patrick.net

Oh and more:

In Sydney, the time taken to sell a property has fallen to 82 days in May from 90 days in March.
(They used to get snapped up ON the day of auction - most houses used to be sold at auction to get the prices up but they are less popular since the downturn)

Good story, Jamie, and welcome to the party!

One person, maybe with a better memory, said that prices during the last real estate bust in the Bay Area only dropped on high-end homes and one-bedroom condos. Does anyone know if this is true?

Well, since I was living in L.A. (and still am) I can't personally vouch for what happened in the B.A., but I know firsthand that prices overall dropped in SCAL quite significantly (the CA statewide drop was 21% in real terms from 1990-96). In general, condos always get harder hit than SFRs during market downturns, largely because neighbors/lack of yard/HOA rules, etc. makes them relatively less desirable and therefore harder to sell. There tends to be a lot more apartment-to-condo conversions towards the end of a bull market as well, so oversupply is more of a problem.

Not sure if I agree about the high-end homes being hit harder %-wise. Actually, homes in "desirable" neighborhoods do tend to hold up a bit better, but, that does NOT mean that prices can't/won't fall at all during down markets. When prices everywhere are as out-of-whack with rents & incomes as they are now, look out below.

Actually here is a post-bubble anecdote from the Sydney market talking about the % downturn in the market http://tinyurl.com/dv6dt :

Some buyers are already reaping rewards, such as Adam and Stephanie Horne who secured a Blakehurst property initially valued at $1.2m for less than $800,000 – a 30 per cent drop.

"It was on the market for about a year," Mr Horne said. "They actually knocked back $1.1m a year ago and it went to auction five weeks ago and I got it for $791,000, so we were happy with that."

-- I wonder if we will be seeing this kind of story next year?

gabby-

Definitely interested in hearing more about the real estate investment seminar ‘victim’. Please post the link if you can find it. And thanks for the stats on Australia. They (and the U.K. seem to be about a year or two ahead of us on the Bubble curve). A glimpse of things to come, perhaps...

gabby, thanks for the information.

Do you think AUD (or NZD) is a good buy right now?

There are always many false bottoms in the housing market, because information is so imperfect. Saying the downturn is over is much worse than saying that "Bay Area housing crash continues." At least patrick is forward-looking. :)

Jamie, it depends on which downturn you are talking about. During the 2001 "correction", high-end homes got hit because of wealth destruction and one-bedroom condos got hit because single engineers got laid-off and they moved out of state. (It is not that single engineers are more susceptible to laid-offs, but they were more likely to move in that case)

The 1991 crash was probably more severe and broad, but I do not know too much about that.

I haven't been thinking about currency too much lately. Things feel a little odd in the Aus market right now. The locals are ranting about the dollar here: http://tinyurl.com/b395x (scroll down near the bottom and there are a few comments).

I have some money in AUD paying off an offset mortgage (pretty cool financing option) so I'm not going to send more over. I'm considering moving some money to some type of EU currency, not sure which just yet. I'm feeling the need to stay fairly liquid with some diversification. Just watching the stock market bounce around is making me seasick and I'm going for the more moderate risk investments at the moment. I think you could get really lucky if you knew what you were doing at the moment playing off of the uncertainty, but I don't have enough time or money to play that game:)

movin2davis, that seems to demostrate that housing supply can and do come out of thin air. Using future demand and current supply to justify price is very dangerous indeed.

gabby, I am not too bullish about Euro in the long run. The idea of having one central bank (hence interest rate) for multiple countries with completely different cultures and needs is questionable. At the current interest rate level, some countries (e.g. Spain) are overheating and some countries (e.g. Germany) are in near-recession. How can monetary policies be effective?

I think you could get really lucky if you knew what you were doing at the moment playing off of the uncertainty.

The problem is that no one knows what is going to happen... we are all speculating. :)

I do think Aus and the UK are good places to watch to get a feel for similar patterns that may signal similar events in the US market. I remember being out there a few months before the downturn trying to tell friends that the market had to go down and would go down soon as it all felt really wrong (like how I feel right now).

They thought I was completely off base and were convinced that the market would at most flatten out due to a lack of housing, immigration, the wealth in the market etc. I felt like an alien looking in as it seemed so obvious taht the wealth was all on paper and in debt, they were living these insane lifestyles (like the time I was offered cakes to have with tea at a friends that were some organic brand and were tiny things the size of a small cookie that cost $4.95 each!) and were oblivious to anything that might burst their bubble.

One theory on the slight bumb recently is that people are so scared of a recession they want to buy before they lose their jobs. It's really starting to look bad over there.

One theory on the slight bumb recently is that people are so scared of a recession they want to buy before they lose their jobs. It’s really starting to look bad over there.

Isn't it counter-intuitive? Won't they be on the hook for the mortgage as they lose their jobs? Don't they lose financial flexibility byentering the market now?

Peter P - I meant other EU currencies not the Euro persay. I agree, the Euro has too many constraints on it right now and the whole experiment is looking a little fragile. I'm thinking more the Danish Kroner or maybe still the pound. I'm only going to invest if I'm doing something creative with my money but am still working out what to do.

On stories - I was at a friends b-b-q recently and he was excited as he'd bought a piece of land in Florida with a friend as an investment. Nothing built on it, not ROI and an interest only loan. He is a QA engineer by day and his wife is getting her real estate license. He is also looking for other great investments. Another thing I ran into recently while looking at houses was that two of the 6 I looked at were owned by people holding a new real estate agent licence. Sound like a disaster waiting to happen?

Sorry for the typo's tonight. Long day at work and all;)

Dipanjan:
I read somewhere that, on average, refinancing and cashing home equity were not as big in Australia as it is in US. Do you have some data on that?

I'll look but keep in mind that you can't get 15-30 year fixed rate loans. They don't exist and seem to be a fantastic bonus in this country. Most people get 3-5 year fixed that then turn into variable rate interest loans. The current interest rate on loans is around 7% currently so it's also a lot higher than here. People don't typically re-finance like they do here as they have the mortgage costs to deal with and it's not so advantageous due to loans not staying fixed. Still, people are doing a lot of second mortgages. I know a couple of friends who have sold their equity for additional mortgages and spent the money on lifestylin'. People over there have a great love for enjoying themselves and are really spending up large. Things cost a lot more as well. Food and general commodities are really expensive.

>Also I think Australian economy being more commodity and export driven will probably withstand the burst better than US where job growth in last few years has been mostly confined to housing - construction, mortgages, realtors etc. What are your thoughts on that?

The US market has a lot of foreign investment, more so than Australia but it's really hard to know what will tip a possible downturn in Australia. Personal debt is incredibly high over there and with home loans not being fixed for long periods of time and interest rates continuing to rise I think there will be a lot of pain. Even though I'm not a big fan of John Howard he appears to have kept the economy going for a long time but the locals think things are really looking shaky and they never had the downturn we did so in some ways it's just thier turn.

gabby, I am looking at some european currencies too, in particular, CHF and NOK. I am still doing some research but my wife is really pushing me. :)

Some people think that they can flip houses at a lower cost with a real estate licence. This is true but a bad flip will still be fatal.

Some good threads from the locals regarding predictions on the Aus. property market and economy (mentioning commoditities amongst other things)

http://tinyurl.com/bbnfw

The houses the real estate license sellers are trying to move start off too high (trying to prove their metal in being a successful flipper) then they have to lower them but the houses have been on the market for a while and don't get enough attention to command a great price so these people seem to do a little worse in the markets from what I've observed.

Peter P - I'm pushing myself to diversify so I don't have all my eggs in one basket here. Your wife sounds like a sensible woman, better than spending it on high fashion right? ;)

Your wife sounds like a sensible woman, better than spending it on high fashion right?

Absolutely. I am quite fortunate. ;)

BTW, many flippers are quite detached from the reality. They somehow think that they are ask for any price and still get a bidding war. It is going to be ugly...

Did you guys notice another big jump in inventory number in the Bay Area? The list that I am looking at is expanding at an unseen rate (~25% increase in two weeks. That particular list contains starter-homes in the larger silicon valley. (IMHO, these homes will be hit first due to buyer exhaustion.)

Davis: all the pretensions of the Bay Area, plus the Sacramento weather.

Truer words were never spoken. 106° today. Auuuuuuuuuuugh!

On the other hand, there are currently 1091 listed properties within 10 miles of Palo Alto. When I sort it by price in ascending order, the first 600K+ property used to be around the 135-th entry (a few weeks ago), it is now the 170-th entry.

Looks like cheaper properties are starting to sit and this may explain the higher median price as well.

Feel free to poke holes in my theory/observations.

Davis is a rather safe place. However, restaurants are not that good. My biggest complain is still the occasional *think* fog. It is lovely otherwise.

Actually, I like Davis too. But the heat the heat.
Maybe it's frying my brain and I'm having my own *think* fog, but I don't really get what that means.

Thick fog. Sorry for the typo.

No problemo.
You guys are so smart, that I tend to think you're making some reference that's totally over my head.

My philosophy is there are no stupid questions. And if there is one, I'll be the one to ask it.

my point is that Patrick still believes is bubble after wasting 150K for rent.

How much interest he would have wasted if he had purchased?

Let's assume that his house worth 600K five years ago (meno park did not have crazy appreciation), at an extremely optimistic 5.5%, he would have wasted 165K in loan interest only.

If you insist that a bubble does not exist we will not spend time to convince you. Believe whatever you want.

Sigh…another fine example of Bubblehead talks, you can dream about buying below 2000 price, for your lifetime. You have missed the train, so please snap back to reality and learn to live with your regrets.

I remember that someone says that prices will go back to 1887 level, inflation adjusted. Since real estate prices historically track inflation almost exactly, this is quite possible indeed.

BTW, 1887 prices and 1997 prices are probably the same inflation adjusted. ;)

1200/month is too low for a 5 bedroom house because it probably does not even cover the interest of the construction cost. :)

Let's say it is 3000sf. At a very low cost of 100/sf the construction will cost 300K. Monthly interest payment for a construction loan would be 1500 @ 6%.

What sources of news and information do you use to form and sustain your opinion of the Housing Bubble? What sources do you believe, and what sources are not believable?

As Fake P said, I probably get my information from the dark side of the force. ;)

You already know that Prat gets his from the future using a time machine.

"San Diego has definitely had a “soft landing” from a hyper inflation market to a more stable and sustanable market condition which is serving both buyer’s and seller’s well."

May 1 1930: Herbert Hoover was quoted in the NYT: "While the crash
only took place six months ago, I am convinced we have now passed
through the worst and with continued unity of effort we shall rapidly
recover…There has been no significant bank or industrial failure. That
danger, too, is safely behind us."

I have two bubble stories (firsthand) In-laws listed home on golf course in Summerlin in Vegas - drove to North Carolina and bought a home to be near their kids...... problem is, the house is still listed in Vegas. It's been five weeks.

Great friends live in California 40 min South of BA - bought a house less than two years ago - their father is ill in Texas and they want to sell, take the money and run out of state. She's a Realtor and predicts a strong correction - even a 5% dip will take out huge chunks of their perceived wealth. They have had it listed for over six weeks and I believe they've just lowered it 20K - still no takers. House payment of nearly 4K a month .. not including taxes and insurance. Ouch.

Great friends live in California 40 min South of BA

Let me guess... Hollister?

I have some friends who wanted to move up into a bigger house. They actually should have been able to move up. They make a combined 300K a year and bought their house before the housing boom and refinanced the house so their payments were only $1600 mo. (really nice 4b/3ba in an upscale neighborhood). Sounds great right?

Well, they went a little nuts with the equity in the home. All new appliances (house didn't need it) $10,000 spent to faux paint the kitchen cabinets (didn't need it), new cars, trailer for camping, fake boobs (didn't need those either), you get the picture. Long story short, they can't afford to move up to a bigger home, and I can't even begin to guess how in debt they really are because they also eat out several times a week, buy lots of new clothes and so on and so on. What should have been a really good position to be in could be ugly before too long due to all that large livin'.

I don't know how common this is, but I doubt it's all that UNcommon.

In-house ATM, right?

I have a business idea: let's make in-house ATMs (literally)?

Banks can put semi-mobile ATM machines (like those in restaurants) in people's living rooms. Through a regular phone line and an "automatic home equity process" homeowners can literally withdraw cash from the ATM machine. The green one, you know.

Imgaine this in "As seen on TV".

Of course, the in home ATM will have to come in designer colors so it doesn't clash will the newly bought decor.

Yeas, stainless steel ATM machine, right next to the kitchen, with matching granite on top.

I have another friend who's doing basically the same thing, but less further along in the debt load. They sold their crackerbox house in So-Cal, and bought a much bigger, nicer one up here. The husband is trying to get a new business off the ground, but that hasn't stopped them from buying a new boat and some new furniture. My friend told me her husband got mad at her one month because she'd spent $10,000 that month. This is just on stuff, not the mortgage or any of the utility bills. I just don't get it.

Oh, must have the granite.

Home equity is too tempting, no? It is self-financing - one can take an equity loan to pay for itself, with many other nice things, until it doesn't work any more.

Credit is available only when you do not need it.

This may be a good topic for the future:

“What sources of news and information do you use to form and sustain your opinion of the Housing Bubble? What sources do you believe, and what sources are not believable?”

TWIT - Actually, that was kind of the idea behind "I See Debt People", but I like the added twist of credible vs. non-credible sources.