patrick.net

"It will not be until AFTER interest rates have been
raised substantially and then begin to reduce again
will we see another substantial increase in the value
of real estate in the US."

Not true. Home prices rise in times of rising or falling interest rates. Interest rates are a secondary factor in home price increases.

If interest rates are so important then why do home prices go up rapidly in some places while holding flat or even falling in others at the same time? The interest rates were the same but the price movement was dramatically different.

Like all markets, housing prices are driven by the relative balance between supply and demand. Currenly the supply is excessive relative to demand. It will take a while to clear the excess supply. Lower interest rates will influence this but not drive it.

When the market was rising demand was temporarily increased by many people who bought on a speculative basis. Many did not care what the interest rate would be because they believed the rising prices would more than offset the interest cost. If they thought they could cover the cash flow for a couple years before hitting the jackpot they were in.

I'd like to get some comments on long-term Bay Area trends. From my perspective many employers are starting to react to the fact that future population growth from the fortress can only go east or south. I think they see the reality that to get affordable labor they have to relocate from the fortress. Working in commercial real estate I've seen numerous examples of peninsula companies signing or looking to sign leases in the East Bay. Take for example the solar industry that appears to be a key industry in the Bay Area's future. Where do you think all these companies are setting up shop?

# skibum Says:
I’ve come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don’t see a real effect here for another 1-2 years.

I think that is pretty much understood, at least on this forum.

We let go of 18 contractors in my team in March. Only 4 of them are still in the area - the rest of them moved out to jobs outside the bay area (based on what I see from linkedIn).

PermaRenter,

>Virtually nothing of money management is taught to citizens.

Are you joking? Of course one cannot teach impressionable children that there are whole industries out there that exist mainly to fleece them of their money, and that the buyer had better beware. Teaching this would be heretic and "anti-business". There is no bigger sin in the US than being "anti-business", in case you hadn't noticed. Also, we cannot teach anyone that regulation (yes, regulation, the R-word) exists mainly to control how Wall St plays with Other People's Money. That would be Co*munism, and we all know how bad THAT is .

Ouch - anyone notice the spike in 30 year Jumbos now at 7.21%

http://www.bankrate.com/

In Chicago, that is a purchase with loan amount above standard conforming of 417k (no increase here like the coasts in the recent bail out bills!).

http://www.fanniemae.com/aboutfm/loanlimits.jhtml

Zepher says:
Interest rates are a secondary factor in home price increases.

Possibly. But the availability of credit may have a more pronounced effect. House prices may not be driven down by a 1%-2% rate increase, but I believe higher downpayments and outright credit denials will noticeably help push priced down. A left shift, if you will, in the demand curve.

Virtually nothing of money management is taught to citizens

I remember taking a "Time Value of Money" lesson in an 8th grade econ class. But even if such courses were competently and widely taught, would it matter?

People already know that paying $500 over twelve months at an easy credit store for a $300-at-Wal-Mart item is foolish. Same with waiting all night outside an Apple store to overpay for an I-Phone. Ditto the 7 year auto loan, maintaining a credit card balance, and generally spending more than one earns.

Teaching kids finance is a good idea, but I think the real issue is financial disipline. Gotta break them out of the "take it home today" habit.

I would not angrily denounce "society" for any individual or collective lack of judgment. You will need to prepare your kids to live in "society," where they will face pressure not just to overextend, but to smoke, drink, do drugs, and put out.

Teaching kids finance is a good idea, but I think the real issue is financial disipline. Gotta break them out of the “take it home today” habit

Why? We need willing consumers to help grow our economy. I am against teaching those who are not interested in learning.

Best evidence of global warming yet:

http://tinyurl.com/3qbae4

Best evidence of global warming yet

LOL!! Either proof of global warming or of better waxing techniques.

Paul says;

Ouch - anyone notice the spike in 30 year Jumbos now at 7.21%

Encouraging. Let's hope the "spike" is just the start of a trend up.

I for one - living off the interest on savings - could sure appreciate some more "Volkeresque" interest rates right around now. How about setting a floor under those interest rates set by the Fed - maybe CPI + 2%? :?

How about setting a floor under those interest rates set by the Fed - maybe CPI + 2%?

No. Then they will find a way to revise the CPI all the way down to 0%.

The Merc is such a joke. Hard to be sympathetic for the first two famililes in the story.

http://www.mercurynews.com/ci_9444900

cb :

The Merc story rhymes with what I have been saying ad nauseum.

Even in these Fortress areas, these high salaried people have stretched thin. Earning so much money - over 200K a year - should let one sleep peacefully. But that doesn't happen when you buy a 1M+ home. If not that then you became a slave to a home that you don't really like.

Unlike many people here who think job recession is necessary for prices to go down, I have argued that higher interest rates would be enough too. But so far neither has happened. So the debate is yet to be settled. But we already are seeing effects of tighter credit conditions even in Fortress. Overbidding is almost absent - unless the house was deliberately priced low to start that.

I have to admit my total surprise - people are still buying at these prices in Cupertino - a market I closely watch. Still willing to give up so much quality of life and future savings for an unshaken belief that prices will not go down here. And still not realizing that even if prices hold steady, the real cost of owning will actually leave them poorer when they need the money most.

The negative effects of this bubble are so long term that they are beyond the horizon for most people to see.

>> Even in these Fortress areas, these high salaried people have stretched thin. Earning so much money - over 200K a year - should let one sleep peacefully. But that doesn’t happen when you buy a 1M+ home.

This is exactly what I said before .... We are earning 250K and priced out of Cupertino housing SCAM .... renter in ZIP code 95014 (Garden Gate School)

"Unlike many people here who think job recession is necessary for prices to go down, I have argued that higher interest rates would be enough too."

I totally agree with this.

People will continue to buy when they feel more comfortable to buy than not to buy. The fear of inflation may as well balance out the cost of higher interest rate.

Job fear is entirely different.

>> People will continue to buy when they feel more comfortable to buy than not to buy.

Let them go to hell ..... adios amigos ....

Jus saw a used condo opposite Cupertino Library ... list price 999K.

The Merc story is a joke because the first family stretched thin to buy a 1200 s.f. cottage in Menlo Park which likely costs over 1M. The second couple chose to become a single income earner because one of them started a new company to try to strike it rich. Cry me a river really.

I would never send my kids to a Cupertino school even if I don't have to pay a mortgage. There are many alternatives; for example, many areas that has good K-8 school has less of a school premium. You can just live there and pay 4 years of private school and saved a bundle.

My wife has a co-worker who sent her kid to Harker for kindergarten and complained that they have no money (no sh*t when kindergarten costs over 20K), when I lived in Canada, I remembered all the private school kids were pretty rich, there aren't many working/middle class families that send their kids to private schools.

I just bought a one year old used car so I asked a guy who I used in the past to come out to detail the car, he was boasting how he just bought a house in Menlo Park for over 1M but it was only 1200 sq. ft.

Also, if you make 250K for a household, why not rent, you will be pocketing some serious change each month.

@OO

The auto loan rates are really low. For certain types of cars (BMW, Infiniti), you can get rates from 1.9 to less than 5%. I belonged to the HP credit union (where I worked many moons ago), they promised loans rates like 4.75% for 60 months. Live a little and get out of the Asian stereotype of Camry's and Accords :)

I wish Toyota would make a 2-ton car with aluminum space frame. :(

Cartels generally die off. Indonesia - home of Royal Dutch Shell Ltd. - has had enough and has pulled out of OPEC.

www.msnbc.msn.com/id/24856026/

StuckInBA,

The negative effects of this bubble are so long term that they are beyond the horizon for most people to see.

This is a very key point that I believe will take on a much larger significance when historians look back upon this period. Combine a general ignorance of personal finance in the majority of the population with a planning horizon set so far into the future that it shakes loose even those with a rudimentary grasp, and I'm not surprised with the stories that are hitting the headlines these days. When I pointed out to my wife we that could settle in an 1860 sf St. Tropez home in the south of France for the same amount many far more pedestrian metropolitan US cities' realtors are claiming is fair value for tract homes or shoddily-built recent construction "custom luxury homes", she readily agreed with me to start looking outside of the US for a permanent home as it is apparent to me now that the US monetary leadership will attempt to save the REIC at the expense of the currency and wealth of the nation. Even with the infamous tax loads of these offshore locations, preliminary analysis indicates to me that we would pay roughly the same, for a better value; there are many aspects I don't like about France, but for a 2-3X difference in what I would expect to pay in the US for the same cachet, I'm finding I might be willing to overlook those undesirable issues.

Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic ... The April total works out to about one in seven previously occupied homes available for sale nationwide.

... By cutting prices, lenders have managed to increase sales of such homes sharply in recent months in some cities hit hard by foreclosures ... Mark Zandi, chief economist at Moody's Economy.com, forecasts that the inventory of REO homes won't peak before the end of 2009.
...
The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers.

The lenders were slow to reduce prices at first, apparently hoping for "better market conditions". Now some lenders are getting aggressive as they realize that holding REOs means even greater losses as prices continue to fall.

From anecdotal evidence, it appears the lenders are being aggressive on pricing at the low end, but are still reluctant to discount mid to higher priced homes. This will probably change as the REOs continue to pile up at the banks.

Price expecatations go a long way in setting prices.

That little piece in hte Merc is showing people what it is like to count on 250k combined income to buy what was intended to be a tract home near a major emplyment center back in the 50s when it was built.

Back then there was no where near the kind of pressure on families just to meet their housing needs as there are today.

Even I these boards I am stunned by people saying, "I expect to pay $750k for my home in San Jose."

Ummm, no.

Change those expecations.

The sacrifice to spend that kind of money on a home should mean a premium home in a premium location. The standard should not be dual income just to cover expenses.

Only New York matches the low quality it the high prices of the Bay Area, and the finance job sector had to overpay its emplyees to do it. And the wheels have come off that bus. Leakage to Wall Street is stemmed and Manhatten shouldbe poised for a flop.

Even if the Bay Area is 'special'. I think that the outlaying areas can be at least as special as the penninsual proper. Indisty should migrate to cheaper areas, even if we do not see the flight to Colordao and Arizona as we have seen previously.

If a couple makes $300K and finds it hard to survive in BA, there's something wrong with that couple, not with BA. If they just pay rent, they can easily find a $3K place that is worth over a mil in asking price. Then, they can sock away a substantial portion of their income even if they go Whole Foods, imported car, European vacations etc all the way.

If a couple makes $300K and finds it hard to survive in BA, there’s something wrong with that couple, not with BA.

Even with 300K, one cannot comfortably afford a "regular" house (1.2M) in a decent area.

Moreover, Bay Area is quite ugly for the price. It is not Left Bank. It is not Lake Geneva. Mind you.

If they just pay rent, they can easily find a $3K place that is worth over a mil in asking price.

How? Perhaps a 1M contractor's special? ;)

A nicer 2/2 apartment in Mountain View with good amenities will cost $3200/month.

We are paying less, but our rental has flimsy everything. Besides, it is on a busy street and with underpowered air-conditioning.

RE: rent vs buy

An "unimproved" crap in a good location can cost little to rent and a lot to buy simply because you do not rent the "potential."

Plenty of choices around $3K for a 3/2 house on a decent lot in Cupertino, Saratoga or Los Gatos, just don't expect any fancy interior. But again, you won't get any fancy interior with a mere $1M budget either.

With $1M, you either get a fancy interior in a crappy location or a crappy interior in a good location.

But again, you won’t get any fancy interior with a mere $1M budget either.

You can get fancy interior for under $1M in a decent location if you are willing to live in a condo or townhouse.

Semi-fancy interiors (worker-bee standard) don't usually cost more than $100K for a 2/2.5 townhouse.

Aventino, the brand spanking new apartment just finished about a year ago along Los Gatos border rents for below $3000 for 2 bedder, very posh interior and amenities. I was visiting a friend there the other day, I'd say that's probably the best apartment I have ever been to.

Spending $1M on a townhome or condo is downright silly. Most of that $1M you pay for a SFH goes into the value of the land, with condo or townhome you get almost no land.

Not to mention the $400+ and fast increasing condo fees which definitely tracks the TRUE inflation. Condos are always the first to crash and last to appreciate in real estate cycles.

Spending $1M on a townhome or condo is downright silly.

One pays to live. Remember that.

Aventino, the brand spanking new apartment just finished about a year ago along Los Gatos border rents for below $3000 for 2 bedder, very posh interior and amenities.

I did check that one out. It was quite nice. Smallish bathrooms though. Nevertheless, back then the units we wanted were not available. Perhaps we should call again.

Check out this $300M townhouse in London:

http://tinyurl.com/5c67v7

If one has $300M to spare on one of his residences, I don't think he is not looking at it from an investment point of view. It's just a toy, very expensive toy.

The rent distribution is is far more volatile than the purchase price distribution across micro-markets in Bay Area. In Cupertino, some apartment complexes charge over 2K for a 2 Bed 2 bath - but I know people who have been renting uncrappy (!) and of course bigger SFH for less than 2400.

If you are willing to spend only(!) about 1M in the same neighborhood, then what you can get is really nothing but a sh1tbox - you have to keep convincing/deceiving yourself that it's all worth it.

Let's not kid ourselves though. These cities/areas are very small. In Cupertino, all it takes is 20 idiots per month to keep the madness going.

What is changed is this. While I was watching over my kids while they were playing in a park, an impromptu discussion started with other parents and topic soon went to housing. Every single person expressed disbelief about what people are STILL paying in this area. Instead of thinking of the buyers as lucky folks on their way to riches, everyone ridiculed them to be the last idiots to hang themselves.

Such are my unscientific indicators of market psychology. Every single one of them is negative. But not enough to go contrarian yet.

If you are willing to spend only(!) about 1M in the same neighborhood, then what you can get is really nothing but a sh1tbox - you have to keep convincing/deceiving yourself that it’s all worth it.

Just tell yourself that it is only(!) GBP 500K. ;)