patrick.net

Wow, CNN really did wonderful job.

According to the article, it seems to me what they're saying is that homes in major cities except a few are undervalued, and in so so sized cities are overvalued.

So, people in small cities and nearby suburbs, you've been warned. Now it's your turn. Brace yourself for that.

Why would bay area homes go up in price ?

1. Because NUMMI is closing ? - loss of 4000+ jobs?
2. All tech companies have shamelessly outsourced most software / hardware jobs to India / China?
3. There is 0 probability of earthquake and even if it comes, homes are so advanced they can handle it easily.
4. Lot of janitors / drivers / waiters bought shacks for ridiculous prices in hope of atleast 10 % yoy appreciation of home.

I don't think that the Bay Area is moving into another boom just yet. I don't think we are done with price drops. I agree with liveconfused on points 1 - 3.

That said, the janitors/drivers/waiters with houses may be doing better than you think. If they went for their Prop 13 reassessment, their state taxes are down, and that is a little more money in the pocket each month. Assuming local taxes are reassessed periodically, their local property taxes are down, too. They may have bought with the help of sweet down payment assistance loans from their cities, so right now they may be paying on smaller mortgages than you would expect. For the people making little enough to qualify ($72K individual, up to $120K for a family of six), my city more or less gives away $50K - $80K. No interest for the first five years, shared appreciation after that, due in 15 years or upon sale. Would that I qualified for such treats! I don't, but I know some people who do, and they are hanging on surprisingly well. Yes, their home value is down, and if they rented it out, the rent would not cover the mortgage. But, on the other hand, they have no need to rent it out, and the mortgage they actually pay--which does not include that sweet interest-free DPA loan--is more or less in line with the actual value of their home at this time. Their property taxes have dropped, and absent a catastrophe, they will be able to keep paying their bills.

I think it is a mistake to assume that people in relatively low-paid work are uniformly irresponsible flippers. In my experience, many of these folks are the original American Dreamers, very interested in owning and living in their own homes. They are also the sort of people who will take in roommates or find a second or third job in order to make ends meet, and it need not be formal employment. It is almost always possible to find a few more hours of survival work in cleaning or childcare or maintenance or whatever.

The problem is that those Cool and Hip media types just project the past into the future and call it "analysis". Probably, it is correct to use the past to imagine outcomes for the future, but they don't look at enuf of the past to consider all the outcomes.

If they did, a recent piece on PBS Newshour might have caught their attention, when a local historian said something like (not exact quote here) "if you were an energetic engineer from anywhere in the United States, it didn't matter how much experience you had, you could come here and get a good paying job". Sound familiar? "The technology was new and disruptive" (paraphrasing here). Sound familiar? "We were the Silicon Valley of our time".... "satelllite communities sprung up with ancillary businesses all over the region". He was talking about Detroit, in the years when the auto industry took off about 90 years ago. I suppose the Outlook for residential real estate in Detroit was a lot rosier in 1920 than it is now.

You can say that the great weather will continue to attact wealthy people here, but I think places like Oxnard and Salinas also have great weather; so it ain't just the weather.

We have had a flow of outside capital here propping up the rents and home prices in the region from the Gold Rush of 150 years ago to the dot.com. One outcome is that the flow will resume but I don't think so, do you?

Another outcome is that all the folks who are struggling to pay rent here in places like Seven Trees will quit the area when they realize that they can earn the similar wages bagging groceries or cleaning toilets in places like Oxnard or Salinas or further away, why should they piss away those wages here to pay the higher rents? Or if they are homeowners, why should they work second and third jobs and take in boarders just to tread water on that high priced mortgage (and property tax) if they can quit the area and do the same kind of work outside the region?

Sybrib,

Seven Trees! I know where that is (South San Jose). Quite the obscure reference, there. Nobody could fairly say that you don't know your way around the bay area :).

People who have family here have reason to work harder in order to stay. I get that the Bay Area is full of people from elsewhere, but there are some locals, too, and staying in the area is meaningful for them. So maybe we considering different slices of the lower income homeowner pool. If I were from elsewhere, and if my income were low, yeah, I would move. If I were from here and wanted to stay near parents/siblings/kids, I would do my best to stay here, even if it were difficult.

sybrib says

“if you were an energetic engineer from anywhere in the United States, it didn’t matter how much experience you had, you could come here and get a good paying job”. Sound familiar? “The technology was new and disruptive” (paraphrasing here). Sound familiar? “We were the Silicon Valley of our time”…. “satelllite communities sprung up with ancillary businesses all over the region”. He was talking about Detroit, in the years when the auto industry took off about 90 years ago.

Sure was not the case when I first started in SV. But that has been the norm post 2000. Its slowly going back to prior way of doing business.

Eliza says

I don’t think that the Bay Area is moving into another boom just yet. I don’t think we are done with price drops. I agree with liveconfused on points 1 - 3.

We are now some 10 years since the great boom/bust, and i dont see anything out there that was similar in impact as was the case back in the 80s or late 90s. Some would point to Google or Ebay type which they term as Tech Company, but they fall out of the Tech definition. They are advertising and online market places. Not that exciting or having a great impact compared the the former giants we had back in the 80s. The most notable phrase people would use back than was .. "not yet there" to compare their current roadmap to where they want to be. I dont hear that too much these days. Some corporations and consumers are still running XP and older office programs on their PC. Very little motivation to upgrade. Hence tech spending has been a meager 5% compared to high double digit growth in 80s and 90s.

Eliza says

If I were from here and wanted to stay near parents/siblings/kids, I would do my best to stay here, even if it were difficult.

Its no longer a choice left to you or me as an individual contributors. You, me, along with everyone else is aggrated into costs and compared to other regional costs. I known too many who left their primary career and moved into a different profession. Tech worker to nursing or culinary profession.
It does happen!

sybrib says

Correct, the problem is that those Cool and Hip media types just project the past into the future and call it “analysis”. Probably, it is correct to use the past to imagine outcomes for the future, but they don’t look at enuf of the past to consider all the outcomes.

If one learns about the past, one can easly see the hype we see today. The Cool/Hip media types are all hype under the skin.

toothfairy says

double dip is getting to be overused term. Prices going down 1% for a quarter would constitute a double dip. Doesn’t mean prices will go back to the bottom.

Oh we certainly saw this during the declines of the Tech Stock back in 2000, 'it will come back' and 'buy more on the pull back' was the motto. LOL! never did... this is all volatility.

The ripple effects are still being felt, like the waves at Mavericks.

justme,

a landlord/investor posted the Seven Trees address of one of his aquisitions here.

I used to rent in Seven Trees, it was a rough place. I had a nextdoor neighbor whose landlord lived nearby in Berryesssa. The renter was a hard-working middle aged lady who worked two custodial jobs to make the rent; the Berryessa Landlord vetted his tenant well.

But then her (unemployed) adult son showed up with tattoes after his incarceration, and soon he had pit bulls. His drinking/pot smoking tattooed friends showed up there, often staying days at a time. When I threatened to sue my landlord and my neighbors' landlord if those dogs did anything to hurt my family, the Berryessa landlord was intimidated by his uninvited tenants. I don't blame him. Rather than confront them about the dogs, he just shrugged and told his tenant that he had to sell the place, which he did.

sybrib says

But then her (unemployed) adult son showed up with tattoes after his incarceration, and soon he had pit bulls. His drinking/pot smoking tattooed friends showed up there, often staying days at a time.

When I first moved to Los Gatos, Cocaine was the drug of choice. But I guess you need big bux to support an expensive habit. Not to mention two major busts of "houses of ill repute" in sunny LG. Some things never change and drug abuse in LG HS is still a problem.

>>That’s an awful lot to write in an attempt to discredit something

I'll offer you a reverse touche' on that one. But seriously,

>>that is taught as fact in university economics courses

I sure hope not. Perhaps you were thinking about the stock market? It is closer to being true there.

The housing market is a very different beast than most other markets. We are talking about a market that has a small annual turnover relative to the stock market. For example, NYSE had nearly 100% turnover in 2008. The housing market is just a few percent per year.

The general public sentiment matters much more in the stock market, because (1) a large fraction of the general public is a participant an (2) because the granularity of transaction in the stock market is much smaller.

In the housing market, it is the sentiment AND ability of REAL buyers and sellers that matter, not what everyone else thinks.

So what do you REALLY BELIEVE for 2010? Is unemployment going to get worse? Or is there going to be a recovery? Unemployment lags growth about 12-18 months. If you’re betting that unemployment will continue to rise, you’re inventing new history. You’re claiming that although the recession ended early last year, that unemployment IS NOT in fact a 12-18 month trailing indicator. You’re betting that this recovery (yes it is a recovery by definition) will look radically different from all other recoveries.

The interesting thing about recessions with high unemployment is that it creates a perfect pretext for a company to pare down its workforce and make more lean its compensation packages. It is a great time to let go of people for the sake of shareholders because it is the order of the day. It is expected. Recessions are also a great time for mergers and acquisitions, which are all but synonymous with lay-offs/redundancies. So yes, unemployment (and its variants) will easily continue to rise at least throughout 2010.

And yes, this *recovery* will look radically different from all other recoveries because the underpinnings are radically different from other recessions in recent history. For one thing, a housing bust is not the same as a stock market crash; a lot of the employment growth we witnessed after the tech crash was directly related to the housing industry. Along with the quasi-jobs from the housing boom that continue to evaporate, off-shoring is also way up from 2001, easy money (HELOCS, CCS) is mostly history, and the selection of creative economic stop-gaps is growing thin. Maybe you're looking in the rear view mirror a little too much when trying to determine the next bend in the road.

E-man,

your opinion is wrong, I don't think "bad" and "landlord" are the same thing. Everybody is an individual. There are probably good landlords and bad landlords, good tenants and bad tenants.

In the case I cited, the bad person was not the landlord and it was not the tenant. The landlord was concerned about his family over in Berryessa and the tenant lost her rental. They were victims. I just didn't want my family to be a victim of those dogs, and neither of the landlords was willing to take responsibility for fixing the fence.

There's probably lotsa bad guys in the current crash, starting with a couple named Bush and Greenspan, igniting a housing bubble and credit bubble in order to "paper over" a recession with The Ownership Society theme to secure the 2002 Congressional election, and subsequent other federal elections. Those are the bad guys.

9/11 was an awful disaster that took 3000 American lives and wrecked the lives of the families of both elite bond traders and the working class folks who were also in those towers providing services for those elites that day. Who do you suppose did more overall damage to the "entire" USA: Al-Queda or those who created conditions for the housing bubble and credit bubble? Look up how the Constitution defines treason and you will know who the worst enemies of the United States were in recent years.

sybrib says

Who do you suppose did more overall damage to the “entire” USA: Al-Queda or those who created conditions for the housing bubble and credit bubble? Look up how the Constitution defines treason and you will know who the worst enemies of the United States were in recent years.

I like the cut of your jib. Net mortgage borrowing was $153.6B/yr in 1995 and $383.3B/yr in 2000, rising to $1T/yr in 2004-2006, falling to $700B in 2007 (it was NEGATIVE $115B in 2008).

Going with $600B/yr as sustainable borrowing given lower interest rates and flat incomes, that's an excess of $1.5T+ of household mortgage indebtedness over the bubble years of 2002-2006.

30% of that is guaranteed dead loss and 50% is entirely probable -- $500B to $750B of engineered market failure, losses the system has to absorb or attempt to inflate away.

By way of comparison, the WTC attacks incurred around $40B to $100B in damage.

Troy,

It is interesting to put dollar figures on disasters, on argument there.

I was more addressing about the human cost, how many lives have been Wrecked all over the USA and other parts of the world like the UK by the fallout of that Wreckless ignition of the credit bubble, in order to create an OwnerShip Society theme for federal elections.

E-man,

>>If I read your comments correctly, we agree that the bottom was already established for the low-end market.

No, I am not claiming that. All I am saying is that the low end has fallen more than the high end, and that further dips will be more significant at the high end.

I'm not calling the bottom of ANYTHING at this point.

sybrib, Troy. Good stuff.

the time when most people were negative on housing was probably middle of 2009.

I could be wrong but I just dont see us going back to a point where the majority of people are saying it's a bad time to buy a house.

I completely disagree. 2010 will see EPIC foreclosures in the Bay area. 2009 was a start to the pricing correction, not housing crisis. This is a market that needs to correct itself before it can stabalize.

Buyers, Investors, and Leasors, beware of believing anyone who's income is based upon the profit of whether you believe their lie or not.

Values in the Bay area have dropped in 2009 and are expected to drop more in 2010 and 2011. There is a huge amount of hidden inventory and distressed homes in San Ramon, Windemere, Danville, Livermore, Dublin, Pleasanton and Alamo. Banks have been sitting on homes.

www.cyberhomes.com
www.forbes.com
www.marketwatch.com
www.patrick.net

The Northern California real estate market (values and loans) was the biigest lie, scam, fraud, scheme of the decade. Fool me once, shame on you. Fool me twice, shame on me.

Gina, for the most part I agree.

There have been up till now, though, some enclaves like The Fortress where money was no object because prices were set by wealthy people, mainly elite immigrants concentrating some repatriated American capital collected from WalMart-type shoppers all over the USA, into a handful of places like The Fortress zipcodes in the Bay Area. But recent figures suggest that the flow of those huddled masses is declining so it sounds like maybe the stream of such wealthy immigrant buyers has trickled. And if money is no object buying in, then losses on selling on the way out aren't a catastrophe either; and there has been a buzz about some of those folks going back home where they can make even more money. If there's not another rich immigrant buyer to replace that seller, then it means the new buyer will also be a borrower, which probably means a lower sales price.

So it seems like, even in The Fortress, maybe at least for awhile the jig is up.

It appears some want to control the blog well as real estate prices.

Absolute power= absolute corruption= California Real Estate Values (Time to correct the problem and not continue it.)

The facts are the facts. Prices have dropped state wide approximately 20% in 2009, and are expected to drop again in 2010.

I don't need a fancy chart or flim flam diagram to show me how less money I have and how much I continue to lose on my investments. Real estate (in most areas) values and prices continue to decline in the bay area and it is predicted they will continue to decline further in 2010...

This is the ugly reality of the biggest lie of the decade. People are enduring substantial financial loses everyday.

Real Estate values have to correct them selves in proportion to the average income of it's population. No other way around it.

I stand by my previous opinion and agree with the experts cited at FORBES, MARKET WATCH, ABC, NBC, Patrick.net, and others.

Sorry but I no longer trust realtors, property mangers, or mortgage brokers as they have been proven wrong, personal lied to me, and continue to perpetuate the biggest fraud of the decade by keeping prices and profit over inflated to generate personal income and profit for themselves.

Those are the facts, believe as you choose.

I completely disagree. I believe the experts cited that in 2010 we will see EPIC foreclosures in the Bay area. 2009 was a start to the pricing correction, not housing crisis. This is a market that needs to correct itself before it can stabalize.

Buyers, Investors, and Leasors, beware of believing anyone who’s income is based upon the profit of whether you believe their lie or not.

Values in the Bay area have dropped in 2009 and are expected to drop more in 2010. There is a huge amount of hidden inventory and distressed homes in San Ramon, Windemere, Danville, Livermore, Dublin, Pleasanton and Alamo. Banks have been sitting on homes.

www.cyberhomes.com
www.forbes.com
www.marketwatch.com
www.patrick.net

The Northern California real estate market (values and loans) was the biggest lie, scam, fraud, scheme of the decade. Fool me once, shame on you. Fool me twice, shame on me.

Put your own address in www.cyber homes.com

See what your home was worth in 2008 and see what it is worth now. The -20% is a state wide, some areas as high as 40% others less. Depends where you live.

If you like, I can sell you my home today, for its 2006, 2007, or 2008 value?

I didn't think so.

I'm going to be nice too, so have a Happy Valantines Day!

housing price doesn't move overnight like stocks. I'm surprised at the current pace of price declines, especially on the low end. The bubble took a long time to inflate and I've always expected it to to take a long time to deflate. Just look at Japan to see how government intervention affect the decline.

Some people have short attention spans and little patience. Just because its "only" dropped 15% (whats 15% of $600k? ouch!) doesn't mean we have bottomed, or the worst is not yet to come, or it will go back to bubble evaluations anytime soon.

Some people seem to dismiss the possibility of an overshoot below historic valuations. Just give it a few years or 10.

If major global cities such as London, Paris, Zurich, etc can sustain real estate prices that far exceed the median wages of its residents for prolonged periods of time, it can happen in the SF Bay Area too. There is just such a global demand for these cities that great drops in prices are unlikely.

brokebaroque says

If major global cities such as London, Paris, Zurich, etc can sustain real estate prices that far exceed the median wages of its residents for prolonged periods of time, it can happen in the SF Bay Area too. There is just such a global demand for these cities that great drops in prices are unlikely.

Unlike the global cities you listed which has a diverse economy, eveyone has penned SF Bay Area (esp the south bay) as Tech Mecca, as such they ignored the deflationary economy. We are more like Tokyo, fast booming technology economy with dreadful downturn.

Also keep in mind that the US has lax immigration laws compared to Japan.

Yep,

cheaper than London Paris now as it was before those bubbles, when we were still more expensive than flyover land, but nowhere near out of whack like now.

Some of us in the Bay Area can be a little bit too Bay Area Centric for our own Hip Cool and Beautiful good.

It is great that you and E-man are putting dissenting points of view on Patrick's blog, a good exchange of ideas. But putting so much energy into arguments for folks who have made up their minds to be skeptical, who are you really spending so much energy into trying to convince? Could it be yourself?

Hey Wong,

You thought cleantech was funny? - I have another one for you.

Question: (sybrib) Please paint the rosy scenario for how the Bay Area economy will prop up or even according to your forecast increase the high cost of home ownership and propup/boost the rents.

Answer: (Guess who) I think the answer is health care.

LOL! thats good one sybrib.
I guess if i get a hernia thats somehow translates to a higher GDP.

1) Home prices double from 1976 to 1980.

Job expansion! Growth in Tech industries like PC/Semiconductor/Software. By mid 80s SV had 70% of world wide semi production. There was lots of demand for skilled tech employees. A very young demand driven economy which allowed high salaries to grow.

2) We had 100% inflation from 1980 to 1995, but 50% inflation from 1995 to 2010.

Yes, and thats were prices indeed doubled based on inflation line but after the correction due to job losses. Much of the manufacturing was wipped out. PC/Semi manufacturing was closed down and moved out of the valley. Others like Microsoft pretty much killed off their competition , our local software makers. Others fell due to fierce price competition.

3) We had 30% inflation during the recession from 1989 to 1995, but we’re in a deflation stage since mid 2008.

What cost $100 in 1989 would cost $122.53 in 1995.. more like 20-25%.... 30% is passable.
Deflation is factored in based on published results.

4) Shouldn’t the graph be plotted on log scale?
Yes you can certainly do that... try excel or open office... its free.

thomas.wong1986 says

1) Home prices double from 1976 to 1980.
Job expansion! Growth in Tech industries like PC/Semiconductor/Software. By mid 80s SV had 70% of world wide semi production. There was lots of demand for skilled tech employees. A very young demand driven economy which allowed high salaries to grow

Which part dont you get ? See above....

E-man says

How do you explain the median household income of $175k with a median home price of $2.4mil?

The same way I explain Yahoo Stock with price of $350/share with PE of 200x earnings back in 1999.
Irrational Exhuberance!

The fact is we hardly had $1M homes before the bubble years with the same 5% makeing $170K a year. Irrational Exhuberance (second edition).

Prices will eventual fall back to pre-bubble plus inflation (30-35%)

http://www.redfin.com/CA/Campbell/1212-Capri-Dr-95008/home/997015

Date Event Price Appreciation Source
Mar 08, 2001 Sold (Public Records) $731,818 26.3%/yr Public Records
Apr 16, 1997 Sold (Public Records) $295,000 - - Public Records

thomas.wong1986 says

Date Event Price Appreciation Source
Mar 08, 2001 Sold (Public Records) $731,818 26.3%/yr Public Records
Apr 16, 1997 Sold (Public Records) $295,000 - - Public Records

BTW, similary homes by year 2000 went to $500K... long before any easy lending or evil bankers
even created the toxic loans.......

The census data says in 1950 the median home value adjusted for inflation was $44,600. It also says the median home value adjusted for inflation in the year 2000 was $119,600.
Median, Ha, ha... that's a good one. The reason many of us live and breathe Shiller is that he uses ACTUAL home sales data pairs -- looking at what a house sells for and comparing it to when it was last sold. He's able to aggregate all the sales pairs and construct a comprehensive picture of how the market behaves over time. There are limitations to this approach, but I'll take it any day over medians.

E-man says

@ camping,
I don’t think the Bay Area is special like everyone elses. However, you cannot compare the Bay Area to TX or AZ. It has always been expensive to live in the Bay Area. When was the last time that RE could cash flow positive in the Bay Area?

I haven't been here that long - were good parts of the Bay Area not cash flow positive in the 90's?

The census data says in 1950 the median home value adjusted for inflation was $44,600. It also says the median home value adjusted for inflation in the year 2000 was $119,600

Along the same lines as what EBGuy says, have you considered that newly constructed houses have been increasing in size every year for a long time? You cannot directly compare a 1950 house to a 2000 house. Again, this is why Case-Schiller exists!

>>I love accuracy. I hate propaganda. I don’t get upset, but I do like to set the record straight.

I'm busy right now, but will respond in due time

>> Who wants a discussion where everyone agrees with each other anyway?

The purpose of discussion is to FIND THE RIGHT ANSWER. Discussion for the sake of disagreement is just a waste of time.

justme says

The purpose of discussion is to FIND THE RIGHT ANSWER. Discussion for the sake of disagreement is just a waste of time.

You won't find the right answer if everyone agrees with each other. It's called groupthink...