patrick.net

Let me make a wild prediction.

I believe the housing price of the fortress BA will continue heading up till late 2008 at an escalated pace, not because of BA jobs, but because of money from China.

China will crash hard, all the factors for a perfect storm are well in place and brewing strong. But like all bubbles in the world, the last leg up will be the most spectacular. Lots of Chinese are making USD like mad over there now, due to the twin bubble of housing and stock market. Fortress price to these people look very reasonable compared to Shanghai or Beijing. When China crashes, there will be an exodus of wealthy emigrants along with their money coming to the coveted havens like Palo Alto, Cupertino and Saratoga (ranked in terms of prestige based on Chinese perception). Most of them actually will head for the SoCal fortress (Palos Verdes, San Marino, Arcadia). Chinese won't be able to hold back the tide of housing depression, but after all it is a big country with very skewed distribution of wealth. So the Chinese money will be able to delay and soften the landing of few select burbs.

I don't know much about India, but I sense that there is a risk of India crash landing as well, maybe not as bad as China.

I am well aware of the various factors that effect the value of real estate. But, in such a short period of time, I ask someone to point out what other value factor has had a significant change over the course of the past month to justify the increase in the cost of home ownership that has come as a result of the rate increases. I'm willing single-mindedly to say none other over that time. Hence, for the cost of ownership to stay the same during the past month, there needs to be a corresponding decrease in prices.

Arafat is dead. I won't comment on the effectiveness of the UN. But Jimmy Carter had a very distinguished post-presidential career.

Maybe this blog could turn into a book club...

Hence, for the cost of ownership to stay the same during the past month, there needs to be a corresponding decrease in prices.

I don't think it works that way. Last few years, people have been either paying more of their paycheck towards housing, or buying nominally cheaper houses (which are really more expensive in terms of $$/SQFT etc). The logic was, if the house you like is 1.2M and you cannot buy it, buy anything that is for 800K. A lot of crappy houses got sold for obscene amounts.

So buyers adjust their expectations about the house they can afford, more than the sellers adjust their expectations of how much their house is worth.

Although, the rate increase will help bubblesitters via another dimension. Now ARM resets will have even more adverse effect on prices.

Ultimately it's the psychology that will have a far bigger impact. This was a mania fueled by panic buying and speculation. Once that psychology changes - because of jobs, rates whatever - then real fun will start.

I dont remember a stock market bubble blog in 2000

No blogs then, but there was this.

Another year or two, and f'd company website should be revived and rarin' to go!

Most of them actually will head for the SoCal fortress (Palos Verdes, San Marino, Arcadia).

Good start, but you forgot to mention Monterey Park, Alhambra and San Gabriel.

astrid,

I was being facetious. I named only people or institutions that have been publicly declared "irrelevant" by the current Administration.

ptiemann,

I think the lack of correlation can be easily explained by time lag.

Unlike stock market, housing market takes time to adjust. When I do stock trading, I adjust my limit price 5 times a day if I want the transaction to clear. It is not the case for housing. Even the most aggressive sellers only adjust their price monthly. By the time that transaction price is recorded at the county and NAR, the market has long moved ahead.

If he does a T+X timeline plotting between housing price and interest rate, he probably would have gotten a graph with more visible pattern.

OO didn't like it when I was writing it here, but the past few days he has been writing nearly the same remarks as me:

"Prime" neighborhoods in Santa Clara County are being help up rich Asians, mainly Chinese.

But Indians too. I can't tell you how many Indian H1's I know who went "back home" within hours of getting their green cards, come back with an Indian bride and suddenly purchase a home in a neighborhood of the Bay Area that was off limits to blue collar locals like me.

During the dot-com there was a tongue-in-cheek editorial in a one of those free job listing tabloids about the pricing of dowries vs. Silicon Valley job status, US residency, type of degree, degree field and the like. A very intricate spreadsheet.

It'll be interesting times if OO's prediction about the Chinese bubble unfolds the way he said it might.

Maybe this blog could turn into a book club…
How about Edgar Allan Poe's short story The Masque of Red Death. Maybe Fortress BA can take a lesson from Prince Prospero. I don't think even good school systems will be able to fend off the Red Death (but maybe a good economy?).

Speaking for the Indian community in the bay area, I don't see any awareness about the bubble or the fact that it is bursting.

There is a dim awareness that things have "slowed down" or that houses are cheaper "for now" but beyond that, I haven't seen any greater awareness.

Of course, I don't speak for the entire community - my sample space is quite limited.

There are many reasons for this, but one big reason is that real estate has been on the rise in India for a generation or more (much of it is due to inflation and the devaluation of the rupee). Essentially, we have a people who have not seen real estate values go down. So it is never considered a bad idea.

Hopefully, there will be easily observed, hard evidence in the bay area soon. If the immigrant community starts believing in a bubble, it is pretty much over.

ptiemann :

I did read the document. And I was referring to his conclusions. He took 2 data points and tried to find correlation only between them. I noted that this is an incomplete analysis.

If incomes rise along with rates, during an inflationary environment, real estate prices will at least hold nominally. But they are falling in real terms.

Such kind of analysis (including effect of other factors) is absent. Simply taking 2 variables and trying to find correlation tells only part of the story. The finding - either way - whether there is correlation or not - is grossly incomplete.

I am not arguing FOR a correlation. I have stated in my other posts, that incomes are more important.

But rate IS is factor. So the only discussion is how important it is FOR THIS bubble. I argue it is very important. Maybe even more than income this time. So even is BA job market remains strong, a higher rate of something like 8 will have a very negative effect on RE prices.

Because interest rates are a fundamental factor affecting housing affordability it is logical to expect interest rates to be a prime mover of the housing markets. However, history does not support this view. Over the last 40 years, interest rates and home prices have moved together in the same direction as often as they have moved in opposite directions. Essentially, there is no significant correlation.

Interest rates do affect housing demand, but other factors are much more powerful. Prior bull markets have occurred while mortgage rates were high and rising. Mortgage rates declined during much of the bear-market years of the early '80s and '90s.

When interest rates rise it is generally in response to inflation and/or a stronger economy. Both of these elements will increase the demand for assets and drive prices upward. Eventually the market gets far ahead of its normal long-term trend and a slowdown or decline will occur to bring it back on trend (often temporarily below trend). This will happen with or without higher interest rates.

The point is that while interest rates are an important factor, they are overpowered by other economic forces. If you think you can forecast the direction of housing prices based on the direction of interest rates you are ignoring history.

The one fundamental that drives long term housing price trends more than anything else is the affluence of the upper 50% of the households.

The lag in supply adjustments, combined with market psychology drive the cyclical fluctuations around the long term trend.

We see an overshooting of the top because of momentum driven by buyer psychology, including exuberance and the twin demons of greed and fear. These become the two most powerful forces in the market and their best accomplice is foolishness.

Don't forget the market can stay stupid longer than we can blog.
The fact that there is still this obsessive interest in RE reinforces my feeling that this stupidity is going to last for a very long time. I'm talking about 10 years. There is no shortage of stupid money chasing RE. It is everywhere globally.

There is nothing worse in life than someone else paying more than the fair value for an asset you want to purchase.
It will be a long journey to the promised land and in the process this blog might become irrelevant indeed. Becoming irrelevant is part of the lifecycle, nothing to fear.

Be patient and have fun while waiting :).

A quote from a recent Paul Kasriel article:

Households' single largest asset, their houses, is carrying record debt relative to its market value. I can't confirm it, but conventional wisdom has it that about one third of all owner-occupied housing has no debt associated with it. If that's the case, then with record leverage in housing today, the two thirds of houses with debt associated with them must have an incredibly high debt-to-value ratio.

...which is why I - neophyte that I am - am not married to historical models as they relate to the relationship between interest rates and the market value (not asking price) of housing. There may be a few past instances of similar debt loads, but probably very few which coincide with a consumer-driven economy.

"There is nothing worse in life than someone else paying more than the fair value for an asset you want to purchase"

Did Ben Franklin say that? Is that a quote from Ben Franklin? It should have been! Oh I'm there Ozman, I'm there. Especially when that "someone" is a realtor!

I'm in the middle of a continuing ed. course (with an exam on Thursday) so I don't have all the time I'd like right now but this recent debate on the relationship between int. rates and RE prices is intriguing. I've never really heard this challenged before?

(And they say we're getting "over the hill"!)

I don't think anyone can be blamed for making that assumption. Particularly in the mainstream. After years of DL harping on the "boom" being sustainable as long as "rates remain low" and then imploring the Fed to LOWER rates we've all become focused on that as an all important factor.

Taken to extremes I don't suppose it would bode well for RE prices if the 30 yr. fixed was @ 1% if none of us had jobs? Just as being willing to pay nosebleed prices @ 15% wouldn't be a factor if no one qualified.

Busted Says:

"I damn well hope this rate increase translates into a significant price drop. Hell, the boom in prices was the result of cheap rates, now we’re at 5-year highs in rates, it’s time for prices to drop."
_____

I'm sorry Busted but you forgot one thing: it's the Bay Area.

You see, the Bay Area is very, very special. It defies all logic and even the laws of economic physics itself, for it is the land of milk, honey and great weather.

Any piece of crap shack in the Bay Area--from Morgan Hill to Napa Valley-- is a priceless jewel that commands a high price. You will be fortunate that housing prices only climb 5-7% per year before they take off like a bat out of hell for their usual 10-15% increase every year.

Didn't a realtor tell you that prices in the BA only go up?

So, my hard-won advice to you is to buy anything at any price any way that you can or be left behind groveling like a rat in the dust.

Just do it!

NOW! (just ask Surfer-x, he'll tell you!)

;-)

I thought young Indian women didn't want to marry H1B or GC holders because they can't get dirt cheap servants in America. What's so great about having more greenbacks if they have to trade a upper class existence for second class citizenship?

OT, but I thought you all might enjoy this - just reading the circular which accompanies UBS's statement.

On page three is 'Increase Your Borrowing Power', suggesting securities-backed lines of credit or equity extraction for UBS clients planning summer travel, a new car, home improvements or launching a new business venture.

How's that for advice?

"or equity extraction"

You mean there IS some still out there that HASN'T been tapped?

KT,

O.K, so they did look a little goofy, but what is up with the earlier buyers!? The one gal said "the developers promised us (as she fights back tears) they wouldn't sell below the market value!" Lady! Half of what you paid IS market value!

Instead of a book club, you guys could write a book. Patrick could write the first chapter, followed by harm, randy, etc. etc. Surfer-x and DinOr write about buying when they did. Peter P could have a food chapter. You could even have a just for fun chapter all about trolls.

dcfemme-I have the same problem, Brother in Santa Clarita, not here, friend in Willow Glen, not here, mother in law in San Jose, not here. I have decided to stop talking about it to them, and then they ask me Why are you not buying a house? It's annoying.

OT - had leaflet distributed round our neighborhood, realtor looking for sellers - offering 1% comission only - full service. They are based in Cupertino, we are in Mountain View.

@patseajul,

Hey thanks! If I ever get out from under the relentless (and redundant) "continuing ed." courses I'd love to be a part of that!

For the working title I was thinking something like....

"How I DID my homework, timed the market and STILL took it in the shorts!"

I certainly hope no one here takes my actions as a "capitulation" b/c it certainly isn't. I would take serious exception to any troll contorting this "purchase of convenience" into a sign that the ranks are thinning! I'm as bearish as ever and am fully anticipating a major correction from coast to coast. I still have a firm conviction there will be ample bottom feeding opportunities and in the grand scheme of things having taken a path that ensures I won't have minimalist shelter sold out from under me (yet again) seems a small price to pay to "keep your powder dry".

I'm hardly saddled with a McAlbaross I can't get rid of and the nominal payments shouldn't preclude me from getting the place we'd ultimately like to have down the road. Still a bear,

DinOR

I know bears will say that the crash is still coming. It’s always just around the corner for them, but it never comes.

Yup, ignore all those nasty news reports of falling prices and underwater borrowers and repeat after me: "there is no crash, there is no crash, there is no..." Not working? Ok, try covering your ears and yelling "LA-LA-LA-LA-LA-LA...!", while thinking happy, happy thoughts.

As an aside: I know that many here have contempt for RE flippers, speculators, investors, etc.

Another "Face Reality" trademark: if outright lying/denial fails, resort to the straw man argument. Like deliberately conflating our contempt for lazy, parasitic Casey Serin fliptards, who drive up prices but add ZERO value to the properties they try to flip, with old-fashioned long-term investors and professional housing renovators (OO, FAB, etc.).

Who here hates people who fix-up distressed properties and work hard to earn a fair profit? A: nobody.

http://www.dqnews.com/RRSCA0607.shtm

Continued slow for Southland home sales

Face Reality is just shifting the argument.
By changing the subject area from "BA" to "Fortress".

There is no more denial in the BA. The slowdown has arrived is generally accepted. The only debate is
1. Magnitude
2. Which communities.

Go check out fringe areas and you will know that downturn is getting stronger. But the bulls like FR will talk only about the Fortress. And we here are also way too fixated on the Fortress. That may be the most important area for many, but that doesn't change the fact the RE is in downturn in BA.

Doesn't anyone realize that the tune has changed from "BA is special" to "BUT Cupertino is STILL strong" ? Don't forget that the sentence has a "BUT" and "STILL". To me that speaks volumes.

Everyone predicted that the 'fortress' areas would be the last to fall, and really what you see is 15-20% yoy gains there down to 1-5% yoy gains while the rest of the BA went from 10-15% yoy gains to -5-0% yoy losses.

It's FRUSTRATING to see the fortress still holding, but not unexpected. And the gains are median masked losses, anyway. Since I managed to find a place my wife is happy to rent and wait out the collapse (and one that we can afford on a single salary, no less) I am no longer stressing about when the fortress areas go down, or if they just stagnate until rents/salaries catch up. Tokyo did that, so it's not inconceivable that it'll happen to the BA.

The biggest support of housing prices is salaries. And salaries don't support current house prices. Prices down, salaries up, inflation/deflation, one way or another it will work itself out. I believe it will be prices down as it becomes more and more obvious that hyperinflation is the only way to keep the credit bubble alive, and I think we'll let the housing market tank and take the economic hit first. Although, hyperinflation might actually be a better long-term solution as we can then pay back our pissed off creditor nations in worthless greenbacks.

I'm not worried about irrelevance. When this blog is irrelevant, I'll be pretty happy.

But a food blog or book club would be great too.

BTW, sorry about the database issues today. The spammers are hitting me pretty hard recently.

Patrick

It creeps in SJR. Look at east SJ prices. Look at south SJ prices. Those were holding when Gilroy/BC/sundry SCMountain places started sliding.

It's gonna be a long, slow slide. And given that you've got a good deal going where you are, why worry for now?

Go to The Housing Bubble Blog, Site Future. You'll get two ear fulls and a sack left over in case you want more later. :)

Seriously, good stuff over there.

Face Reality Says:

> I’ve been away from this blog for many months. I promised
> to drop by once every few months to see if people are adjusting
crash in the Bay Area.

Mortgage interest rates up over 50 bps in the last couple months will only increase the slowdown…

> As an aside: I know that many here have contempt for RE
> flippers, speculators, investors, etc. Folks here think that
> these guys don’t know what they’re doing, they’ll go broke
> in this market, etc.

True “flippers” (and “day traders”) always go broke (with the exception of very short periods of massive appreciation)…

> Again, this doesn’t correspond to the reality that I see.
> People who act in a naive or stupid way typically get into
> trouble eventually; that’s pretty clear. However, the sophisticated
> ones tend to do well. I mentioned a while ago that a couple
> of friends of mine were getting into this business in the Bay
> Area, and I’ve been following their progress. They are both
> doing very well, making much more money than they were making
> in their regular jobs. The way they do it is to have a collaboration
> between a guy scouting for promising properties, a general contractor,
> and an RE agent. They buy houses in the fortress, renovate
> them nicely, sell them, and divide the profits. They’ve been
> making around $400K/year each flipping about 8 houses a
> year.

This is not flipping since the people could make as much or more (without the risk) working for others finding real estate deals, renovating property and selling homes (I know many contractors that make over $400K a year working for others)…

> They pay the RE agent about $100K for the 8 deals.

You first say they make $400K each, now the RE agent only makes $100K?? If you figure that the average home in the “fortress” is over $1mm the agent is only making a 1% fee selling 8 houses for $100K (or less than they would make selling two homes for others at a 6% fee). Making $100K of 1099 money after paying out of pocket expenses to sell 8 homes is not good money…

> The rest of the money goes to the scout who arranges, manages,
> and supervises the deals, and the contractor. I was pretty sceptical
> about this “business plan” when I first heard it, but it seems to work
> well for these guys. I guess this is another case where I was
> over-pessimistic.

It is a horrible business plan since there is limited upside and a huge downside. If a politically connected neighbor slows the renovation (or limits the scope of the renovation) you can lose a ton of money.

How about giving us the address of just one of the deals they have sold (or are you just making this up?)…

The next NY Times best seller?

http://www.foreclosurecode.com/

If you are not stupid enought to "loose" millions on your own you need to read this book...

What FAB said. Especially the Making $100K of 1099 money after paying out of pocket expenses part.

I love the bulls 'round here. They make market agnostics like me fell bearish.

I listened to a presentation from the head of AllianceBernstein recently talk about residential real-estate returns in various US markets. These guys have done a ton of actual quantitative research. The conclusion for SF, which was among one of the absolute *best* RE markets in the country over the past 7 decades by the way, has returned just under 3% *real* returns. And that is extraordinary by historical standards.

Just keep that in mind when comparing to the 100+% returns people have boasted in the past 5 years.

Got to chime in on the discussion between Stuckinba and Ptiemann -

Stuckinba comments are closer to the truth and here's why. It's down to econometrics, specifically multi-variate analysis. I looked at the "paper" and basically it is only based on secondary data, and you don't even know the data he is using for his correlation is harmonized or can be compared in time-series modeling fashion. Also, "correlation" done on excell is not in any way, shape, or form compex enough to make conclusions for this sort of research question.

Let me simplify, to make the kind of conclusions the writer of the article came to, you need 1. clean data points, 2. multiple relevant factors, 3. the correct model equation ,4. an R2 (stat that tells how well your model fits the data, or how much variance is explained away by the model) that is very high or + 80% - which basically tells you if your hypothesis is right, 4. to conclude WHICH variables are significant, there is something called a P value, and it has to be "significant" and there are degrees of significance..... (plus lots of other statistical stuff I am not including in this post)

So, to conclude that interest rates do not affect prices that variable would have to have an insignifican P value, which I'm sure is not the case. There may be OTHER variables that are ALSO significant, but I'm sure interest rates are one of them.

Hope you enjoyed the stats lesson, ptiemann - consider the source before you assume the conclusions are correct. Even Schiller (who is FAR more qualified that the guy who wrote that article) will not even make concrete conclusions or predictions.