patrick.net

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.

@SP,

But to be "happy", the Amerikan consumer "needs" to have 5,000 sft per person, miles of polished granite & Travertine, gold-plated commodes, 50" plasmas in every room, and a pair of current-model leased Hummers in the garage. Don'tcha' know?

On the other hand, I think Ha Ha's intended point was, $250K is the minimum HH income needed to service the mortgage on an average median-priced McShitbox in the Fortre$$. On that point, he is probably correct.

incidentally the national peak ended up occuring in the 4th quarter of 2006

Where do you get that factoid from? I would like to share it with others.

RandyH, why do you think that the Bay Area is *not* going to have a 3% real average appreciation rate, going forward long term. You have to admit that 7 decades is pretty darn long.

If prices go up 3%/yr, they double every 14 years, by the rule of 72. We have had nominal prices double in 5 years, then real prices must be up about 80%. So in the next 9 years, we can expect prices to go up 20% in real term, to return to mean average appreciation rates right?

This would mean 20/9 + inflation (let's use 3) = ~5%/yr increase in real estate values. This is actually more optimistic than my prediction, since I am expecting 5-7 years of 0% nominal gain and a slight real loss from inflation.

Also, I think we should be tracking home price values vs. income gains for the top 5%, at least in the Fortress. Since it takes that kind of money to buy a home here, it is gain in income for the top 5% that is driving home prices. I am having a tough time finding what income gains have been like for the top 5%, but I know for the top 1%, it has been impressive, at 16%/yr lately.

If prices go up 3%/yr, they double every 14 years, by the rule of 72.

Um, crap. I can't divide 72 by 3. I blame my Berkeley public school education. That should be 24 years, which makes the rest of the analysis kind of stupid. Sorry.

If it takes a quarter-million dollars a year to achieve peace, something else needs to be addressed first. I doubt that 250K/year will help in that case.

It's true. In the end, we on this board are for the most part all a bunch of materialistic f#ckwads. Including me.

Um, crap. I can’t divide 72 by 3. I blame my Berkeley public school education. That should be 24 years, which makes the rest of the analysis kind of stupid. Sorry.

Jimbo,
Not only is your self-correction true, but the statement that if appreciation went up 80% for some period, it must go up another 20% to reach the full doubling of prices is wrong. Just think about it: 15% or so appreciation for the last 5 years, followed by (what you suggested) another 5% per year for 9 years? How does that EVER average out to 3% per year?

You're right - must be the Berkeley public school education! :)

FYI: Foreclosures now greatly outnumber sales in San Bernardino & Riverside Counties. But no worries, this is just a figment of my warped bearish imagination. Permabulls carry on like nothing's happening, as always.

Foreclosure rate spikes in region

Riverside County recorded 4,550 foreclosure filings last month, which was more than four times the 1,066 filings recorded in May 2006.

San Bernardino County was the seventh-ranked county in foreclosure activity, with one foreclosure last month for every 166 households, or a total of 3,633 filings, up more than seven-fold from 513 a year earlier

Southland home sales hit 12-year low

Most of the erosion in May's sales appeared in the lower-priced regions, particularly the Inland Empire. In Riverside County, sales fell 45.4% to 3,307 year over year, while in neighboring San Bernardino County, sales plunged 46.5% to 2,220.

Randy H Says:

> 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.

By “real” returns are they talking “returns after inflation”?

Any reason that AllianceBernstein went back “7 decades” (before most of us were born and my Dad and Warren Buffett were little kids) other than to pick up the “Great Depression” and depress the overall numbers?

I would be interested in what they are tracking in SF that only beat inflation by 3%. We were just talking about an apartment in Cow Hollow that a cousin built in the 1920’s with a $2,000 cash down payment and a loan from the Bank of Italy. The property had a positive cash flow from day one (not even counting any income from the wine they were making in the basement and selling at a huge profit during prohibition). The construction loan was paid off in the 1950’s and the property has been debt free since then. Thanks to low Prop 13 taxes the property has been throwing off piles of cash every month for decades (with over $10K almost every MONTH positive cash flow after expenses every month for the past decade when rents ran up in the early days of the dot com boom). I don’t have time to put the numbers in to Excel and dig up 70 years of inflation numbers but I’m betting that this $2K investment in the 1920’s has beat inflation by way more than 3% even if my cousins give it away today (vs. sell it to TICs for about $10mm)…

If it takes a quarter-million dollars a year to achieve peace, something else needs to be addressed first. I doubt that 250K/year will help in that case.

250K/yr will not buy you peace. At that rate you will still have to fly airlines.

HARM Says:

> FYI: Foreclosures now greatly outnumber sales in
> San Bernardino & Riverside Counties.

Keep in mind that Realtors do not count forclosures as "sales". The Realtors do not count Bank REO Sales or Short Sales as "sales" either. Back in the early 90's when all S. Cal prices and high end N. Cal prices dropped by ~50% the Realtors kept reporting that the "median prices are up"...

FormerAptBroker: A figure of 3% real price growth per year for 80 years sounds reasonable for San Francisco. It is likely to be one of the highest in the U.S. I have heard in the 1950s Pittsburg, PA and San Francisco had similar home prices.

Why do I say 3% real per year sounds reasonable?

If home prices in the 1920s were 3 times family income and house prices grew by 3% per year while incomes grew by 2% real per year, current home prices would be 6.5 times household income

If you assume home prices grow by 4% real per year while incomes grew by 2% real per year, current home prices would be 13.5 times household income.

Even San Francisco is not that overpriced!

FAB,

Thanks for that reminder. While that probably means sales are somewhat larger than reported, it ALSO means that the CAR/NAR reported median is pure Bull$hit (as if we already didn't know).

It would be trivially easy to replace the MLS with a national database in which all sales must be recorded as part of a 'transparency in transaction' reform for housing. If foreclosures and REO sales were counted in there, you might actually get some useful statistics.

“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?

No, I think it was Warren Buffet.

HARM :

Before you gloat over the foreclosures, please read the latest DQ report. It clearly states ...

Foreclosure activity is high, although foreclosure properties are not yet a drag on home values in most markets.

Nothing ... I mean NOTHING ... not even facts will change RE perma-bulls.

You know, I'm pretty damn sick of average and median prices. Could data companies just post a f---ing pareto already? Number of homes sold vs. price range. A graph in $25K to $50K increments would be just fine. Perhaps the granularity could get smaller on a scale adjusted for individual markets.

I mean, how hard could that possibly be? And then line up the graphs month after month, so people can see how the mix changes and what's selling. Yeesh...

Brand :

It is pretty hard to produce that kind of data. The housing tracker site at
http://www.housingtracker.net/askingprices/California/SanJose-Sunnyvale-SantaClara/

does that only because it is easy to do that analysis for asking price. For selling price, man, the algorithm is yet to be invented.

Gavin

Thanks for the concise explanation. Much shorter than my rambling would have been.

The other reason for going back 70 years was in order (because of the nature of the presentation) to compare adjusted real estate returns to adjusted stock market returns. The point was that the stock market generally beats real estate in most residential markets, but there are some markets that are roughly equivalent or better, over the very long run. I think he was also trying to factor out cycle timing issues, at least on a horizon we can all understand. No coincidence he went back far enough that your father was too young to be an investor himself. That's the point of the exercise.

And remember, these are very general figures. It has nothing to do with Cow Hollow. It has to do with "in general, at random, the mythical average SF house..." Your father could have just as easily bought a building in SF that sank into the fill, which also wouldn't prove that all SF land sinks into the bay and becomes worthless.

Lessee, in normal times, a small premium is paid over renting. So considering the "investment' is so highly leveraged, 3% real appreciation is spectacular.

But these are not normal times.

Oh yeah, and someone here pointed out to me last week that leverage can work the other way, too.

Mr Perfect,

Dude, you are still trying to talk about median and averages ? Did you read DQ's press release carefully ? Not just they but even RE agents are admitting the problem with the median and how it is not representing the reality. If you are trying to prove a point about your knowledge of statistics, please be assured, you have.

And we bears have been putting our money where our mouth is. That is not in RE. Right or wrong, time will tell. But at least we are honest and consistent.

Gavin Says:

> FormerAptBroker: A figure of 3% real price growth per
> year for 80 years sounds reasonable for San Francisco.

Randy didn’t say “price growth” (or increase in value) he said “real-estate returns” (and he said 7 not 8 decades)…

> If home prices in the 1920s were 3 times family income
> and house prices grew by 3% per year while incomes
> grew by 2% real per year, current home prices would be
> 6.5 times household income.

In the 1930’s my Grandfather made $20 a week ($1,040 a year) and bought a home in San Francisco for $3,065 (2.95x his income)… Today that home is worth a little over $1mm. My other Grandfather bought a home in a nicer part of SF for closer to $4K (I never heard what he made back then) and it is worth a little under $2mm today. The house I grew up in on the Peninsula would have sold for about $9K in the 30’s and it is worth about $5mm today.

> If you assume home prices grow by 4% real per year while
> incomes grew by 2% real per year, current home prices
> would be 13.5 times household income.

I just ran the numbers (over 70 years) and a 6% a year annual increases my Grandfather would have gone from just over $1K a year to just over $60K a year (about what people doing his old union job make today). The home of one Grandfather’s home has gone up 8.75% on average and the home of the other Grandfather (in the nicer area) went up on average of 9.25% while my parents house (in an even nicer area) went up 9.50 per year on average%.

Since few people “pay cash” for homes and pay over 30 or more years their “real-estate returns” are far higher than the “price growth” (or increase in value). If someone bought a home like the one I grew up in 10 years ago with no money down and an IO loan their return over the last 10 years would increase to about 55% per year. Over 70 years the increase is not as dramatic since if you bought the home 70 years ago with 20% down and paid it off (with interest) over 30 years the average return would “only” increase by about .5% (keeping in mind that $1,000 will grow to over $500K at 9.5% over 70 years and will grow to over $1mm at 10.5% over 70 years)…

Most people need a place to live so to compare “real-estate returns” of a SFH to another investment over a long term you should adjust the annual “investment” to take in to account the extra cost (or savings) vs. renting a similar home. Doing a quick back of the napkin taking extra cost early on and rent savings in later years in to account more than doubles the annual return over the 70 year period pushing it up to well over 20%...

As Randy said I’m Bearish on Housing in the Bay Area “right now” (since most values have tripled in the past 10 years), but over the long term housing (that you live in so you don’t have to rent) and housing (that you rent to others) beats almost any other investment class…

(just ask Surfer-x, he’ll tell you!)
I'm a whore. I'll only tell you for money.

FAB

I don't disagree. The point is that your statement is true only is selected cities/regions. Not overall. In SF, your statement is true. That was AB's point. In Cleveland or Des Moines or Colorado Springs it is false.

On an unrelated point, do you mind if I email you questions on specific properties time-to-time? I promise to publicize the info here on everything unless it happens to be the one I end up buying. I'm eying a couple of seemingly nice places in MV right now.

15% or so appreciation for the last 5 years, followed by (what you suggested) another 5% per year for 9 years? How does that EVER average out to 3% per year?

You are confusing real and nominal rates of appreciation. 20/9 = 2 and it should be 20/19 = 1. I added in the rate of inflation to get nominal rates. Sorry if that was not clear.

I need some extra money - and especially before I have kids and a full fledge family, I'd like to build up some more savings.

I'm wondering what it would take to get a consulting gig on the side.

Actually, in general, I'd love to chat with one of the more seasoned/senior folks on here about career advice - and surviving in Silicon Valley.

Any takers?

Anybody have predictions for the SF Bay Area DQ #’s?
Sales will be down... 24.8% (can't bring myself to say they will be off by a quarter).

Forgot to include Piedmont as part of "Fortress BA". Someone is trying to sell some land at $100 per sq.ft. for ~8000 sq.ft. Trying to compete with Marin prices... over $4 million an acre.

Randy H Says:

> FAB I don’t disagree. The point is that your statement
> is true only is selected cities/regions. Not overall. In SF,
> your statement is true. That was AB’s point. In Cleveland
> or Des Moines or Colorado Springs it is false.

If you buy in a better than average area in any city you should do fine (homes in the Bratenahl area of East Cleveland and homes in the area around The Broadmoor in CO Springs cost more than a typical home in Marin… My point is that if you want to compare the “returns” of stocks and gold to real estate over a long time you can’t forget to add the dividends with stocks and adjust the “cost” of a single family home based on the rent savings. As I have posted many times it would cost me thousands more to “buy” today than to rent, but over a long time (after you pay off the house and lock in low Prop 13 taxes) it costs a lot less each month to own (My parents total housing cost each month is less than the cost of renting a typical apartment in San Mateo and that includes taxes, utilities and even the gardener)…

> On an unrelated point, do you mind if I email you questions on
> specific properties time-to-time? I promise to publicize the info
> here on everything unless it happens to be the one I end up
> buying. I’m eying a couple of seemingly nice places in MV right now.

I’ll be happy to answer any Marin property specific questions when I have time. Since I don’t check my Google e-mail every day add a P.S. to one of your posts on the BLOG letting me know that you sent me a question. I’ve been traveling a little more lately and have not been reading the BLOG (or posting) as much so if I don’t respond right away add another P.S. in the next thread.

Ozman,

Somehow I'd like to think that Ben Franklin would have approved of Warren Buffet whole heartedly!

@eburbed,

Now you're talking! Actually Randy H's Cap. 2.0 web-site might be a better forum (just click on his screen name). I won't pretend to know anything about tech consulting but what I can tell you is if you've always been a "W-2 guy" just being introduced to Schedule C will seem like such a revelation to you!

At least initially, the primary benefit (as you ramp up your business) is that you'll be able to show legitimate expenses and... in essence, operate at a loss for the first 3 years. Randy and I have had our doubts about those that seem to be starting some sort of "new" consulting service every 3rd. year! It definitely seems you have an eye on more than just milking Sched. C!

In the end, our practices become a reflection of ourselves. People tend to gravitate toward other like minded people. As evidenced here. I know it sounds old fashioned but it's still true. Create in your mind what your ideal client would look like. Make a list of 50-100 clients/firms that fit that description and then create a business plan to bring those clients on board!

Good luck and maybe we can talk Randy into giving it some time over at his forum!

@FAB

Thanks. I've been traveling too, and my BB isn't idea for viewing and responding to the blog. For the same reason my own blog has gone stale.

PS: I have sent you another query re: MV. We've decided to pass on Eton -- the property will take $0.35mm in work just to fix the kitchen & add a small family room. It is a great example of how one can buy 1.5acres in prime South Marin for under $2.00mm, whereas the same things a year ago would have been pushing $3.00mm.

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.

Interesting trip down memory lane. I wonder if when Patrick wrote this, he had any inclining that 6 years later his "housing blog" would in become a haven for 9/11 conspiracy theories, permabears who still think a massive price drops are just around the corner, and people fabricating and then furiously deleting posts in a never-ending troll war.

It's not the site that's irrelevant, it's all of us that comment. lol