patrick.net

Rent IS on the rise. A soft-landing for Bay Area real estate is a very real possibilty. This is why timing a home purchase is not necessarily productive.

The good news is, even if rent goes up 30%, it is still quite affordable. On the other hand, home prices are going nowhere, so we still have time.

BTW, I am under the impression that 1BR units are in demand. This may imply new entry-level technology employment. In about 2-3 years, these renters will become potential homebuyers. Keep that in mind.

We should pay more attention to any new business development in the area. Of course, if the recession hits soon, the outcome will be different.

Rent IS on the rise. A soft-landing for Bay Area real estate is a very real possibilty. This is why timing a home purchase is not necessarily productive.

Yes, I'm sure it is, but that won't be for long. The perfect storm is just around the corner. Jobs are already disappearing as we speak. People are opening their monthly mortgage bill and saying "OMG! It went up again! We can't pay this! ". I believe 2007 is going to be a very painful year for many folks.

Not sure if you guys are aware of this, the mortgage rate on 30-year fixed is dropping. Someone must be turning on the tap (where did M3 number go)?

Great! :)

The market is pricing in a future recession.

On the other hand, most people do not use 30YR FRM anyway. We want the interest rate for FBs to skyrocket. We want 30YR FRM rate to go down. Ha Ha.

Jobs are already disappearing as we speak.

Although I hate new hiring activities (more competition for restaurant tables), I have to say that hiring has indeed picked up.

Off topic, somewhat:

I've been having a conversation with someone over on housingpanic (amazing, an actual 'conversation, not the normal xeophobic, sexist shouting that normally goes on over there) about the idea of a Blue Book for Real Estate...

Rather than rely on 'emotional' pricing for houses, have a sq footage price, based on what it would cost to build today (for exstisting homes) and a plus-or-minus system for things like location, access to freeways, school districts, improvements, condition, etc...

So many people think of thier houses as a commodity, in much the same way as they think of stocks and share, rather than an asset that appreciates or depreciates with time, like a car.
Car dealers don't use emotion (well, not as much as REAs or homeowners) in selling used cars. If you don't like the price, you can argue it up or down according to the Kelly Blue Book valuation. If they insist that thier car is 'different' and 'unique', at least you have a baseline figure with which to compare.

It may not be perfect, and not all people base thier asking price on the Kelly Blue Book price when selling a used car, but at least you have some idea of a'ballpark' figure for the make, model and year you want.

Am I on crack? Is this a stupid idea?

Although I hate new hiring activities (more competition for restaurant tables), I have to say that hiring has indeed picked up.

Yes and all those extra waiters and waitresses who used to be Realthores aren't going to get the greatest tips.

Peter P,

I concur with your assessment. Both salaries and employment have been strong for the past 3 quarters and are just leveling off a bit now. But the impact is still working into the local economy. Rents are starting to rise more broadly; they have been rising at the top and bottom ends for almost a year now. Further, the churn has leveled and the BA is now receiving net in-migration. And not just because of Google. I'm not sure how many jobs Google has added to Marin or San Francisco counties, both of which also have net in-migration as of 1 or 2 quarters ago.

Add to that the almost certainty of a "pause" in rate hikes, and we're looking at a very sticky ride. Downward pressures from financial debt stress will be slowed by these fundamentals. Remember, inflation hurts savers and rewards debtors (and usually investors). Tightening does the opposite.

I still give hard -v- soft 50-50 odds. It's fundamentals versus psychology, and I'm afraid I believe in both.

I am sure the BA will be bouyed by the 3000 or so googleaires.

I remember Prop 13 but don’t know what “SMUG/NIMBY” are–any one care to fill me in? [I now live in “Hot”lanta–can’t wait to get the F outta here and get back out West…]

Nik,

NIMBY is an older and commonly used acronymn: "Not In My BackYard". Basically refers to any knee-jerk reflexive reactionary mentality on the part of existing residents against any change that might require some small sacrifice or perceived intrusion on the tranquility of their idyllic lives --especially when it's of benefit to working-class people. Typical examples are: homedebtor opposition to building any new "affordable housing" developments or apartment buildings, opposition to having new power lines or new rail lines built though one's neighborhood, or a new freeway overpass, school, etc.

SMUG = "SMart Urban Growth (see 'Coté-isms' section of the Housing Bubble Glossary)

You left out the “California Future” - a truly scary concept to contemplate. Maybe Ebenezer Flipper will be convinced to change his evil ways and start buying turkeys for all the FB’s…

Excellent point, Skibum! I give you a vision of California Future (a.k.a. "Blade-fornia"):

That’s the unfortunate reality all of us that read this board must face: the possibility that a combination of factors may stall a hard landing. I don’t like that.

I don't like it either. I would very directly profit from a hard landing. The harder, the better. I am currently positioned with a strong bias towards taking advantage of even a harder-than-soft landing. I'm just not so sure I'll get my way. This could yet take a lot longer to play out. I offer one small example from my own little world: last week I had beers with some b-school colleagues. One of these guys who used to do a ton of MBS industry risk management work is now on to a new company which is creating a bunch of new products to market to lenders enabling them to profit by refinancing "thin" equity owners out of adjusting ARMs. Some of this includes the ability to make lending to negative-equity owners within a range profitable. None of this will work if rates go up another 150bps. But they're hedging their bets in case rates don't go up, at least for a while. And if a guy I know is working on shit like this, then hundreds or thousands of others are doing the same. So I'm not so sure the flood of ARM resets will cause the armageddon that would buy me a 6BR estate in Tiburon 25% of today's prices.

> Not sure if you guys are aware of this, the mortgage rate on 30-year fixed is dropping. (...) the long-term mortgage rate has been dropping since about a couple of weeks ago, originally she could only get 6.7%, now she could lock in 6.3% or so.

Treasury yields are decreasing, due to increased expectations of a recession. Fixed mortgage rates follow 10yr treasuries yields.

After the increase in ARM rates, the trend was to refinance into a fixed rate. If the rates decrease again, the ARMs (not option mortgages) wouldn't have been so bad after all, but the mortgage brokers would have collected less fees.

> when there is a recession and your apartment is foreclosed upon, the sheriff isn’t going to kick out a perfectly good renter and whoever takes ownership of the house (probably the bank) isn’t going to want to lose the income of a perfectly good renter either

But they might increase your rent for the rest of the lease, maybe significantly, because they expect that the renter wouldn't like to move out fast at that time.

Blade Runner is one of my favorites.

Peter P Says:

Although I hate new hiring activities (more competition for restaurant tables), I have to say that hiring has indeed picked up.

Let me generalize on this observation. I bet a lot of hirings go to newly arrived immigrants who are willing to work HARD for less pay.

Contrary to many people's wishes, immigration in this country will NOT stop.

The reason is very, very simple.

The economic growth is driven largely by population growth. As the US population ages, there is a (desperate) need to import young and fresh workers to maintain the growth. It does NOT matter what kind of people US imports, as long as they are young and willing to work. Therefore, I believe the anti-illegal immigration stance taken by the politicians are half-hearted.

A hard landing is still in the cards. There is a denial going on right now. I think those wish to profit from a hard landing (myself included) may actually be right on the money.

The problem is: When the majority of the people -- I think the word PEOPLE will have increasingly significant meaning in the coming turmoil -- are suffering, you cannot just go ahead and profit without inciting a lot of envy and anger. It must be done with great subtlety and in some cases, out-right deception.

A word of caution: Do not boast if you ever profit from the hard landing.

But they might increase your rent for the rest of the lease, maybe significantly, because they expect that the renter wouldn’t like to move out fast at that time.

Since when does anybodies rent increase during a recession? When their is a recession, there are many who lose their jobs and do not pay their landlords. There are mass evictions and mass evictions cause rents to fall and when rents are falling and vacancies are rising, the few good renters are gold. I have read stories about landlords during a recession that actually lowered their tenants rent just because they were paranoid that their good tenant was going to leave.

Repost. I used the V word again.

I believe the low-end housing market will do well, because that’s why the new immigrants can afford. The mid-to-high end of the RE market will suffer, because a lot of middle class workers will be squeezed by (1) layoffs, (2) debts, and (3) rising cost of reputable living (which includes Martha Steward living standards, good schools for children, SUVs, latte every day, vacation every year, a Plasma TV in front of the toilet, daily V pill for the aging fathers, ipods for their babies, blah, blah, and blah).

I’m also worried about the significant rise in rents and recent drops in mortgage rates.

Don't worry. At some point you will just buy something you can afford. We need to figure out the best course of actions for a given scenario. Wishing or worrying about a particular scenario is not necessarily productive.

I am a hypocrite because I worry all the time. :(

The rents ARE increasing. There has been more demand because less people trying to buy, less supply due to condo conversion. Other factors like some salary increases may be playing their role.

But get this. $920 per month in Santa Clara is LOW. I used to pay that much in 1996. So let's not expect that today.

The fact is during the last 5 years, rents in BA were super duper low. Rents are still not back upto the levels seen in 1999.

Many people moved to BA during the dot-com boom. Rents sky-rocketed. $2500 in Santa Clara (near El Camino) for a 2 BD / 2 Bath was normal. Many new apartments were constructed during that time. Those were the late comers to the party. Do you remember the Aviere at De Anza and 280 ? Or Avalon at Lawrence and 101 ? Those did not exist before 1998.

Then the bust happened. Huge number of people went out of BA. The census probably did not even get a chance to measure the increase and subsequent decrease in population. Apartment vacancy increased dramatically. Many people started buying home from 2003 onwards, keeping the downward pressure on rents low.

Guess what ? The balance has shifted back to Apartment complexes. Do you know Cupertino Villas near Wolfe and Fremont. It was a rental complex. Now it is condos. Still available to purchase.

So as much as homedebtors got used to "guaranteed appreciation", renters got used to low rents. Now the tide is turning, both groups are complaining. If housing prices need to come back to economic fundamentals, so do the rents need to move up.

That means rents will go up as much as they can, and house prices will drop as little as they can. The rents will catch with reality faster. House prices will take longer.

I do not expect the rents to provide any cushion to house prices. Increase of $100-200 will not force people to take out a loan of 800K+. No way. And if people cared about the price/rent ratio, the bubble will not have happened in the first place.

Hardly anyone cares about those ratios. It's all psychology. Which has reversed. Already. It's not going to turn around 180 second time in a few months. Look for YOY drop in median by this year end in Santa Clara county. The sheeple will force the rents higher then. It will cost you $100 extra per month. But that's the cost of not committing financial suicide. Worth it.

The mortgage rates have dropped. Would the low rates automatically mean no drop in housing prices ?

Hardly. We briefly touched on this in previous thread. Low (dropping) rates and low (dropping) prices combination is not impossible. Has happened before. Not too far ago. In CA.

Remember lowering of rates did not save stock market. It became worse before it got better.

Yes, we are different than Japan. And houses are not stocks. But recession, US$ devaluation is also a strong possibility. A drop in house values, makes refinancing impossible for many folks. And a lot of FBs depend on prices going up. Remember that. So the path downward won't be linear, it never is. But the long term trend is already set in place.

Dear Littleworriedtoo ,

Perhaps your little troll ass should have chosen better, try coding, and being a manager. You should buy now otherwise you'll be priced out forever

Oh, you might consider selling crack. Or a webcam p0rn site with your "wife".

Asshole, go the fuck back to craigslist.

GC,

The economic growth is driven largely by population growth.

False. Population growth does not cause any real economic growth because it is largely offset by capital creation and depreciation replacement. Solow showed the only real source of long-term economic growth is productivity, ie. technology.

Allah,

Rents go up during a recession if there is also present inflation. We once called this stagflation. It can and has happened before. It may well happen again.

What's happened/happening to Bay Area housing/prices is scary.

This thing will not end well for many. Sh-t is way out of whack!

Thanks for reading my in-depth analysis. It's all you need to know.

Sincerely,

Michael Holliday (Original South San Jose Corona Beach Club Member, Class of '84 & "State school" guy).

Rents go up during a recession if there is also present inflation. We once called this stagflation. It can and has happened before. It may well happen again.

Randy,

Rents are controlled by supply and demand. It's hard to raise the rent when the there are two desperate landlords with empty apartments to the left and to the right. When things really get rocking and there are many people out of work, there will be FB's renting rooms in their overpriced shitboxes just to make ends meet, which causes vacancies; Friends leaving separate apartments and sharing, which causes vacancies; children moving back in with their parents;parents moving in with their children. This is going to cause a huge amount of vacancies and the ones that aren't vacant, some of them are going to be a landlords nightmare. It is at this time that the landlords will have NO bargaining power. It is also at this time that those who have jobs and are paying on time are going to have their feet kissed by their landlord.

Remember, when those rents were dropping lower as housing prices rose, more younger people found it affordable to get apartments. Many of them thought it would be COOL to get their own place so they got their own apartment at a younger age.... but, when things get more expensive and walmart decides they don't need as many cashiers, this group of people will leave their apartments causing vacancies.

Yes, it is true that landlords want more when their costs increase and when the supply/demand is in their favor (like it is right now), they can get it. You only see the rents rising right now because their expenses are rising, but there will be a breaking point when people decide to leave the area instead of paying the increased rent and refusing to buy. If this alone doesn't slow down the rent increases, the recession certainly will.

bodysurfer Says:

"Here are the facts...Good luck!! I bet you in the year 2017, same bloggers will be saying the same thing on patrick.net … come on guys, after 11 years, admit that you’ve been wrong and that you are still wrong! You can’t predict the future. Otherwise, you’d be a multi billionaire. Oh yeah…. I forgot, all of you are already multi billionaire… who still rents wink wink."
_____

Probably you missed the most salient, earlier posts of Surfer-X: HE ALREADY OWNS 40 F'ING HOUSES. HOW THE F' YOU THINK HE SURFS ALL DAY?

Now clean the sh-t out of your ears at get back to the bathhouse, I mean
housing market.

Sincerely,

M. Holliday (San Jose refugee to Phoenix & "State school" Corona Beach Club Member, Class of '84).

Gotta love this, this guy is posting this ad for a mansion in GA for $100k below bubble value and he posted in the LI NY category. I can only guess that this guy was originally from Long Island and decided on buying the biggest he could get for the money in GA and then got in trouble with an ARM reset.

allah,

Rents are controlled by supply and demand.

Supply and demand are only a factor of real-price, whether rentals or houses. The value of your dollar as per inflation is another factor. Even if rents stay flat or fall in nominal terms, they may well be increasing in real terms if there is inflation.

Inflation can, has, and will again exist without wage growth. During the deflationary periods of the early 70s and late 70s/early 80s rents in many markets were rising even while wages were flat and supply was increasing.

Stagflation is cruel. There are risks associated to trying to time any market, including those of us trying to time real estate. Macro factors can sneak up and bite us in the arse.

who buys home in OAKLAND??

The Raiders.

During the deflationary periods of the early 70s and late 70s/early 80s rents in many markets were rising even while wages were flat and supply was increasing.

You really cannot compare today with what happened in the 70's/80's it's a whole nother ball game. We have a credit bubble and many will have to pay for what they already consumed. Many landlords are just a rent check or two away from defaulting on their property. Things are going to get thougher for everyone, whether they are renters or homedebtors (or homeownee's since the house owns them). Renters however, have the option to just pack up and go if the going gets too tough. It also gets alot easier to do when you lose your job. Remember, for every expensive rental, there is a nicer/cheaper one somewhere else in this great country of ours. I have a few dozen friends who ahev already left LI NY and most of them tell me that they wish they did it years ago.

"My wife and I pay $1550 for a 2-BR near the Fremont BART on a 7-month lease that ends Aug 31. Just got the letter saying rent will be 1755 for an 8-month lease (that’s a 13% increase on similar length lease)."

I just checked rentals on Craigslist and apartment complex listings on rentnet.com. $1755 is ridiculously high for a 2br in Fremont.

bodysurfer,

Good to see you back. I'd have thought you'd have resorted to writing books and showing powerpoints to the kind of people who live off of payday loans on the snake oil lecture circuit by now.

Since you used to be a jr assistant IB analyst, you should know how to use the =NPV function in excel.

I sold my massively overvalued home in 4/05. Since then my alternate use of invested equity has earned me about 11.5%, net of taxes. What has the median home produced during that period?

So, I'm not losing to any kind of lost opportunity.

If prices fall by even 10% in real terms, and I buy back in within 12 months, then how far ahead will I be over those who sat there servicing their IO, NA, ARM? The math isn't that hard (hint, =PV)

Oh yeah…. I forgot, all of you are already multi billionaire… who still rents :) wink wink :) .

I don't personally know any billionaires, and neither do you. I know a good number of millionaires. I'd say about 25% of them are currently renting, most of those bubblesitting after having sold multi-million dollar homes. Any of them could buy all your homes for cash today. But why bother when we can buy even more for less tomorrow?

Or didn't you learn the "buy low sell high" part in your early IB indoctrination?

allah,

You may be right. It might be different this time. But I've heard that phrase before, applied to numerous different things, good and bad. Extraordinary claims -- such as "it's different this time" -- require extraordinary proof. I have yet to see such proof, but I admit that there's always a chance no matter how small.

The early 70s stagflation was preceded by a credit bubble larger than todays in terms of % of GDP, btw. All that inflation didn't just come out of the blue. There was a huge debate raging at the time because of petrodollar induced inflation.

I just checked rentals on Craigslist and apartment complex listings on rentnet.com. $1755 is ridiculously high for a 2br in Fremont.

Then leave!

"Then leave!"

I don't live in Fremont. I was replying to littleworried's post.

The early 70s stagflation was preceded by a credit bubble larger than todays in terms of % of GDP, btw.

Where is the data for this? I mean I'm not an economist, but what I do know is that never before in history have people overused credit. We didn't have the negative savings rate like we are having now. We didn't have all these different toxic loans, we didn't have people buying with "no money down", with closing costs worked in. We didn't have house prices doubling or even tripling in such a small timeframe. We didn't have people stretching to buy a McMansion just because they thought "the bigger the better". Manufacturing was the only type of job that was being outsourced. Americans got used to making alot of money in high - tech jobs and they aren't used to going backwards. The younger generation got used to believing that their wages were going to keep going up so they can borrow as much as a bank will lend them and their future salaries will be able to bail them out. It is VERY different today then it was back then. How could you possibly compare?

I don’t live in Fremont. I was replying to littleworried’s post.

He is a troll. Don't waste your time with non-sense!

allah,

what's funny is that your original statement was that ALL that matters for rents is supply and demand. I assume you know admit that statement was incorrect, given that you are arguing macroeconomic history.

i am data driven. aggregate national income accounting components such as savings rates, gdp, debt, etc. are all available in time series from various government sources. www.bea.gov is a great place to start.

*now admit