patrick.net

I regert not being more educated back in 2001.

Tried to qualify for a mortgage through my local credit union.

They literally laughed at me. Little did I know that 1) my student loans (which were substantial back then) showed up on my credit report twice (clerical error) and 2) different banks have different programs / lending standards. I probably could had qualified for a loan to buy a small condo had I just shopped around a bit more.

Almost eleven years later and I still haven’t bought anything. (Despite a few noble attempts)

Even my wife (who I had only just met back then) would have tired harder to shoehorn into a loan back then… knowing what we know now.

zesta says

Wow, even in hindsight knowing that it went up so much after 1999 you'd still consider it a bad buy because of the early 1990s prices?

for many in 1998-2000, it didnt matter, it was from other peoples money.. stock they cashed out at high share valuation/price. Someone else took that loss..

On many levels this was very abnormal compared to decades past.

Since 2000 things around here are not so bright .... you pay a price.

2001 was stricter qualifications. 2003 not strict. 2005 can you move a pinky toe? Ok here's half a million. 2012 can we check your 8 year olds credit too? No? too bad no loan 4 U !

zesta says

In hindsight, would you also consider AAPL a bad buy at $25/share at the end of 1999 because it was only $10/share a year earlier?

Apple is a toy company! talk to me about Semiconductors, Servers, Storage, ERP software. Without the 3 S's, Ipod,pads are paper weights.

Yes, it would be a bad buy.... it was over $75 per share in 2000.
Actually fell 60-70%... so yes you would have lost your shirt.

Thursday, December 7, 2000 - Page updated at 12:00 AM

http://community.seattletimes.nwsource.com/archive/?date=20001207&slug=TT2H2IAQM

Apple stock falls fast, hard
By Cesca Antonelli
Bloomberg News
Cupertino, Calif.--Apple Computer shares rose sixfold in the 2½ years after Chief Executive Steve Jobs returned to the company in September 1997, but they've given up almost all of those gains in the past nine months.

The stock reached a record $75.19 in March before tumbling as low as $14 yesterday, after Jobs said Apple wouldn't meet profit forecasts for the second consecutive quarter and would have a loss in the current quarter, its first in three years. Apple also cut its 2001 sales outlook. By contrast, the shares closed at a split-adjusted $10.75 the day before Jobs was named interim CEO.

thomas.wong1986 says

The stock reached a record $75.19 in March before tumbling as low as $14 yesterday, after Jobs said Apple wouldn't meet profit forecasts for the second consecutive quarter and would have a loss in the current quarter

How they forget so easy! Does anyone else recall this or have you been brainwashed ?

http://finance.yahoo.com/q/hp?s=AAPL&a=08&b=7&c=1999&d=05&e=28&f=2012&g=m&z=66&y=132

AF, I liked you're old picture better.

wthrfrk80 says

AF, I liked you're old picture better.

I like his new name! subtle change, there's a new duck mania around here. duckhead is funny, but if he is the same "prices are cratering" monologue guy, then it's not cool.

thomas.wong1986 says

Some homes around my block went straight up to $1M .. I bought my home in early 90s when prices were much more decent.

How can you be so negative about a home purchase in 1999 and at the same time be positive about your home purchase in the early 90s?

According to your NorCal graph..

In 1987 SF prices were at about 150
In 1991 SF prices were at about 250
In 1995 SF prices were at about 230

By your logic you made a bad financial choice by buying in the early 1990s. Isn't it accurate to say that a person who bought a home in 1987, 1991, 1995, or 1999 and has held it to 2012 probably a good financial decision?

zesta says

How can you be so negative about a home purchase in 1999 and at the same time be positive about your home purchase in the early 90s?

See the article i posted earlier... how about this.. I sell you my Yahoo or Ariba stock (2000 shares) for say $250/ share. I pocket $2.5M and buy myself a home at what ever price the seller wanted because its your money.. and you lose your shirt as you watch your stock value fall to $10 per share.. thats what happened in SFBA in 1999. Bernie Madoff would be proud of me.

illustrate anytime

http://www.paloaltoonline.com/news_features/real_estate/fall2000/2000_09_22.lowmarkt.php

Publication Date: Wednesday, Sept. 20, 2000 & Friday, Sept. 22, 2000

Breaking into the market
Yes, Virginia, it is possible to buy a first home in this area--if you're willing to make compromises

by Jocelyn Dong

So you're looking to buy your first home in Silicon Valley. How do you get into the market?

zesta says

According to your NorCal graph..

In 1987 SF prices were at about 150
In 1991 SF prices were at about 250
In 1995 SF prices were at about 230

By your logic you made a bad financial choice by buying in the early 1990s. Isn't it accurate to say that a person who bought a home in 1987, 1991, 1995, or 1999 and has held it to 2012 probably a good financial decision?

At anyone point before 1998 have you ever seen prices double or triple in a few short years. What did we learn after 1989 that we forgot in 1998 .. hey RE prices do fall and do fall hard when disconnected from fundamentals.

Over the long run! home prices only appreciate at the rate of inflation.
If you want an investment, go buy stocks and bonds. Speculation go to Vegas...

Per Shiller, 1/3 of people surveyed in LA believed 50% appreciation year over year.

http://www.youtube.com/embed/d__GPqOVNbE

All of those stats are completely meaningless w/o adjusting for inflation.

thomas.wong1986 says

See the article i posted earlier... how about this.. I sell you my Yahoo or Ariba stock (2000 shares) for say $250/ share. I pocket $2.5M and buy myself a home at what ever price the seller wanted because its your money.. and you lose your shirt as you watch your stock value fall to $10 per share.. thats what happened in SFBA in 1999. Bernie Madoff would be proud of me.

I ask this sincerely, are we having a mathematical discussion or an ideological one?

Hindsight and math tells me that buying in the 90s and holding until now was a wise decision.

zesta says

I ask this sincerely, are we having a mathematical discussion or an ideological one?

You had to be here to understand the fundamentals in buying a house in SFBA didnt exist. It was all "free money" from other peoples savings.
Look... you give me $2M in cash I a will give you shares of Yahoo with a "current" value of $300 per share. If that stock dropped to $10 per share, which it did.. well too bad!

Do the math!

zesta says

Hindsight and math tells me that buying in the 90s and holding until now was a wise decision.

1992 was very different from 1999. Your question was regarding 1999, and was a bad idea... 1992 buying was based on more sober and realistic matrix based on incomes, vs 1999 which was based on free money.. The free money era wasnt sustainable! so what ever prices was cooked up wouldnt last.

They can build more houses and apartments. The govt can issue ever more and more bonds and interest rates can be so low that the return is actually a negative yield. So, the supply of these "assets" can increase forever.
The shares of AAPL are not going to be increased, they will be decreased shortly. Apple will buy back $10 billion worth of AAPL shares.
Other stocks are a similar story.
If you want to capture inflation, buy a house. If you want to appreciate capital and beat inflation, buy stocks.

clambo says

If you want to appreciate capital and beat inflation, buy stocks.

Just not in RIM...

thomas.wong1986 says

zesta says

Hindsight and math tells me that buying in the 90s and holding until now was a wise decision.

1992 buying was based on more sober and realistic matrix based on incomes, vs 1999 which was based on free money.. The free money era wasnt sustainable! so what ever prices was cooked up wouldnt last.

clambo says

If you want to capture inflation, buy a house. If you want to appreciate capital and beat inflation, buy stocks.

My math tells me that the price increase due to "free money from the internet bubble" has been sustainable for the last 13 years and counting. Perhaps there are factors other than "free money from the internet bubble" that affect housing prices.

I generally agree with the comment about housing following inflation and stocks appreciating capital.

But... since 1999 by how much has the DJIA beat inflation?
since 1999 by how much have SF home prices beat inflation?

Now in 2012, if you had the opportunity of using hindsight in 1999, which was the better financial decision?

zesta says

Now in 2012, if you had the opportunity of using hindsight in 1999, which was the better financial decision?

1997 was the last year it made sense before doubling by late 1999.
No, it didnt make sense in 1999.

It was fairly clear by first half of 2000 what was forecasted for the next 5 years in the local economy would not happen. as such if you lived here back then.. it was very similar to late 89s and therefore ripe for a correction.

zesta says

since 1999 by how much have SF home prices beat inflation?

As history has shown, home prices cannot beat inflation, since incomes increases are also tied to inflation by many industries. That was the whole point with Shillers study. Your factoring in bubble prices as some rational event, which it wasnt.

zesta says

Perhaps there are factors other than "free money from the internet bubble" that affect housing prices.

factor in the irrational buying, and hype mania many from the East coast, what is there left.. what could you say about the local SF economy which has been around for over 50 years now, booming tech industry, limited land, high demand, etc etc

so how is that different from the 70s,80s, early 90s.

If you were going to see an over the top expansion of prices, it certainly made more sense having it in the 80s vs late 90s/00s.
so why didnt it happen ? we certainly didnt have the hype then compared to the hype we started to see in post 1999.

Historically what's the longest duration of a speculative bubble?
Can a speculative bubble last 15 years?

and...

why can't I get you to answer this direct question:?

Now in 2012, if you had the opportunity of using hindsight in 1999, which was the better financial decision?
A. Buying a house in SF
B. Investing in DJIA
C. Putting it in the bank

D. Gold

zesta says

I'm curious what metricslas Patrick used to determine it wasn't the right time to buy in 1999 and if those metrics have been adjusted in hindsight now in 2012?

For example if the 3x income or annual rent / purchase price = 3% metrics didn't work out for in 1999 have they been revised?

These have been my concerns as well. It seems that these "rules of thumb" are too often taken as gospel and people assume they will rigidly apply, uniformly to all areas in the US.

And its not just people looking in overperformers like SF that get hurt by this. My understanding is even at the height of the bubble, some rules of thumb said it was OK to buy in detroit. Yet, even with those assurances, detroit prices still went down about 50%

Its like that old saying, if you flip a coin 20 times and each comes up heads, what are the odds that the next flip is tails:

(a) 50/50

or

(b) you are playing with a 2 headed coin and you dont realize it.

If after 13 years of flipping that coin patrick is coming up tails every time, perhaps its time to re-inspect it...

wthrfrk80 says

D. Gold

I had a feeling someone would pick secret option D.
Let's see... Gold is about 575% higher now.. You're 100k would be 575k. Pretty good.

Back to my paper napkin math:

If one would have bought a 500k house in SF with 20% down @ 7% in 1999 with a 15 year mortgage, one would now have almost 400k in principal + 100k downpayment + 450k appreciation (thomas' graph above shows about price almost doubling in SF from 99-2011) - 250k interest - 75k prop taxes -100k maint/ins = 525k

Additionally, one can add rent they would have spent in that 13 years. ($1500/mo *12 * 13) = 234k

The best part of it is that in two more years you'll be able to live in it while only paying prop taxes, maint and ins.

What will your 22 lbs of gold provide for you other than an expensive paperweight?

Furthermore, for all the moaning about the 6% commission a realtor takes (and I agree it's excessive) compare that to the capital-gains tax you'd pay on your gold. Now THAT's a lot of $$$.

zesta says

What will your 22 lbs of gold provide for you other than an expensive paperweight?

I wouldn't trade 22lbs of gold for any of the middle class houses in SF. As the wood ages and the floors slope, my 22lbs of solid wealth would keep separating me from the house poor folks. Don't knock gold, it is the only thing that has done anything positive in the last decade.

zesta says

Furthermore, for all the moaning about the 6% commission a realtor takes (and I agree it's excessive) compare that to the capital-gains tax you'd pay on your gold. Now THAT's a lot of $$$.

There is a big difference! The 6% is on purchase price (no profit). The capital-gains tax is on profit (no purchase price)! Huge difference. Bigger than the 800 sqft million dollar homes in SF for crying out loud.

RentingForHalfTheCost says

zesta says

Furthermore, for all the moaning about the 6% commission a realtor takes (and I agree it's excessive) compare that to the capital-gains tax you'd pay on your gold. Now THAT's a lot of $$$.

There is a big difference! The 6% is on purchase price (no profit). The capital-gains tax is on profit (no purchase price)! Huge difference. Bigger than the 800 sqft million dollar homes in SF for crying out loud.

Well in this particular case...

1m * 6% = 60k
475k * 28% = 133k

zesta says

Now in 2012, if you had the opportunity of using hindsight in 1999, which was the better financial decision?
A. Buying a house in SF
B. Investing in DJIA
C. Putting it in the bank

unless someone gave you several hundred thousand dollars to over $1M FREE, you were not in the housing market in 1999.

this was not a market for joe 6 pack or anyone else... thats the whole point of the article i posted above from early 2000 published in local Palo Alto papers.

there was not much of a choice you had! all you had after 2001 was some crazy loan! and a hope we would from 2000 to 2010 see another tech boom .. and crazy valuations with new IPOs.

thomas.wong1986 says

zesta says

Now in 2012, if you had the opportunity of using hindsight in 1999, which was the better financial decision?

A. Buying a house in SF

B. Investing in DJIA

C. Putting it in the bank

unless someone gave you several hundred thousand dollars to over $1M FREE, you were not in the housing market in 1999.

this was not a market for joe 6 pack or anyone else... thats the whole point of the article i posted above from early 2000 published in local Palo Alto papers.

there was not much of a choice you had! all you had after 2001 was some crazy loan! and a hope we would from 2000 to 2010 see another tech boom .. and crazy valuations with new IPOs.

I'll admit I read your article, but I thought you were arguing that home prices after '97 were fueled with help from internet bubble. Why couldn't someone have saved $100k or so by 1999 even without investing in stocks? or maybe sold a house in the midwest for 100k profit in 1997 and used that money to buy a house in SF in 1999? Is that impossible? Maybe I still don't get what you mean.

zesta says

I'll admit I read your article, but I thought you were arguing that home prices after '97 were fueled with help from internet bubble. Why couldn't someone have saved $100k or so by 1999 even without investing in stocks? or maybe sold a house in the midwest for 100k profit in 1997 and used that money to buy a house in SF in 1999? Is that impossible? Maybe I still don't get what you mean.

Extremes... everyone was investing in tech stocks.. and on the other side cashing out free money. By 1997 homes barely broke even from their prior 1989 peak. So there wasnt much profits one could have used to move up or else.

thomas.wong1986 says

zesta says

I'll admit I read your article, but I thought you were arguing that home prices after '97 were fueled with help from internet bubble. Why couldn't someone have saved $100k or so by 1999 even without investing in stocks? or maybe sold a house in the midwest for 100k profit in 1997 and used that money to buy a house in SF in 1999? Is that impossible? Maybe I still don't get what you mean.

Extremes... everyone was investing in tech stocks.. and on the other side cashing out free money. By 1997 homes barely broke even from their prior 1989 peak. So there wasnt much profits one could have used to move up or else.

A buyer saving 100k by saving over a number of years is an extreme? or moving in from another state is an extreme too? maybe joe 6-pack decided to cash out a few stocks so he could buy a house?

According to the article, at least 1 person was in the market to buy in Berkeley 1999. It doesn't reference what price range he was, but I think it's reasonable to assume he probably had 20% down. If he had around 100k down, he probably could have bought one of these properties..

http://www.redfin.com/CA/Berkeley/593-The-Alameda-94707/home/1871605
http://www.redfin.com/CA/Berkeley/1370-Ada-St-94702/home/1609593

RentingForHalfTheCost says

There is a big difference! The 6% is on purchase price (no profit). The capital-gains tax is on profit (no purchase price)! Huge difference. Bigger than the 800 sqft million dollar homes in SF for crying out loud.

Plus you don't have to pay property taxes on gold. Or heat or cool it. You do need to "insure" it though, with a vault. Or by paying some guy to guard it.

zesta says

RentingForHalfTheCost says

zesta says

Furthermore, for all the moaning about the 6% commission a realtor takes (and I agree it's excessive) compare that to the capital-gains tax you'd pay on your gold. Now THAT's a lot of $$$.

There is a big difference! The 6% is on purchase price (no profit). The capital-gains tax is on profit (no purchase price)! Huge difference. Bigger than the 800 sqft million dollar homes in SF for crying out loud.

Well in this particular case...

1m * 6% = 60k

475k * 28% = 133k

Sure, but the 1m was my own. Someone took 60K of my hard earned money. The 475K was profit from my investment. I should pay taxes on it, just like any income. The 1m was already after tax money.

zesta says

A buyer saving 100k by saving over a number of years is an extreme? or moving in from another state is an extreme too? maybe joe 6-pack decided to cash out a few stocks so he could buy a house?

Zesta, no, this is not extreme. I and other people I know bought houses in the late 90s based on savings for the down payment.

For all of Mr. Wong's statements that buying a house anytime after 1995 is a bad idea, he still owns his house around here. Personally I think that's a fine decision, but I also don't predict prices dropping to 1995 levels. So either he doesn't really think that prices will revert to 1995 levels, or he likes his house so much that he's willing to take the multi-hundred-K loss when this happens. Sometimes people own houses even if it's not the cheapest possible way to get shelter.

Regarding the rules of thumb - in the early 90s I rented a place in SJ where the metrics said RENT. In hindsight, I would have been better off buying it for sure, but I wasn't in a position to buy then. Now, it's true that the same kind of appreciation that we saw in the last 20 years is unlikely to happen in the next 20 years, but the point is that metrics are not always right.

The metrics say that buying in Los Altos/Palo Alto/Los Gatos is not as good as buying in EPA/East SJ/Oakland/Stockton. But, those who can afford it may choose to buy in Los Gatos/etc even if the metrics say otherwise.

SiO2 says

For all of Mr. Wong's statements that buying a house anytime after 1995 is a bad idea, he still owns his house around here. Personally I think that's a fine decision, but I also don't predict prices dropping to 1995 levels. So either he doesn't really think that prices will revert to 1995 levels, or he likes his house so much that he's willing to take the multi-hundred-K loss when this happens. Sometimes people own houses even if it's not the cheapest possible way to get shelter

No I said after 1997, not 1995.

And yes, if prices from 1989 corrected down to 1980 plus inflation, whats there to prevent peak prices from correcting down to 1997 plus inflation. Robert Shiller has proven with data that over the long run even LA (glamor capitol of the world) can correct downwards, whats changed ? Oh where are you going to point to some data point or economic fact to as sustainable long term trend that supports prices
from NOT correcting further.

For me, and my home...Its all about what one values the most.. my house or my career? Our industries is what counts the most. The speculative prices, disconnected from fundamentals, which in the long run are not sustainable has never led to any positive outcome.

Wanna live in place like mine in Los Gatos... slap the fucking shit off the face of realtors and their lies.

Do your own research, read Robert Shillers book, research what prices were before the bubble, discount all the crap BS you hear, negotiate and take no prisoners. Fact is buyers have more ammo now than even back in early 90s. We even have the actual blow up of housing bubble as even greater justification to counter to all the BS we heard. Yep, buyers have a lot of ammo!

What can realtors say! No such thing as bubble.. the same jackasses who said a few years ago... no correction to 2004, 2002, and now 1997 prices.... Good Luck!

.

Of course he regrets it! However a very central tenet of his is never ever admitting he was wrong, so no surprise he did not answer.

Nope, no regrets. It was the right thing to do to rent at a good rate and put all my savings into the stock market.

Might buy soon though, just because I can easily do it now with no mortgage, lol.

The message always was and still is: every house has an appropriate price, and it's not whatever anyone would pay. It's how much a landlord would pay. It's the price that is equivalent to or less than to renting the same quality house in the same area for the same period of time.

Just use a good rent vs buy calculator to see if you should buy: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

I regret that anyone that bought a shack paid more than 10% of listing price.
When they were ready to sell some damn fool would pay more then the new listing price.
Now that's clever flipping.

Patrick says

Just use a good rent vs buy calculator to see if you should buy: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Agreed--but someone who buys to occupy should always pay more than a landlord. The NYT calculator will show that though.

Patrick says

Might buy soon though, just because I can easily do it now with no mortgage, lol.

The message always was and still is: every house has an appropriate price, and it's not whatever anyone would pay. It's how much a landlord would pay. It's the price that is equivalent to or less than to renting the same quality house in the same area for the same period of time.

So since nowhere on the peninsula has rental parity, you are moving out and buying elsewhere? If not, seems like you would be contradicting your own message.

A flash from the past. We got lucky with the timing. Bought our first house in 1996 for $200k. It was a great stepping stone to get our future investments in the later years. It was appraised for $850k last year on a refinance. Funny we cluelessly bought our first rental in North San Jose in March 1999 for $330k. It's worth about $1M now. Prop 13 is nice I must say. Still own it and won't sell. Have to choke the supply side to get prices higher. ;)

And a couple of decades later, we have another tech boom. This one feels almost like the one last time except most of the current tech companies are actually making profits. I wouldn't be a buyer in the current environment. 2020-2022 might be a better time to buy IMHO.

I find this post to be extremely interesting.

I notice that we sometimes get misaligned in real estate debates because in order to compare whether or not a home purchase was the right thing to do, we have to look at two things: First, we have to identify a starting purchase point in time and an also an assessment point down the line where we assess the purchase. And second, we have to identify what the rent alternative was at the time the home was purchased AND what it is during our assessment point. As of today, I only see a brief window in time where I would argue that it was unquestionably a bad time to buy, which according to the Case-Shiller index was about mid-2005 through 2008. This was the height of the housing bubble, the height of the subprime lending crisis. I say this was a bad time because prices are just now recovering to where we were during that bubble years in California (generally speaking of course as there are some regions that have exceeded it).

I was one of those people that bought in summer of 2007 in the East Bay. I was a few years out of engineering school in my mid-20s, saved enough for a down-payment, and had to make a decision in whether to rent or to buy. At the time didn’t have much real estate education. My regret today is not so much buying at that time, but rather not being educated enough on the topic of real estate to see what was happening. At that time, buying pressure was coming from the media, my real estate agent, my parents, and my friends. House flipping get-rich-quick stories were running in every newspaper at the time. The following statement was being thrown around like candy, “buy now or be priced out forever”. The real estate education came the hard way, as it often does. That property I bought was worth less than I paid for it starting just a year later and stayed that way for a number of years. That was a difficult pill to swallow despite being able to comfortably afford the property and having a nice place to live for all those years. I watched several of my friends foreclose shortly after the bubble years. It wasn’t until this past year or so that prices rebounded enough to put me back in green. And after a decade of ownership, I was able to sell the property for more than I paid for it. I have a great deal of appreciation for what Patrick did with this site and with his book given that it was the ONLY detailed resource out there that I knew of that said, “hey, wait a minute! Let’s take a cold hard look at the less glamorous side of buying a house before we take the plunge”. Big thanks to you Patrick for that. I wish the book was available before I bought.

In regards to Patrick not buying and having regrets, there are several points that need to be considered. First, in affluent areas like the Peninsula, the rent:buy ratios are extremely low. Patrick covers this point well in his book. Next, it sounds like Patrick invested in the stock market and did well. Although it would have been great to buy in 1999 with prop13 in your back pocket, Patrick followed an alternative path. The story is not so tragic given that he isn’t one of those people that decided not to buy while neglecting to pursue any other investment options. And lastly, consider that competition in this area is fierce but it was also competitive back then too. One regret that may be present is that by not buying in 1999, prop13 cannot protect Patrick now from outrageous property taxes that would come with purchasing a home on the Peninsula today. Paying $12K, $15K, $20K in property tax, my gawd.

I moved to San Carlos in 2015. I watched an older lady, who had lived in the house across the street for 25yrs get evicted because the landlord wanted to jump on the rising rental wave. That really etched a point about the importance of home ownership in my mind. Although Patrick’s rent vs buy approach is valid, where it can break down is in the situation of insane YoY rental increases like we’ve seen between 2013-2017.

In terms of what’s to come… I honestly thought that 2017 was the year where things were going to cool off in the Bay Area (at least go flat). And so far I was dead wrong. 2017 was a strong year for real estate and according to Case-Shiller, SF increased 10-12 index points since January of this year. Although home prices and salaries can only diverge for so long, I have to keep reminding myself that here on the Peninsula, it's not just salaries that buy homes and create the frenzies but rather insane tech capital gains that are also at play that skew the normal rules in play at most regions of the country.

I wouldn’t dare get in today, but very interested to see where things go in the next 3-4yrs. Best of luck to everyone in your future real estate endeavors.