weeks.

Michael McNamara, of Australian Property Monitors, said the new estates had become an unattractive option for those working in the city.

"People just don't want to live there,'' he said. "It's so difficult to get from the outer suburbs of Sydney to the city.''

astrid, you might ask them if they might want to consider something in a more affordable nearby city with still good schools, like Menlo Park. Homes are still very expensive there, but probably 3/4 of Palo Alto. I see plenty of very nice homes there in the 2200 sq ft + range for the price your friends are considering. Hopefully, they will buy something smaller though and lower their risk to the housing market.

HARM, I have never been as pessimistic as most of the posters here. Last January we all made guesses as to far how housing prices would go down in 2006 and I picked the smallest number at 10-15% for which I remember Surfer-X cursing me. I guess he curses everyone, so I don't really take it personally. Actually, I should probably be proud.

I predicted then that the most likely outcome is a small initial drop and then a longish period of zero nominal gain and inflation in the 5% range. 5 years of that plus a 15% initial drop puts us down 40%, which is probably about where we "should" be, in my book. From 1991 to 1996 home prices went down 10% while inflation was about 30% total. A repeat of that would be the most likely scenario, in my eyes.

I actually think now that inflation will be a bit lower and the period of stagnating prices much longer. As long as money stays cheap and unemployment stays low, I just don't see a big rash of home mortgage delinquencies in the near future. A recession could change everything, as would the end of cheap money, but I see no reason to suspect that either of those is on the near term horizon.

The comment about "buying vs. renting" was just to let the guy know that he really had to think about a bunch of different things before trying to do the math and that most of them were hard to predict, like the inflation rate 10 years in the future. I did say that he would have a tough time finding anyone who posts here telling him that this is a good time to buy.

I have always been one of the least pessimistic posters, but I am also a homeowner, remember. I have decided that the best course of action for my wife and I would be for us to sell the bottom unit in our duplex as a TIC to lessen our exposure to the market. Now all I have to do is convince her! I pointed her to RandyH's bubblizer and since she works in Real Estate finance, I think she will see the light.

I will let you know how it goes.

astrid, are you sure your friends aren't looking in the $1.5M range? For some reason, there are a couple of pretty nice large homes in the $1.5-1.7M range in PA but everything under $1.5M is crap.

It is like that in a lot of places in the Bay Area. I don't know why there is such extreme price compression. It might be a consequence to everyone having some "move up" money but no one having *that* much.

Jimbo, I've never considered you a troll, but I do like to curse ;(

Yeah, I am not offended, though I was kind of taken aback at the time. It is just your way! :-)

kind of a rimshot, but http://www.tmz.com/2007/02/14/annas-nanny-smith-underfed-baby-to-make-her-sexy/