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Ruminations on "Inflated" / "Overpriced" Real Estate
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2012 Jan 17, 3:25am 15,478 views 51 comments
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Thomas says "So young so much to learn! " and quotes Hotel California - you can check out but you can never leave. Ok, you can never leave, but why not? Personally I don't want to leave, but then I don't complain about it here either. And if you think that housing prices will fall 50% (as stated in another thread), why not sell and rent?
I dont have to sell... All I have to do is watch the "hipsters" overdose on their own crap and hope they dont drag the rest of the responsible people down with them. All i heard for the past 10+ years, there is no bubble, we are special, and as prices skyrocketed denial that prices will never fall 50%. Well guess what..
The reality is, in good neighborhoods and other good areas in the valley, prices fell about 15-20% when I was hoping they would fall 50-70%.
The economy here is solid. I'm a beneficiary but I sometimes wish it was less competitive to buy a house.
New Renter
2012 Jan 27, 3:34am
The reality is, in good neighborhoods and other good areas in the valley, prices fell about 15-20% when I was hoping they would fall 50-70%.
The economy here is solid. I'm a beneficiary but I sometimes wish it was less competitive to buy a house.
Or you may be thanking your lucky stars in 20 years if prices have stagnated and you find those who bought have lived the last 20 years paycheck to paycheck in a slowly deteriorating overpriced wooden box while you the renter had more flexibility, fewer responsibilities and paid less overall in the process. Just imagine how you'd feel having your wooden box severely damaged by a major earthquake with little to no earthquake insurance to cover the damage.
Thomas.wong.1986 has a point when he says Things around here change, and change quickly.. yes be ready when it happens.
The economy is but one factor, natural disasters another.
Surprised I didn't see this thread. While I would agree with a lot of what the OP said, I think its far more simple then that.
A lot of people buy houses because of societal pressures and expectations. They truly still believe in the "American Dream" and all that goes with it. The usual reasons are that either they're getting married or having children. Thus they MUST have a house because.... that's what they're supposed to do... right? If not then something must be wrong.
That's my take on it anyway.
SiO2, if you're a hardware engineer, have your exit/backup plan ready.
Same thing if you're a code jockey.
Because even if you don't have your exit plan shovel ready, your employer does.
All positions are replaceable. Any company could fold. Everyone should have an exit plan ready, regardless of career choice.
It's somewhat of a myth though that software engineers can easily be replaced by foreigners and/or kids right out of college. Most work in manufacturing and need to be on site and be there for years to understand all the spaghetti code, older machines still using BASIC and Ladder Logic, and computer connections throughout their area. There are secrets that engineers hold onto and would not share with a guy there to replace them.
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This pertains to the SF Bay Area, particularly the south bay & the peninsula since that is where most people here seem to be located & paying attention to.
There are two main groups in here. The bigger one is comprised of the housing bears, and I would imagine that many or most of them are in this boat: would-be first time buyers that have obvious reasons why they want prices to go down (faster). I am in this group as well. The other group is made up of the housing bulls, or people that just see no reason for prices to slide much (if any) further. The continual battle between them rages on with various repetitions of, "here is my data showing why housing prices are sure to decrease XX% over some unknown timespan, but it will surely happen soon. The market is being manipulated & will correct when that stops." Then someone will counter with, "your data is crap and you are wrong; house prices are going to be flat and go up after Y years," or "well this is my data and it says yours is wrong because reasons A, B, & C. Oh and the market is permanently corrupted so forget a free market." Both arguments have merit, on some level.
Really, it all comes down to the market value of the houses in the area. I think that many of us are losing sight of how value is derived. The value ascribed to the properties in the Bay Area are obviously high, and a lot of people call it outrageous, inflated and over-priced. Because it offends the sensibilities of many, lots of people feel certain that it will "become reasonable" (e.g. price implosion) at some point. However, this seems pretty unlikely.
Value is determined by the market. Yes yes, the government & banks are manipulating the market & it isn't really a "free market," but this is how it is, and we all know that this manipulation won't end in our lifetime. So, the market determines the value, and obviously the market is setting the value at a pretty high point. OK, so maybe the prices seem ridiculous. Patrick.net is obviously made up of people with an above-average interest in their finances, with the key term being "above-average." The market is comprised of everyone, from housing bears to housing bulls, and everyone in between. The vast majority of the market is people "in between," while most bulls & bears are those "above average" folks that actually take time to look at market data.
What am I getting at? I am making the point that Bay Area housing prices won't see a massive implosion any time soon (they already did), and they will probably continue to slowly drift downward for a few more years, like they have been. OK, but why? Here's the crux of it. See the plot below that illustrates my perception of the market.
The "smart" people that see how messed up the market is have to compete with the "dumb" majority that "just want a house," and are enabled by the "rigged" market. Income & education also don't necessarily have a direct correlation with financial sense either, so you can't pull the, "well the SV is full of smart people so it's different here," card. Lots of highly educated tech workers made really stupid financial decisions with RE in the last decade and live paycheck to paycheck. People with little financial sense make up most of the market. When people with little financial sense, and large paychecks make up a big part of the market (Silicon Valley), you get super high housing prices. This is why there won't be a price implosion: there is a HUGE pool of people that don't think critically about borrowing as much money as they possibly can to buy some sort of property within an hour of where they work. People that don't want to sell themselves into debt slavery have to compete with this endless supply of people that don't think twice about it.
In short, "you can't compete with stupid." Rage about it, get mad, whatever. There are times that I just want to bang my head into a wall when I think about it. The fact is that the Bay Area / Silicon Valley is expensive, and will remain so despite it being "unreasonable" by most logical standards. Prices are coming down since some of the mechanisms that enabled people with average or below-average financial sense to inflate things went away & have been scaled back. However, GSE loans & FHA loans ARE the mortgage market, enable the market to remain "overpriced" and certainly aren't going away in the foreseeable future.
So, to end this post that is now borderline-pedantic, I think that folks here should be more careful with their usage of the terms over-priced, inflated & over-valued. On a personal level, these terms have personal meaning. In regards to the market though, they don't really apply. The market will bear what the market will bear, and most of the market (average people) are just fine with bearing the heaviest load that they can (and more, when given the opportunity).
There are some caveats to the "no price implosion" claim. Prices could and probably would tank in the BA if:
- Interest rates went up to 10%
- GSEs were dissolved & FHA loan limits were changed to 50% of what they are now
- Banks liquidated their shadow inventory & got the foreclosure process back under 100 days
- HUGE earthquake that knocked out utilities & took down a few buildings
- Prop 13 got repealed & CA cranked up property taxes to try to gain solvency
- The mortgage interest deduction was eliminated
- Open spaces were sold to developers & all the NIMBYs magically disappeared
- The economy entered a real depression, and all the frivolous consumption that fuels the tech economy (directly & indirectly) dried up, turning the BA into something akin to the rust-belt (minus the rust).
Evaluate the probability of these things happening, along with whether or not you would stick around if they did, and see how likely a price crash would be, and how likely you would be to take advantage of it.
This post was sort of fun. I am usually a housing bear in my posts, being a would-be buyer and all. As messed up as the housing market still is around here, I guess I can't realistically see any good reason for prices to take a big step down, no matter how much I want them to. I'll wait another year or two since slow declines seem probable, but at some point I am going to pull the trigger for personal reasons, despite it not making the most financial sense. The old adage of, "if you can't beat them, join them" holds some weight here.
#housing