patrick.net

To BA Or Not To BA,

Speaking for myself only, when I talk about hard vs. soft landing I'm talking about a macro perspective. I don't claim to know for sure there will be a hard-landing, but I think it's likely. However, this is a macro thing. Even in a hard landing not all areas of the BA will deflate at the same rate. What I'm saying is that during this great run-up the old saying that real estate is location, location, location became less true. Areas that shouldn't support $1M homes had homes selling for $1.2M. As it corrects, those areas will get hit "hard", whereas traditionally wealthier areas probably will get hit "soft".

As the bubble pops again people will focus on location as their three most important factors. Homes in good places will do much better than those in not so good places.

Randy H,

And as Peter P is fond of reminding us, the market is about 97% psychology. B/c most of the other major metro areas are already in various stages of collapsing the BA has been somehow awarded the unique status of "flight to quality". In the early stages of the tech wreck the junk sold off first (dot coms etc.) As it became more clear that fundamentals were clearly lacking the next wave of the sell-off took place and finally when "flight to quality" meant flight to another asset class altogether (in this case bonds and REITS) it didn't matter how solid your balance sheet was or how many consecutive quarters you'd paid or increased your dividend, it was now your turn in the barrel! This is a large part of the reason that our little chirping troll teed me off earlier when he pointed to very specific areas of the Bay. Right now I'd say we're about in the "April 2000" stage for the housing crash.

Skibum,

In this Haiku thread,
it was the best
I have so far read.

Are you gouys implying that BA RE prices won’t crash and we will actualy get a soft landing ? Or you are just investigating the probability of this happening ? Specifically for some areas or entire BA ?

Some price segments in some parts in the Bay Area may not correct as much. The rental sentiment in Lower Peninsula for appears to be heating up. It is not as bad as 1999 because low-end units are still stagnant. This seems to confirm the Google effect.

On the other hand, I was touring some complexes and I was told that there have been more than a few former homeowners turning renters.

Five seven five, the
Price of my crib? Hell no, foo,
It's silly Haiku.

Me have big car, drive
Very far and live in it
Too. Me very Coo!

You are not smart, kid
You hocked your future for dirt
In this here valley.

My wife Sally is
Cute, lazy, and plump: she sports
a supersized rump.

Damn it all, I quit.
I don't give a flying sh-t.
Wait till it crashes.

The dashes become
dots. The tots become teens. The
Stock market deflates.

An algorithm
For disaster is status
quo. Quid, pro quo...Ho!

I've become more dumb.
Literacy is as rare
as children here, see?

The whole lie exposed.
Buttocks of economy
Moons the light of day.

The masses cower
Under their covers for help
As housing plummets.

I must stop this now.
For I'm hungry and want lunch,
Or tea and crumpets.

In the end a lot of the most "laughable" properties that are being offered actually have the least to lose! Some guy that bought a dump in San Jose or Oakland or wherever and never put a lick of work or a dime into improvements heard about "why we are going ga ga over real estate", listed at a ridiculous price (of course not selling it) but WTH, the guys mortgage is like what, 125K anyway. It was wreck back then and it's more of a wreck now. As long as he didn't draw against that "equity" no big deal. Folks that have bought up over the last 1-3 years, different story.

I must admit, I was a bit surprised to read your comments.

I can be very surprising sometimes. Don't be surprised.

In the end a lot of the most “laughable” properties that are being offered actually have the least to lose!

Laughable properties are more volatile. Until recently, people were buying up crap just to hold on to something.

Peter P,

I was referring to some of the laughable listings on the "overvalued" blog and find it hard to believe that the 400 sq. ft. home they showed in Santa Cruz 875K could become that neglected in the span of a few short years. It looked more like DECADES of abuse. But you're right, if someone bought a dump thinking major renovation or tear down just to "get their foot in the door" yeah, they're in for a spanking.

It looked like the "re-fi" house from fantasyland mortgage for crissakes!

Right now I’d say we’re about in the “April 2000″ stage for the housing crash.

Sounds right. Again, April is the cruelist month.

Just think - in a declining or bottomed-out market, do you think anyone will want to pay 1/2 million $$ for a bungalow in south-central LA??

Half-a-mil is a lot of money. It is all about easy money. There will be heartbreaks, lots of them.

Skibum,

The types of listings that I believe I was referring to belonged to "Rip Van Flipper" where it looked like the guy had slept for a hundred years woke up all of a sudden and decided if everbody else was makin' money then he should be able to cash in too! I think Randy H would refer to this as a "me too" listing. Just throwing my hat in the ring kind of a thing. Some of them I've seen didn't even bother to mow the lawn let alone slop paint on. Now that's confidence!

Peter P,

"There will be heartbreaks, lots of them"

I couldn't agree more. It may well tun out that other than "cashing in" and walking away (or staying put on the sidelines) that it's ALL heartbreaks! I was reading that over 1/2 of the mortgages in the country are under 3 years old. My guess is that if someone went to the trouble of doing a re-fi that they went to the trouble of taking the equity out. People keep harping on equity like it's a totally personal thing. It can be, but if your neighbor has none and he's selling b/c of it that won't be of any help to you.

Skibum,

You bring up some good points. Who knows how much equity extraction has gone on in some of these neighborhoods? In more traditional times it would have been limited to the incomes in those areas, but now with shady appraisals and creative financing it just may be possible that someone actually owes 1/2 mil on a South Central bungalow! I'd believe it! I'm sure we'll hear "poster child" cases as this unravels but some of the asking prices appear to an Oregonian anyway that they were just drawn out of thin air.

DinOR,

Good metaphor to the equity markets circa 1999-2002. Similar to that fiasco, what I mean by "soft landing" zones is simply that parts of the BA will probably come out with between 0% and 15% nominal losses (bigger real losses as infl rises). It's the dot-coms of houses that will see the +50% nominal losses.

Take a nice, not super wealthy but quality neighborhood like Menlo Park west of El Camino. Good schools, coherent community, lower turnover than nearby Redwood City or Mountain View, and the bulk of housing stock is owned by very high income families with significant wealth beyond just their home equity. As prices drop fast in Redwood City, prices in Menlo Park will be very sticky on the way down. Many people won't have to move in a bad market because they can afford to wait it out (not all, some will leave for logistic job reasons and sell off the peak). But the hold outs will keep inventory down and prices higher for longer. At worst, nominal prices go flat and then start to dip slowly as the normal turnover starts to produce inventory.

In the shorter term, prices may actually go up in places like Menlo Park. I'm seeing this in parts of Marin right now. What is happening is people are paying a premium because of the "me-too" crap that's hitting the market in droves. If I just looked at 9 houses in Redwood City for $1.2M, and all of them are crap, then I see a $1.25M home in Menlo Park that is _comparatively_ very nice, me and 2 or or more others bid on that, perhaps even a small amount over (say $1.28M). I think this is the Spring Bump Realtors(tm) will crow about, even while ignoring the crash going on around them. This is also a sign of a soft landing for Menlo Park.

*Note, I'm not looking in Menlo Park, just extrapolating recent Marin experiences to the Peninsula (and I used to own in Redwood City).

Scott,

October has been the host to several crashes (while epic) also sporadic. Just about every April sucks. Tax time, etc. Then it's, "sell in May and stay away" the summer doldrums.

skibum,

Just throwing my hat in the ring kind of a thing. Some of them I’ve seen didn’t even bother to mow the lawn let alone slop paint on. Now that’s confidence!

I have seen way too much of these in Mill Valley. I have come to loathe Sundays because I get to see about 1:10 (optimistically, more like 1:20 these days) reasonable homes to crap. We're talking about serious crap. Leaks that haven't been attended to since the 1950s kind of stuff. Unretained slides 5 inches from the foundation. Neighbor encroachments that have long since become legally permanent (I saw one where the neighbors built a garage 80% on the for-sale home's front yard, but the absent owners never complained, so now it's permanent). Or the famous Mill Valley "42 steps up to your front door" cliff dweller, but with the added feature of 40 year old rotten timber steps that are so bad you have to go to REI to buy hiking boots just to get to the front door.

These things usually pop on the market at $1.3M+. Zillow shows, if anything, that they paid an order of magnitude (that means drop a zero) less. These homes will drop, or be taken off the market. No one is buying them. I've tracked about 20 of them now in Mill Valley/Corte Madera. None have sold from what I can tell since last Fall. A few have fallen out of escrow, but none have closed.

HARM, sorry for the OT comments. I exhausted my creative side earlier in my short Haiku attempt. Let me direct any investment-minded discussion for the week here if you want to talk ETFs and hedging against the RE bubble, among other things.

Guys,

I request again. Shouldn't we start a sticky thread to post our anecdotes, experiences - the RE market as we seet it. No predictions, no guesses, just report on RE in BA.

Maybe I can start my own blog to do ONLY that.

Mine is not Haiku...it's a sing-a-long!!
Now everybody...to the tune of the 60s show Flipper!

They call him Flipper! Flipper!
Faster than lightening
We all can see
his idiocy!

They call him Flipper! Flipper!
Isn't it frightening
Creatingtroubles
inflating bubbles!

Here's a different tone...

Let those specuvestors
Those lying jesters
Californicate
On fudgepack Mountain

And another tone...
Dedicated to all of you at Patrick.net :P

Brilliant blogging bears
Peraphrasing praise in prose
Hoarding Hahas happily

Randy H,

Going into this thing I think we all had a sense that there would be one area of the country that would somehow be "immune" or less prone than all of the others. My guess early on would have been New York, but when Boston started imploding it became obvious the "spoiler" would not come out of New England and all eyes and $'s focused on the BA. I will differ slightly (and respectfully) that the BA in general will see a downturn. Because some will have net worth beyond their homes isn't going to make it any less unpleasant.

To BA Or Not To BA,

I don't know WorldPress well enough to know how to make a sticky thread. I know Patrick can make links, therefore he could just link to a specific thread from the main page. What I fear is that many just have the blog page bookmarked (http://patrick.net/wp), so they'll never see that "sticky link". Also, people using RSS feed readers will miss the sticky thread, as will anyone jumping here from syndicates (automatic links from other blogs).

You could start your own and just drop in links here time to time and put out a request that everyone else here with blogs link to you. I recommend either Blogger or Typepad as fast ways to start up a blog for minimal HaHas.

Randy H,

What I meant to say is that I for one am not going to feel in the least bit guilty for getting clients out of REIT's early on and talking as many as would listen into not buying homes from 2004 on just b/c a few high end neighborhoods out of an entire country were spared. I feel bad that they happen to be in your area but look at how many doors it WILL open!

No haiku. Just a realtor's e-mail. Isn't he honest?

"Spring is here and we are already in day-light saving hours, but the weather is unusually wet and we are breaking records with consectutive days of rain. What this weather does to the market is forcing some sellers to delay putting their homes on the market, perhaps due to unfinished work and try to maximize the weekend open houses in better weather. Home inventory in most areas are higher than what it was last year and expected to increase in the next 2 months. Despite the wet weather, more buyers are getting into the market but on the average. The average DOM (Day on Market) has increased compared to last year. The average percentage-over-asking-price statistic is still over 100% (buyers paying over asking price) for cities such as Sunnyvale, Mountain View and Santa Clara; but in Cupertino, the average was under 100% in both January and February. The interest rate has gone up and will reduce the buying power for some buyers. Coupled with the cool-off period and price adjustments, we are in a neutral seller/buyer market. If you have not come across the 'perfect' home or are still waiting on the side-line, pay attention to homes that have just reduced price or have been on the market for over 2 weeks, chances are the sellers are more motivated and willing to negotiate."

I'm surprised to see this:

"but in Cupertino, the average was under 100% in both January and February"

I thought everyone wanted to live in Cupertino, no? Condos in Cupertino should've appreciated another 50% by now.

http://tinyurl.com/o2h2v

Insurance group: Area home prices could slump within two years
GREATER CHANCE OF DECLINES IN EAST BAY, S.F. AREA

I believe that OLDER neighborhoods, not necessarily richer, will have a softer landing.

It is a myth that Los Altos doesn't crash, down here in South Bay, Los Altos and Los Altos Hills crashed the hardest in the last round, down more than 25%. These neighborhoods are already looking at a much thinner support group.

I quoted a few months back the historical data of median price in different neighborhoods, Los Altos Hills and Atherton both crashed in 2001, coming down in price as much as 33% in 2 years! Then they got saved by the credit bubble.

Older, solid middle class neighborhoods with a high percentage of PAID OFF homes will have a soft landing. Exclusive neighborhoods may not fetch better, because people move there for prestige, and as I found out on foreclosure.com, you'd be surprised to see how many of these "owners" in Atherton or Los Altos Hills are living on the edge to put up the facade.

I don't know the data from the top of my head, but I would expect any OLD, traditionally middle-class neighborhoods with a higher percentage of families near "poverty line" to do better. Why so? Because the households that can afford to live in such neighborhoods with a "near poverty line" income are usually retirees, with an entirely paid off home. I have a neighbor like that, they own the place free and clear, have an old Mercedez Diesel that still runs, and lives on pension plus SS income. They have a small household expense, and can defer their property tax till they die, what else can knock them out of their homes? The retirees are the true cushion of a neighborhood, they have no reason to go anywhere, and they can afford to stay as long as possible.

The types of listings that I believe I was referring to belonged to “Rip Van Flipper”

Yeah, why shouldn't the guy who bought a place for $50K 20-30 years ago cash in? They didn't invent the boom. As long as they're planning to retire somewhere far, far away where housing is still affordable...

I sent this one to my "futureme", 3 years from now:

Blood is in the streets
Don't be afraid to buy now
Be glad that you sold

Los Gatos and Cupertino did very well in the last 89 crash, because both were sort of undiscovered from price point of view. I am afraid this is not going to be the case this time, because the mix of residents have changed.

Since I did househunting in the heat of last RE bust, so I will just talk about anecdoto stuff I encountered.

Los Gatos and Cupertino were sleepy retiree towns last time, the houses were generally small (

Oops got cut off, gotta start again.

Los Gatos and Cupertino were sleepy retiree towns last time, the houses were generally small (

what is the problem here? How come my message got cut off?

Try again to see if it works this time.

Los Gatos and Cupertino were sleepy retiree towns last time, the houses were generally small. When I was househunting, the sellers were typically long-time occupants, the home was paid off, and acquired for $20K or so. An average home that you see on the market in these neighborhoods for 1.2-1.3M today was selling at ~400K. Back then, a typical ~200-220K household of today was making around ~140K for the comparable jobs. So you see, the ~400K home was not unaffordable at all.

Saratoga was decisively more expensive, and outta my budget. But if I applied today's financial sense (or the lack thereof), I could still stretch it. A 2000sf home with 15K lot was selling for ~550K, newer ones for ~600K.

Los Altos actually crashed pretty hard, so a home of 2000sf on a 14K lot was only going for 480K or so, the comparables that I was looking at had a 20K premium over Cupertino (foothill) or Los Gatos equivalents.

ps,

the question depends on the following things.

1) How many new buyers have moved in Saratoga in the last few years. From my househunting experience in the last bust, the new occupants who got in at the top were the ones dropping price like nuts. The old occupants just held on.

2) How much greenbacks the Fed starts to crank out. Well, as you know, 1M today is not the same as 1M tomorrow, adjusted for money supply.

3) How many buyers like yourself are eyeing that piece of Saratoga property

I frankly don't know the answer (duh!), and I am not eyeing any neighborhoods that everybody is eyeing on, so I am certainly hoping for far less competition when the time is right.

Call now and let me show you how I’m more than just a loan officer — I’m a personal Home Mortgage Consultant!

I am more than a code monkey -- I am a computer software professional! Engineers get less respect than an illegal alien nowadays. Oh well, free market.

Scott,

yup, that was it, I took it off my last message. Thanks.

The question is. Are housing prices really coming down? Or is the media and internet really hyping a crash up?

It seems that apartment inventory is shrinking but condo inventory is growing. If this is sustained, the crash may be cushioned for certain property types in certain areas.

Check out this place I was bidding on. It is in ‘The Gold Box’, but on a very busy street. I offerred asking price, and got rejected! It’s only about 1,150 sqft. Went for $1.14 mil!

It is a shame that it does not even reach $1000/sf, isn't it?