patrick.net

"In Belmont by contrast prices have fallen only 20% from the peak. "

I am completely baffled as to why anybody compares current prices to the peak of a bubble, as if they are some valid baseline. Not to criticize you, but I do not think looking at that statistic is meaningful in any way whatsoever.

Here is something I think is more useful: What was the premium paid to live in Belmont as opposed to Hayward in the pre-bubble era? House prices were pretty stable in the mid-90's so that's a pretty good baseline. But 2000 will do to demonstrate what I mean:

In 2000, Belmont was $323/sft. Hayward was $168/sft. Ratio = 1.92

Today? I can't read the chart exactly, but it looks like Belmont $500, Hayward $200. Ratio = 2.5.

So, for some reason, 10 years later Belmont is about 30% more expensive on a relative basis. Some people will say "well the rich are getting richer". Or, when I presented a similar statistic to a real estate broker (and SF homeowner) a few weeks ago, he said "people are realizing how much better it is over here".

I think that is complete BS. It's just that the correction mostly hasn't happened yet in the high end markets. You already half answered your own question as to why: "Another interesting difference is the lowest sales in Hayward occurred in late 2007, early 2008 around the time sub-prime loans stopped being made. The lowest sales in Belmont occurred in early 2009 when jumbo mortgages became very expensive."

Hell, lenders were still writing ultra-toxic Option ARMS in San Francisco a year after the sub-prime market had dried up and it's impending collapse was already headline news. It's all about the finance. Sub-prime tended to have 2 years recasts too, as opposed to five elsewhere. Shorter fuses.

It's also conceivable that Hayward is now "undervalued" a bit, and that part of the normalization of the ratio to (1.92 or thereabouts) is Hayward coming up rather than Belmont going down.

I think in order to validate any ratios between prices, we also need to enter the ratios of all-cash buyers vs mortgaged- buyers. I have not found that data but I think it is relevant to where the market really is. Just saying "sales are up" does not tell the whole story if sales are up because of cash buyers out-bidding each other.

I kinda agree with MarkInSF:

"I am completely baffled as to why anybody compares current prices to the peak of a bubble, as if they are some valid baseline. Not to criticize you, but I do not think looking at that statistic is meaningful in any way whatsoever."

The best baseline is by referencing the time when house prices are not speculative. I projected what house prices "what it should be" in a previous post. That is the baseline I use. Just like when I go to buy stuff in supermarket, unless I urgently need to, I buy when it is on sale. I am waiting for soCal to drop another 25%.

MarkInSF: The reason I included the fall in prices from the peak is to show that in cities where prices went up a lot (like Hayward) was that prices were also likely to fall a lot.

The ratio between home prices in Belmont and Hayward (used to be 1.92 in 2000), now 2.5 is relevant to understanding price changes. I agree that you cannot explain the increase in ratio by claiming it is the rich getting richer. The gains in income have not been concentrated not among the top 30%, nor the top 10% but for the top 1% of earners. In 2006, if we compared the ratio in house prices between Belmont and Hayward the value would be much smaller, about 1.4 and the explanation would not have been “the rich are getting richer”

Marko: It is irrelevant over the short term if buyers are using cash, 20% down payments, or 3.5% down payments. As we saw during the bubble even liar loans are capable of driving up sales and house prices. Over the longer term (measure in years) cash buyers or buyers with larger down payments will lead to more sustainable gains in prices.

What is undeniable is that Hayward currently has some of the highest sales of the decade while Belmont has the lowest sales of the decade.

MoneySheep: If you are in a city where sales are up significantly, prices are likely to be close to a bottom. You can use trulia.com to look at graphs similar to the ones I created for a 10 year history of sales.

If sales are at the highest level ever, it signifies that many buyers have decided that it is a good time to buy houses now. Today’s buyers will also have their incomes verified, unlike the stated income buyers of the past. Also they are unlikely to use negatively amortizing or interest only loans.

Don't you have to look at the current inventory in addition to number of sales to make reasonable judgments? If the inventory for Belmont is at its lowest in years wouldn't it also make sense that the number of sales would be at its lowest in years, and not necessarily mean anything more than since there's less to sell, there are less sales? Belmont had 68 houses for sale back in July '09, today there's only 43. I don't know how many houses Belmont typically has for sale.

Also from your charts, both Hayward and Belmont prices seem to be pretty stable since about March of '09. Doesn't this also prove that number of sales doesn't necessarily relate to prices? Lots of sales versus few sales equals same result -> meaning no direct relationship.

By 2000 we were already in a bubble where prices doubled. The bubble didnt start with ARM loans.
Perhaps someone needs to compare prices back in 1997 to 2000 to today.

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

BTW, since when did Belmont become high end anyway ? Certainly not in the 40+ years i
been in the Bay Area. Jeez! Have people been brainwashed and are they that stupid?

camping: Inventory numbers are better than sales numbers in analyzing housing market conditions. But I do not have a history of inventory numbers available. If you have a good source let me know.

Also both inventory numbers as well as sales numbers are very seasonal so you cannot compare July 2009 figures with March 2010 figures and say the market is improving. What would be ideal is if we could compare inventory in the same month every year for the last 10 years.

thomas.wong1986: The increase in prices before 2000 was partly justified. Incomes were rising rapidly and so were rents. It was after 2000 that incomes and rents went in a different direction from house prices

Currently the median price of a home in Belmont is $800,000. The median price in the 9 county Bay area is only $350,000. What would you call a city with prices more than double the median?

n/m

gavinln,
Yeah, I wish I had inventory history numbers too. The only thing I have as far as inventory goes is what I wrote down over the summer. And yes, you certainly can't compare July numbers against early March numbers to determine a trend. I was just pointing out that the numbers seem quite low - if there are only 43 houses for sale in all of Belmont, depending on how quickly new ones come on and are sold, it seems pretty unrealistic to expect over 50 sales in a given month.

camping: The question is whether sales will recover and if so how.

In Hayward it is easy to explain how sales recovered. Prices fell significantly. The government is supporting the low end of the market. Subprime loans with shorter fuses blew up quickly forcing banks to foreclose and put houses on the market. Prices are so low that even cash flow investors who buy rental property are interested.

In Belmont prices haven't fallen as much. The government is not supporting the high end of the market. Option arms loans have longer fuses and take longer to reset/recast. Prices are not low enough to attract cash flow investors to buy rental property.

But how do you know sales haven't recovered proportionately in Belmont? If normally there are 100 houses for sale in a month and 50 sell, is that necessarily different than if 43 are for sale and 21 sell? What matters is that the price is holding steady because of the reduced supply. What if the supply doesn't increase back to 100?

As far as Hayward sales recovering, that also is because there was an increase in the supply. Lots of people in Hayward lost their homes to foreclosure or sold in a shortsale. There's no guarantee that is going to happen in a place like Belmont.

I disagree with "the gov't is not supporting the high end." Low mortgage rates are more helpful to people buying $800k and $900k houses than investors buying crappy places in Hayward for cash. And options arms may not have as much of an effect as people hope/think.

camping says

But how do you know sales haven’t recovered proportionately in Belmont? If normally there are 100 houses for sale in a month and 50 sell, is that necessarily different than if 43 are for sale and 21 sell? What matters is that the price is holding steady because of the reduced supply. What if the supply doesn’t increase back to 100?

I would call recovery if
- Normal sale volume in normal inventory level. When price starts sliding down it is not unusual for inventory to go down, especially in the well-off area. Because sellers wait for market to turnaround.
- Price holding steady.

Check the Belmont Market Trends chart in redfin.
Inventory dropped. So did price per sqft. That's not recovery. It's just an stanoff between potential sellers and potential buyers. Buyers are not coming to market because they cannot afford. The sellers are not listing their home because they are hoping for better time.

Someone making more money usually has more ability to belt-tighten. E.g. family 1 has $200k income, family 2 has $50k. But, baseline food, car, energy, etc is the same. So family 1 could reduce their discretionary expenses to family 2's level if need be, and use the remainder for paying the mortgage. (e.g. Lexus lease expires, turn it in and buy a used car for $5k. Drop the iphone and get a prepaid. etc) Family 2 would have a tougher time reducing discretionary spending since they already are doing those kind of things.

So the higher end will fall slower because fewer people will exhaust backup resources and be forced to sell. And eventually the economy will recover. (probably, perhaps we will enter Mad Max). Not immune to falling of course. And when the economy recovers I'd imagine that Hayward would go up faster than Belmont, so for investment purposes Hayward is better.

These charts show something else interesting - the peak compared to 2000 was higher in Hayward than in Belmont. Hayward peak/2000 = 2.56. Belmont = 1.97. Belmont didn't go up as much, so won't go down as much.

SiO2 says

Someone making more money usually has more ability to belt-tighten. E.g. family 1 has $200k income, family 2 has $50k. But, baseline food, car, energy, etc is the same. So family 1 could reduce their discretionary expenses to family 2’s level if need be, and use the remainder for paying the mortgage. (e.g. Lexus lease expires, turn it in and buy a used car for $5k. Drop the iphone and get a prepaid. etc) Family 2 would have a tougher time reducing discretionary spending since they already are doing those kind of things.

But family 1 likely has a much higher mortgage payment than family 2. Most of the "family 1's" cannot afford their mortgage without 2 incomes. If one person loses their job they'll fall behind on their payments immediately. Or if their Neg-Am loan recasts they still might not make it.

Yes, it is taking longer for the higher-end areas to fall but they will.

Only an idiot would pay $800K for a home in Belmont thats only worth half.