patrick.net

MP, As so many of us here have pointed out oh-so-many-times:

1. Rents in most bubble areas are NOT going up (by much): patrick.net.
2. If both rents AND home prices rise beyond the ability of most households to pay, then either incomes must rise, or prices & rents will have to fall (due to people being forced to leave the area and lowering demand).
3. You would expect SOME increase in rents at the tail end of a housing boom, due to priced-out families turning to renting as a cheaper alternative (and thereby temporarily boosting demand for rental units).

As your article says:
"A government report yesterday also offered new evidence that the housing boom could be reaching a peak. The median price of a newly built home fell to $203,800 in July from $219,500 in June, after having risen in the winter and spring, the Commerce Department said.""

As I said, completely predictable. If you think rents are going to go up 300% to match current prices, you're dreaming....

(yes, with bars on the windows. If you find one without bars on the windows at that price point, it's considered "deeply deferred maintenance"...i.e. active crack house.)

@HARM: back a few months ago, I think the general consensus here was that a mild housing crash could mean broadly higher rents.

What's your take now? No soft landing? The falling tide beaches all boats?

(yes, with bars on the windows. If you find one without bars on the windows at that price point, it’s considered “deeply deferred maintenance”…i.e. active crack house.)

Er, I'm guessing your 'hood' is a bit more extreme than mine.
My familiarity with the hood is sketchy at best. I know Rio Linda is not too great because my Dad's office used to be right by the welfare office out there, and boy was it busy. Mostly I hear about what area's are bad by word of mouth, usually by those who live there.

Apparently the only real life that exists is on MP's street. The rest of the world's real life examples are pure fiction.

@HARM: back a few months ago, I think the general consensus here was that a mild housing crash could mean broadly higher rents.

What’s your take now? No soft landing? The falling tide beaches all boats?

Don't recall (do you remember the thread)? But, I agree with Peter in that I'd expect some uptick in rents at the end of the boom as priced-out people give up on trying to buy and switch to renting. However, as I said, I don't think the average increases in rent will be either large or sustainable as the bubble pops.

Reason: when prices begin to plateau & fall in a given area, this puts more housing stock on the market, either via "investor" rentals (trying to cover some of their monthly payments while seeking a greater fool to buy the house), or foreclosures. The flood of new inventory on the market will increase supply for both renters and buyers.

Good luck trying to raise rents in that environment.

@MP. I don't know what maths they required of you in school... But in the first few minutes of Stats 101, they bring up concepts like "sample size" and "selection bias" and "unwarranted extrapolation". Maybe you didn't take statistics. Check it out.

You can believe what you want about this article and that article, but i’m posting a real life example. There’s no better proof than something that’s real, that is why i post examples of properties going through the roof.

Like we've all said, MP, a slight uptick in rents at the end of a long housing boom is predictable, expected --and temporary. Even in those areas in the NYT article that showed the largest rent increases were only a point or two ahead of inflation --not a giant leap by any standard.

Your "my neighborhood, blah-blah-blah" anecdotes do not impress, my friend.

SactoQt- I’m only telling you with great confidence of what i know in my hood(s). Is that bad?

Not at all, but there are a lot of neighborhoods in the world and what goes on in one is not representative of all-- that's all I'm saying.

But, as a homeowner, a landlord, AND an ex-renter, I believe i have more working knowledge than someone who has only been a renter. Is that not fair to say?

How long have you been a homeowner and landlord? Have you been through the up and down markets? Going by your age I'm guessing you haven't experienced and survived both just yet. When you've had time to mature in your role as an owner/landlord I'll be very interested to hear what you have to say.

Peter P - Regarding our inverted yield curve bet, let’s make it fair and simple on the deadline. January 1st. You’ve got 4 months.

Fine. Let's use the spread between the 2YR and 10YR note. If the yield curve ever inverts between now and the end of the year, I win.

Which sushi place?

My, oh, my --that yield curve is sure getting thin: .18

US Treasury rate site;
tinyurl.com/79u6u

@HARM: I don't recall the thread.. I may have been cherrypicking comments to reach my supposed "consensus" (see above re: selection bias!)..

Reason: when prices begin to plateau & fall in a given area, this puts more housing stock on the market, either via “investor” rentals (trying to cover some of their monthly payments while seeking a greater fool to buy the house), or foreclosures. The flood of new inventory on the market will increase supply for both renters and buyers.

Agreed. I guess the builtin assumption there is that rent levels presently reflect (a large percentage of) recent buyers' cashflow positions. Which sounds reasonable under normal circumstances, but I'm not sure it's true today.

I'm seeing houses and condos in SF that rent for about 35% of their theoretical sale PITI amount (20% down, 30yr fixed). If things got really heavy and sale prices dropped 50%, there would still be room for rents to rise to meet in the middle..

AFAIK, "affordability" for rental qualification is still the traditional 30-40% of income. The median household income for SF is $70k...does anyone know the "median" rent in the city?

http://patrick.net/cache/rankrent.html

San Francisco $1983

@SiliconValleyRenter,

You should have no problem negotiating them down --I know lots of people on the peninsula & East Bay, and rents are flat to falling. See average rents by city I posted above.

@Shmend Rick,

I sure hope they're right. Personally, I can't wait.

@HARM: San Francisco $1983. Well, that would be the average rent, which should be higher than median...but I just don't trust those numbers...

Jack

Location would definitely belong to your list of intangibles. Kurts view off his neighbor's pier is a definite example. I wasn't really questioning that a nicer location will fetch a higher price or that it may sustain a correction better. What bothers me is that areas that don't have many intangibles have also seen ridiculous appreciation. Sacto doesn't have the higher population density, but has seen prices climb as high percentage wise at the BA. That said, I'm sure our prices will probably (hopefully) see a bigger dip.

SactoQT - And when you finally do own a home, come back to me too. *wink, wink*

Promise me that and I may never buy. ;)

Peter P - Hmmm… that’s pretty arbitrary choosing the 2yr and the 10yr… i thought we using the 1M vs. the 10-yr i.e. Fed Funds (what’s being raised) vs. the 10-yr (what mortgage rates are based off). Aren’t these two yields, in essence what is really being debated between us… Greenspan vs. The Market?

MP,

As has been noted in previous threads, the yield curve seems to be calculated by subtracting the 2yr from 10yr bond yields --at least that's how it's done by the mainstream financial press. Using the 1 month for comparison would be useless (yet highly favorable to yourself), given that it (3.34%) is well below the current Fed funds rate (3.5%).

More cherry-picking perhaps...? ;-)

Peter P - Hmmm… that’s pretty arbitrary choosing the 2yr and the 10yr… i thought we using the 1M vs. the 10-yr i.e. Fed Funds (what’s being raised) vs. the 10-yr (what mortgage rates are based off). Aren’t these two yields, in essence what is really being debated between us… Greenspan vs. The Market?

I thought the 2/10 spread is what many traders look at. I cannot bet on FF/TY inversion be the end of the year, I don't think that is going to happen before more clear signs of a housing bubble bust.

I thought the 2/10 spread is what many traders look at.

Indeed. If we look at CNNMoney's most recent article on the subject (August 9th: "Flattening yield curve squeezes banks" tinyurl.com/bomd4), we see they report the yield curve thusly:

As of yesterday, the spread fell to about 0.27 percent.

"Yesterday" at time of publicatio meaning August 8th. If you look at the various Treasury yields on that date (US Treasury's rate page tinyurl.com/79u6u), you see that the only thing that comes close to that figure is the 2/10yr split (.26).

I did a search on calculating the yield curve spread, and found that using the 2/10yr (or 5/10yr) Treasury split to measure the yield curve is common practise among investors:

July 14th ECOInsight report:
tinyurl.com/ddkaz

Nomura's US Fixed Income 2005 Outlook
tinyurl.com/738ow
(see "Treasury Yield curve changes" chart on page 3)

@MP,

See my above post. And btw, the 1 month Treasury rate is NOT the same as the Fed funds rate --it's currently BELOW the Fed funds rate (3.34 vs. 3.5%) as I already noted.

The 2/10yr split as a commonly accepted measure of yield curve slope still stands (if you're still willing to take that bet).

Think about it guys. You guys are betting that the short end will be higher than the long end. The short end is the 1M or FED FUNDS RATE and the long end is the 10-YR BOND b/c there is no more 30-yr bond!!

There are still bonds "out there" with maturity beyond 2015 and they behave like 20+ year bonds, what about those?

How about that, we bet whether Bloomberg or Reuters will have declared "US yield curve inverted" by the end of the year?

How about that, we bet whether Bloomberg or Reuters will have declared “US yield curve inverted” by the end of the year?

Forget it, Peter. Whatever measure you use, MP will find a way to weasel out of it. But he's NOT a cherry-picker, no sir, he's "in finance for goodness sakes!" :lol:

What you haven’t covered (or I’ve missed) is an opinion on land prices and their behavior within the property bubble. Should they behave similarly?

I'd like to adress the original (land~bubble?) topic within my small scope of experience. In fact, this is what brought me to the whole subject in the first place.

Earlier this year, I was looking for waterfront land to purchase, with the intention to buy now, build later. I do realize the "cash flow" aspect wasn't there, but my strategy was to find some land on Puget Sound just outside developed areas (cheaper), keep it long-term, and eventually build a home. I thought, given my knowledge of living on Puget Sound before, my current experience, and some knowledge of local geology, I'd be able to pick a good tract.
Well, doing some research, I find it's a bit more complicated than that, with zoning, easements, and proposed taxation/restriction on waterfront dev in WA. I also found that every piece of land has a markedly different composition, in terms of road/utility access, grading, ground stability, flood history--not mention: usable space. Yet, while the investors mostly flock to waterfront condos for "cash flow", I've also read of people buying land, and sometimes sight-unseen. (they're going to get burned). To me, land actually seems a lot riskier and less profitable in the short-term because there's so much work involved to buy land, develop and "flip" for a huge return.
The exception I've seen is land in new developments, or empty waterfront land adjacent to recent growth. There, I've seen as much as $500-800K per half-acre, and they're dropping McMansions on those. So, if someone buys that land for $500K, spends another $750K to build a home (too low?), then sells for what? $2M?--that's pretty typical $ for a 3000sqft waterfront home in Bellevue. Bainbridge waterfront is less.
So, that's not as good of a margin compared to a recently "flipped" property in Los Altos:
Sold 10/03 for $1M, house raised, "brand new french villa"(their words) built, price: $2.7M. Apparently it's off market, so I'll assume sold.

My "educated guess" there are mini-bubbles in land where people think they can either buy/sit, then turn quick or: develop and sell for a premium, such as tourist areas, waterfront/coastal, new commuter areas. Even there, the risk seems high.

My “educated guess” there are mini-bubbles in land where people think they can either buy/sit, then turn quick or: develop and sell for a premium, such as tourist areas, waterfront/coastal, new commuter areas. Even there, the risk seems high.

Risk is high whenever there is high level of speculation. When expectation turns into disappointment, value plummets.

Kurt,

Las Vegas is going through major land selling these days, as well....actually, just outside of LV in a town called Pahrump. From what I can tell it is not that developed but the hope is that people who don't want to pay the "high" (?) prices in LV proper will buy in Pahrump and build. Henderson may have started out that way, and who's to say that Pahrump won't turn out the same. But it IS a big thing right now. Oh! And the other *big* thing that seems to get a lot of mention in the ads has to do with water rights and utilities. Check out the ads in craigslist...some have pictures....some don't (buying sight unseen?):

tinyurl.com/dchjd

tinyurl.com/dr4xu

About Pahrump here > tinyurl.com/78zlk

I'm not sure what kind of services and other infrastructure that have in the area, but I believe it's pretty sparse right now.

In a case like this, do you think people will buy because of the proximity to LV and because of Henderson's growth history? Henderson began as 13 sq miles and is now 94; incorporated in 1953. I suspect that anyone who buys here would be a speculator or you don't mind the 1 hour drive to LV to work.

But they do have a nice web site. :-)

BayQT~

has anyone menitoned the relevance of the Proposition 13? as far as land valuation is concerned, property taxes are the main variable as the contribute most to the cost liability. Fact is that CA has moved to practically eliminate property taxes. this makes infrastructure scarcer and thus reduces supply of useable land.

Shmend Rick,
See previous thread "NIMBY Laws and California Housing Prices" July 27th, 2005

I am EXTREMELY anti-Prop. 13 for exactly the reason you mentioned (reduces housing supply by dis-incentivizing cities from zoning adequate amounts of residential development), plus it arbitrarily and massively shifts the tax burden from older to younger homebuyers.

yes but the governor is sooo charming!

But he is at least a "republican" who is at least openly pro-business and pro-rich. At the very least, he labels himself correctly.

Many self-proclaimed "rich" liberals in this state are basically hypocrites.

(Not an accusation)

I try to keep politics out of my discussions because 'emotional' doesn't even begin to describe how people get on that topic. But I had to mention that when I lived in LA and worked in the televison industry, political affilitations were very much about whatever was in vogue. If someone thought a director/producer had a bias, then they would take on whatever bias they thought would get them work. Tough to have a political discussion with someone who doesn't have any real opinions.

Las Vegas is going through major land selling these days, as well….actually, just outside of LV in a town called Pahrump. From what I can tell it is not that developed but the hope is that people who don’t want to pay the “high” (?) prices in LV proper will buy in Pahrump and build.

Thanks for the info--fascinating! Those res. Pahrump land prices have me scratching my head; they're actually higher than many residential tracts (street+utilities) along Puget Sound (WA). I can't imagine what LV is priced at. And this is hot, blistering desert--go figure. My picture of Parhump is a "wild-west" town with poor infrastructure; maybe that's changing. I'm sure your money will go further in WA or OR, and the weather won't kill you.

Btw, Pahrump is the home of Art Bell, that nutty conspiracy-talk show host who considers himself a real "survivor". I have to wonder if others moving to Pahrump consider themselves "survivors"? Perhaps it's a good outlook to have there.

I have to wonder if others moving to Pahrump consider themselves “survivors”? Perhaps it’s a good outlook to have there.

You'd better believe it. It's spittin' distance from Death Valley. I think you can see some of the tumbleweed in one of the pics (ad) I referenced.

I'm definitely not interested in buying land there. I have family in LV (10 years) so they keep posted on everything.

BayQT~

HEPFinance

Very good info. Thank you for de-lurking in the interest of keeping the peace. :cool:

Many self-proclaimed “rich” liberals in this state are basically hypocrites
amen brother, amen

I third that. Makes me ill to hear a bunch of millionaire pseudo-"progressives" trying to tell me how GOOD things like Prop. 13 and UBL laws are for me. "It's all about the environment and helping old people." Yeah right --more like, "I got mine, so screw you and yours!"

@HEPFinance,

Sounds reasonable --the spread between the 1/10yr Treasury is now .30. With 2 more Fed rate hikes ahead, I'm willing to bet it will invert by year's end.

Sounds reasonable –the spread between the 1/10yr Treasury is now .30. With 2 more Fed rate hikes ahead, I’m willing to bet it will invert by year’s end.

I can bet the 1/10 too... which sushi restaurant?

Pop!

That link didn't work. Would you mind trying again?

BayQT~

Try this link too:

http://tinyurl.com/9fntu

More than a sushi dinner, if I win, i just want you guys to have an ‘Ode to Marina Prime’ forum posted, since u guys are webmasters. Sounds good?

No. I will not bet anything other than food. :(

‘Ode to Marina Prime’ forum

Just the thought of what could end up being posted frightens me. :shock:

But Peter - That would mean we’d have to get together. What if you are an axe murderer?? What if I’m an axe-murderer?

Sushi Groove on Hyde st. in Russian Hill is great. Butterfish sashimi!

You afraid of me attacking you in front of fellow sushi eaters?

I clicked on the nytimes link thinking it would be a sushi review... :(