patrick.net

The reason there will be no bubble in the Bay Area is that very, very few people will qualify for a loan over 820k. The cash requirements are too strict. Sure if you're looking at 600k properties there are a lot of buyers.

robertoaribas says

Homes are anything but commodities, each and every one is different

rowemoore says

The reason there will be no bubble in the Bay Area is that very, very few people will qualify for a loan over 820k. The cash requirements are too strict. Sure if you're looking at 600k properties there are a lot of buyers.

I think that the term "bubble" is getting used too loosely by some. Folks in here seem to want to call any possible increase in pricing in the Bay Area a "bubble." I agree, the mechanisms that led to the big bubble here are no longer present (free liar loans). However, the market is heavily manipulated by both public & private interests and we currently have an order of magnitude more demand than supply. Couple that with people that let their emotions drive the largest financial decision in their lives, along with a temporary glut of money coming from a pumped up stock market & a few IPOs, and you get what we have: a frenzy over the few available houses and bidding wars. It's stupid, but it isn't a bubble.

The Bay Area really is the perfect storm of idiocy & money needed to make the place totally unreasonable for middle and upper-middle class folks that want to have disposable income & financial security after borrowing for a house.

Love that photo of all the identical houses! Worth 1000 words for sure.

bmwman91 says

we currently have an order of magnitude more demand than supply.

I disagree. What units are you using for demand?

Demand is the number sold at a given price. You could say that demand is sufficient to maintain current prices at the moment, but demand can't be higher than supply unless the supply is completely sold out at current prices. We do have a large supply of houses on the market though.

For example, Zillow shows 134 houses for sale in Mountain View right now:

http://www.zillow.com/homes/Mountain-View-CA_rb/#/homes/for_sale/Mountain-View-CA/32999_rid/37.452104,-121.904469,37.355013,-122.258091_rect/11_zm/0_mmm/

http://en.wikipedia.org/wiki/Demand

Sorry for being picky. It's just that "demand is greater than supply" is one of those fallacies realtors use all the time to scare buyers into making bad decisions.

Sorry, let me clarify that.

Demand exceeds the supply of houses that are a) livable & priced somewhere around reality and b) cheap enough for people to not care if they are livable. There aren't enough decent "middle class" houses out there. Have you SEEN the piles of crap in MV, and the asking prices on them?

Overall, prices have nowhere to go but down as a whole. Outside of SF & Palo Alto, junky shitboxes won't sell at the outrageous prices they are asking, so they either sit or get taken off market as part of some seller's wishful thinking about the future.

rowemoore: hilarious response with that picture! +1.

bmwman91 says

think that the term "bubble" is getting used too loosely by some. Folks in here seem to want to call any possible increase in pricing in the Bay Area a "bubble."

Agree. Seems like there's a bubble in calling everything a bubble.

rowemoore: your picture shows all the differences. Some home have windows on the left, while some on the right. Some have two fireplaces while other have one. Some have an off-white garage while others have just plain white. There are differences everywhere. I bet the layouts are all different as well.

The one on the end of the court is so cute, and the one on the beginning is really aggressive. Like a smorgasbord of personalities.

It's a bubble! Yeah, a sucker's bubble..

http://www.reuters.com/article/2012/04/26/us-usa-housing-negative-idUSBRE83P12E20120426

bmwman91 says

Overall, prices have nowhere to go but down as a whole.

you assume rational, thoughtful people. if people remain irrational prices can easily stay at current levels.

group-think in the bay area is strong. it was especially evident at the peak of the bubble (almost no bears. today we have a nice balance of bears/bulls). and the home ownership at all costs mentality is a big part of the culture; especially among asians.

you'd think 6 years after a housing bust, with prices --still-- falling, people would be more careful about buying houses but this is not the case. people are still buying as much house, as fast as they can. the main difference today is lenders aren't giving loans to poor people; but i have no doubt if easy lending came back we'd be right back into a huge RE bubble. people haven't changed much, the lending is what has changed.
amazingly, i still get the "you better buy before you get priced out" speech despite prices falling for years. no. it'll take a decade or two before people change their mind - assuming the housing slump lasts that long.

things i have learned:
a) people are extremely irrational about certain things - housing being one of them.

there's a very strong emotional component which blinds good judgment. my suspicion is generations have been brought up with the idea housing is the best investment money can buy and 6 bear years isn't nearly enough to change this deeply ingrained perception.
people are slow to adapt.

b) lemming behavior always trumps rationality.

c) don't fight the mindless masses. you can't win.

wthrfrk80 says

Agree. Seems like there's a bubble in calling everything a bubble.

LOL, nice.

In the bay area the housing market didn't correct to the same level as other metro's. This has left an investor mentality making the housing market behave more like the stock market.

For whatever reason you choose to believe we have low inventories right now. Buyers are wanting to buy because they saved up money during the four year recession and salaries have risen. This will cause the prices of homes to rise until some sort of equilibrium in met. Treating this as a stock market will mean sellers will not start listing until prices rise over their purchase price or the peak price in 2007/2008. This price point is called resistance and home prices might stop at this level. But if for whatever reason resistance in broken with strength, prices will keep going up at a fast rate. This would be the first sign of a bubble, prices will be going up, buyers will be buying out of fear of being priced out and the cycle will fuel it self.

This is unlikely to happen because the cause of the previous recession is never a leader in the next cycle. In this case housing will reach it's peak 2007/2008 peak pricing around the same time the fed will start raising interest rates somewhere around 2014. The higher rates should limit the upside in prices by making the total mortgage costs higher.

(If you want to see a bubble forming, take a look at rental prices)

Hysteresis, your user name is a one-word summary of what seems to be going on with RE prices. I guess we'll need 20% minimum down payment requirements on all loans, and greatly diminished demand to knock the prices off of the upper end of this hysteresis curve.

I agree about the group-think stuff. Yeah, "buying a house" is one of those unquestioned dogmas in the US, and it is especially pervasive in the BA. Maybe that is because prices are so high and everyone is always on the subject. The fact that we do have a lot of 0- & 1st-gen Asians & Indians also adds to it a bit since that brings in some other cultural elements that fixate heavily on having a house.

Then yes, add to that the fact that people are generally incapable of rational thought & decision-making, and that a "house" has become a pie-in-the-sky emotional dream, and it gets nuttier. So you are right, you can't fight the idiot masses.

fewy says

This would be the first sign of a bubble, prices will be going up, buyers will be buying out of fear of being priced out and the cycle will fuel it self.
...
(If you want to see a bubble forming, take a look at rental prices)

I don't agree that it would be a "bubble" though. The bubble was inflated by no-doc liar loans flooding the market with funny money. Buyers fighting to buy out of fear would lead to a bump in prices, but unless the funny money returns, there is nothing to fill the bubble with.

Now, with respect to rentals, there is certainly something going on there. I am not sure if I would call it a bubble since you still need to borrow money (in most cases) to get your hands on a property to rent it out. I would definitely call it a "bull stampede" since everyone & their mother "knows" that "rentals are hot, good cash flow" right now. The market is not flooded yet since new construction takes time, but there are apartment complexes going up all over the South Bay, and a number of very large condo complexes (that didn't sell very well) are starting to rent units to cover costs. I don't have any numbers, but given the present excitement over "investing in rentals" I can imagine rents dropping a bit in a couple of years.

Then again, if house prices DO rise, rents might get even hotter. Man, the BA is a pain in the ass!

fewy says

Treating this as a stock market will mean sellers will not start listing until prices rise over their purchase price or the peak price in 2007/2008.

They might as well be waiting for godot. Seriously, the loans for 2007/2008 prices do not exist now and will not exist in 5 years. May be a generation before they do. Easy credit days are gone.

edvard2 says

There is a lot of overreaction on this site. We too are in the market and this is the first time we've gone house hunting. We've waited 12 years to buy and have saved up a lot of cash, have perfect credit, and good jobs. Yes- there is a shortage supply problem.

I agree, not a bubble, but a supply problem.

We are in the same boat as you, and I think there is some pernt up demand for people like us, the ones who waited.

But in a true bubble, everything gets snapped up, even the crap.

I see a lot of overpriced properties and crappy homes not selling. It's just the decent stuff that goes for over asking with multiple offers.

Looks like we might be renting another year....

bmwman91 says

WHEN inventories return to their normal levels, everything will calm down again.

But the WHEN is a big deal for those of us who have been waiting for 12 years. I'm going gray waiting for the correction and to stop being a renter.

edvard2 says

Furthermore, you have to have really high creditworthiness. Lastly, you need a lot of cash as a down payment. We did this, but it took 10 years to do so. I'm guessing many couples did not do this.

Or be an all-cash investor.

Here's a house that got bought for $425 LAST MONTH, and our realtor just sent us the MLS listing for $609, all shiny and new.

This house must have been bought at auction, because I never saw it listed, and we've been looking since Christmas.

http://www.redfin.com/CA/San-Francisco/1127-Burrows-St-94134/home/1977033

edvard2 says

Funny, a realtor I talked with 2 years ago said pretty much the same thing. Still waiting...

Why would that be an advantage to a Realtor?

Wishful thinking.

Did you send the offer to the seller yourself?

Patrick, I started a thread a few days back about whether or not to submit a personal letter to the seller via mail (with whom we made a personal connection at the open house) or to include it in our offer.

Pretty much everyone on this blog said submit with your offer.

They are accepting offers on Monday. I think I will drop off another copy of our personal letter in her mailbox, just to make sure she knows we have submitted an offer.

I don't trust realtors, and I know our offer will not be the highest. There is no other way to make sure the seller sees our offer.

1sfrenter says

But the WHEN is a big deal for those of us who have been waiting for 12 years. I'm going gray waiting for the correction and to stop being a renter.

I feel for you there, and I certainly have not been waiting 12 years (almost half of that). You mentioned that both you and your partner are teachers, correct? I think that some of the challenge lies in trying to live in the hottest real estate market in the region on a squarely middle class income. There is just way too much money in this area to compete with. Having saved for 12 years will definitely help you a lot, but it might not be enough to compete with all the money from other sources. Heck, my fiancee and I are both making solid salaries in high tech, renting in a much less desirable part of the BA than SF proper, and even on our incomes & having $200k in cash savings, it looks like a bad idea to get a house at this point. It is really disappointing to think about, but the BA just isn't middle-class friendly unless your hobbies include "making money" and "being house poor."

1sfrenter says

I think I will drop off another copy of our personal letter in her mailbox, just to make sure she knows we have submitted an offer.

I read that thread. Having thought about it a little, I think that delivering the letter straight to their mailbox is the best way to go. If you want to try to work the personal angle, it is the only way to go. You really have nothing else to lose in doing to. Good luck, hopefully the things that you have in common with the seller will work in your favor!

Stop with the hyperbole about the "idiot masses". Plenty of these "idiots" make good enough money to buy their homes and stay within the old 3x rule, some go out to around 4x. Most of my friends have bought within the last 3 years. All with graduate/professional degrees and good incomes. They can probably do the math just as well as some 26 year old anonymous internet person.

Let's see:
Dermatologist--bought a 2nd property up in Sonoma County
Derm/Engineer couple--bought Los Altos
Internist/Eng couple--bought Los Altos
Pharmacist--bought Hayes Valley
Pharmacist--bought SOMA
Harvard Law--bought SOMA
UPenn Law--bought Mission
Child Psych MD--bought Hayes Valley
Child Pysch MD--bought SOMA
Radiologist--bought Burlingame
Zynga exec--bought Burlingame
MBA/DDS couple--bought Burlingame
PhD/CPA couple--bought Burlingame
Stanford MD/Stanford MBA couple--bought Palo Alto
Harvard MBA--bought SOMA
Cornell MBA/Cornell MBA couple--bought Sunset
Northestern MBA/MBA couple--bought SOMA
Stanford MBA--Pac Heights

I've owned two houses before in DC/Austin. I held off for the longest time here in the Bay Area but found a property that I really liked in SF that's within 2 blocks of some of my favorite spots in the city. 22% off the high, got it around 8% off current comps, the HOA is low for SF. Rent to Buy ratio is approx 14.3. Had 3 prior contingencies fall through on financing but I came in with over an over 800 credit score so I beat out someone coming in with over 45% down.

Prices here are outrageous compared to where I've lived previously but there are lots of really damn smart/ambitious people here that make good incomes so guess what, it's not cheap to live here.

PS House poor? What does that even mean? My houses have gotten progressively smaller as I realize that I don't need the extraneous space. Who needs 3k of square feet? How about "outdoorsy poor"? Try living in Houston and see where you'll climb, swim, cycle (much less board/ski).

1sfrenter says

I agree, not a bubble, but a supply problem.
We are in the same boat as you, and I think there is some pernt up demand for people like us, the ones who waited.

Good article on the front page of the WSJ today about the bidding wars and supply issues. I was surprised that even Phoenix has limited supply. Guess some investors jumped in with both feet there.

bmwman91 says

You mentioned that both you and your partner are teachers, correct? I think that some of the challenge lies in trying to live in the hottest real estate market in the region on a squarely middle class income.

With a combined seniority of over 20 years in our jobs, leaving the city would mean a massive pay cut. Most school districts are hemorrhaging jobs right now due to the decrease in property taxes from the bubble.

Trust me, we've crunched the numbers every which way.

Hmm, maybe we should both change careers now that we are approaching 50? Yeah, that's a great idea.

2 cents says

Good article on the front page of the WSJ today about the bidding wars and supply issues. I was surprised that even Phoenix has limited supply. Guess some investors jumped in with both feet there.

Wow, that just ruins the credibility of the WSJ. Sort of depressing that even the WSJ won't tell the truth.

Phoenix has HUGE inventory. GIANT NUMBERS of houses for sale.

Like 12,851 houses for sale right now according to Zillow:

http://www.zillow.com/homes/Phoenix-AZ_rb/

1sfrenter says

I don't trust realtors, and I know our offer will not be the highest. There is no other way to make sure the seller sees our offer.

Do this if your goal is to be seen as a potential stalker.

You're already saying the other offers are going to better than yours, and you expect the seller to give up thousands of dollars just because you're a nice person?

Isn't it just possible that the other committed buyers willing to spend more also happen to be nice people with perfectly lovely families, too?

Letters are useful if you have a situation where the seller has to pick between two roughly equivalent offers. I had this situation when I sold my Palo Alto house where two offers both had relative bids (ie, I'll offer $xK more than the highest offer and I asked the one with the lower offer to match the one with the higher offer). Afterwards, the one with the higher offer was ticked that I didn't counteroffer with something even higher.

Don't know what to tell you, multiple offers even though they seem like a great thing for the seller also bring their own emotional complexities for the seller.

This whole conspiracy thing that the listing agent is going to be unwilling to present even the lower offers to the seller strikes me as more than a little paranoid. If the listing agent really doesn't like your offer all he or she has to do is point out that its the lower offer and that the seller needs to look out for his or her own interests. If it's philanthropy that the seller is interested in, then there are better causes then you.....

DukeLaw says

Try living in Houston and see where you'll climb, swim, cycle (much less board/ski).

True, but in Houston you wouldn't be living in voluntary serfdom like you would be in the Bay Area.

1sfrenter says

With a combined seniority of over 20 years in our jobs, leaving the city would mean a massive pay cut. Most school districts are hemorrhaging jobs right now due to the decrease in property taxes from the bubble.

Trust me, we've crunched the numbers every which way.

Hmm, maybe we should both change careers now that we are approaching 50? Yeah, that's a great idea.

Sorry, I didn't mean to say that you should leave. It is a really popular place, and there are lots of younger folks with money looking to buy there as well. It may just be that purchasing won't be an option since there are a number of other competitors out there with greater financial means. For your sake I hope that you land a deal since you are obviously not one of the reckless idiots that rushed out to nab the biggest FHA loan you can, and you have worked long & hard for your cash, as opposed to striking it rich on an IPO or having mommy & daddy fund you.

Wow, that just ruins the credibility of the WSJ. Sort of depressing that even the WSJ won't tell the truth.
Phoenix has HUGE inventory. GIANT NUMBERS of houses for sale.
Like 12,851 houses for sale right now according to Zillow:

I don't know how the inventory stacks up vs. the number of transactions each month. Article states there is 2.4 months of inventory in places like Phoenix. Are they not telling the truth? Here's the link.

http://online.wsj.com/article/SB10001424052702304723304577366294046658820.html?mod=ITP_pageone_0

fizbin says

Letters are useful if you have a situation where the seller has to pick between two roughly equivalent offers. I had this situation when I sold my Palo Alto house where two offers both had relative bids (ie, I'll offer $xK more than the highest offer and I asked the one with the lower offer to match the one with the higher offer).

This is exactly what happend to us as buyers. Wrote a nice letter with a family picture and put up a strong offer. We were a little shorter than another offer. They asked us to come up a little bit- we did- deal done. A couple of other offers we made the same thing happened and we declined to up the bid. A letter may buy you a chance to match or come close to another competitive offer. It will not buy you a severe discount.

fizbin says

Isn't it just possible that the other committed buyers willing to spend more also happen to be nice people with perfectly lovely families, too?

Letters are useful if you have a situation where the seller has to pick between two roughly equivalent offers.

*Almost* all of the buyers are Chinese investors in this neighborhood, and the seller explicitly told us she did not want to sell to them.

Our offer is 19K over asking. 6 months ago, it would have been a done deal, but now, this spring, I don't know.

I just want to make sure our offer gets seen...if it's way under, oh well, nothing lost. But if it's in the ball park and she wants us and asks for more, then maybe...

wthrfrk80 says

Try living in Houston and see where you'll climb, swim, cycle (much less board/ski).

True, but in Houston you wouldn't be living in voluntary serfdom like you would be in the Bay Area.

I guess there's always tanker surfing in Texas:

oops, video won't embed, here's the link:
http://www.youtube.com/embed/4m4MsUHOUC0

Those waves don't look as fun as Norcal waves...

1sfrenter says

Those waves don't look as fun as Norcal waves...

They are probably a lot warmer though :)

1sfrenter says

With a combined seniority of over 20 years in our jobs, leaving the city would mean a massive pay cut. Most school districts are hemorrhaging jobs right now due to the decrease in property taxes from the bubble.

Trust me, we've crunched the numbers every which way.

Hmm, maybe we should both change careers now that we are approaching 50? Yeah, that's a great idea.

I definitely see your dilemma. That said... I come from a family of teachers and all of them live in the Southeast. My parents, who also work as teachers live in NC and make about half of what I do combined. Yet they own over 10 acres of land with a 2 story house, a pool, a large workshop, a camper, a couple of newer cars, and so on. You would have to be a millionaire for that in the Bay Area yet they do just fine on less than 70k combined a year there. The value of everything they own is well under 200k. Its literally the difference between night and day between here and there. Prior to making the decision to buy here the thought had been to just save up our Cali money and move back to the Southeast and semi-retire because if you're willing to say- live 30 minutes outside a major Southeastern city, you can buy land, a house, and probably a small farm with it for under 200k.

1sfrenter says

*Almost* all of the buyers are Chinese investors in this neighborhood, and the seller explicitly told us she did not want to sell to them.

I'd suggest making sure to remind the owner who you are and that you appreciated talking to him/her and an attractive, warm photo wouldn't hurt.

I don't recall you saying anything about your own agent. If they are at all competent, they should be able to ask to pass along a few kind words wrt your situation and ask for a counteroffer at the point where it looks like the news is going to swing against you....

Hopefully you are already using an agent who is willing to return the bulk of the commission to you, right? An easy google look around reveals several obvious candidates who will rebate everything past the first 1% commission back to you. When I bought my current home, I found a Sacramento broker (with local area MLS membership) willing to rebate all but .6% of the commission back to me. She isn't working anymore, but looking around I do see that there is at least one Sacramento broker with local MLS credentials who claims to rebate "up to 75%" of the commission back to the buyer....

BTW, Patrick, I've been meaning to say this to you: if you are really looking to change the industry then you should try to track down all of these "deep discount" buyer's brokers willing to rebate the vast majority of the commission. Perhaps let them advertise on your site if they agree to conform to your minimum set of rules.....

1sfrenter says

*Almost* all of the buyers are Chinese investors in this neighborhood, and the seller explicitly told us she did not want to sell to them.

Just out of curiosity, how do you know that they are investors, versus people looking for a house to live in?

It is another bubble/buying frenzy.
The anticipation of inflation and rising interest rates that come with it ENCOURAGE people to take on debt and buy things knowing that they will be paying back the debt with discounted dollars. This, in turns drives UP prices as the market bids up the price. The increase in price means more inflation and people anticipate more inflation and take on more debt to buy things... And around and around we go

bmwman91 says

Just out of curiosity, how do you know that they are investors, versus people looking for a house to live in?

Talking to neighbors and watching houses in the neighborhood get bought and then resold. Property shark and the assessor's online web site.

There is definitely something going on with RE. The inventory that is at least decent is gone days after it hits the market (OC), and multiple bids on everything. We've been looking but nothing is available to even bid on.
One thing is different from the bubble years: homes that are overpriced are sitting until they lower price. People aren't stepping up for substandard inventory either. But the premium stuff is flying off the shelves!