patrick.net

"Their data, methods and economic theory is sound if their contextual assumptions are correct."

This is the Achilles heel of the entire study.

IF we ignore second/multiple investor-purchased homes and the booming condo-flip market...
IF we ignore systemic credit risk...
IF we assume that NAAVLP serial refinancing can continue indefintely...
IF we average in midwestern and southern states with Bubbly regions and only use the neg-am figures when calculating "monthly ownership burden"

...then there's no RE asset bubble.

So what they're really saying is, if any of these assumptions is wrong, then yes, there IS an asset bubble. Am I missing something here?

NAAVLPs are even a bigger problem now that they aren't nearly attractive now versus 2 years ago - may as well get a 30 year fixed - er .... um .... damn, still can't afford that one either! ;-)

"And folks, the Fed raised rates today, and the long bond yield remains unchanged." --HITMAN

That's because todays rate hike was priced into the bond market 6 months ago you fucking moron. Do you really think that any bond investor with half a brain was taken by suprise by todays rate hike, especially given that the fucking FED has been telling the market that they are going to keep raising rates over the past year and a fucking half?

“And folks, the Fed raised rates today, and the long bond yield remains unchanged.” –HITMAN

By the way Shit For Brains, why do you think the 10-year rate closed up about 10 basis points YESTERDAY?!

HITMAN,

Thanks for the indirect props! ;-)

As to your question about pessimism being the cause for the dreaded scourge known as "renting", I'm no sociologist. I'd definitely say that there's evidence for a positive correlation between being lower income and renting (duh). Now, if being low income makes people feel generally less optimistic vs. high income people (plausible), then it's possible that renters are in general less optimistic overall than homeowners.

However, even if this chain of assumptions is broadly true, you are attempting to create a false causality/tautology here:
Pessimism causes renting

Rather, it should be:
Low income causes pessimism. Low income people tend to be renters, so renters tend to be more pessimistic than owners.

Not saying I agree with this logic, but this at least makes more sense.

Regardless of whether or not renters tend to be poorer or more pessimistic as a group, I and most other non-owners here (there are also plenty of owners on this blog) have long maintained that we intend to be owners one day, when home prices are in line with economic fundamentals once again. We're not anti-homeownership (straw-man argument), we're just anti-lighting a match to our hard-earned money.

"Exactly. I’m glad you are in agreement with me that the argument about ‘rising rates’ is going to doom the housing market is totally unfounded, simply because rates aren’t rising."

Too bad however most buyers have NOT been getting 15 and 30 year fixed .... quite the opposite actually in California.

Too bad however most buyers have NOT been getting 15 and 30 year fixed …. quite the opposite actually in California.

Yes, the Fed funds rate hikes affect those with ARMS directly, and such loans constitute a clear majority in CA (and other "frothy" regions") in the last few years.

Even so, I don't think rate hikes will be the trigger here. I believe stalling/negative appreciation will. Once flippers realize they cannot make 20-30% simply by holding the property a few months, while they burn through available cash (remember that term: "burn rate"?), they will rush for the exits en masse. I believe this is what we are starting to see play out right now, as inventory is piling up along both coasts.

The yield on the 10-year bond was 4.39% last week, and closed at 4.52% yesterday:

http://finance.yahoo.com/bonds/composite_bond_rates

That's 13 basis points in a week. If I am wrong as to the exact day of the move, oh well.

"Remember, most talented individuals who work at the top banks and money management firms finish by 25." --HITMAN

I bet that makes you feel like shit when you look back on your life old man. What kind of 45 year-old fucknut comes trolling to discussion boards anyway?

"Remember, most talented individuals who work at the top banks and money management firms finish by 25." --HITMAN

I love it. Pathetic old man wants me to fail. Keep it coming, more fuel for the fire. Oh, I must be such FAILURE because I decided to start the CFA program now that I'm 26. Keep it coming old man.

“Remember, most talented individuals who work at the top banks and money management firms finish by 25.” –HITMAN

Keep it coming you motherfucker. I studied for 2 hours last night and I will study for 3 tonight after getting this motivation from you. Keep it coming.

@SFR,

Please remember that by allowing personal barbs to offend you and reacting, you are only encouraging more of the same.

Calm... focus on peaceful relaxing thoughts...

“Their data, methods and economic theory is sound if their contextual assumptions are correct.”

Let's assume that real estate prices always go up, I hereby conclude that real estate prices always go up.

"Calm… focus on peaceful relaxing thoughts… " --HARM

Deeeeep breath. "Cool blue ocean. Cool blue ocean..."

I shall now leave the blog and relax. Someone PLEASE delete the troll before I get back.

Hitman sounds an awful lot like our other sushi loving troll.

Me?

HITMAN, is it PRIME?

From Wikipedia:

INTERNET TROLL

"In Internet terminology, a troll is a person who posts rude or offensive messages on the Internet, such as on online discussion forums, to disrupt discussion or to upset its participants. "Troll" can also mean the message itself or be a verb meaning to post such messages. "Trolling" is also commonly used to describe the activity."

Oh, I must be such FAILURE because I decided to start the CFA program now that I’m 26. Keep it coming old man.

Assuming you even want to be an IBanker, SF Renter, don't be discouraged by HITMAN: he's full of shit. The average age of IBankers completing Associate level is closer to 29-30. Most top folks in this field take 2 years out to complete their Ivy MBA right around 26. More importantly, if you do the right internship and get the right creds, you can engage at any point up to your mid-late 30s (but I'm not sure why you'd want to). Many from my cohort were non-traditional students who went into IB well into their 30s. Just be sure it's something you want. IB types can be hard to swallow.

Getting into PE is quite a bit harder, but that's more of a cyclical thing. Getting your CFA is a good bet no matter what. The CFA and CPA were rated by the FT last year as being the two most important creds in finance, greater than all but the very top MBAs. With the CFA you can move into a wide variety of operational finance roles in corporations. And these jobs pay quite well and are in heavy demand.

Regarding the Columbia/Wharton RE Econ Study:

I tend to agree with the reactions you guys have had. I would point out that removing speculators and condos is not necessarily damning. They are contending that the speculative & condo markets are different markets (as is the vacation home market). This is what I meant about contextual assumptions. It is quite possible that these segments do not move in perfect correlation, being that primary residential RE is much more sticky.

That said, I still agree that the credit overhang is the problem pushing the whole model towards threshold disruption. I just wanted to point out that there is a scenario which is logically consistent that yields a "soft landing".

Is posting anything that disagrees with housing crash fanatisicm deemed “offensive” or disruptive or upsetting to participants on this site?

Barnum, given the way you've phrased the question, I think it's safe to assume you already know the correct answer: no.

Yes, SFR went "off" on HITMAN, which is why he received a calm advisory. I'm well aware that HITMAN didn't use any profanity and managed to engage in a relatively polite give-and-take discussion (notice that his remarks weren't censored?).

We're not RE-hating fanatics here, and despite the odd rant or outburst here and there (aren't we all entitled to vent now and then?), we welcome a diversity of viewpoints. There are plenty of "reasonable bulls" who post here regularly: Zephyr, Jack, Face Reality, Mr. Right, etc.

@HITMAN

Exactly. I’m glad you are in agreement with me that the argument about ‘rising rates’ is going to doom the housing market is totally unfounded, simply because rates aren’t rising.

Are you, in all your claimed financial engineering prowess, asserting that only long rates affect the burden of ownership (either economically or financially)? So nominal current rates are irrelevant? What are you using as r0? Hmmmm...

Hint: broad, generalized statements are neither particularly informative nor entertaining.

Answer: Rising current rates and rising forward rates both affect RE prices as determined by net ownership cost burden, both independently and dependently.

"After that, we opened up the Sunday paper and saw PAGES AND PAGES of open houses - it was crazy."

And this is still supposed to be the "slow" time of year LOL!! Hold your breath when you open the paper come April and May!

With the CFA you can move into a wide variety of operational finance roles in corporations. And these jobs pay quite well and are in heavy demand.

One needs a fews years of experience in finance to be granted the CFA charter though. Since I am in Tech, should I set myself up as a independent broker? Does that count? I may need that to take some series X exams anyway.

One more thing Linda:

Neighboring San Ramon, as of this last Sunday, now has 4 large complexes being converted to condos on top of all the new construction - the point being that the open houses and MLS are very much undercounting the inventory that exists right now.

@ Linda: congrats and admire your concern for your canine loved ones.

Now for some RE humor....

It was so cold out today that I saw a Realtorâ„¢ with his hands in his own pockets.

@Linda,

Given your circumstances, I think you've made a wise decision and have a healthy attitude. Best of luck to you.

Bottom line is, people should not feel pressured to gamble on their primary residences one way or the other. I hope someday RE speculators & condo flippers will be regarded by the public in the same light as pond scum and corrupt lobbyists.

Presumably the happless asset inflators will seek to keep their kids in the same school district

Why not rent a 3BR apartment in Cupertino. Do they HAVE to own?

HARM, Randy, SF Renter what do you guys think? or do you not fully support the crash thesis of Mr. Renter himself Patrick K.?

To me, the rent vs. buy equation and the cap-rate to treasury yield ratio are sufficient justification for the bubble case. Note that I consider affordability as merely a tipping point.

No. We are staying put in our little house. We are going to sit back, pay our mortgage every month, and watch the fireworks. Whatever happens, happens. Que sera, sera. It’s not enough to try and chase money your whole life. We didn’t buy the house to make a killing. We bought it to live in it.

I would do the same.

"I’m not even sure the 10-yr yield will break 4.75% this year since we know the end of the interest rate cycle is this year."

Well, there's some argument that the 10 year will soar once the fed stops raising rates.

"Either way, people on 1-3 year ARMs are simply refinancing into 5-10yr or 30yr fixed b/c the rates are LOWER now, given the kink in the yield curve. The US consumer lives."

No not really - they couldn't qualify for a 30 year fixed 2 years ago when they bought so what makes you think they can refinance into one now?

What happens to rents in your crash scenario?

I think rent should more or less track inflation.

IMO, rent increase will account for 10% - 30% of the price/rent mean reversion while price decline will account for 70% - 90%.

barnum:

You obviously weren't around in 1982 - very high unemployment, very high interest rates, big recession - you can't generalize that high interest rates automatically equals a strong economy. 1982 was the pits.

barnum,

If I'm interpreting what you're implying correctly, then you might expect rents to trend upward as the housing market cools/deflates, due to increased demand for rentals, as marginal buyers shift away from purchasing with NAAVLPs. This makes some sense, and we may well see some upward aggregate movement in rents above inflation in years to come.

However, for rents to rise high enough --assuming home prices don't fall-- to make purchasing a reasonable idea in Bubble-heavy markets (so Rent vs. Buy calculations at least break even) would require a 200-300% nominal rent increase in those markets. Where is this going to come from --sharply rising incomes? Unlike homeowners, renters have to come up with real money every month, not NAAVLP "monopoly money". This is one of the reasons why rents are historically a much more reliable indicator of fundamental housing demand than sale prices.

Added to this is the large amount of unoccupied investor-owned housing stock in said Bubble-heavy markets. When investors cannot sell (or refuse to sell) in a down market, guess what they are likely to do? Rent it out. This should increase the local supply of rental stock available and at least partly offset new demand. Also keep your eye on recent apartment-to-condo conversions. In a down market, there will be little reason NOT to convert them right back to apartments.

My money's on sale prices coming down a lot more than rents going up (assuming Heli-Ben doesn't hyperinflate, that is ;-) ).

Looks like the Google dot-bomb finally exploded!

Looks like the Google dot-bomb finally exploded!

Let's see what happens tomorrow morning.

Short-sellers: beware of a rally that may take it back to 430.

NOT INVESTMENT ADVICE

vacancy rates and rents in the bay area…HARM, Randy, SF Renter what do you guys think?

I'm not willing to hazard a prediction on rents, although I generally agree that they *should* tend upwards as the bubble deflates for the reasons stated. What I do predict is that the rent-to-mortgage ratio will narrow. This doesn't imply direction, just that mortgage/ownership comes down faster than rents. (It's all in the first order derivatives).

@HITMAN

It's hard to describe what I do for a living, besides serial-entrepreneur and independent entrepreneurial analyst. When I'm not starting a company of my own I'm helping some VC and/or entrepreneur do hyper-analysis on their market. This is how I got pulled into the whole "competing against the NAR/CAR" thing.

Everyone gets an MBA to change their career on some level. To give an honest answer, I was a very successful entrepreneur/CTO/software architect who got fed up with getting screwed by VCs and IBs, so I got myself into one of the top schools to crack their code. I happily discovered an extensive network of incredible folks along the way.

Note, for a 20% drop from *peak* Patrick “I want to swap your house for my apartment” Keliea needs sub $600K in SF and $500K in Bay Area. I guess if it is going to be a crash, the Patrickists would believe that these values are perhaps on the high end - more like sub $500K in SF and sub $400K in Bay Area?

The "crash" will take years, but IMO much decline will occur within 2 years.

I believe Bay Area SFH prices will be down 15% - 40% while condo prices will be down 25% - 65%.

We do not care much about the median because it depends too much on what is being transacted.

I guess if it is going to be a crash, the Patrickists would believe that these values are perhaps on the high end - more like sub $500K in SF and sub $400K in Bay Area?

Why are these number unbelievable? They were even lower a few years back when there were more jobs in the area?

"I’m glad you admitted your mistake that you were off. I know a lot of people who confuse 10 basis points to mean .01, instead of .1 of 1%." --HITMAN

What are you saying? A basis point is NOT 1/10 of 1%, it IS 1/100 of 1%. That would be 0.01. Because 0.01 X 100 = 1.0. That's why a basis point is 1/100 of 1%. Documentation:

http://www.investopedia.com/terms/b/basispoint.asp

That's why I said this before:

"The yield on the 10-year bond was 4.39% last week, and closed at 4.52% yesterday:
http://finance.yahoo.com/bonds/composite_bond_rates
That’s 13 basis points in a week. If I am wrong as to the exact day of the move, oh well."

And I'm not admitting a mistake, because that is a correct statement. So what are you saying again?

"One needs a fews years of experience in finance to be granted the CFA charter though. Since I am in Tech, should I set myself up as a independent broker? Does that count? I may need that to take some series X exams anyway." --Peter P

Peter, what I currently do is work for a software company that creates and supports financial management software. A Lot of back-office management type stuff, portfolio reporting, allocation modeling, billing, etc. Finance and tech are industry sectors that are co-dependant these days. I would recommend that you leverage your tech knowledge along with your CFA studies and first make the move over to a tech company that specialized in financial software, perhaps a 401K plan administrator or some such, they all have web portals nowadays. This will begin to fulfill the finance experience you need for your Charter. If your designing or supporting financial applications, that counts.

1. Natural supply restrictions - I know that theoretically the space market has no bounds

Think Japan. Any supply restriction would have been discounted by the market long time ago. It does not explain price actions.

2. Willingness of people to (continue to) pay a disporportionately high percentage of their income toward deeded property (not renting) - call ‘the pride of homeownership’

Willingness? People base their decision only on price action. When the market stops shooting up (like now), this willingness will be gone. The sheeple effect can easily reverse. When the market is heading down, we will be talking about people's unwillingness to hold a depreciating asset despite mortgages being cheaper than rent.

3. The income is not going away here and it does trickle down. Talk to commercial realtors - it is net office absorption - these are jobs. We are long passed bottom in SF.

We are past bottom. But housing prices never adjusted back to the fundamentals after the bust because Greenspam delayed the inevitable.

Do you even understand concepts like bubbles, trends, and reflexivity?