patrick.net

Ha ha!

Thanks --nice to know someone around here appreciates my stories ;-).

I'm not a professional writer (I.T. guy), though I do have an English Lit degree and had considered becoming a journalist at one point. Sadly, silly things like food, clothing, shelter, student loans, etc. kept me from pursuing that.

I do a fair amount of technical writing at my job, and may someday actually get around to writing my own Great American Novel, but this is my main creative outlet for now.

Oh, shit! We just violated the no personal/literary topics rule!!

I would like to see a Brideshead Revisited or an English Patient set in the good old U.S.A.

VAX/VMS lives !

Huh?

I would like to see a Brideshead Revisited or an English Patient set in the good old U.S.A.

To this day, I can't go to a Forest Lawn without thinking of The Loved One --hilarious.

Here's an exerpt:

Now we come to the broken phrases, the last words spoken between the Realtorâ„¢ and me. How had she severed my hopes from my parcel? She of the low cut mauve dress. She of the promised annual appreciation. And if she had brought me to this, what had I brought her to? I dragged my sweaty forearm across the back of her neck, sending a salty stream down her creamy back. She said, "if you leave me, forget me," her face unconquerable.

LOL -- we should do a thread on mimicking your favorite author's style while writing about RE (if the killjoys around here will allow it, that is).

Oh goody - no creativity. That's my kind of thread.

1999 Houses for sale in Santa Clara County as of today. The numbers were exactly the same on this date in 2001. Two weeks ago, they were significantly higher than in 2001 on the same date.
That means the inventory curve is going to be flatter this year. If that trend continues, there will be a slight price decline (maybe 15%?) this year, but no crash.

Here in my neighborhood (West San Jose), there are almost no "For Sale" signs, and I'd estimate that more than half of them are "Sale Pending" or "Sold".

Looks like we'll have to wait some more for the drama.

VAX/VMS lives !

HP 12C, banzai!

If that trend continues, there will be a slight price decline (maybe 15%?) this year, but no crash.

15% will be a crash for many people. Those who have put down 20% will see their equity drop 75%. Those who have put less than 15% down (pretty much most first-time homedebtors) will join the Matrix of NEOs.

Also, did I mention that this bubble has been sustained by _accelerating_ debt load? When appreciation even slows, the house of cards will collapse.

The process has started. The tipping point was reached last October. ;)

@Unalloyed,

I just posted a new story to the "Jurassic Popsicle" thread that you might enjoy.

VAX/VMS lives !

I dreamt of JCL last night. No! It was a nightmare! JOB# 101 : ABEND

Perhaps this has been posted already but it's worth a look. Daily Sacramento Inventory with monthly comps to population increase over last 10+ years.

http://sacramentohousingbubble.blogspot.com/

VegaswillBust,

Keep those links, stats and data coming! I have a good friend that just sold his SoCal home and "thinking" about putting a major down payment (to keep the payments low) you know? The more tangible "dope" you can bring the better! He's retired Navy and just couldn't afford the hit, then again who can? Much thanks!

Harm,

3212, basic military jouralism?

Well what do we have here? A f@cking writer? You think your Mickey Spillane?

Sir! I wrote for my high school newspaper Sir!

You're not a writer you're a KILLER!

Sir yes Sir!

I just thought "realt-whore" read more like Spillane? Wambaugh? No?

I want more!

Conor,

Loved your post! The only thing I would add is that when lenders begin to sober up by having to eat their own cooking and raise downpayments it will be the equivelant of "the house" or the NYSE changing margin requirements, not just "rates". Typically set at 35% for the "house" (brokerage) and 25% equity for the NYSE. Just changing the "cost of money" would devastating enough for speculators! If we moved margin calls to say 35% at NYSE and 50% at the house ALOT of people would be in trouble! Good solid post!

Do you suppose there's room in that cloud for me to live there too Pete?

Rents keep going up?

There is no margin calls?

Who better to detect a bubble than stockbrokers! (been there, done that)

Expect a lot more "articles" like this in the weeks and months to come.

athena,

Good point, I wonder how DL is going to defend his position (as the RE crash becomes obvious to a child) that "incomes are rising". I believe it was Randy H that steered us toward a link that clearly showed real incomes have actually DECLINED 4.1% from 2000 to 2004! This Pete guy is just Clayton's version of Jimmy Castro up in Sacto. Any right thinking buyer should be very alarmed by these types of statements (and I believe the evidence indicates they are).

I've heard the "train is leaving the station" pitch before. What you have to ask yourself; "is the train's destination any better than where I'm already at"? Unless of course you just like being taken for a ride!

Pete's "guest commentary"?

athena, dear, as much as I'd love to pick this thing apart line by line, well let me just put it this way.

You can't polish a turd, O.K?

A general observation: the actual price of any asset cannot stay above its theoretical price indefinately. RE cannot continue to exceed affordability. You don't need to be an economist to figure this out.

THE HYPER real estate market couldn't last forever and on its own is slowing to a "normal" market.

How will revert to a normal market unless prices reduce in real-terms? I could agree that nominal prices may continue to go up, but slower than inflation. The problem is that this would take decades, and would probably end up hurting more people than a quicker correction.

If you buy a home for X, and it appreciates at Y, but inflation is Y+Z, then you're still *losing* potential wealth.

This year is expected to have about 5 percent fewer sales and appreciation will still go up from 5 percent to 10 percent. This will be a welcome return to an "average" year where prices still increase and home ownership still makes sense.

Who expects this? I sure hope you don't mind others making predictions if you're willing to do so yourself. Especially given that your predictions are stated as facts.

However, the media have been exaggerating and that scares buyers into renting.

The media has not had any part in promoting the credit/housing bubble either with shows about making money by flipping homes or such.

While every winter slows down in sales volume, media articles scream "slowing down" without explaining context.

I guess that the YoY numbers are part of the great media conspiracy to sink RE.

The media also has been promoting fear of a "real estate bubble" that "might" burst. This is just their "prediction," not news. It is a prediction I've heard every year of my 37 years in real estate, while prices just continue to rise.

It always goes up. How could one fight against such logic. I guess 89-94 in the Bay Area was part of the media conspiracy too.

Those who believe this nonsense don't buy, so they watch their friends buy and values and rents keep going up, while they get stuck with nothing but rent receipts.

No need to resort to pejoratives here. "Nonsense"? I guess those friends who're watching many of us now to see when we'll buy are full of nonsense too. Apparently there is no timing aspect to RE. It's always a good time to buy.

Media and stockbrokers apparently don't understand that unlike stock, bonds and futures, homes are not "paper," but are real and needed by all people as a place to live.

How did stockbrokers get into this? Stockbrokers do understand the time-value-of-money pretty well, and pricing theory. I suggest you read about the definition of an asset (http://en.wikipedia.org/wiki/Asset) and then understand that "real" assets are just a type of asset. A corporation is not an asset, but an entity made up of assets (both real, and intangible), as well as equity and liabilities.

This is all irrelevant anyways. Investments depend upon expectations of future Free Cash Flows for their valuations. A home is not an investment. It is a form of savings. It does not produce Free Cash Flows.

Homes aren't at risk from incompetent management like corporations that lose value or go bankrupt. And also unlike stock, there is no "margin call."

Homes have other risks. Market risks, goverment regulation risks, location-based risks, disaster risks. Everything has risks. Risk is part of the pricing equation.

Most average people don't buy/sell/short stocks on margin. They own stock through their IRAs, 401ks, etc. in the form of mutual funds. Moreover, since they own through funds, they are diversified. If you insinst on comparing a home to an investment, then a home is a *terrible* investment because it is entirely undiversified. For that high of an implied beta, you should be earning over 100% return a year.

Most homeowners have 30-year financing in place, which the lenders couldn't demand be paid off even if they wanted too.

Only if you take national averages. Try regional measures of loans over a period. That is, what types of loans have California buyers been taking in the past 5 years?

High balance variable rate loans have protections limiting their rise, and most loans are fixed rate, low balance, or are paid-off anyway.

Firstly, a paid-off loan isn't a loan. LOL. Even with ARM adjustment limits, the fact is that the homebuyer faces the threat of worsening debt burdens just at the time when they can least afford it. Fixed loans are great assuming you can afford the payments.

Homeowners aren't likely to leave one home without going into another, and Bay Area vacancy rates are low whether buying or renting.

Only ceteris paribus. In the real world, people move out of, into, and within a region. The Bay Area in particular has higher than average international and domestic immigration, as well as very high emmigration. That elevates turnover rates, which tends to keep rental demand high, while not necessarily implying home-purchase demand is also high.

Also, most sellers don't have to sell, so they'll just wait until the "market" heats up again.

When bubbles deflate, there are always a few who manage to ride it out. But that's tough. People are human; they have lives to lead. Sometimes taking your lumps and moving on (and out) are the best rational choice. This will probably be true of lots of folks facing very real hardships imposed by falling RE prices, rising adjustable debt burdens, and an at best stagnent income-growth economy.

Maybe if you're only talking about Atherton I'll buy this argument.

While prices can plateau for awhile or roll back a little during a recession, that's not the case right now with California and the Bay Area's economy booming, builders are unable to meet demand, and interest rates while higher, still are low.

Rates are low. You got that right. But they are rising, and just about everything has anticipated and priced in a future rise in rates. When the yield curve corrects, and it will eventually, then look for the perception of mortgage rates to rise even further.

The BA does not have any shortage of housing. If you're making a microeconomic argument then you're wrong. It's not supply affecting prices.

The BA economy is not booming. It's doing pretty good, all things considered; better than many parts of the country right now. But, real-incomes have fallen here in the past 5 years, just like everywhere else, if you remove the top-5% of earners. The top-5% don't really constitute the entire home buying population, do they? At least not yet.

Yes the state's incompetent politicians could raise taxes, chase off employers and screw up the economy, but hopefully they'd be thrown out like Gray Davis, before too big of a recession.

Suddenly we divert into political commentary? Politics are reactionary, not proactive. Especially when you talk about voters. Voters punish recessions *AFTER* they happen, not *BEFORE* they occur. LOL.

Anyway, tax burdens aren't well correlated to RE prices. Tax burdens are correlated strongly to population density. For your tax-argument to be true, then your supply-and-demand argument must be false.

Anyone who's now waiting for a reduction in prices before buying is hurting themselves. Smart buyers to save money, are out buying now, before the annual spring and summer rush begins.

I'm waiting, and will continue to do so for a while. I've already gained about 4% (real-terms) by selling in 2004, and renting since then. And, since I'm an "anyone", then you must be wrong.

Seriously, the "annual ... rush". Couching RE in terms of a white-sale doesn't really do the subject justice. Here's a better set of simplified signals people might watch for when to buy:

* Bay Area real incomes surge, much faster than RE prices. This could be the correction (although unlikely)

* RE prices fall. There probably won't be a "bottom" signal, so the best bet is to just wait until they fall to within your own personal affordability zone. If you can afford it, and you use fixed financing, and you can stay there a while, then you don't need to worry too much.

* Some brilliant person (not likely a Realtor(tm)) wins the Nobel in Economics for proving that the very fundamentals of asset pricing theory have changed and that we all now live in a new world where "it always goes up".

Conor,

I thought that was what you were driving at but it's my nature to make things "more perfect" if that's possible. You know, we have a lot of fun here and it's a great diversion from getting "stern phone calls" from clients. At 24 you have so much to look forward to and b/c participating in this blog has certainly raised MY level of awareness you've been "drilling down" much further than traditional media permits. In doing so I feel you'll be just fine, if we DO have 20% unemployment you'll be part of the other 80%! One thing (without being parental) I try to advocate for young folks is to develop a "side line" or moonlighting gig early on in life. Perhaps something more in line with your true interests and don't worry about it being all that lucrative out of the gate. It's more important that it has potential in the long run. The day will come when your industry goes through a restructuring (getting screwed) and b/c you have a tax advisory service (or whatever) as a sideline you'll have the savings and client base to ramp it up as full time gig. I only wish I had done so earlier. Keep drilling down!

@Conor,

There really is no effective hedge against loss of income, except education and flexibility; especially when young. Just staying informed and actually planning your future will put you in a better position than most of your peers.

As DinOR says, "moonlighting" can be incredibly powerful when you're younger. Learn and make mistakes on someone else's dime, while building competencies and experience. Many people, myself included, ended up entrepreneurs later in life by doing side-businesses earlier. I was running a side-consulting business developing software when I was a 23 year old KPMG Consultant. By 28, I had a thriving telecom software business of my own.

MMMMMmmmmmmmmoneytalk

I used to love Brinker; even subscribed to the newsletter. He kind of lost me when he started spending half over the show on politics though. Kind of the Lou Dobbs effect, I guess.

Randy H,

Up to the challenge and then some! If you can't polish a turd I suppose you could always just squash it? These meandering tantrums always befuddle me because they are so chock full of inaccuracies and down right fibs I have a hard time knowing where to start. The reason I believe Pete drags out the ghost of Enrons Past is to lead the reader down the "primrose path" and portray RE as Fort Knox when compared to what's happened in their 401K's. In the end this this has been a fight to the finish for the consumers dollar. This was the realt-whores time to shine, their 15 minutes. What can I say the milked it for all it was worth. All the way up until the homedebtor was bled dry. They pushed the envelope and now we all have to live with it.

Randy H,

Excellent example! Like I say, we needn't fret ourselves to death trying to become the next Larry Ellison (Peter P's favorite guy) with our moonlighting gig. It simply needs to be something we enjoy and are comfortable with and it can also be a great tax write-off and teaches how to manage our tax position. (When I first went "independent" I didn't know just how much I didn't know). Now if it just so happens to go public, great! I have some guys you gotta meet!

This just in...

After running a careful series of calculations in Excel, complete with linear programming and VBA-automated Solver series, I've determined exactly what one needs to buy a home in the BA.

$150K in the bank & 160K/year income

I would like to see a Brideshead Revisited or an English Patient set in the good old U.S.A.

Maybe that was The Great Gatsby...

You could always write Golden Age-style science fiction, HARM, with that IT background - and, after all, Michael Crichton abandoned his medical training to write his world-improving novels... and put up a website saying sustainability is guff... http://www.crichton-official.com/

So nothing to worry about, it will be Lexus SUVs all round in Michael Crichton's brave new world of the future, and property in this utopia will go up 15% every year!

Randy H said in his rebuttal
The BA does not have any shortage of housing.

You could be right. But here is some data that says otherwise.

I have been trying to get a guage on this part of the equation. I have been looking at ZipReality since begining of the year. In Cupertino the inventory has stayed at about 70-75. And Pleasonton has been growing - still very slowly - from around 180 to around 210 today. This does not seem like a lot.

So I stumbled upon the blog that tracks Bubble Markets Invenotry. Most of you probably know about this site. Here is the url
http://bubbletracking.blogspot.com

Compared to any other market - the inventory to population ratio for San Jose area is terrible. I got this bad sinking feeling after looking at that number.

Here is a quick roundup.
(One house : per number of people)
San Jose 1 : 708
Sacramento 1 : 192
San Diego 1 : 181
LA 1 : 378
Orange County 1 : 316
Las vegas 1 : 110
Phoenix 1 : 110
Seattle 1 : 305

See how bad San Jose (which includes Santa Clara county) is. I know Phoenix and Las Vegas are ground zero for bubble today. But San Jose is double tighter than even Seattle.

For San Jose to be in the same ballpark as other cities, the inventory needs to double, triple and quadruple. Are these numbers wrong ? The blog has the same surprise mentioned about San Jose.

This is as interesting a topic as the predictions about future.

This blog is degenerating

How could this be, I mean, what about the money? come on, housing is your path to riches, it's not a zero sum game, those fuckers on wall st. have nothing compared to an asshole with a broadband connection, the internet has made everyone equal. NAAVLP reigns supreme. Face Reality folks, be the dollar, become the dollar, embrace the dollar. It's not money, it's a lifestyle you've seen on TV. Come ya'll Flip that house, not to be confused with Flip this House.

Assholes.

And like a blonde poltergeist, she was gone.

@HARM - your story was fantastico. Awesome talent there.

@To BA Or Not To BA

The problem with Listing-to-Population ratios is that it doesn't account for the socioeconomic, turnover, and transient dimensions of a particular city. I think such statistics are relevant when aggregated over an entire region, but not very relevant when comparing cities among each other.

Places like San Jose have very large lower and working class populations, reasonably high population turnover, and younger age demographics. This tends to increase rental demand and decrease home purchase demand.

The real indicator is whether the current housing supply in San Jose is in equilibrium to demand. One can really only tell this by measuring how fast inventory is growing or shrinking over time.

I just found the link below that says REALTORtm Pete is a Junior College grad:

http://smartvoter.org/2002/11/05/ca/cc/vote/laurence_p/

I wonder if he had many econ. classes before he got his "AA Business Degree"?

When considering San Jose housing you must also consider that rents have been down/flat ever since the dot.com collapse. If home buying was truly driven by population you would see rents going up. But they're not.

Different Sean,

What did you think about the Great Gatsby? (Sally Kellerman)

Well, I think he was great. (Rodney)

"Rodney Dangerfield in Back to School"

PS,

I hear ya man! My wife's cousin (against all my wife's "soap box preaching") went ahead and bought two rentals in Austin, TX. When asked if she was showing positive cash flow she paused (as if it wasn't something she hadn't considered previously) and said "Oh yeah, of course". Translation? Oh I guess I never really stopped to think about THAT! Meaning RE ALWAYS goes up doesn't it? What makes it even more surprising is that she lives in Vegas (Crash Central). She had reservations about their local market and actually sold a few of her properties there. So you're thinking to yourself, O.K I'm actually having a sobering effect here. Then ka-blam! Ya know what, I'm DONE talking. If you want to slide down a bannister full of razor blades I'LL get the bucket of turpentine for her to land in my damn self!

@CensoredPoster?,

Patrick (meaning Patrick Killelea, site owner/administrator) doesn't normally read or respond to the housing blog on a daily basis. I don't know what Iraq post you're referring to, but it looks like an OTH blog (other than housing). If you'd like to contact him about it, I'd recommend emailing him directly: p@patrick.net.