patrick.net

myob says

What the heck is going on? I have not seen a frenzy like this since the peak of the bubble in '05. Realtors are citing the "Facebook effect" and "google Effect", but I don't buy that, since that can't apply to such a large geographic region.

I'm asking the same question too. My real estate agent told me that inventory is low because sellers think house prices have bottomed and are holding for better prices. House prices could have bottomed since unemployment rate is declining and stock market is buoyant, S&P is pretty near previous ATH.

I have heard the same things from a number of friends and family. It is sort of a weird social feedback loop. Inventories are super low, and demand is about the same as ever. So, that means that there will be multiple interested parties for given properties. Well, word of that starts getting out, and people that thought that they would wait start freaking out and thinking, "OMG the market is reigniting and I need to get in NOW!" So, they go and start trying to make a rush purchase to, "get in while they can." This gets out to more people, who do the same thing, and so on.

By this time next year, I assume that this will not be the case any longer. Inventories are ridiculously low because a lot of people that are underwater are waiting to see if the government doles out free money (loan mods, principal reductions). It is an election year, so expect a full set of shenanigans from the candidates, aimed at buying votes from this large group of people. After the election, it'll be forgotten. There are likely other reasons for the low inventories, but I am blanking on them. Perhaps there are a lot of wishful thinkers out there that think Facebookers will be eager to overpay for their unremarkable wooden box. There are far more of those wishful sellers out there than FB folks with the cash and low enough intellect to grossly overpay, though.

If the market is still nutty by this time next year, and prices are rising for some reason, that is still no reason to buy. Even IF the, "buy now or be priced out forever" BS was true, it would be stupid to overpay for a house now. If the value goes up wildly in a year, you could sell...but everything else went up wildly too and you will end up with just as much debt, or more. The whole system is a huge scam, designed to rob people of their money and happiness.

So, things will either look better next year, or this place will just continue to make less and less sense for middle class families. I am hoping for the former, but there are enough monied fools here that the latter might be reality.

If buying is too expensive then why not just keep renting? I don't understand your logic of not being able to buy. Super low inventory is the main reason for the still holding BA prices - or as some people here thinks,it is the newly monied Chinese. I am sorry,if you are not a Chinese cuz that is the new qualification to buy in BA. :)

Can you afford 10% rent increase every year?

xenogear3 says

Can you afford 10% rent increase every year?

We're building lots of apartments in the SF Bay Area. You can have thousands of units in one small area. How much land do you need to build a thousand single family detached homes? It is much easier to build an apartment complex with a thousand units than a thousand homes. What happens if supply overwhelms demand?

myob says

Often, they sell without even going on the market, or sight unseen by buyers, sometimes with no contingencies! Getting a couple dozen offers isn't uncommon on a nice house, and even horrible housing next to dumpsters goes over list.

Sounds like you believe everything your realtor tells you.

You have even the slightest whiff of proof that they're not just checking how gullible you are?

That's not from my real estate agent. I work in a company where quite a few of my co-workers have big money, and I know that they bought houses sight unseen, but with inspection contingency, and also pre-listing without disclosure. My agent isn't trying to push me to buy a house, nor will I be buying one just to have one, it has to be a place I want to live at a price that I can afford to pay, even though I assume it will depreciate in areas like Sunnyvale.

We have many things to consider when buying a house here; potential depreciation, length of commute, schools, price, etc. Sometimes, some of the other factors can outweigh waiting for the best price. I'm not a happy house buyer, but given how high house rents are, the premium to own a house over renting is decreasing in the neighborhoods that I'm willing to live in, and commute from.

Given how deliberately opaque the housing market is, I don't think you should rely on anecdotes either.

I think the only safe thing is to compare rent vs buy assuming no appreciation at all. Assumption of appreciation was the root cause of the whole bubble.

I'm assuming depreciation and return to the inflation-adjusted static housing price eventually, meaning I'll take about a 25% hit on the house I'm buying if that pans out in the next 10 years (likely).

Yes, the rent vs buy comparison is nice, but needing a larger place, I've been looking for a house for rent for about five months now. I can put up with my cramped place, but not forever. A decent house for rent in a reasonable area of sunnyvale/mountain view/los altos/cupertino will set you back about $3000+, more if it's on a nice lot, or a good neighborhood, less if it's older or from a private landlord who pays low prop 13 tax rates. Compute what you can buy for that on a 30 year fixed at a good credit rating interest of 4.5% amounts to about a 700k house considering taxes. The market price of this house would be closer to a million, so I see quite a bit of overvaluation, however, I've not been able to find someplace we want to live, and it's getting to the point where I'm willing to get financially raped to live someplace we like :)

I cannot comment on the "Silicon Valley" area that the OP references as I decided it was too much for me to handle and don't even look at listings there now. I've now started visiting areas in search of homes (because rent/buy ratios started making sense to me) in far flung areas that still have a reasonable commute option for atleast one member in the family. Having bid on a few houses or watching a few houses that seemed "overpriced", I'm coming to the realization that there is some truth in what the OP commented on. There is hardly anything to look at and realtors/sellers are bringing on inventory when there is minimal competition. A few examples of this house buying hunger:

a) I saw a home that was 41 years old, had a lot of work done by the owner himself (permits unknown and some of it, like the flooring, was of questionable quality on the inside). The house had comparables pointing it in the 490-500k range. It was listed for ~540. Apparently, it has an offer now atleast 1% over list.

b) I posted a review of an Open House in the Edenvale, San Jose area in the OH reviews . Bought in 2003 for 563k, very nice inside with the owner doing a lot of work, listed for 589k (closest comparable was 495k but this house in question was nicer) and went pending within a day after the OH weekend.

This tells me that:
a) There is either no shortage of dual-income couples or well-to-do people in the Bay area or inventory has been controlled to match demand (I don't have proof of this).
b) People do not think too much before taking on a 30 year commitment for half a million dollars (its just the monthly nut they worry about) and they always assume the happy scenarios like career progression, dual-incomes etc. Some folks I speak to don't even think about inflation helping them pay their loan - as in, they are ready to gamble on what seems like minimal information.
c) Anecdotally, my circle of acquaintances don't seem to put down 20% even if they have the money. If another crushing recession occurs and they lose the ability to pay, strategic defaults are available.

Given this and many other factors, it is difficult to see how housing will fall much further in the bay area. The housing casino is open here and people are unable to get in through the doors fast enough.

rent vs buy assuming no appreciation at all.

Exactly. However high the BA home prices may be,I am just not convinced that there will any appreciation to these properties for another 10 years. You can't built a bubble on top of an insane bubble,when there is no correction in between the two.

myob says

Realtors are citing the "Facebook effect" and "google Effect", but I don't buy that, since that can't apply to such a large geographic region.

Google pre-IPO shares are long gone.. no effect. If the google effect has an impact in the past.. it certainly didnt last long.. see the chart. So why did prices fall in recent years.

Facebook stock per SEC regulation ARE NOT ALLOWED to be traded, assigned, other otherswise transfered to any unregistered persons during its registration process.

Fact is FB shares havent even been priced. So how can it be a factor ?

Trying to explain the SEC registration process to a realtor is useless because its all a realtor lie to begin with.

agst says

This tells me that:
a) There is either no shortage of dual-income couples or well-to-do people in the Bay area or inventory has been controlled to match demand (I don't have proof of this).
b) People do not think too much before taking on a 30 year commitment for half a million dollars (its just the monthly nut they worry about) and they always assume the happy scenarios like career progression, dual-incomes etc. Some folks I speak to don't even think about inflation helping them pay their loan - as in, they are ready to gamble on what seems like minimal information.

We had dual income families in Silicon Valley since the 70s, yet we didnt see prices skyrocket to the extent of the recent bubble.

Dual Incomes pretty much is one of the biggest lies i have heard during the bubble in the Bay Area...

Given how deliberately opaque the housing market is, I don't think you should rely on anecdotes either.

thats how financial manias are created..it only shows we are still at it in parts of the bay area.

hanera says

I'm asking the same question too. My real estate agent told me that inventory is low because sellers think house prices have bottomed and are holding for better prices. House prices could have bottomed since unemployment rate is declining and stock market is buoyant, S&P is pretty near previous ATH.

Whether prices have bottomed is probably regional to a degree. The decline in the unemployment rate isn't bad news at face value, (even full-time employment is up), but when you get down in the weeds on things like the labor participation rate and look at the type of jobs and salaries that are replacing the jobs that were lost after 2008, the picture looks less rosy. Certainly not a strong argument for sustained elevation in house prices. I really think the action you are seeing now is probably just speculation. People are chasing yields. You actually see this dynamic playing out in many disparate markets, including the collectibles market. People just want return. Same old story.

As for sellers holding back...that's probably a fraction of the overall inventory problem. The real problem is that much of the shadow inventory that remains in limbo, while the banks collect fees.

Your agent is probably not going to square with you on this stuff, if they even have the wherewithal to know how to square with you about it. They're just trying to make a living, and in their mind, anything they suggest that might undermine that is simply counterproductive to that end. I was speaking with an agent the other day and told her that I thought buying an expensive house (in this case, a fixer that I didn't realize was so dilapidated) in a low rate environment with 97% leverage loans available was generally ill-advised. She seemed reticent, but eventually nodded in agreement. I was surprised.

If I didn't despise my landlord so much, I wouldn't be looking at all right now.

myob says

I'm willing to get financially raped to live someplace we like :)

This is another dynamic which should not be discounted. I think more people who can afford to overpay are feeling the urge to do so. After all, this staring contest could go on for another four of five years.

myob says

A decent house for rent in a reasonable area of sunnyvale/mountain view/los altos/cupertino will set you back about $3000+, more if it's on a nice lot, or a good neighborhood,

Same in SF.

We're looking...not because I think RE has bottomed, but because for a 500K house we'd be paying roughly the same as rent. No, we're not buying in Pacific Heights or Now Valley.

And our landlady is crazy.
And we're getting old trying to wait out this bubble. I'd like to stop being a renter before I retire...or before our kids go to college.

We put an offer on a house in January. Asking 499K for 1500 sq. ft, 3 br, large yard, garage, in the neighborhood we want. 10 offers in 1 week, ours at 30K over asking was at the bottom of the pack. Went to an all cash buyer for 588K, so even if we offered 90K over asking, we still wouldn't have gotten it.

Hoping that once the facebook IPO comes and goes and the spring season is over then it wont be so crazy.

But there are a helluva lotta folks out there underwater, and plenty of unlisted REOs.

1sfrenter says

We're looking...not because I think RE has bottomed, but because for a 500K house we'd be paying roughly the same as rent.

It's worth noting that rents are currently enjoying a boost from this unusual housing environment. I think the idea that rent never goes down is as specious as the idea that housing prices never go down. Does nobody consider that the more properties that are converted to rentals, and the more MF homes that are built, the more rents will fall over the long run? And the more homes that are sold out of REO or short sales at lower prices, the more it will make them viable rentals at lower prices. The later investors will undercut the earlier ones with the higher cost base.

says

I'm willing to get financially raped to live someplace we like :)

and then you get foreclosed and evicted, right ?

Austinhousingbubble says

I think the idea that rent never goes down is as specious as the idea that housing prices never go down

I've lived in SF for 23 years, in 4 different neighborhoods and 5 different places. My rent has never gone down.

1sfrenter says

I've lived in SF for 23 years, in 4 different neighborhoods and 5 different places. My rent has never gone down.

The question isn't just necessarily whether your rent has gone down in that time; it's the anomalous rate at which rent has been climbing and what has propelled it. People tend to think about these things in strictly linear terms, rather than cyclical; I suspect we are at the extreme end of a vicious cycle.

As to your personal experience -- to what degree did your rent go up? I lived in an apartment complex for a few years and discovered that while they were raising my rent incrementally each year, new leases were being originated for less than I was paying, and indeed, less than I had signed-on for three years earlier. Also, as you moved over those years, did you upgrade to a better area? bigger unit? better view? more amenities?

....derp derp derp...all-cash buyers...derp derp derp...all-in baby...derp derp derp...

thomas.wong1986 says

says

I'm willing to get financially raped to live someplace we like :)

and then you get foreclosed and evicted, right ?

No, I mean that I will lose money. I doubt I'll ever be upside down on the loan, but I could lose my down payment, for sure.

xenogear3 says

Can you afford 10% rent increase every year?

Like a lot of smart people , you leave.

This area stinks. The pays even with the RSUs arent even close to what it takes to live here. Its the worse pay to cost of living ratio I've ever seen. Bay Area, the death of the middle class.

1sfrenter says

I've lived in SF for 23 years, in 4 different neighborhoods and 5 different places. My rent has never gone down.

Normalize for inflation. Because they are destroying the purchasing power of the dollar, no one expects it to go down. Normalize against area pay and or area inflation .

There may have been times where by percent of your income the rent is lower than it is today..

E-man says

Our offer was 6% above asking price. The highest offer was 18% above asking, and this person got the house

Whats funny about this is that companies will interview many nearly equivalent candidates and get the cheapest one.

So how is the guy who is supposed to occupy these homes actually afford them when companies seek to lower pay and reduce headcount at the same time these house prices go up and at the same time the carrying costs are skyrocketing due to things like FOOD and GAS going through the roof?

Its a race to the bottom . Kiss the middle class goodbye.

myob says

I work in a company where quite a few of my co-workers have big money

You realize the average and median incomes in the area dont equate to big money, right?

Just because there are stories of those who are well monied doing irrational or nouveau riche behavior with their money doesnt mean this sets the trend.

It does prove, however, that the movie Idiocracy is a documentary.

Assumption of appreciation was the root cause of the whole bubble.

There seem to be a fresh supply of debt slaves that either did not experience or have forgotten the last bubble just a few years ago.

thomas.wong1986 says

We had dual income families in Silicon Valley since the 70s, yet we didnt see prices skyrocket to the extent of the recent bubble.

Dual Incomes pretty much is one of the biggest lies i have heard during the bubble in the Bay Area...

Dual income as a requirement is a horrible detractor to quality of life, generally creates bad kids due to the latchkey effect and its basically destroying society from within.

Having a dual income situation if there is work from home or a part time jobe thats easy to blow off, but having two high powered engineering jobs, well it sucks,.

agst says

Anecdotally, my circle of acquaintances don't seem to put down 20% even if they have the money. If another crushing recession occurs and they lose the ability to pay, strategic defaults are available.

This is it. Somehow, people are getting in without putting in. Either with unearned equity, or with FHA or some other gimmick. This allows massive leverage. The casino is open, well see how long mister fed can keep the record low interest rates on to fuel this false economy with these gambling activities on as a result. The whole thing at this point is farcical.

I was looking in late 2011, in south Bay Area after being outbid on a few offers I stopped looking B/C I realized it was stupid to pay 600K, for a fixer upper that would cost me almost 2K, a month more than my current rent.

Also, I believe that after the election the the FED's will pull all the support from the housing market.

"they can't keep kicking the can down the road forever"!!!

I'm not sure what's going on in the Peninsula, but we have been looking at houses and our observation is that yes- there seems to be less inventory, but there is also a lot of houses for sale that are priced a LOT lower than they were at the peak. We're looking around the east bay and there are scads of decent houses all in the under 500k range. Some for under 400k.

I talked to one realtor and their opinion from what they were witnessing is that there are a lot of people who bought at the peak who now can't sell because there is no way they would get what they paid... so they are stuck. And so they simply don't put the house on the market.

I think part of this might also be seasonal overlap: The house-selling season has just gotten started.

Along with the owners that are stuck underwater, there are those who are waiting for prices to rebound a bit. In the BA there are a lot of aging baby boomers who counted on the 2005 value of their home for retirement.

The reason for the ridiculous amount of hype by RE agents and brokers over the "multiple offers" and "over asking" sales is not to motivate buyers, but to encourage sellers to list.

They're expensive because they are located within commuting range of well-paying jobs. Foreigners also love the idea of a piece of California real estate.
If you team up with your fiance and buy it together, consider the alternative:
Take 1/2 of your net worth, make a pile in the street, and burn it. At least it keeps out of her hands later.

Austinhousingbubble says

....derp derp derp...all-cash buyers...derp derp derp...all-in baby...derp derp derp...

lol I was thinking the exact same thing.

This is the second time that I've seen that incredibly misleading chart of FHFA data. As I've previously pointed out, that chart is going to tend to simply correlate with what the conforming loan limits are in any given year.

If you're expecting that chart to show a big drop in the future, well, good luck on that! That will happen only happen on the day that they disband Fannie Mae/Freddie Mac. While there are certainly proponents of doing so, I doubt that it is politically realistic in the current economic climate.

Someone pointed out here a short time ago (wish I saved the post because it was so simple and true it was brilliant) - the ENTIRE reason the Bay Area is so high is that the price of available houses is going ALWAYS be equal to the amount that a two person software engineer type family would be able to pay for a house (at whatever the going interest rates are).

Figure a decent AVERAGE engineer makes 90k+ x 2 = 180k - obscene taxes at less than 4% interest rate

Lets say for the sake of argument they clear 10 to 12k a month (on the low end) - then a loan payment of 3 to 4k is not unreasonable. This translates into 600 to 700k houses in today's interest rate environment.

That IMO is the ENTIRE basis behind the BA house prices right there. A boatload of engineers, willing to bet they will be able to keep their jobs for the next 30 years and make those payments on time.

As long as Silly Valley has those engineer jobs, the prices there will stay up. And you can make the same argument for Washington DC and use average govt bureaucrat salaries.

The (ir)rationality is the same and it will not change because that is just the human nature of your average non-thinking human.

Those engineer and bureaucrat jobs tho, they exist right now because the govt/Fed is willing to overspend the natl budget by 40% each year.

When that stops, then the jobs go away, and when the jobs go away then BA house prices crater.

So in buying a BA house, your REAL bet is that the govt will be able to single-handedly continue to prop up the economy with borrowed money at a 40+ percent run rate, for the next 30 years.

Good luck with that.

kochevnik says

So in buying a BA house, your REAL bet is that the govt will be able to single-handedly continue to prop up the economy with borrowed money at a 40+ percent run rate, for the next 30 years.

How do government create demand for tech products? For example, most customers of Apple products are consumers of which more than 50% are outside USA.

kochevnik says

the ENTIRE reason the Bay Area is so high is that the price of available houses is going ALWAYS be equal to the amount that a two person software engineer type family would be able to pay for a house (at whatever the going interest rates are).

Figure a decent AVERAGE engineer makes 90k+ x 2 = 180k - obscene taxes at less than 4% interest rate

My wife and I aren't engineers, but we would fit your model income-wise. That said, there is NO WAY we would ever pay 700k for a house. Doing so in my opinion is simply taking a big risk. At that point the payments would place you in a precarious situation where both incomes would be required in order to pay the loan off consistently, and as someone who has lost jobs several times for one reason or another, I would not count on both incomes always being there.

The fact of the matter is that we're looking at the 400k-500k range, and under 500k is definitely preferable. As far as SF and the Peninsula, we're not even giving those areas a look because the prices are way out of line for our incomes.

This is all after living extremely frugally, renting cheap for over 10 years, and saving for a bit longer then that. I just find it difficult to believe that there are that many people- after all that happened during the housing bust-who would eagerly and willingly place themselves in a financially risky situation for a house.

I don't buy that argument. The Bureau of Labor Statistics keeps track of this stuff, and all of California has about 430,000 "information" jobs. The population of the bay area is about 7.5 million, that's still less than 6%. There are of course highly paid engineering jobs, medical research, etc. Triple that number, and you're at 18%.

I backed out on buying the house I was considering, but the process gave me some insight into the market, and it's totally disconnected from any sort of sensibility. It's like there's another bubble forming before the last one finished popping. I'm hearing the same BS as before, "prices have hit a new floor", "interest is all time low", etc. The moment interest rates go up, housing will suffer here since people max out their loans to buy.