patrick.net

I can’t see a return to median valuations as anything more than a 10-15 year flattening without massive volatility, due to the chicken-and-egg cycle of interest rates, recession, and RE prices.

A 10-15 year flattening is a decline in real term.

On the other hand, if lowering interest rate will prop up the market, increasing interest rate will depress the market, right?

On the other hand, much of the country is in relative good shape. A crash in a few heated regions may not lead to a recession.

Golf courses………..what a waste of space…..

They are good open space though. Low-rise building is a waste of space.

People waiting for valuations to become fair will have to wait a very long time.

Perhaps not. IF the economy strengthens and rent goes up rapidly, fair valuation may be attained without price decline.

I agree with Peter P. I am not *necessarily* looking for significant nominal price declines. The reason I created the Bubblizer was so that people could see their own sensitivity to the various inputs. Any combination of interest rates, inflation, tax rates/treatment, rent levels, your own income level, and of course home prices can dramatically change your buy-v-rent decision.

I fear that lots of people only think in nominal, non present-value terms. For example, the present-value of paying rent goes up dramatically faster than the present value cost of paying mortgage, because of the rates + tax shield. This means that rents don't even have to go up by a huge amount, just enough to push people into a reasonable zone where buying a home isn't simply insane.

It may be a decline in real terms, but is not a crash or even a nominal decline.

huh? So a decline in real terms isn't a crash? So what do you call buying a house expecting a return of at least 10% a year, and actually getting nothing for 15 years? What about all the fucking asshole debtors that bought with NAAVLPs and are already underwater? From all the information I can gather the brunt of loans in the BA are these types? What are the underlying reasons for your myopic veiwpoint.

Oh shit, that's right shouldn't feed the trolls. you are correct Mr. Troll, real estate never goes down, the very worse that ever happens is it goes flat for a while before resuming its normal 10% min per year advance. I say get in early, but more now. Via con dios cavrone.

So maybe the current distorted rent-price ratio is remarkable not because home prices are unusually high, but rents are unusually low, and rents have a higher chance of rising than hope prices do of declining.

But if my PV of paying rent - the value of alternate investment (invest the difference of PITI) is significantly greater than the PV of the holding costs if I buy now, then your statement is false.

Right now, for someone looking at a standard "Ha Ha" scenario and planning to stay in the home for 5 years, the PV difference is about a quarter million. That's a lot of intangibles to stomach. As a hedge, it's a loser by any measure.

IF the economy strengthens and rent goes up rapidly

Huh? Why would the economy strengthen? What new products or services would serve as the basis for this?

Randy and Peter P.,

If rent in the BA goes up significantly in real terms, what's likely to happen is a lot of young people and renters of all ages will move out. Relatively cheap rent is the only thing that makes living in BA viable now. If rent goes up significantly but is not followed by wages, there will be a large second wave of out migration.

has anyone ever seen the Easter Bunny, Superman, and Santa Claus in the same room? See, this proves they are the same person.

Rent is what a property is worth. Rents cannot skyrocket because there aren't enough high salary individuals in the bay area for this to occur. Yes, HaHa, you make a lot of money. I'm just not buying the new paradigm bullshit. Wasn't the dot.com "revolution" a new paradigm also, one in which all that mattered was growth? Oh that's right, profits matter after all.

Do you have a particular prediction of what nominal prices will be over the next 5 years, relative to today.

I don't make specific predictions because I'd only be asking to be wrong. I think in general there will be either slow, flat to moderate nominal gains or losses, but real losses either way -- if it's a soft landing; or it will be a psychology driven hard-landing where people think in nominal terms (nearly everyone does) and we see sharp nominal declines. I can tell you this, it will be a neighborhood by neighborhood battle. There will be small pockets that come out very well and others, perhaps right next door, that get clobbered, relatively.

astrid,

If rent goes up significantly but is not followed by wages, there will be a large second wave of out migration.

That's the if. Rent couldn't go up by enough alone, because of what you say. But, rent could go up faster than real wages go up. But if both go up just slightly out of proportion, then the rent-v-buy decision becomes much different without a lot (or maybe not any) nominal decline in home prices. We would have to see an increase in wages though (or theoretically, a massive cut in taxes).

Surfer-X, you are right that something's gotta give. Either companies make more and pay more, or people get to keep more, or home prices decline. Without something happening there, rents aren't going anywhere soon except perhaps down. And the more rents go down, the less likely anyone should ever buy a home unless they paying factors of millions in present-value to someone else to bank as gains.

I love this counter to the Realtor(tm) sales tactic: "Paying Rent just makes someone else rich" / "...pays someone else's mortgage".

How about, "at least a serious rental property business owner works for their income and gains. after all, being a landlord ain't exactly easy work, especially with a$$holes like me as renters".

Well.. if that ends up being the case, people buying now are not ultimately making a bad move at all.

If that ends up being the case.

We will be very perceptive of any change in conditions.

I’d love to see this bubble plotted out with a couple of other past real estate bubbles just to see how similarly/dissimilarly they behave. What is the average percent drive-up, the slope, the time frame, the denoument (is that what the post peak would be called?), the regression to or below mean.

SFWoman, you should probably be working at a Hedge Fund.

Randy,

"How about, 'at least a serious rental property business owner works for their income and gains. after all, being a landlord ain’t exactly easy work, especially with a$$holes like me as renters'."

LOL! Why just be a bear when I can be a boor!

Huh? Why would the economy strengthen? What new products or services would serve as the basis for this?

Don't know. But the reality is not always reasonable.

If rent in the BA goes up significantly in real terms, what’s likely to happen is a lot of young people and renters of all ages will move out.

Using the 1/3 gross guideline for rental affordability, people can pay a lot more.

For example, someone making 1 HaHa, which is about 13K a month, can afford to pay more than 4400/month.

SFWoman,

I'd feel more comfortable with someone like you working at a HF than many of the types who inhabit those dark depths.

Using the 1/3 gross guideline for rental affordability, people can pay a lot more.

And to further amplify Peter P's point, if you move somewhere like Evansville, IN, then you will be paying significantly more for rent than PITI, which is even worse than it appears because wages are so much lower there.

If people were to do a present value calculation (I know, in my dreams) and really consider their options then fleeing the BA because of rents is not going to be a winner except for a very few select areas in the SE or perhaps Texas.

Peter P,

Yeah, I'm still looking forward to the day of guaranteed 1 Ha Ha per capita income :P Maybe Different Sean can start a worker's revolution around that slogan...

SFWoman,

Noooo, you need to write a bunch a pretty calculus formulae, draw a couple graphs, and throw a differential equation in the foot notes too. Not that these have to really support your numbers, just have lots of greek letters. Seriously, take a look at what the Black-Scholes equation really is and ask yourself if you have what it takes to win a Nobel. I guarantee you did much harder stuff in your second year in undergrad.

Ahh the Laffer Curve. You're venturing beyond my domain of knowledge there because, to me, it's just a sidenote theory in neoclassical economics which manages to piss off both the Keynesians and the high-tax/no-deficit crowd at the same time.

My only claim to fame is having Stiglitz as a prof, but he managed to piss off even his Clinton allies before he got a chance to get fired by Bush.

Randy and Peter,

Okay, let's work with the 1 HaHa number. :P

1. I think we'd better work with after tax dollars for rent, since realtors are always telling us that there's no tax deduction for rent. The tax bill will eats up about 45% of that Ha Ha. If I made less in a different part of the country, the tax burden would also be lower, esp. in a state with lower taxes.

2. Although rent is higher than PITI in certain parts of the country, both PITI and rent are a lot cheaper in absolute terms than BA right now, and will be even cheaper when BA rent starts going up.

3. In a lot of the other communities, decent to good public schools are still available, so there may be savings on private school tuition.

However, I never assumed the rising rent price to squeeze out directors and tech supervisors (because junior engineers do not make 1 HaHa, I wish they do so I could mooch off of my junior tech friends more, but they don't), it's the marginal people who are barely making ends meet. Any price increase can lead to affordability problems and drive them or towards cheaper local housing.

In any case, I don't see anything driving BA wage growth or population growth right now. And the housing stock now in existence will still be there when the bubble bursts. I just don't see any conditions, outside of a few small high income pockets, that would give landlord pricing power.

SFWoman,

Your intuitions are right. RE isn't liquid enough for B-S to really apply anyway, but certainly RE is highly psychology-driven (there is no efficient market for RE transactions, at least not yet or probably anytime soon).

In B-S risk is just volatility as measured by standard deviation. There's all kinds of related pricing theories which include more esoteric stuff like random-walk theory, Brownian motion, and stuff only math and physics Phds can understand. But none of these work for RE.

Maybe you could use a binomial model on RE for a specific home if you could get the function right.

I thought the 1/3rd was for buying a house, not renting? I assume rent should be less, because:

1. no tax deduction
2. no equity building

Landlords also use the 1/3 guideline to qualify tenants.

SFWoman,

So coy with your nameless Ivy League school. :P

Return to BA,

Congrats, sounds like a nice bargain. I asked about CL bargains. Just curious. I sold some furniture on CL when my parents moved and everything worked out pretty well. Are you moving back to the BA before the summer heat sets in for Virginia?

Ha Ha is 150K pre-tax.

Yeah, I’m still looking forward to the day of guaranteed 1 Ha Ha per capita income Maybe Different Sean can start a worker’s revolution around that slogan…

'Universal suffrage, Universal HaHaness'
'One HaHa for all'
'A message to all employers: HaHa'

We're doing an international comparison, and this is the only wrap I get :cry: Some trotskyist, 1st international comintern reference...

Apart from the FT articles, there's a recent OECD report on housing affordability across 17 affluent OECD countries. This is a useful summary from The Age which includes links (may also require free subscription, hmm, I will paste it in if any demand):
http://www.theage.com.au/news/national/house-prices-world-highest/2005/11/30/1133311106610.html

and plenty of coverage in The Economist in recent years. Some good work at demographia.com also, altho Robert Cote and I disagree quite adamantly with some of Wendell Cox's most basic theses...

OECD report (PDF):

www.oecd.org/dataoecd/41/56/35756053.pdf

Returning to BA,

Ha! You Bay Area weather wimp! Well when I was young, I lived in Shanghai with no air condition, and 100% humidity and mosquitoes the size of giant mallrats...

Sorry, can't resist. I took some classes at Berkeley one summer and had project partners who thought Berkeley had bad weather! :P

DS,

Excellent slogans. Can't wait for my 1 HaHa job. Do I have to take over factories physically? or can I just send in my resume?

Thanks for the graph, very interesting and very effective demonstration of your point about higher housing costs.

DS, Anyways, sorry about what I may or may not have implied about your being or not being a Trotskyite. It's really a sort of praise, I'm too flabby and bourgeoisie to lead a revolution.

Return to BA,

Well, at least the evenings will be cool and the humidity will be low. The Tri-Valley areas is a bit more temperature extreme than the rest of BA.

Bhiptis says:
I’m still not convinced that the correction would be a decline, rather than just a moderation.

That's fine.

I've been playing around with a Randy's model, and one that I built from scratch that shows a month-to-month breakdown of all costs, tax advantages, reinvestment returns, etc. There are a couple of selectable scenarios for appreciation and inflation ("Hard Landing" and "Speculator's Wet Dream" among them :-) ).

Given the current gap between PITI and equivalent rent, in most scenarios a renter who saves the difference and reinvests will be ahead of a buyer. Leveling prices at anything less than 10% inflation gives an advantage to the renter. The lower the inflation rate, the better for the renter.

Peter P says:
Using the 1/3 gross guideline for rental affordability, people can pay a lot more.

For example, someone making 1 HaHa, which is about 13K a month, can afford to pay more than 4400/month.

I thought then "1/3 gross" rule works only when paying PITI, because at first, most of your monthly payment is tax-deductible.
$4400 after tax is a boatload of money, even if you make 1 HaHa.

Peter P says:
But I am quite surprised that rent is nearly 25% higher in Mountain View compared to last year.

That *is* the Google effect.
Have you been to downtown Mountain View recently? No one over 30 lives there, it seems.

I wrote:
Given the current gap between PITI and equivalent rent, in most scenarios a renter who saves the difference and reinvests will be ahead of a buyer. Leveling prices at anything less than 10% inflation gives an advantage to the renter. The lower the inflation rate, the better for the renter.

Correction: if prices stay flat for 10 years, then start rising again at the rate of inflation, higher inflation is actually better for renters.
For a house price of $1mil, $2800 equivalent rent, an after-tax reinvestment return of 2% above inflation and 10% inflation p.a., a renter who saves and reinvests the difference to today's PITI can buy the house in cash after about 10 years.
After about 6 years, the renter's PITI will be lower than his rent if he bought at that time. Nice.

Pop!,

yes, 28% collectable tax. However, here is the caveat, if you can engage in a cash transaction when you sell, you don't need to tell IRS, the coin dealer will certainly report you though, unless the transaction is small.

If you buy CEF, you are not taxed the 28% collectable tax, only capped at CG tax 15%, however, you are subject to PFIC tax filing each year. You can google Passive Foreign Investment Company to familiarize yourself with PFIC taxation.

*not a tax advice nor an investment advice*

Joe Schmoe,

of course wealth has concentrated, just look at the earnings and assets of the top 10% housholds, they have increased their share of the entire pie significantly in the last decade.

Come on, do you really take the 70% home "ownership" at face value? 0-down ARM/Neg-am - financed homebuying will make you a home "owner"?
Without at least a certain percent equity (I personally define that to be 50% at least), one cannot call himself an owner, he is a debtor, the bank is the homeowner. Who owns the bank? Who owns the MBS?

Real estate is just one form of asset. And owner-occupied home is NOT an asset, it is a durable good. What can I do with my home? Unless I want to start a business and need to pull equity from the home to get a head start, it is of no use other than providing a roof over my head. BillG doesn't need to own homes, he can own shares of REITs, he can own GSE shares, owning a home and renting it out is very *primitive* and *labor-intensive* way to make money these days, let the REITs or professional apartment owners do that, you provide the money, they provide the sweat job, that is how capitalism works, marrying money with knowhow.

This RE bubble will lead to further redistribution of wealth from the moron masses to the wealthy class. Why? The wealthy people are unlikely to take on toxic loans to buy 3 McMansions. They instead invest in REITs, or hold GSE bonds, or shares to benefit from the RE boom. Remember we said who will get bailed out when this all blows up? It is certainly not the shareholders of GSEs or large banks who will be the bagholders. The bagholders will be still the marginal middle class who took on the toxic loans thinking that they can get ahead in this game. This is their ticket to poverty.

I thought then “1/3 gross” rule works only when paying PITI, because at first, most of your monthly payment is tax-deductible.

It is on most apartment rental application. Again, there are affordability guidelines. One should spend LESS than that.

Most people do not itemize anyway. To them, mortgage interest deduction does not exist.