patrick.net

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

what’s funny is that your original statement was that ALL that matters for rents is supply and demand.

Where did I say that?

I said:

Rents are controlled by supply and demand.

What that means is that when there are more places for people to rent and fewer renters, the renter has the luxury of moving to the one that is cheaper; That is all I said as far as supply and demand. This is common sense. The coming recession will certainly help make that happen.

Anyway, you could supply all the data in the world, but the most strongest force is psychology. The same psychological force that drove this market way up is going to drive it straight down into the ground, and then some.

The finacial health and the ability to borrow huge amounts of money are just the tools available. It is the psychology that determines whether or not they will use them as well as how. Combine that with major stupidity and you have a disaster waiting to happen. Now you know why they make it harder to get a gun.

The most common sob story I hear:

FB: "Duh, I can't afford my payments on my ARM. The payments went from $1700/month to $3300".

Reporter: "Why did you get an ARM?"

FB: "It was affordable, the monthly payments were reasonable"

Reporter: "but didn't you know the rates were going to go up"?

FB: "Duh, nobody told me that an Adjustable Rate Mortgage Adjusts".

I know what supply and demand mean. S&D does not control rents [prices]. It is a factor. Your very own arguments invoke other factors relevant to real rent prices.

Anyway, you could supply all the data in the world, but the most strongest force is psychology.

So this is your belief. Except where supported by data -- and there is an enormous amount of data relating to behavioral economics -- your assertions are no better than throwing a dart or reading the stars.

I want the same thing you do. The difference is I admit that it may not turn out according to my best laid plans.

HARM,

Thank you for that about NIMBY and SMUG--and esp. for the link to the Housing Bubble Glossary--I had no idea there was such a thing.

Best,

Nik

I know what supply and demand mean. S&D does not control rents [prices]. It is a factor. Your very own arguments invoke other factors relevant to real rent prices.

Ok, it's a factor, then you admit that it does control rents.

z = x * y;

x and y are both factors. If either of them change, then so does the product z. x and y control the value of y, do they not? I rest my case.

So this is your belief. Except where supported by data — and there is an enormous amount of data relating to behavioral economics — your assertions are no better than throwing a dart or reading the stars.

Data is important and current data supports my argument. My data and your data take different forms. Yours are numbers, and mine are actual people in serious trouble who have finally admitted that they made a very stupid mistake. I know how people think and I know what people do under certain circumstances. My predictions are much better than throwing darts or reading stars. Look at all the articles that are out there now, there are even video feeds. This itself is strong current data. The stories were much different a year ago. I told you before, the numbers provide the tools, but the psycology of people cause them to act. It was herd mentality that drove this market, "get in now before it's too late". Now it is "get out now while you still can". Numbers can only do so much, once you have the stampede running for the exits, there is nothing you, I or the FED can do to stop it.

Who buys a house in Oakland?

Former Govenor Gearald R. Brown.

Who buys a house in Oakland?

Former Govenor Gearald R. Brown.

z = x * y;

x and y are both factors. If either of them change, then so does the product z. x and y control the value of y, do they not? I rest my case.

Ok, if we're going to get technical then the form is:

y = c1x1 + c2x2 + c3x3 + ... + cixi + err

x1 .. xi are not independent variables because there is inter-correlation.

As for supply & demand, those are each reduced to an input price equilibrium, which itself is a ranged estimation. We don't know the elasticity or dead loss in the s & d equation, for example. Worse yet, the amount of elasticity is itself directly affected by the amount of true real income the buyer (renter) has, which has little to nothing to do with either supply or demand but with macro factors.

Your evaluation ignores two important aspects: (1) the relative weightings and sensitivity of the inputs and (2) the dynamic nature of the system itself. In reality such systems when evaluated deterministically are extremely complex and produce a wide variety of non-intuitive results.

Randy,

I also do not like any arguments based on "it's different this time". But was there any previous credit bubble ? What happened at that time ?

If there was no such credit bubble, then isn't it really different this time ? There is a first time for everything/ And every first time is "different", as it has no precedent.

y = c1x1 + c2x2 + c3x3 + … + cixi + err

What are c1, c2, c3 and cixi or should I bother to ask? C1x1 will always be C1 so the first constant is redundant.

All I know is that if money is tight (such as during a recession) and I'm renting an apartment for let's say $1500/month, and the exact same apartment right next door has been vacant for several months and the landlords is crying, "please, please rent my apartment, I beg you. I am going to lose everything, I will give you the apartment for $1200/month". I know that I'm not even going to have to think a second about taking him up on that offer. Eventually, my previous landlord is going to be begging someone to take up at least some of his slack and that will only happen by being competitive and lowering his price until equalibrium is reached which usually results in some landlords losing the property because they can't lower there price anymore and still afford to keep the property, yet can't get someone to rent it because there is a cheaper unit available.

Look at what happened just a few years ago when people were buying up houses left and right. The landlords were lowering their rent and offering incentives such as 3 months free rent and a free laptop computer, free cable, etc. This is a direct result of supply vs. demand as many renters became owners (actually ownees) and fewer people rented pushing up supply. It will happen again when the recession hits and people share rooms and stuff like I mentioned above.

allah,

I don't disagree with your qualitative observations. And they are relevant. They just have to be considered along with quantitative and fundamental aspects. Otherwise they are just anecdotes.

What are c1, c2, c3 and cixi or should I bother to ask? C1x1 will always be C1 so the first constant is redundant.

The "1" "2" "3" etc. are subscripts denoting sequence.

First Constant * First Ind. Var + Second Const * Second Ind. Var and so on.

Another factor is the McMansions that people wanted but now seem to have realized that they weren't such a good idea and now cannot sell them.

I am guessing that some of them will be converted into multi-family housing thus increasing the rental supply side since noone wants to live in them.

Random1,

We at Patrick.net welcome contrarian or unconventional views as long as they're presented without inflammatory racial or sexist slurs, or gratuitous insults. We are not the P.C. police and do not censor unpopular views that are presented in a mature, reasonable manner and provide some evidence/data to back them up.

I can and will remove those posts that I deem inflammatory and/or baseless, in order to prevent flame wars from developing, which tends to drive away quality posters.

If you have something important to say about the racial/demographic makeup of Oakland and how this has or has not contributed to the local crime rate, please feel free to re-state your position in a mature tone, and then present some data to back it up. Thanks.

IMHO, this is housing crash related. Posting today’s SJMN news article …

Killings ripple across much of Bay Area

hmmm, only inasmuch as failing to provide a social guarantee of affordable housing will produce anomie. could just be a cultural swing in MO for gangstas. these guys are certainly not middle class struggling with mortgages or high asking prices... altho maybe disposable income is lower so nobody's buying drugs and they're getting frustrated ;)

this plan calls for bringing in family members and giving them strongly worded warnings as well

right, like 'please ask your son to stop killing people, it's against city ordnance'. i like how they propose to locate and follow exactly 100 violent people as the solution -- i would have thought actually investigating crime scenes and arresting people who kill people would maybe be a good thing...

Randy,

I think a stagflation scenario would depress rent prices. First by depressing demand - stagflation mean people making the same wages but have everything they need go up in price = less money for housing. Stagflation also increases supply by forcing many home owners to let out rooms and basements to make ends meet.

If you want to talk high inflation (above 20% a year) then we're in a whole other ballpark. But if that situation ever occurs (and I certainly hope it does not) periods, then I agree with you. But in that case, we should have plenty of warning and pick up some good deals off of the ARMed FB carcasses.

Can I ask, if you get a FRM in the US for 30 years at, say, 5%, does that rate get reviewed over time, e.g. after 3 or 5 years, or are you guaranteed 5% for 30 years?

littleworried,

If a $150/month rent rise (which may be technically impossible in CA to start with) is enough to get you to buy and double your costs. Then why don't you do us a favor and go do that. I for one can do without the internal monologue of an illogical troll.

As a Maltusian of some sort, I must oppose any quantitative (as opposed to qualitative) immigration scheme to support an economy. That just smells like a pyramid scheme.

I will reconsider this position when someone figures out a way to turn us into energy beings living in cities powered by a couple duracell batteries.

Or at least cracked cold fusion and built economically viable floating cities in the sky/ocean...

Some parents in China would happily give their lives if that would help establish their kids into a prosperous life.

hmmm, isn't that logic a bit off?

1) i don't think it would be a prosperous life, it would be a one-off sale with quickly spent proceeds.
2) do parents really value their kids lives more than their own? how will the kids survive if they lose a parent if life is really that hard? surely the logic defies itself.
3) the law recognises every individual's right to safety and security of person, and the recognition of personhood -- this would completely usurp that. the whole legal and welfare framework, in the west at least, revolves around it.
4) it would be too tempting to murder strangers or other people to sell to body part sellers, thus starting a kind of thuggi movement in various areas -- thus reducing everyone's safety and undermining the social fabric entirely.
5) some Indian villagers are known to have donated a kidney, and limp along for the rest of their lives without one -- and are run-down and sick from that point on, making them less able to cope with what is already a difficult life.
6) a national economic system in a state of surplus should be able to provide adequately for all who want to participate without resorting to suicide/murder or lifelong incapacitation. the communist dream, in particular, should be more inclined to this view than the capitalist one.
7) apart from the low ethics of the act -- regardless of one's wealth, becoming ill and needing an organ transplant is an act of nature and is just fate and bad luck, paying for organs is a deliberate wilful social choice with all its attendant implications of right and wrong, and needs to be judged accordingly...

I must oppose any quantitative (as opposed to qualitative) immigration scheme to support an economy. That just smells like a pyramid scheme.

this is exactly what 'property councils' want -- they want to prop up their members' property values by immigration if necessary -- anything to keep that property value growth alive -- and they lobby govts for it. they just assume that the immigrants will get jobs in the economy, and they will need to rent of course -- price fixing will ensure they will never be able to afford to buy... talk about vested interests...

DS,

Oz doesn't have our 30-year product, which guarantees a rate for the course of 30 years regardless of what happens. As far as I know, you guys have something like 5-year fixed or 10-year to the most, but majority of the mortgage taken out in Oz is floated with the cash rate.

thanks, OO

yeah, they wll review the rate after 3 or 5 years, as the banks don't want to get locked into a low interest loan for 30 years, they wouldn't be able to milk you then -- in effect, a FRM mortgage here is like a slow-motion ARM...

allah
Nice link. Thanks.

agreed. if 2 doctors can't afford a single mortgage, what chance is there? now they're apparently running with 2 mortgages -- must be renting the mcmansion out...

there are environmental benefits to occupying smaller houses also, being reduced power/heating /cooling usage in particular.

plus, there was the case of the michael peterson who was convicted of killing his wife in order to retain his 11,000 sq ft place (which she was doing the lion's share of paying off) and paying off credit card debt with a $1.4 M insurance payout - not the best link, but nevertheless:
http://www.peterson-staircase.com/financial_fire.html

astrid Says:

As a Maltusian of some sort, I must oppose any quantitative (as opposed to qualitative) immigration scheme to support an economy. That just smells like a pyramid scheme.

First of all, I have serious doubts about the so-called qualitative immigration. If the quality you refer to is the level of schooling, I'd say the US has been doing extremely well with regard to immigration. We don't need many highly schooled and pompous asses.

Those illegals who are daring enough to seek a better life in US, despite all kinds of risks and adversities, are far worthier than those better schooled or moderately-moneyed smart-asses who are good at taking office jobs but have contribute nothing of greatness to this country. BTW, I am one of those second type, but not smart enough to call myself a smart ass.

Secondly, Astrid, whether you like it or not, these (illegal)immigrants will still arrive en masse. Within 50 years, there will be a hispanic president in US of A. Hispanics are already re-shaping the US pop culture. Sure, the Blacks have done so. But they, as a group, have never capitalized on their cultural domination to win true political power. Hispanics may fare completely differently.

Highly talented people are to be recruited. But they will come if (1) the country has economic might and (2) it is free of persecution. Fermi did some good work with the bomb, so did other imported European phycists. But native-born Americans also contributed their (probably significant) share to the making of the bomb. Other than that, I thought American power (over the rest of the world) was established long before these great European intellectuals arrived.

She can always fool some people. This is the downside of a free market.