patrick.net

P2D2 says

chip_designer says

I am not a realtor. I just stating my opinion , maybe I am the only one in this blog who thinks contrarian to all of you. And seems like I am being treated in a bad way, right P2D2?

Neither did I say that you are a realtor. But your sales pitch “if you have stable job, 20% downpayment, fico > 740, now is the best time to buy your home in those prime bay area locations” comes right from realtor’s manual.
The chip_designer has serious logic problem.

P2D2, you can win with your words. But at the end, it is us, 60% of silicon valley’s scientists and engineers are foreign-born, we are the ones buying in those prime bay area locations. Thank You.

we are the ones buying in those prime bay area locations.

...and you depend upon the Greater Fool Theory to help you sleep at night.

By the way, if you're going to subscribe to the whole contrarian investment meme, I'd suggest a broader set of indicators to flesh out your perspective than the popular sentiment on a housing crash blog.

I'll join in with chip_designer here and say the Fortress is Safe.

By this definition I mean anywhere a GOOG or AAPL employee would want to buy, the PA -> LG axis, plus "middle class" Sunnyvale below (above?) El Camino Real.

The market as I see it is totally screwed up. Anyone who bought prior to ~1997 can just rent the place out and make a killing vs. the tax burden, and Prop 58 will protect this as the OG geezers die off.

I don't know what rents are for SFH, but $40K/yr doesn't sound out of whack, that's implies a $1.3M asset value that is fully inflation-protected.

I certainly screwed myself not buying when I was FOB in 2000. I didn't know what I didn't know back then, I assumed I had to save $100,000 for a 20% down etc. Shoulda just walked into a Countrywide and said, "gimme money!". SISA was a bit rarer, but probably doable. Funny thing is I did darken the door of a Countrywide in late 2001, and they weren't exactly jumping through hoops trying to get my business then.

It strikes me as very interesting and distressing at the same time that Chip's singular headline statement has kicked up so much dust. Believe me, I got fired up. Opinions aside, I wonder if this is a mirror of the seriously growing gap between those that live in the "prime/fortress" neighborhoods and the rest of us, who, let's face it, want to live there too. They are very very nice (and I've traveled our country extensively...the prime/fortress neighborhoods are very very nice).

I grew up in a prime hood, and while getting an advanced degree from a local institution of higher education during the late 1990's, I lived in the home I grew up in. Over a period of a few years, I saw homes all around my childhood home sell. At first, the expected sale price...some where in the mid-700s. Then, word got around that Mr. and Mrs. Soandso just sold for 800k, then 8 months later, people were excitedly talking about the home down the street that sold for 900k--unbelievable at the time. I remember the day my father told me that our next door neighbors sold their home for 930k. They were the original owners of the home that was built in the late 1950's. At that time, I was 30 years old. I distinctly remember saying (and thinking all time), "Where is all the money coming from?" It just seemed too good to be true. With the events of the last few years, the question in my mind is whether, after all these years, it was too good to be true and now people are paying the price. So, to Chip I say this: I think you are being less than objective to think housing prices in the prime hoods won't being coming down.

I think the prices will be coming down. The question is how much? I think it will be one of two outcomes, either a nominal drop (say 5-10%), or a massive drop (50+%). If Chip is right, the drop will be nominal. I am going to put my money on the massive drop. Why? Well, as I think we can see very clearly now, the easy money housing price skyrocket of the last decade was too good to be true. If you sold during the run up, good for you!! My parents sure benefited. However, this has all been a house of cards and it is falling down. Sure, the prime/fortress hoods are taking longer to fall but time is the enemy.

From a "consumerism" point of view, there is nothing different about the prime hoods of Saratoga, Cupertino, Monte Sereno, Palo Alto, Menlo Park, etc. and East Palo Alto and East San Jose. The only marker is available funds, meaning, do you have enough cash available to "buy into" a prime hood? Outside of that, many of us made financial decisions, spent money, and purchased homes, in exactly the same fashion, prime hood or otherwise. Over extending and buying more house than you can afford was not a "poor man's move." In fact, chances are that if you bought into a prime hood over the last 10 years, your leverage is amplified. Fortress owners may have higher incomes, but chances are they live pay check to pay check, just like those in East Palo Alto. The mighty fall too and are starting to fall already.

There is a tremendous amount of downward pressure on prime hood home prices, and they are beginning to crumble. The Willow Glen area is a prime example. Not even four months ago, homes would be priced at 1mill, only to sell between 700-800 (generalization, yes, I understand there are still some homes selling at or above 1mill in Willow Glen--globally though that is not the case anymore). In the last two weeks however, similar Willow Glen homes are being LISTED between 700-800k. This, I believe is only the beginning of the drop. Moreover, I take this as the very first sign that prime hoods are going to take a major step down in price. Willow Glen is on the cusp; so it is not surprising to me that it would be the first to drop.

On another note, take a moment to consider the typical prime hood resident. Baby boomers or foreign born owners in their 60s, 70s, 80s, and even 90s!! Bottom line...old people are the typical prime hood residents. The kicker is that the children of old people have already settled somewhere else; so there is no one to "give" the house to. You wait Chip...the years ahead aren't as rose colored as you think. But hey, if they are, good for you. If not, watch out it will be ruthless.

Are you guys saying the monthly mortgage cost will lower? Because interest rates were hovering around 8% in the mid to late 90's. If you put those interest rates to play with today's prices, it seems like the prices are about the same. I agree with everyone that interest rates must go up though. Then you'd see a lowered price to match a monthly cost that wage earners can sustain. You're not really losing that much out of it. Just take your time with your mortgage payment, and do not pay early. If interest rates do go up after you purchase, and you do have the money to pay it off early, you should invest it elsewhere since interest rates have gone up already. Property tax basis will be lowered by the assessor if it is justified.

But if people can't afford it due to cost (because of high property taxes), then waiting will be the ONLY option.

Some may be wanting high interest rates to refinance at a lower interest rate. But I can't see that opportunity coming any time soon. You may as well buy now and hope for a 3% interest rate in the next year or two. Especially for the ones that think double dip may be coming. Once the prices dip, the interest rates will go to 2 or 3% to prop it back to the same price levels. If you want to play a waiting game against corporations and companies that can live longer than you, then you should do so. But I can't...

Define "prime areas" and "dramatic". Go to Google maps and there is an option to show foreclosure listings. There are enough of them in Crapertino to tell me that they are not immune.

It sounds like someone is in over his head with a mcmansion and is trying to convince himself that prices won't crash.

Serpentor says

Define “prime areas” and “dramatic”. Go to Google maps and there is an option to show foreclosure listings. There are enough of them in Crapertino to tell me that they are not immune.

Serpentor. I noticed there are many Preforeclosures where the debt owner falls behind in payments just to try to get a loan mod.

On the side note, I know someone that bought a house long ago for $180k, heloc'd 700k out of the home, and attempted a loan mod. He could have paid the mortgage. They auctioned the house off before he was able to complete the loan mod. I guess he may have been suckered by someone he hired to do the loan mod.

Vain says

I noticed there are many Preforeclosures where the debt owner falls behind in payments just to try to get a loan mod.

Just look at this pre-foreclosure in Palo Alto. I think we should notify those 60% foreign-born "scientists and engineers", so that they can buy this property and save owner and lender from "costly scenario".

LOL Chip_designer. I wonder which chips you design? Frito Lay or Pringles?

You are not contrarian, you are a sheep that still recites the same old tired Realtor's mantras that have been debunked for a while now. go ahead and click on P2D2's link or just go on google maps. I'm guessing that you're still going to be underwater about the time when Justin Beiber songs gets played on the oldies radio stations.

And no one commented on my theory :-( that potential buyers for these properties are decreasing with time:

1.) not many companies are going IPO to create rich people who would be the potential buyers for these properties.
2.) Don't expect someone from Austin, Phoenix to trade their better homes for shacks in crapertino.
3.) Don't expect many move up buyers becuase they themselves are underwater on their present homes.

Agree. Adding to that: with the new accounting rules, public companies are not giving options out like candies anymore. If anything, employees at public companies get RSUs which does not have a huge potential for gain like stock options...

Serpentor says

I’m guessing that you’re still going to be underwater about the time when Justin Beiber songs gets played on the oldies radio stations.

ROTFLOL.

I’m dubious they have the votes to raise taxes on the master class, and our fiscal situation getting out of hand while we’re carrying $9T of public debt is not a pretty picture.
Troy, I may be off base here, but I believe all the Bush cuts sunset at the end of the year , so they will just have to muster votes to NOT raise taxes on the middle/lower class. If they can't do that, then everyone gets reset to the old (higher) rates. Quite frankly, I think the Dems have the stronger hand, as they can cite Republicans who block lower taxes for the middle/lower class. As they say, correct me if I'm wrong...

EBGuy says

As they say, correct me if I’m wrong…

The mistake here is seeing the Democrats in Congress as uniformly being on the middle class' side here. I fully expect the DINOs to force through a 1yr extension of the whole 2010 package, except perhaps the death tax holiday.

The Senate knows who butters their bread. It's that bottom right circle, and they know if they can push policy to keep the millionaires getting that bigger piece, they themselves will receive a nice chunk of that cash via contributions and sinecures, not to mention the rates they and their friends themselves pay.

Vain says

I agree with everyone that interest rates must go up though.

This is a dangerous belief to hold, really. The Japan example went the other way.

There are enough of them in Crapertino to tell me that they are not immune.

There is plenty of fraud in the system to be worked out. What matters is the bid side of the market. Who's buying and how much they can pay.

The kicker is that the children of old people have already settled somewhere else; so there is no one to “give” the house to

No need. Prop 58 in all its glory protects the ability to rent out the property, too.

the easy money housing price skyrocket of the last decade was too good to be true

Skyrocket's still burning for AAPL and GOOG.

From a “consumerism” point of view, there is nothing different about the prime hoods of Saratoga, Cupertino, Monte Sereno, Palo Alto, Menlo Park, etc. and East Palo Alto and East San Jose.

Wat?

The ability to take a walk at night safely is a consumer value, as is the classmates of your kids, and the number of minutes required to commute to work.

A point about California schools. A certain "blue ribbon district" cut hours for librarians, health techs, janitors and food workers last year in addition to Furlough Fridays. You may pay extra for a "good school," and your kids will surely associate with kids of similar socio-economic status, but you'll find yourself volunteering to pick up trash and serve Lil Caesar's; relying on the teacher to inject your student with anti-venom for bee stings and going to Border's since the library is closed. Remaining staff is exhausted and scared. The union is a weaselly joke.

This year we find out the District saved so much money that the administrators gave themselves 20% raises. As the budget crisis gets worse, thank heavens the vice principals and superintendents can afford their mortgages, right?

Cautious1,

DO tell which school district that was.

If your description is correct, it appears that school districts "top management" think they are robber-baron CEO-types.

chip_designer says

P2D2, you can win with your words. But at the end, it is us, 60% of silicon valley’s scientists and engineers are foreign-born, we are the ones buying in those prime bay area locations. Thank You.

LOL! and what does that say about the rest of us in SV who work in Finance. I can certainly say after working 30 years in SV, engineers have the biggest egos around. Foreign-born ones have even a bigger one. .... Your Welcome!

hooch_raider says

Opinions aside, I wonder if this is a mirror of the seriously growing gap between those that live in the “prime/fortress” neighborhoods and the rest of us, who, let’s face it, want to live there too. They are very very nice (and I’ve traveled our country extensively…the prime/fortress neighborhoods are very very nice).

The gap is between the recent migrants, past 10 years, to the region with their rose colored glasses and the natives who cant justify these prices.

Troy says

The kicker is that the children of old people have already settled somewhere else; so there is no one to “give” the house to
No need. Prop 58 in all its glory protects the ability to rent out the property, too.

Yes, I suppose that would be an interesting thought if the prime hoods became populated with a majority of renters. I think it is more likely that the heirs of prime hood homes will sell in an attempt to cash in. The more supply of homes would increase the downward pressure on prices. Think about that...the next twenty years could be interesting for the prime hoods as the old people die off and their children sell the property. Higher inventory with no end in sight????

the easy money housing price skyrocket of the last decade was too good to be true
Skyrocket’s still burning for AAPL and GOOG.

Ahhhh, no. Not like the "webvan" days brother. Guess again.

From a “consumerism” point of view, there is nothing different about the prime hoods of Saratoga, Cupertino, Monte Sereno, Palo Alto, Menlo Park, etc. and East Palo Alto and East San Jose.
Wat?
The ability to take a walk at night safely is a consumer value, as is the classmates of your kids, and the number of minutes required to commute to work.

You missed the point. Consumerism has nothing to do with taking a walk at night. It is a mindset. My point was that those who bought in East San Jose had the same "consumer" mind set as those who bought in any of the prime hoods. The only difference was available cash. Those with a lot of available cash could buy into the prime hoods. The mind set was...price means nothing. Value means nothing. Just pay whatever you have to in buying a home. Take on the debt, it will be all good because home prices will NEVER go down. Everyone drank the kool-aid. Everyone. That was my point. Now we are seeing the consequences, even in the prime hoods.

thomas.wong1986 says

hooch_raider says

Opinions aside, I wonder if this is a mirror of the seriously growing gap between those that live in the “prime/fortress” neighborhoods and the rest of us, who, let’s face it, want to live there too. They are very very nice (and I’ve traveled our country extensively…the prime/fortress neighborhoods are very very nice).

The gap is between the recent migrants, past 10 years, to the region with their rose colored glasses and the natives who cant justify these prices.

Agreed. Of course, I can appreciate the desire to keep the rose colored glasses on. Its pretty ugly out there without them, especially if you paid 2 million for a home in one the prime hoods and are coming to realize that your 2million dollar home was only 700k in 1997. Brutal indeed.

hink about that…the next twenty years could be interesting for the prime hoods as the old people die off and their children sell the property. Higher inventory with no end in sight????

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I went to see a home in Mountain View last year, the owner died and his kids were trying to renovate the home and sell it for 900K. while the one of them was working (and was defintely high), there were 2-3 people sitting in the home smoking pot. Their plan was to go settle in Arizona somewhere after selling the home and may be smoke pot everyday with that 900K.

Well I rent a fancy house in the good school district of Saratoga (bully for me). My cost is far lower than if I had chosen to buy. I doubt my landlord is making a dime, but suspect his employer makes up the difference. I am paying however market rate for the rental.

I am fine with the shame of renting. Historically rent and mortgage have been about the same. So if history repeats either my rent will rise or the price of housing will fall, or some combination. I suspect housing prices will fall. In the meantime I save money every month. If rents begin to rise to mortgage like levels I can buy.

Present day recent "owners" have the reverse problem they spend every month far more money than is strictly necessary to live in a similar property. This can only make financial sense if the historic disconnect between rents and mortgages not only continues but becomes more extreme. I wouldn't want to be in this position.

On the other hand the very biggest debtor in the whole wide world is my Uncle Sam, who as luck would have it he also has the ability to print money. There is a chance that he will decide to debase the currency to escape his debts and your old mortgage will cost no more than a cup of coffee at Starbucks.

The house across the street is going into foreclosure, decent house, just too much equity extracted over the years.

hooch_raider says

My point was that those who bought in East San Jose had the same “consumer” mind set as those who bought in any of the prime hoods. The only difference was available cash.

THAT'S A PRETTY BIG DIFFERENCE

People keep classifying the regions as desirable vs not desirable but the truth is there are subtle variances on wealth even among the same cities and everything is connected. If willow Glenn drops in price people who would buy in Los Gatos and Saratoga are going to look very closely at that area.. etc etc.

thomas.wong1986 says

chip_designer says
I can certainly say after working 30 years in SV, engineers have the biggest egos around.

thomas, that is not fair. I think what you mean is that "engineers who are in my face or swagger around flaunting their materialism" have the biggest egos around. So that leaves the rest of us who don't call attention to ourselves (and who generally get stomped on by the set you notice).

My partner is in finance and I am in engineering, both of us for nearly as many years as you; living rather humbly in East San Jo with kids in "middle-tier API schools", hanging our laundry in the backyard, not subscribing to pay TV, growing some of our own food, not jet setting to Asia every year or so, using public transit to go to work, driving depreciated 100K+ old (but well maintained) cars when we don't use transit, borrowing books and DVDs from the library, and are very content to live like this. It is a life that most people in the world would aspire to have. My parnter and I both have colleagues like ourselves and have had such colleagues at different places we've worked at.

You just don't notice us because we blend into the background and generally get swamped out by the ones you do notice. But we're out there.

Troy ,
tell me what is the big difference between mission san jose, warm springs and then milpitas and even some parts of North San Jose.
I have colleagues who are scattered over all of these three. Only colleagues who are nearing retirement are in mission san jose, so basically it's the same kind of people. Engineers or white collar workers not gangsters.
No bullets flying in there, all are equally safe. The only difference is schools and to pivot everything is on schools is big mistake because the health of schools depends upon the health of goverment.

In any case , one should not pivot everything on just once factor.

cloud, when I speak of the fortress I think of MP, PA, LA, Cupertino well above 280, then down (up?) to LG.

The best cafes, the best doctors and hospitals, the best supermarkets, the best neighbors, etc etc.

Lots of people want to get in, but the gate is small.

AAPL and GOOG have around 5000 permanent powerhitter employees between them no doubt looking for houses in the fortress. Demand is willing but the supply is weak.

aaah the old Google and Apple argument. Where are these rich people to buy up all these foreclosures and price drops in the fortress areas previously posted? The fact is most of these rich Apple and Google employees already made their money and bought homes during the bubble.

The ones that haven't bought yet are not going to prop up prices because the sentiment has changed and there is no rush to buy for fear of being priced out anymore.

There are very few newly rich people from stock options, and the few that have money either already have homes, or are looking for bargains like everyone else.

There were plenty of people that got rich before the bubble, IBM, HP, the old Apple, Cisco, Yahoo, etc etc. hence the price premium compared to the rest of the country. The bubble portion of the price must drop just like every other part of the country.

Serpent,
I am with you on the stock option crowd. Like thomas.wong86, I am a lifelong resident of the area, had many such colleagues/friends/relatives who have been optionees over the decades, and have been one myself, I suspect you & thomas.wong86 have been, too.
That is why, to the way I see it, the only rational explanation for the herd of folks like the chip_designer, is that they already had their moneybags with them when they came here from other parts of the USA and other parts of the world.

^ I don't really see a bubble here. Housing prices will always be what the market can bear, and the fortress buyers can bear a lot.

The beautiful thing about real estate is that it's a good that is required to be used continuously. No matter where you go, you're using it.

Excepting boats and aircraft, I guess, but even then it's hard to use an aircraft without using someone's real estate : )

But I don't know where fortress prices are going. 15% down from here is possible I guess, but I wouldn't count on it.

I agree it is not a bubble. I also think it is horribly overpriced, unless a buyer thinks its worth that price to 'own' their residence in such an Enclave.
I am skeptical though that folks can just buy/borrow their way out of the challenges of the urban life.
http://www.mercurynews.com/ci_15919301

Call me crazy, but I think prices in the fortress will actually drop back to 1998 prices, slowly, over the next decade. Very much like the Japan experience.

Things are still so crazy compared to rents that I know two families that dumped their houses in the area and are renting now, just to save the extra, oh, $3000 per month or so. They just can't pass up that much money, while living in the same area and same quality house.

you don't see a bubble? well I guess you don't see a recession either and everything is just fine. Banks are not in trouble, there's no double digit unemployment and there are no US tanks in Baghdad.

Patrick, because of the remark you made, I changed my post from "live in such an Enclave" to " 'own their residence' in such an Enclave.

Good point.

if you don' t think there is a bubble then why are you wasting time posting on patrick.net?
trying to convince people to buy? good luck!

Very much like the Japan experience.

Japan's fortress is actually still rather f---ing expensive. I lived in it 1995-2000 as a renter. I think my LL was getting utterly slaughtered since he bought in the late 80s, and rents haven't gone up since.

But thanks to the 2% interest rates there's not really a rent-buy gap. . .

Here's the building. Owner-occupied first floor, son in one unit, 3 more to rent @ $50K/yr, with Japan's 2% cap rate that's a $2.5M valuation with the partial occupancy, $5M with full occupancy.

Lots in the general area are listed for $2M or so.

http://used.realestate.yahoo.co.jp/bin/cdetail?rps=6&pf=13&md=key&key=%C6%EE%CB%E3%C9%DB&code=1125000101U1005

Serpent,

I am not trying to convince any one to buy, but I have tried to talk people I know OUT OF buying. The one I persuaded has told me he's glad he did; he needed the moral support at the time considering all the pressure he got from his inlaws to buy in 2006.

Others who I didn't persuade have told me that they wished they had listened, or else they don't say anything about it anymore.

To me a bubble would be like two standard deviations or more above the "real value", (ie, not the mean); I dunno what that should even be. But if prices collapsed in The Fortress like they did in my neighborhood, which really was in a Bubble, it would be a buying opportunity for investors. I don't wanna live in The Fortress or any other neighborhood where people with the arrogant swapper like chip_designer dominate the community. But because such people covet Fortress type appellations and are willing to pay dearly for the privilege to do so (either in rent or in borrowing costs), and seem to covet a few higher points in the margins of the mean API scores of the schools their kids attend, well, yes, a total collapse of prices in The Fortress would be The Buying Opportunity of The Century for investors, so I don't think prices will collapse like that, so I don't think it's a bubble.

Horribly overpriced? Yes. But not a bubble.

When horribly overpriced meets horribly overpaid, you have an equilibrium

nobody said fortress will drop down to Milpitas levels, pricey areas will go down to pre-bubble levels. they will still be expensive but the gains of the previous decade will be lost, it may be a slow painful decline like Japan or it may crash. I have no idea if Japan had the same ridiculous lending standards but with the foreclosures appearing in the "prime" areas, I got my bet on the latter.

As for people waiting on the sidelines to buy, don't forget all the people waiting to put their houses on the market "as soon as the market turns around"