patrick.net

Peter P,

Yeah, I'm still looking forward to the day of guaranteed 1 Ha Ha per capita income :P Maybe Different Sean can start a worker's revolution around that slogan...

SFWoman,

Noooo, you need to write a bunch a pretty calculus formulae, draw a couple graphs, and throw a differential equation in the foot notes too. Not that these have to really support your numbers, just have lots of greek letters. Seriously, take a look at what the Black-Scholes equation really is and ask yourself if you have what it takes to win a Nobel. I guarantee you did much harder stuff in your second year in undergrad.

Ahh the Laffer Curve. You're venturing beyond my domain of knowledge there because, to me, it's just a sidenote theory in neoclassical economics which manages to piss off both the Keynesians and the high-tax/no-deficit crowd at the same time.

My only claim to fame is having Stiglitz as a prof, but he managed to piss off even his Clinton allies before he got a chance to get fired by Bush.

Randy and Peter,

Okay, let's work with the 1 HaHa number. :P

1. I think we'd better work with after tax dollars for rent, since realtors are always telling us that there's no tax deduction for rent. The tax bill will eats up about 45% of that Ha Ha. If I made less in a different part of the country, the tax burden would also be lower, esp. in a state with lower taxes.

2. Although rent is higher than PITI in certain parts of the country, both PITI and rent are a lot cheaper in absolute terms than BA right now, and will be even cheaper when BA rent starts going up.

3. In a lot of the other communities, decent to good public schools are still available, so there may be savings on private school tuition.

However, I never assumed the rising rent price to squeeze out directors and tech supervisors (because junior engineers do not make 1 HaHa, I wish they do so I could mooch off of my junior tech friends more, but they don't), it's the marginal people who are barely making ends meet. Any price increase can lead to affordability problems and drive them or towards cheaper local housing.

In any case, I don't see anything driving BA wage growth or population growth right now. And the housing stock now in existence will still be there when the bubble bursts. I just don't see any conditions, outside of a few small high income pockets, that would give landlord pricing power.

SFWoman,

Your intuitions are right. RE isn't liquid enough for B-S to really apply anyway, but certainly RE is highly psychology-driven (there is no efficient market for RE transactions, at least not yet or probably anytime soon).

In B-S risk is just volatility as measured by standard deviation. There's all kinds of related pricing theories which include more esoteric stuff like random-walk theory, Brownian motion, and stuff only math and physics Phds can understand. But none of these work for RE.

Maybe you could use a binomial model on RE for a specific home if you could get the function right.

I thought the 1/3rd was for buying a house, not renting? I assume rent should be less, because:

1. no tax deduction
2. no equity building

Landlords also use the 1/3 guideline to qualify tenants.

SFWoman,

So coy with your nameless Ivy League school. :P

Return to BA,

Congrats, sounds like a nice bargain. I asked about CL bargains. Just curious. I sold some furniture on CL when my parents moved and everything worked out pretty well. Are you moving back to the BA before the summer heat sets in for Virginia?

Ha Ha is 150K pre-tax.

Yeah, I’m still looking forward to the day of guaranteed 1 Ha Ha per capita income Maybe Different Sean can start a worker’s revolution around that slogan…

'Universal suffrage, Universal HaHaness'
'One HaHa for all'
'A message to all employers: HaHa'

We're doing an international comparison, and this is the only wrap I get :cry: Some trotskyist, 1st international comintern reference...

Apart from the FT articles, there's a recent OECD report on housing affordability across 17 affluent OECD countries. This is a useful summary from The Age which includes links (may also require free subscription, hmm, I will paste it in if any demand):
http://www.theage.com.au/news/national/house-prices-world-highest/2005/11/30/1133311106610.html

and plenty of coverage in The Economist in recent years. Some good work at demographia.com also, altho Robert Cote and I disagree quite adamantly with some of Wendell Cox's most basic theses...

OECD report (PDF):

www.oecd.org/dataoecd/41/56/35756053.pdf

Returning to BA,

Ha! You Bay Area weather wimp! Well when I was young, I lived in Shanghai with no air condition, and 100% humidity and mosquitoes the size of giant mallrats...

Sorry, can't resist. I took some classes at Berkeley one summer and had project partners who thought Berkeley had bad weather! :P

DS,

Excellent slogans. Can't wait for my 1 HaHa job. Do I have to take over factories physically? or can I just send in my resume?

Thanks for the graph, very interesting and very effective demonstration of your point about higher housing costs.

DS, Anyways, sorry about what I may or may not have implied about your being or not being a Trotskyite. It's really a sort of praise, I'm too flabby and bourgeoisie to lead a revolution.

Return to BA,

Well, at least the evenings will be cool and the humidity will be low. The Tri-Valley areas is a bit more temperature extreme than the rest of BA.

Bhiptis says:
I’m still not convinced that the correction would be a decline, rather than just a moderation.

That's fine.

I've been playing around with a Randy's model, and one that I built from scratch that shows a month-to-month breakdown of all costs, tax advantages, reinvestment returns, etc. There are a couple of selectable scenarios for appreciation and inflation ("Hard Landing" and "Speculator's Wet Dream" among them :-) ).

Given the current gap between PITI and equivalent rent, in most scenarios a renter who saves the difference and reinvests will be ahead of a buyer. Leveling prices at anything less than 10% inflation gives an advantage to the renter. The lower the inflation rate, the better for the renter.

Peter P says:
Using the 1/3 gross guideline for rental affordability, people can pay a lot more.

For example, someone making 1 HaHa, which is about 13K a month, can afford to pay more than 4400/month.

I thought then "1/3 gross" rule works only when paying PITI, because at first, most of your monthly payment is tax-deductible.
$4400 after tax is a boatload of money, even if you make 1 HaHa.

Peter P says:
But I am quite surprised that rent is nearly 25% higher in Mountain View compared to last year.

That *is* the Google effect.
Have you been to downtown Mountain View recently? No one over 30 lives there, it seems.

I wrote:
Given the current gap between PITI and equivalent rent, in most scenarios a renter who saves the difference and reinvests will be ahead of a buyer. Leveling prices at anything less than 10% inflation gives an advantage to the renter. The lower the inflation rate, the better for the renter.

Correction: if prices stay flat for 10 years, then start rising again at the rate of inflation, higher inflation is actually better for renters.
For a house price of $1mil, $2800 equivalent rent, an after-tax reinvestment return of 2% above inflation and 10% inflation p.a., a renter who saves and reinvests the difference to today's PITI can buy the house in cash after about 10 years.
After about 6 years, the renter's PITI will be lower than his rent if he bought at that time. Nice.

Pop!,

yes, 28% collectable tax. However, here is the caveat, if you can engage in a cash transaction when you sell, you don't need to tell IRS, the coin dealer will certainly report you though, unless the transaction is small.

If you buy CEF, you are not taxed the 28% collectable tax, only capped at CG tax 15%, however, you are subject to PFIC tax filing each year. You can google Passive Foreign Investment Company to familiarize yourself with PFIC taxation.

*not a tax advice nor an investment advice*

Joe Schmoe,

of course wealth has concentrated, just look at the earnings and assets of the top 10% housholds, they have increased their share of the entire pie significantly in the last decade.

Come on, do you really take the 70% home "ownership" at face value? 0-down ARM/Neg-am - financed homebuying will make you a home "owner"?
Without at least a certain percent equity (I personally define that to be 50% at least), one cannot call himself an owner, he is a debtor, the bank is the homeowner. Who owns the bank? Who owns the MBS?

Real estate is just one form of asset. And owner-occupied home is NOT an asset, it is a durable good. What can I do with my home? Unless I want to start a business and need to pull equity from the home to get a head start, it is of no use other than providing a roof over my head. BillG doesn't need to own homes, he can own shares of REITs, he can own GSE shares, owning a home and renting it out is very *primitive* and *labor-intensive* way to make money these days, let the REITs or professional apartment owners do that, you provide the money, they provide the sweat job, that is how capitalism works, marrying money with knowhow.

This RE bubble will lead to further redistribution of wealth from the moron masses to the wealthy class. Why? The wealthy people are unlikely to take on toxic loans to buy 3 McMansions. They instead invest in REITs, or hold GSE bonds, or shares to benefit from the RE boom. Remember we said who will get bailed out when this all blows up? It is certainly not the shareholders of GSEs or large banks who will be the bagholders. The bagholders will be still the marginal middle class who took on the toxic loans thinking that they can get ahead in this game. This is their ticket to poverty.

I thought then “1/3 gross” rule works only when paying PITI, because at first, most of your monthly payment is tax-deductible.

It is on most apartment rental application. Again, there are affordability guidelines. One should spend LESS than that.

Most people do not itemize anyway. To them, mortgage interest deduction does not exist.

That *is* the Google effect.
Have you been to downtown Mountain View recently? No one over 30 lives there, it seems.

Too bad I have to compete for housing with these people. :)

I am not bitter, if rent continues to explode, buying would not be as bad an idea. I doubt this will happen soon. But if it does, I will embrace the change.

GLD between approval and launch took almost a year, so there is no telling when it is going to launch, but at least we know 90% of chance is, it is going to launch. That's why CEF is exploding with the premium, in case you are really desperate to get in, you can buy a UK silver ETF on LSE. You pay no capital gains tax to UK for playing on the LSE as a foreigner, but you still owe uncle sam.

The only problem is, this fund is just backed by futures contract like DBS on NYSE, it doesn't carry physical silver. I prefer SLV that will store physical silver.

I won't use the Hunt Brothers $40 as a benchmark tho, that was an unnatural price. Silver also had some fundamental weakness, like the disappearance of film processing, I have yet to see another big industrial usage replacing that yet. However, during the 1980s, the natural support seems to be around $20, which is about $50 at today's price, I hope SLV will launch before silver hits $20.

You also need to watch out for gold. Gold in the last run shot up from $650 to $850 in FIVE days, so not many people could really cash out at the top, so setting a realistic goal of $650 adjusted for CPI is a better way. But again that also depends on how much money FED prints, who knows, last time we had a 18% Fed rate to curb the gold run, I don't think Ben has the gut to do so.

Fewlesh,

as a west valley native, do you know of any nearby places with really beautiful setting, least earthquake risk, and NO brand name (or least brand name), so when things tank I don't have to compete with other IPO lotto winners, trust fund kids for a good piece of land. School district is not an issue with me, I plan to send kids to private schools. I prefer something on the west side, commutable within 45 minutes to San Jose.

Fewlesh,

why can't Fed just buy the federal long-term treasury outright through open market operation? At least in the short term, that will stabilize the long rates. In the long term, we all know that USD is doomed.

Fewlish,

thanks for the link on electronic manufacturing, that is a big help.

Do you know what is holding up SLV ETF? I think the price is going to explode once it is available. Perhaps that is the problem.

USO is already trading.

Returning,

Try "Analysis for Financial Management" by Higgins. From there, if it's what you're after, try "Principles of Corporate Finance" by Brealey, Myers & Allen.

I think what you're after is Corp. Finance, not really economics. Econ is all theory and won't help you evaluate individual companies on their GAAP reports. Econ will help you to evaluate the strategies of companies in some depth and determine if they're full of shit or not, especially smaller companies (harder with larger, multinational or conglomerates).

One more, "Valuation" by Mckinsey & Company is very good at getting into the mechanics of how to take GAAP statements and comparables then determine a value for a company, which helps you determine things like merger opportunities, EPS and PE reasonability, and value from glamor stocks. For example, I ran a simple WACC valuation on Google just for Giggles. They need to find gold buried under their campus to justify their share price.

The_Scum,

Many posters -- and at least one notorious moderator -- bring more heat than light. In and ideal world we are purely rational beings. We rise above our fear, greed or anger. Even love can lead to irrational behavior.

But we need to get emotional to do anything important. We certainly have to listen to our hearts.

Huck Finn knew he was damned for helping his friend Jim escape. He knew it was wrong because Jim's "owner" had never done anything to Huck. He tried hard, but Huck just couldn't bring himself to do the right thing by turning his friend in.

The "spring bounce" in the BA will closely track Barry's batting average and slugging percentage. His OBP is still high because opposing pitchers and managers remain in awe of his historical "past performance." But when they've gone after him this spring he can't get it done -- so far. It just seems like something's missing. What could it be?

If Barry keeps slumping, they'll keep testing. Either he finally breaks out or they'll eat him alive when they know it's all gone.

When the psychology of fear and greed reaches its logical conclusion, prices will move.

And all will be well in the garden.

Garth,
To add to that, now everyone finally believes that Barry's past performance was "pumped up" artificially. Balco=seedy mortgage lender. Didn't his surge in power start in the late 90's?? Hmmm, coincidence?

It is no mystery to me as to why the top 10% of the country has the majority of the wealth. All one has to do is look at basic American business practices to see that the system essentially works to constantly cut off it's arms one by one until nothing is left. If you look at the last 50 years you have American companies slowly shifting most manufactoring jobs overseas. We've come to expect that everything is now made in China. I don't know a soul who works producing a physical object.
Now it's programming, research, technology, and to my amazement- even some graphic design and hollywood movies being outsourced more and more. I just read an article in Eweek, and the cover mentions outsourcing IT and tech jobs to India. It doesn't mention the extreme obvious, which is that many people are going to lose their jobs or be unable to afford to ever live in California due to this migration of talent, but instead frames it as something companies "Must" do if they want to stay ahead of the game.
The company I work for is strictly against doing any outsourcing. We have a call center in TX, an office in SF where the IT, marketing, and design work is done. We are very profitable, and doing just fine. The companies that want to outsource want to show a quick buck and fast profits, and that's it. In the end, what is this all about? It's about making sure CEO's of large multinational companies can stuff as much money into their pockets as possible, regardless if what they are doing in the end will wreck yet one more industry. It won't matter to them because in the end they'll be the ones on the yachts in Greece while the rest of us eventually have to flip burgers for a living.
I went to college and got a degree specifically in design and creative marketing for the prime reason that A: It is art, and B: Job security. I get emails almost every day from some company in India with entire web sites they will sell you for $50. I know that the day is coming when even our damn art will be "outsourced". It makes me wonder if there is any job that cannot be outsourced. Hell- even medical work is being outsourced, which can only mean that Lawyers, investors, and everyone else is just as easily replaceable by cheaper labor. Eventually the system will have to be changed, for the way things are going now, the US cannot continue on this path unless they want an entire country under the poverty line.

Bay Area Newcomer,

Wow! What can I possibly add to that post above! Says it all for me! Some time back the topic of what people thought would be a reasonable entry point and I tried to cut to the chase by simply saying that any discussion has to start with "pre-bubble" prices. And I'm not talking about working through some scenario that has 2002 for a starting point! I like the means you deployed to arrive @ Delta b/c mine was so primative. That baby should be in Patrick's preface to interject some sobriety into the discussion!

No. The FED doesn't care about some busted specuvestor in AZ! One of the arguments that has really plain worn me out is this notion that b/c so many of us are up to our privates in debt and so over leveraged that some "White Knight" is HAS to ride up and re-inflate the bubble! And why not? We've bent over backwards to create it! As long as the banking system and publicly traded home builders are intact the FED has done their job.

Oh yeah, and just for a goof I've asked a few mortgage brokers about the new 40 and 45 year loans and they lower your monthly payment by about 50 bucks (and add a several LARGE to your pay-off). Great.......

monadtoons2,

Uh, I don't know how to break this to you but I was watching a special last week where China has bascially street vendor artist in an assembly line sweat shop "recreating the masters" Want a Van Goh? That'll be 50 bucks Mr!

Bay Area Newcomer,
Just also wanted to step in and say that I agree with Dinor. That equation just about sums up the potential ( hopefully true) future.

Garth Farkley,

Randy H and I get chided about our midwestern "leanings" but I'll just say that the "Big Hurt" was hitting about 35-38 HR per season before the "doping" and then guys were hitting like 65-70 HR's per season! Notice how the numbers (league wide) have come down. Frank Thomas SHOULD be laughing! And he just looks great with that new Championship Ring!

Now that we're weaning mortgages off of steroids will see just how much of an impact they ultimately have on prices!

And uh, GO CHISOX!

Robert Cote,

Finally, the FED -needs- to bust home equity. As an inflation protected asset home equity stymies Fed efforts to manage the economy.

Interesting point. I personally require a lot more convincing beyond a logical motive. But this motive is logical.

So, the assertion is that the Fed has encouraged easy credit in order to buy down the home equity stake Americans hold in aggregate? And the assumption is that the macroeconomic risks created by this strategy -- quite significant risks -- are justified by the marginal increase in monetary control that the Fed gains.

Like I said, I'll need to see more data points before I can buy into this.

SFwoman,
I don't think we have to edcuate anyone about the bubble. Everyone who got into this mess knew it was a bubble from the start, knew they could lose a lot of money, and knew they were taking big risks buying things they couldn't afford. We might as well fly to Vegas and tell the gamblers they could lose their life savings, yet since 1 in 1,000,000 gamblers makes it big there, that doesn't stop the hordes from going. All it takes is one person " that such and such knows" who made a bundle on a concept or idea, and the masses follow like cattle.
There were risk takers and those like myself who chose not to gamble, as well as people like yourself, already in, but wanting a better future for your kids. To me this is simply a game. The game gets played over and over, and the cycle serves to cripple one group long enough for those disadvantaged to swoop in and take care of themselves. Humanity thrives on opportunistic principals. It's too romantic to assume otherwise. I'm not going to lie and say that I don't look forward to seeing masses of people defaulting on their payments not because I want " revenge" or because they deserved it after making unwise decisions, but because I've waited my turn and now it is time for us to make it to the front of the lunch line for a piece of chocolate cake. I even feel bad saying that, but it's the way I feel. (today at least)
Idealy it would be great if everyone was positive, community minded, and always thinking of ways to better the lives of the future generations. I know I'll do as much as I can, like try to vote towards laws that repeal protective principals that halt building and digression towards overgentrifying of entire regions,even after I have bought my own home, but in all liklihood, there will be generations after mine who will also have great difficulty as a result of those in the sweet spot, hording as much for themselves.
So now we have arrived at the end of another cycle, prices will drop, people will lose money, and those who didn't have a chance will do so. So the question now is what do we do to prevent this from happening again? Or should we just accept it as a given?
I admire people such as yourself who already own, who have their financial situations in order, who still have genuine concern for their community and the effects of current trends and what they might do to the future. Perhaps that is why you may be more optimistic than I.

Robert Cote'

O.K, that's fine. Perhaps 94-96 was crater for CA. The REST of the country was at or near the mean. Go peak to peak or trough to trough, but for it to mean anything it has to be a point in chronology that precedes 1997. After that everything becomes contorted b/c we went quite mad.