patrick.net

Peter, I didn’t say there is no bubble. The point I am making is that the current average household income in the silicon valley can hold the bubble for much longer than what is being preached on this board.

It is not about how long the bubble can be sustained. The stock market could have been sustained indefinitely because there was NEVER any affordability issue (you can buy 1000 shares, 100 shares or 1 share), but it did not. It is a game of psychology.

If the employment market is that good rent would be through the roof by now. It is still WAY (40%) below 2000 level.

The salaries you’re quoting sound about 15%-20% too high (unless things really changed significantly over the last year or two).

Or perhaps you have to start paying your minions more. Just kidding. :)

Anecdotal: Took my tax binder to the CPA today. He said there's no question the RE market is headed into a steep decline.

Just go to zillow.com and you will discover something interesting in Palo Alto:

Houses above 1.5M sustained a relatively stable trend all the way from 1999.

Houses below 1M went relatively no where before 2004. Then they shot up sharply.

It is not hard to see that one is caused by wealth and one is caused by debt.

Since debt = wealth, perhaps I have been talking nonsense. :)

If the salary quoted by bb is true, I think most of the companies in the SV will have relocated to Austin, TX, and their employees will happily obliged too.

Give me a freaking break, 140K for a QA, lowest on the food chain. If your QA costs 140K, how much should you be paying your code-spewing engineers? 180K? Then how much should you be paying your group product managers, program managers, biz dev directors? Everyone will be making 250K plus and yeah, the next thing we know, we are all paid in US peso.

Now I am not saying that the "wealth" behind these higher-priced homes cannot go away, but it is more real than Greenspired liquidity.

Good luck. If I were you, I would be looking into relocation or even outsourcing. How can you compete?

...they just keep raising the debt ceiling and let the next generation deal with it. There seems to be no consequence for the current congress to have such a high deficit

Congress is just the entertainment ministry of the shadow government. They don't care if the U.S. spirals into a black hole of debt. Congress has its marching orders and the ultimate goal is to level the world economy so that a new order, one world government, can be established.

Unalloyed, have some faith in your government. Bubbles have been rather common throughout history. It is not the end of human civialization.

BTW, a 300K combined household income can barely support a 1M mortgage.

I can give you some examples of houses above 2M coming down since 2001.

I have been tracking acreage properties in Los Gatos, Saratoga, Cupertino and Los Altos Hills, I can find quite a few examples that their current asking price is LOWER than the price purchased back in 2001. Here is one example:

15289 TOP OF THE HILL RD, Los Gatos, purchased in 2005 for 2,650,000, currently available for sale at 2,195,000

I can give you some examples of houses above 2M coming down since 2001.

Yes. However, it is probably safer to hold one 2M house than 4 500K condos. :) (NOT INVESTMENT ADVICE)

These higher-priced houses are much less detached from the reality than liquidity-driven shitboxes.

I am not saying people are not making that kind of salary, I have plenty of friends with 250K+ household income, but they are all people armed with ivy league degrees, JD/MBA, 5-8 years of working experience.

QA on average make south of 80K, maybe if you are the best QA in the whole wide world you make 120K. You make it sound like every QA is making that kind of money is such ridiculous. It is not like we don't know anyone in these companies and don't get headhunting calls. Quoting a few examples out of hundreds of thousands is called a bias. The valley always has a place for the elites, but not for there are just not that many elites that support so many multi-million dollar homes.

I guess all these folks are buying, not renting…

Really? What a convinient explanation!

Then how come apartment equivalent housing (aka "cheap" condos) have seen the most appreciation? I know, these highly-paid professionals like to experience lower-middle-class lives in transitional neighborhoods.

Also, I thought whenever an employment boom occurs, demand for temporary housing will tend to increase...

Rent is the missing link, I guess.

Peter P,

For me the RE bubble and the coming economic maelstrom are symptoms of a nation that has abandoned civilization. Banking deregulation and throwing out usury laws, negative amortization loans, 350 lb women in spandex are all signs of a society that has shown its heels to civilization.

Headhunters are like realtors. They make commissions based on the salary. Hire this guy or forever be priced out.

For me the RE bubble and the coming economic maelstrom are symptoms of a nation that has abandoned civilization. Banking deregulation and throwing out usury laws, negative amortization loans, 350 lb women in spandex are all signs of a society that has shown its heels to civilization.

Well, I guess civilization is not a natural thing. :) Honestly, I do not have much faith in humanity.

15289 TOP OF THE HILL RD, Los Gatos, purchased in 2005 for 2,650,000, currently available for sale at 2,195,000

Perhaps they did some reverse renovations, like taking away appliances and the all-important granite countertop. :)

All I ever wanted was tea and crumpets in the afternoon, and dogs with happy faces. But I'll settle for 60% off 2005 prices at the bottom of the curve.

Why? It’s about $16K/mo after tax. A $1M mortgage would be less than $6K/mo. You can sustain even a $1.75M mortgage with that income - it would still leave a few thousand dollars a month for other expenses.

What? No one should spend more than 25% - 30% gross on housing. It is a guideline for the mass and higher-income people should be even more conservative than that.

How do you get PITI below 6K for a 1M mortgage?

Interest at 6% is already 5K a month. Property tax is another 1K. Insurance and upkeep is at least 250 a month.

They don’t like it, but that’s all they can afford, and they’d rather buy than rent.

Ah, dignity. We can get two gentlemen to engage in a duel just to buy a house.

I never understood why it applied to higher-income people. You only need very few thousand dollars a month to live on. Why is it so bad to spend the rest on a mortgage? Why is it ok for most people to have, say, $3K left after mortgage payments, buy it’s not ok for high-income people?

Perhaps Bill Gates should live in a private Mars conlony with oxygen dome and artifical gravity. He just needs a few thousands to live on anyway. Why not spend the rest on a space mortgage?

Why would anyone want to pay 6K PITI and have 200K stuck in downpayment when I can rent for 3000K?

Why is it so bad to spend the rest on a mortgage? Why is it ok for most people to have, say, $3K left after mortgage payments, buy it’s not ok for high-income people?

Because banks would never lend like this in a normal market. Doesn't that scare you a little bit?

I do not want to be stretching by any definition. We are spending less than 1/5 NET on housing right now, going to 1/2 seems far-fetched.

the loan is backed by a solid collateral (the house).

We will see about that.

If the purpose of life is being in a house, by all means.

Spending so much in a shelter is horribly inefficient to me.

I never understood this fixed 1/3 ratio business.

I never understood this pay 150% more for the same thing business either.

I am saying this based on a very narrow sample - my social circle - mostly Asian immigrants. Except myself everyone "owns" their home. Based on this sample, I think there is more to BA bubble than double income families with more than 200K income.

Immigrant tech workers find this place highly desirable. Weather, job opportunities, immigrant friendly culture and very important - community support from their originating country. Most of these folks came after the last downturn, and when the tech boom was begining. They have not seen RE prices go down. Their friends own homes, and they encourage others to do the same. I cannot even count how many times people have tried to brainwash me into buying. It's a tremendous struggle to not give in to buying a home. Even my wife thinks I made a BIG mistake by not buying 4 years ago. I just couldn't bring myself to take on huge debt to buy a crappy house.

Even today, it's hard to find anyone around me who even entertains the possibility of RE prices going down. I know this is a contrarian indicator. But I have myself gone through many stages of self-doubt. There were times, when I thought I was dumb by not buying. It's only last month that I discovered these blogs, and was kind of relieved to find people with similar thoughts. (But I admit, many folks here have come to the same conclusion by being far more informed than me. I was just scared to take so much debt, have very little knwoeldge of economics).

So what's my point ? I think the bubble in this area would deflate far more slowly than any other area in the country. Most high tech workers are far more financially resourceful, and most high tech immigrants live well within their means. They are resilient and can survive a much bigger downturn than others.

Of course - this is based on the narrow sample of people I know very well.

@Peter P

All this stuff about RE is a bit OT ?

Now what about beating that dead Horse ;)

Curious about your thoughts on the Iranian Oil Bourse.

It might not have a big impact as people might think.
Foreign countries will still have to use the US export dollars for something, why not oil?

@To BA Or Not To BA,

Beware of "It's different here because (fill-in-the-blank)" arguments and people who are convinced RE can *never* go down because they did not experience the last housing bear market (1990-1996), or the one before that. And as you say, you're circle of friends is a "very narrow sample" and one that is probably much above average in terms of income and education.

I could go into myriad reasons why it WON'T be different here (huge % of toxic loans, reflexivity, credit/consumption feedback loop, mean-reversion, price-rent ratios, etc.). I have been there before and frankly don't have the time to re-hash old material. I recommend that you spend some time persuing the archives --as a relative newcomer, you may find many of the answers to your questions there.

As far as addressing the question at hand, I fervently think that the bubble is over, and the burst is now on. You can tell by the fact that the CL housing forum, long a housinghead flavored forum with few who wanted to admit that things were out of whack has changed it's tune from" there is no bubble" to:" How sticky will prices be on the way down?"
I think that the bubble burst is going to be bittersweet for many of us for years. I say this because frankly, even if those prices came down to say.. the 350k level, that would still be very expensive for those of us who aren't making 6 figure salaries. Me and my wife combined make 85k, which I think by national standards is terrific.But not enough for Ca.
The diffrence in housing prices this time around is that the prices went way out of the affordability bracket thanks in a large part to all that creative financing.In reality, this bubble has been about trying to get the prices back to a level that at least some people can afford, those people being the ones making 6 figure salaries. For the rest of us, we're at least hoping for a chance that if we too start making the money, then perhaps we will be able to afford.
The simple fact is that this boom ripped open a new seam and made it clear to everyone that CA essentially shut the doors on the working and middle classes while making a lot of people at the top very, very wealthy. I can't think of any other state, with exceptions being NY and MA of course, that have done more to erode what we would call the american dream, which is that if you work hard, work smart, and wise with your money, that you too can afford your own small piece of the pie.
So what am I doing? I'm still sticking to plan A, which was to wait for 3 years, hope that a burst would happen( which it luckily already has) and see if prices come down to a level we could afford. If not, then I am paying close attention to the many new areas of the country such as TX, TN, NC, and others that are rapidly developing and still provide what most americans want.

Sorry,
I just read some of the commentary above about the "quiet migration" out of CA, NY, etc and into Fl, NC, TX, NV, etc. First of all, as someone who came from TN, and still has all their family living there, I would call the migration anything but quite. By looking at the license plates from CA and NY last time I was in Nashville, you'd think the entire state of CA had gutted itself and dumped them here.
The news in Nashville is surprisingly upbeat. There are all kinds of groundbreakings on new facilities for manufactoring, research, and education. This is actually being due partially to TN state government,who has flown a number of senators, both present and former to NY, CA and others to talk to specific companies, offer them insane tax incentives, almost free real estate, and savings on things like electricity. They spend millions a year putting together ad campaigns for both companies and residents of their target states to show them " what it is like" to live here. TX is even more aggressive about doing this. I'm amazed that CA isn't really doing anything about it. All other states have to do is walk in, state the facts, which is that CA has the highest taxes in the country, the most expensive real estate, the highest employee cost, the strictest environmental laws, and on and on. TN even gave over 150,000 flashlights to Nissan in 2001 that said" the lights were on in TN" during the energy crisis.
It is stories like this that will continue, and the same reason that business, development, and progress will occur outside the CA border and in previously ignored, scoffed at states like the one I am from that will cause a massive hemoraging from this state.
But is this a good thing? Ask people back home and you'll get a mixed answer. These Californians go to the most expensive parts of the city, buy the biggest houses, and almost insulate themselves from the locals. They think 250k for a big house is cheap, when in fact for the locals these are pretty pricey. I could see such an influx of people adjusted to unusually expensive lifestyles causing the local balance to go out of whack. So who knows.. maybe the buuble will go away in CA, but re appear in these new areas.

I've been through the desert on a dead horse with no name, it felt good to be out of the rain.

"I am saying this based on a very narrow sample - my social circle - mostly Asian immigrants. Based on this sample, I think there is more to BA bubble than double income families with more than 200K income."

Based on my narrow sample of friends, they are highly leveraged, live above their means and are seriously stressed about losing their asses in this housing market. I guess we don't hang out with the same people. :)

DinOR,

I didn't mean to put down Schlitz; after all, what teenager in the MidWest didn't have many of Schlitzfaced nights? I was more likely to be at Wrigley drinking Leinenkugel, though. And as a teenager, Hudepohl was the swill of choice. I can still smell that distinctive skunk aroma just thinking about it now.

Percentage Population Growth, measured per GSP capita; scaled by US population growth per GDP capita (2000-2005), US Statistical Abstracts:

Nat'l Avg: 5.3%

Above Nat'l Avg. States we tend to discuss
CA: 6.7%
TX: 9.6%

Red Hot States:
NV: 20.8%
AZ: 15.8%
FL: 11.3%

Below Nat'l Avg. States (meaning losing GSP wealth comparatively):
TN: 4.8%
OH: 1.0%
DC: -3.8%
ND: -0.9%
and nearly all of the Midwest, Plains, and South, except GA, SC, NC, VA, MD, all of which are above avg about the same as CA.

“I just bought a place in Sacto and man did I get screwed”!

That would be a great bumper sticker!

Peter P says,

So they knew when prices were going up. But we never know if prices will come down?

Anyone who bought RE in CA the last 5 yrs had to know that prices were already sky high. Prices here have never been tethered to reality.

No, "they" didn't know prices would go up. They took a risk. Like we all do every time we decide to buy, hold or sell.

The real question is, "what happens next?" The answer is one word: "you never know."

Aren't MACROs supposed to debut soon? We could use this forum to speculate on RE downside. This could be a nice way to pass the time during the long slide.

"Now I am stuck like you all"

Don't think of yourself as stuck. People with toxic mortgages are stuck. You are not.