patrick.net

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"

sybrib, Troy,
I live in a good part of east san jose too , wake up to chriping of birds and absolutely no problem BUT i use the good facilities available within 15 miles from me.My hospital is Good Sam, Don't have to goto eastridge mall , just drive little bit more to hit santana row. Agreed there is no WholeFoods nearby but i go shop at one in campbell/cupertino whenever i have to otherwise costco and the Trader's Joe work well for me and way cheaper.
I guess the only fly in the soup is schools here and I'm pretty sure there is money to be made by setting up a network of affordable private schools better than public one- Basically decouple zipcodes and education.

cloud13,

how connected are you to the community? It varies neighborhood by neighborhood, block by block, but some of the schools around here can be academic power houses for kids with the right ethic. You just really have to know your section.

One of my kids graduated from one of the K-12's here, the 2009 class had lots of kids going to the UC's, at least two that I know of went to Stanford, a handful to the Ivies; my kid got accepted to all the UC's except Berkeley and some of the lower tier ones my kid did not apply to. People I know who live in The Fortress may sneer when they learn where my kids went to K-12, but my partner and I have extra cash now to help pay for grad school when the time comes, because we did not flush it down the toilet for the privilege of going to K-12 with the highest API scores.

Another experience that will come in handy later in life is spending the K-12 experience with a broader slice of American culture instead of a Ghetto of grade grubbers.

Troy says

When horribly overpriced meets horribly overpaid, you have an equilibrium

what happens when the pay goes down? like its been said before, nobody's getting rich off stock options anymore and the Apple and Google people have already made their money.

Thanks sybrib, that is good to know.

And on a side not , i got good options and was expected to make about 250K after toiling for 5 years but guess what i made close to 50K with my options and need to pay taxes on top of it. Even if a company goes to finish line, only a handful of VP's and Directors make money ......So the ability of this area to create rich people have diminished completely. There won't be too many buyers to pay the crapertino price.

Cloud,

Know your schools! Don't take it for granted that your kids have the opportunity to excel just because I said so, it depends on the precise elementary, middle and high school, as the East Side is highly variable.

But don't get obsessed with the API. That is an average or median or whatever, but it is not a good predictor of how an individual student will do, nor should it be.

Troy says

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

I clicked on the link and google translated it for me. Under the description of the "Current State" it says, "Has good shit." What does this mean, marble bathrooms? Or maybe a lazy listing agent? or one who wishes to get away from the "light, bright, gorgeous location" twaddle? [JK!]

not subscribing to pay TV
So, are nerds the only ones who know about OTA DTV broadcasts? I finally convinced a guy I know to hook up an antenna to his TV (just an indoor Radio Shack model, mind you); he canceled his Comcast the next day. Penny saved as they say...

there are a ton of live tv streaming online these days if you don't care about picture quality.

Cautious1 says

Under the description of the “Current State” it says, “Has good shit.”

I see that too. That's funny! Normally 上物 means "quality merchandise" but in RE parlance it means there's a building on the lot.

Troy says

When horribly overpriced meets horribly overpaid, you have an equilibrium

Yep.

Troy says

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.

What is your metric to determine housing price? Please clarity it first. 15% of what? Median price? Price per sqft? Comps?

As you mentioned Palo Alto, I picked zipcode 94306.

Price per sqft dropped from $904 to $785 between 2008 summer and 2010 summer.

My favorite is of course, comparing the current sale/listing price with 2004-2008 sale prices.

Here one nice 3BR/2BA in Palo Alto: 3948 La Donna Ave
2006 purchase price: $1221K
Currently listed: $1190K
That's only 31K less, right?
But it is already 50+ days market with 2 price reductions. I don't think it will even sell above $1100K, it it sells at all. $1221K was 2006 price. I am pretty 2008 price for similar comps were much higher than $1.2M.

So I do see 10-15% drop (some area even more) already in some of these fortress areas.

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.

Patrick. When you say 1998. The rents should also fall back to that level. Isn't it?

No amount of real data is going to convince these guys. The myth of the Fortress is like a religion to them.

dadab says

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.

Patrick. When you say 1998. The rents should also fall back to that level. Isn’t it?

I think rent in some parts are down to 98 levels inflation corrected. I think corporate housing is below 08 levels in absolute terms. When I moved to CA in 97 my company paid for a few months of corporate housing. I was shocked at how much it cost. It was like 2500/mo for a one bed room small furnished apt. A 2bd was like 3k according to my neighbors.

Serpentor says

dadab says

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.

Patrick. When you say 1998. The rents should also fall back to that level. Isn’t it?

I think rent in some parts are down to 98 levels inflation corrected. I think corporate housing is below 08 levels in absolute terms. When I moved to CA in 97 my company paid for a few months of corporate housing. I was shocked

Good point. I just did the math on my rent in 1998. $675 1 BR unit. It now rents now $950. That comes to 3% YOY increase. Does this seem in line with inflation?

P2D2 says

What is your metric to determine housing price? Please clarity it first. 15% of what?

uh, Selling Price?

Let's take this random house on the market:

http://www.zillow.com/homedetails/3001-Bryant-St-Palo-Alto-CA-94306/19504084_zpid/

Here's the 10 year history:

In the current interest rate environment it wouldn't surprise me to see this house get beat down to the 2003 level.

Should 3% interest rates become available, we should see an upswing in the value. If bad things happen and interest rates hit 8%, we're probably in a wage-price spiral and $1M will soon be the bid on EPA homes, just like the 1970s-80s inflation added a 0 onto home prices.

Serpentor says

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.

Its rather a myth that public companies were given out stock options before 2000. I have known lots of Apple folks all the way back to early 80s and they are not rich by any measure. Many are still struggling today and cant afford not having a job today. Stock options were more common with small pre-public companies, where a handfull went public, 1 out of 5. However since SO need to be expensed and many SV got stung with 'Back Dating Scandal" such practice has been replaced with "restrictive options".

Google itself had to reprice its many "restrictive stock options" since many were underwater... worthless.