patrick.net

What if the most egregious offenders of THIS bubble also correct — San Diego, Phoenix, the end of double digit returns, some lending reform, etc., but we’re left with a permanent premium similar to the tech stock premium — let’s say housing costs fall from 9 times incomes, but fail to return to the 3 times income historical mean, and settles upon 6 times incomes? I don’t think this is outside of the realm of possibility at all. And it would suck.

Red Whine,

This very scenario has been the topic of more than a few discussions here, and my impression --as far as CA is concerned-- is that NIMBY anti-development laws, outrageous six-figure "just because" fees slapped on new housing, and Prop 13 have so heavily dis-incentivized residential building here that supply will remain suppressed for the long run. Add to that an unabated flood of illegal unskilled slave labor (but Congress is going to "get tough" this time --yeah right!) and you have continued strong housing demand --mostly on the low end. For these reasons, I'm convinced CA median prices will never return to the 3X HH income ratio common in other states. It's not beyond the realm of possibility, however, for it to fall to 5-6X HH incomes (it's currently about 12X).

As far as CA "equity nomads" and their toxic loans contaminating other markets, we're already seeing this, especially in nearby states like AZ, NV, OR & WA. The question is, will this effect persist once CA housing begins to crash? Personally, I doubt it. The toxic loan liquidity is already in the process of drying up. As Robert Cote pointed out, sane lending standards have a way of returning in a credit/asset bubble's aftermath. And as long as most other states do not make the mistake of copying CA's idiotic regulatory housing model, they won't kill their ability to produce supply adequate to meet fundamental demand.

Face Reality, welcome back. Can you stay around?

I still think that worse homes in worse area will correct significantly. I may be adjusting my outlook on better homes in better areas.

The best way to fix Prop 13 problems is to do away with property tax altogether. It should be reformed into a consumption-based taxation. Owner-occupants may be asked to pay consumption tax on the rental equivalence instead.

BTW Face Reality, I’ve seen your tone get outright nasty over at the Craislist forum while your tone here is substanitally more subdued. Care to explain your split personality?

The Craislist forum is just nasty anyway.

tannenbaum ,
Exactly! I've noticed this for almost a year now. I can rattle off at least 6 or 7 houses around us that have come up for sale, pend, even sell sometimes, then come back up within a month or two. Most often, it appears that the owner gets fed up with their realtor and hires another company.
The stupid thing is that I've never seen one of these homes go up for less. It makes no sense to take it down and relist thinking that buyers give a rat's ass about who the realtor is.

I quit going to the CL forum a long time ago. Like a bunch of 12 year old kids brawling all the time.

I still believe (like most people I know) that prices will hold well in decent parts of the BA. Appreciation will continue to slow down or even stop for a while, but that’s about it. This is what I’ve been predicting ever since I first posted on this blog a year and a half ago.

@Face Reality

Good luck to all the recent home-"buyers" with praying for inflation to bail them out. At today's inflation (if we use the government's CPI of approx. 3.5%), it would take over 20 years for rents to double, thus achieving parity with PITI+maintenance-tax deduction on a house, using a non-toxic amortzing FRM. Even if we use "true" inflation (closer to 6%), it would still take nearly 12 years.

Oh, and welcome back :-).

The most important thing that I look at is how much the house actually sold for compared to what the same house or comparable houses sold for in the recent past. I don’t see any weakness in the prices that properties actually sell for.

Check out SD & Sacto. Plenty of examples there. The Bay Area? Not a whole lot of examples --YET. But we are just entering the beginning of what may prove to be a very looooong correction phase.

Yeah,

I don't who that guy calling himself "DinOR" is over on Ben's Blog but he says some pretty wild stuff. Kind of like all those R+B and motown groups out there billing themselves as "The Drifters" or "The Platters" but don't even have ONE original member! Ugh, I hate that.

Uh, BB is on TV talking and I can't hear what he's saying but it must be really bad b/c the market is trading down. Does anyone have a TV w/sound?

Oh, wait a minute? He's talking about the Housing ATM Machine (without actually calling it that of course!)

HARM,

Good luck to all the recent home-”buyers” with praying for inflation to bail them out. At today’s inflation (if we use the government’s CPI of approx. 3.5%), it would take over 20 years for rents to double, thus achieving parity with PITI+maintenance-tax deduction on a house, using a non-toxic amortzing FRM. Even if we use “true” inflation (closer to 6%), it would still take nearly 12 years.

This is the thing that got me in trouble with some folks on the last thread.

Your calculation is wrong. It is NOT LINEAR. The "gap" closes faster than that because of the iterative nature of the interest tax shield, the time-value nature of the alternative investments, etc. This is basic finance stuff, yet I'm being cast as some kind of obscufator for pointing it out.

Of course you shouldn't use a NAAVLP. But, for those who can afford a traditional 15 to 30-year fixed and have a 20+% downpayment, the gap takes around 7 years to close, not 20. This is because of the way the "curve slopes". I think this is all Peter P and I are saying. The psychology driving these buyers is very different than what's buying desperate FBs or "you shouldn't be buying anyway" (from a financial perspective) people.

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B7B78F4E8%2D5F4E%2D4193%2DA831%2D23ED7B25F3EC%7D&siteid=mktw&dist=

BB talking tough on inflation.

SQT,

"Well, apparently faith isn't enough"

There are a number of "lows" in life but this has got to be just about the WORST! Hoping your sale doesn't "fall through" is a LOT like praying! At least she admitted it (unlike many FB's trying to bail).

I feel for your friend, really I do b/c she probably realized they couldn't afford it early on and put forth an effort to get the problem corrected! We'll be hearing a lot more of these stories in the near future and they will spread from Sacto (which I never made any predictions about dropping btw) to many more areas. Although it makes you wonder? Why was this couple so desperate to sell in the first place? Didn't you say they just bought it last year? Like George says, the ones that bail early will be the lucky ones.

Why do I think wages will rise, because of imperfect-information theory of sticky wages. Wages are sticky, but the do not empirically abide by the predictions of Keynes' General Theory. In fact, wages almost always rise with GDP and employment, but lagged and dampened.

There are only 4 statistically valid and material counterpoints to this correlation in US data: all of those immediately after stagflationary or stagnant periods. This supports John Haverty's claims of stagflation (albeit, circumstantially and ex-post). But (and this is the big but), every one of those data points was followed by a dramatic RISE in real and nominal wages during the subsequent period, which was itself a deep recession.

There are no examples of wages falling for any period of time without these correlations holding.

So, who is it that claims we're in a "new paradigm" and "everything is different this time"? If fundamentals are fundamentals, then wages must rise. I'm just a stickler for consistency. If we insist real-estate is bounded by fundamentals, and it's not different this time, then the same is true of all the well studied and empirically demonstrated wage econ theory.

(Of course, someone will say: "outsourcing, offshoring, wage arbitrage". Maybe this is right, but at least admit you're arguing for a new paradigm that hasn't happened before, yet you deny a new paradigm for other things.)

Also, rent increases in SJ appears to be higher than the 8 - 10% range. This is apartment rent though. I do not follow private landlord rentals.

Look we can even go to burger king and buy two double cheeseburgers for two bucks, man, who can beat that?

But sushi prices are on the rise. :(

While I do share their temptation to just “throw your hands in the air” in disgust I’d have to admit that from inception of the bubble that the BA (and possibly NYC) would be hold-outs.

I don't get it. This thing has just started and you are impatient? Whatever happened to the acknowledgement that housing moves very slowly relative to more liquid things like stocks? Anyone who thought the housing "bubble" would "pop" with the rapidity of the NASQ was fooling themselves; that's the sort of straw-man argument the RE perma bulls are always throwing around. Heck, even the Marin RE bulls who post on my site have backed off a lot from their stance.

SQT,

Oh, O.K my bad. Now I'm not sure if you meant Washington State or DC but regardless she may be jumping out of the pan and into the fire. Can't she RENT for awhile? Isn't that what people did when they moved to a new area until they checked it out? Frantically selling so she/they can hurry up and turn right around a buy? What a perfect opportunity to sit this one out!

Marinite,
I can't speak for everyone, but I think the gyst I get is that people that have been waiting for YEARS for this thing to come unwound have had enough and want a severe crash. I'll speak for myself and say this is the case with me. A fierce crash would be better for the area and economy than a painful, drawn out slowdown.

marinite,

I just think there are those in the BA (I'm in Oregon) that have developed a slight case of "bubble envy". They need only to drive as far as Sacto to see it first hand but the need for a bubble bursting is a lot like for the need for sex and air. (They're no big deal unless your not getting any!)

Can someone find the post with the "airline analogy"? It was great, well written and I'm sure I can't do it justice but they said it was like being shoved out of an airplane at 30,000 feet! True, we're not as high as we once were and we're losing altitude rapidly BUT; we are certainly higher than when we left the airport and man are we MOVING!

(Direction not withstanding)

John Haverty,

For the most part mfr. housing has no negative image in Oregon. I'd say they're definitely our 1st choice for 2nd homes as well as primary res. for many. There were some financing problems back in the 90's where mfrs. offered "free space rent" for a year to create volume and just like today's IO loan they went back to the lender after the free ride was over! Now we have a glut of repo's out there for as cheap as $15 a sq. ft. Prices have firmed somewhat now that our traditional homes have gotten so expensive. Btw, a rally in mfr. home builders is usually a sign for the "begining of the end".

John,
I'm a big fan of modular and manufactored homes. They're built in a controlled environment, are for the most part earthquake proof( since they're built on a metal frame that rolls) and cost between 35-185k. I'm very familiar with these because the biggest maker of them is located in my home town of Knoxville, TN. Clayton homes makes some really amazing stuff. double wides, triple wides, modular 2 and even 3 story houses, all less than 200k, and all made out of good materials. Jim Clayton, the founder has won a lot of awards for helping to build homes for a more substainable economy by offering these at a fraction of the cost to build on site.
Why don't Californians want these in their neighborhoods? Because they're afraid it'll wreak havoc on their precious home values. Surprise surprise.

SQT,

I would turn her on to the Seattle Bubble Blog and I can say that things have become equally "un-hinged" there as well. And homes are sitting. There really shouldn't be any sense of urgency for her at all. Inventories are building, prices are stalling, MSFT isn't turning out any newly minted millionaires and the weather sucks. Seattle is Portland only wetter and colder and you get to deal with the arrogance on top that! Their summers are shorter than ours (if you can imagine that) and they suffered some of the worst and persistent unemployment during the last recession. Is it late to ask for a transfer somewhere else?

Hilarious post.

I have the faith. My wife has the patience.

Renting blues? Look around and move. Toss the consumer crap and empty the fridge. Housingmaps.com will show you the way.

Good rentals are always hard to find. I'd call my last 3 good. You need to keep an ear out for the real deals. Be a superb tenant and drive a hard bargain. Buy some decent tools and fix what you can't stand.

With two kids, we're not as light on our feet as we were, but we're far better than an $800K albatross 2BR/1Ba around our neck. Kids have their own room, Mom's at home, the cash we save each month keeps adding to our sense of security. When they're both in school and the missus re-enters the labor force, we'll be well positioned.

A few friends have bought recently with either generational transfers or equity from a previous house. These are the last buyers out there. When the ability to sell the previous house disappears with the freeze-out and surging inventory and when the grandparents finally buy-in to the bursting scenario ("Read the paper, gramps!"), there will be nothing left to support it except Randy's crowd. He'll be fine either way, but for those of us with not quite as much moola, we can't screw this one up.

If I'm wrong, well, I've got two great kids. Life could be much worse.

With two kids, we’re not as light on our feet as we were, but we’re far better than an $800K albatross 2BR/1Ba around our neck.

True. But aren't there 800K 3+2.5 out there in not-so-bad areas?

I rather have a 1BR/2BA than 1 2BR/1BA.

SQT,

Bummer. I hear they have (as do we) higher incidences of everything from MS to cancers and everyone has SAD. Seasonal Affective Disorder. Actually they should make that a standard feature in all high end homes. Oh, I just don't know what I would do without it! You're supposed to sit in front of this light for like 20 to 30 minutes a day to "trick" your body into believing you're not in HELL!

With two kids, we’re not as light on our feet as we were, but we’re far better than an $800K albatross 2BR/1Ba around our neck.

True. But aren’t there 800K 3+2.5 out there in not-so-bad areas?

I'm not sure what's true about it. I appear to be quantitatively comparing my family to a house! Must start proofreading...

I haven't checked south of Palo Alto, but for equivalent areas in San Mateo county, that appears to be the strike price. Lose a BR, gain a mortgage...

FRIFY,

"we can't screw this one up"

In truth, very few of us can. I've seen quite a moderation in asking prices just since last fall. Even though our kids are really in a place where they need us the most that "fury" will quickly pass. I feel confident that right from where I sit we could probably talk ONE of these desperate FB's into accepting our terms. But that would make me out to be an a$$hole. (Even though I would be doing them a favor). If we finally take the property off of someone's hands in late 06 mid 07, well then we're seen as heros! Right now I'm just having way too much fun watching it all fall apart to take the plunge. I've done "damage control" before and it's not half as fun as damage.

Can I get a ruling here?

In the very near future we may need to create a distinction between FB's as in f'd "borrowers" and FB's f'd "builders". Or should one simply go with SB as in Screwed Builder? Somehow doesn't seem near strong enough. Suggestions?

BTW - Sorry about dropping Randy's name as part of the monied crowd. We all know he sold in 2004, is a smart guy, has a smarter wife and thus pulls in good dough. No slight intended, I'm just pointing out the obvious. I also read all his posts reverently... ;-)

BTW - Sorry about dropping Randy’s name as part of the monied crowd. We all know he sold in 2004, is a smart guy, has a smarter wife and thus pulls in good dough. No slight intended, I’m just pointing out the obvious. I also read all his posts reverently…

Randy is our leader. Follow the Leader...

A fierce crash would be better for the area and economy than a painful, drawn out slowdown.

Just think of the massive revitalization that would come to the BA if a "fierce crash" were to happen? Carnage and blood on the street at first. No fun for sure. Then all the new businesses and talented people who move in as a result.

Carnage and blood on the street at first. No fun for sure.

Let's hope that restaurant wait times can improve. I really hate to be denied a table.

SQT,

The PDO (Pacific Decadal Oscillation) may or may not exist. Perhaps NorCal got their first taste of it this past winter. Over the last several years I've done a little informal research and would have to say that in spite of our milder winters in Portland that on average Chicago has more "nice days" per year than we do. No, I'm not forgetting about shoveling the driveway from November until March! All you have to do is watch the "Weather Channel" during spring and fall and you'll find even Duluth for crissakes has more "nice days" per year than we do!

Red Whine said:

> The silicon chip manufacturer trades at 60:1 P/E,
> and the potato chip manufacturer trades at historical
> norms, 15:1 P/E. I still have a hard time understanding
> why I should pay more for a dollar of profit from Intel,
> than from Pepsico

I just went to Yahoo Finance:

Intel TTM P/E: 13.98
Pepsi TTM P/E 16.76

Home prices in most of the US have been ~ 3x for well over 100 years for the same reason that P/Es have been ~15x for over 100 years. Home prices will revert to the mean just like Intel has...

Thank you for your awesome blog dude! You inspire me to continue to be a hemorroidforhousing.

You are being sarcastic, right?

Red Whine,

I am not sure if I follow your anology of stock prices. It has always been the case that P/E ratios of different companies to be different. And by a wide margin. Hence some are called expensive stocks, while some not. The stock price is based on expectations of future. But then, even the P/E/G ratios are not same for all companies. That's due to risk premiums associated with different businesses.

That has nothing to do with any "New Paradigm". In fact that's the old paradigm.

In RE, the analogy is location. Different locations command different sqft rates. It has always been the case, and it will always be the case.

In a secular bull / bear market, most stocks would go up / down, but there will always be exceptions. And not all stocks would move by the same %. I expect the same in RE. Not all markets will fall the same.

The new paradigm would be, the % of income people are willing to spend on mortgage. That's the ownership premium we as a society will pay to buy a home. Can that change ? Who knows.

Randy H said:

Your calculation is wrong. It is NOT LINEAR. The “gap” closes faster than that because of the iterative nature of the interest tax shield, the time-value nature of the alternative investments, etc. This is basic finance stuff, yet I’m being cast as some kind of obscufator for pointing it out.

Of course you shouldn’t use a NAAVLP. But, for those who can afford a traditional 15 to 30-year fixed and have a 20+% downpayment, the gap takes around 7 years to close, not 20. This is because of the way the “curve slopes”.

Ok, let's assume I buy this (I don't, but for the sake of argument, let's just say I do). So, let's assume it takes only 7 years, not 20, to close the rent-vs.-buy gap. And that it can be accomplished solely through wage & non-RE inflation. Again, this would be OK with me.

While underwater FBs are struggling with the dual whammies of rate resets + amortization payment resets, taking the bus to work and eating Ramen by candlelight, I get to continue to rent an equivalent unit at a steep discount, sleep soundly and invest my savings in T-bills, S&P or Euro stocks, or anything else that pays a premium at or slightly above true inflation. And at the end of that 7 years, I get the full benefit of inflated wages and depreciated housing by having a much lower real cost basis than the previous owner PLUS my savings/investments.

How is this hurting me? Sounds like a pretty good deal in my book.