patrick.net

@Astrid, thanks for deleting the "fake Surfer-X" comments!;)

Mike (in a great long post made some good points that I’ll comment on):

> For the record, I’m closing in on 70 years old.

I’m only about 2/3 as old so I have a lot less experience…

> Here’s some history of property values going back to 1946.
> I’ll start with the UK where I was born. My mother bought a
> house (big struggle) in 1947 just out side London for (exchange
> rate now) $4,000. She lived in that house until she died in 1998.
> That property hardly moved (value-wise) until the late 1960’s.
> Maybe a few percentage points a year. Then in the mid-seventies
> it started to take off. It’s now worth $550,000.

My grandfather paid $3,000 for the Noe Valley house my Dad grew up in. When he died in the early 70’s my Dad didn’t have the money to buy his brothers out (who wanted the cash) so it sold for just under $40K (appreciation about $1,000 per year). In the early 90’s a friend bought a home down the street for $220K and my grandfathers home was probably worth a little less (appreciation about $10,000 per year). Last year the actual home (with a new kitchen) was listed at $995K, but is sold for just over $1.3mm (appreciation about $100K a year). Everyone in SF today expects their home to go up AT LEAST $100K a year and have no idea that before the recent boom we had a 20 year period of about $10K appreciation per year that followed a 40 year period of $1K per year appreciation…

> However, I have learned a few things over the years (I day trade btw)
> about finances and politics and “how it works”. Greenspan instigated
> his free money policy to compensate for all the big losses ($7 trillion
> I understand) brought on by the tech “crash”. The reason being, he
> needed to “inject” that lost money back into consumers pockets.
> Without BIG consumers the US economy nose-dives.

The reason I see a dive is that I can’t think of anything else that will pump tons of cash in to the US economy so consumers can buy more worthless junk like:

1980’s: Women going to work (as a public school kid in the 70’s not one Mom had a job)
1990’s: Stock Market Boom (tow truck drives with E*Trade accounts)
2000’s: Home ATM withdrawals (and GOP tax cuts)

> Where to from here. Bad news for America I’m afraid. Property will
> fall back to fundamentals. Eventually - sooner or later. Statistics
> show that it takes around 18 quarters for over-priced property values
> to reach bottom. The house I rent will probably settle around $400,000
> from it’s current price. About 1/3 or 33% drop. A crash is unlikely.
> Remember, bottom fishers will continually move in to buy at what they
> think is support. Then the support cracks and property falls again.

I was reminded of the hundreds of S. Cal property that went REO twice in the last cycle when I saw people rushing in to buy tech stocks in Oct. 2001 for “half price” (50 times next years earnings)….

> The support level, of course, now becomes resistance.
> Just like stocks. I’m sure the realtors will scream, “BUY
> NOW!” when we get a 10% drop - but it will NOT be the
> bottom. Next level down and new “greater fools” will appear
> and the realtors will cry, “BUY NOW!”

REALTORs and Stock Brokers always scream “Buy Now!” because they don’t make money unless people are buying…

> Look for a serious crisis in the hedge fund and derivatives markets.

I’ve got some real smart friends that are really worried about what the Hedge Funds are doing with leveraged derivatives. They way they all get paid there is really no reason not to “swing for the fences” every year since if the fund has big returns they all make millions, but if the fund goes under it is no big deal since they have made $10 million over the past few years and can always get a new job (they cover their asses with letters to the top guys talking about the risks that they can show when they are looking for a new job)…

> Up until now the US (for over 70 years) has had the world to itself.
> Competition was almost zero. Now China and India and to a certain
> extent Russia and to a big extent Europe, are pushing the US down
> down the economic ladder.

We have all watched manufacturing jobs slowly go away over out lives, but I am amazed how fast technology is allowing companies to move other jobs overseas…

> Worse, again because of Bush, America is very out of favor and in
> many places around the world hated.

I’m no fan of Bush, but I don’t things would be much different if we had Al Gore or John Kerry running the show (what will the Muslims do if we ever elect a woman president?)…

crimsonbey Says:

> I don’t think people who have higher ed ergo Ma’s and
> Ph’ds are worried about Chinese or Indians taking their job.

I found on census.org that MORE than 75% of the US population does NOT even have a bachelors degree so I’m guessing that maybe 5% of the population has a Masters or PhD.

I don’t think the top 5% worries about their job going to China or India because real smart people know they can always make a living…

FAB,

I agree with most of your points. My sole point of possible disagreement is that I think there is a real difference between Bush and Gore. I don't think the Muslim world hated the US nearly as much pre-Gulf War II as post-Gulf War II. I don't think Gore would have went into Iraq or would now try to tangle with Iran, so the hostility level would be much lower.

This is particularly important because the Saudi government is really an American client state. The Saudi and Kuwaiti governments needs the US at least as much as we need their oil. We're the ones with the technology and we're the arbiters of power in the region. They also have a simmering pot of discontent at home and they need every bit of US help possible to contain it, or risk following the Iranian and Iraqi kings into exile and disgrace. Bush's naivete has stirred up a real Muslim hornet's nest there and made the Saudi royal family's job that much harder. I think Gore would not have blundered into war and would have concentrated on hunting down Bin Laden.

The other major difference I see is Gore's fiscal policy. Gore has a pretty decent track record as a fiscal moderate and worked in a White House that actually managed to turn a federal deficit into a surplus. While I think he would have difficulty dealing with the aftermath of dot.com bust, I think he would have taken on less federal debt and have this country in a better shape to face the challenges ahead.

FAB,

I agree with your assessment about highly educated people. Especially for people with financial or technical expertise. There is very little language problem for people from Anglo-Saxon countries since most of the World's elite can speak passable English.

Surfer-X,

No problem! It's my job and it's my promise. :P

I would be willing to pay up to $8k/mo in PITI for the right place. It would really have to be the dream home in the Claremont hills though.

ptiemann,

While PITI is a fudgeable number, the difference btwn a 15 year mortgage and an interest only is not too great. My primary object was to explore the maximum monthly amount folks here would pay for housing. Almost any market, except maybe one catering exclusively to billionaires, must have a ceiling, and I was curious to see where the ceiling was and how it was arrived at.

For me, my current ceiling would be about $1,500 shared with my boyfriend. He's paying about $1,000 for a nice-ish small 1 bdrm in the Tri-Valley area. That place (and a similar earlier apartment) serves our needs pretty well and allow him to save about 1/3 of his gross income + pay off his cheap new car in 5 years. My goal is to push our savings rate to 1/2 of our gross income, when we move in together.

If rent for a similar place goes above $1,500 a month, I may finally do what I've threatened to do. Buy a used RV, find a free or dirt cheap parking place, and live out of an RV full time.

We pay about 1/3 takehome on our house; I don't suppose we'd change that much, unless we reduce expenses elsewhere. We'll "buy up" someday, but only if it makes financial sense.

After 20% down, PITI should be comparable to rent after tax deduction.

I'd really like to see those sweaters Carol Cleveland was wearing back in style, I mean the whole ring zipper thing...

va va vooommmm....

tsusiat Says:
I’d really like to see those sweaters Carol Cleveland was wearing back in style, I mean the whole ring zipper thing…

wouldn't we all...

very good post from mike. not sure whether all will come to pass, but shows great prescience. if things look sticky for the US, they will probably find ways of using force to maintain hegemony though. it's more balanced than some posts where i like to play my saved .mpg of john ashcroft singing 'let the eagle soar' (in his inimitable national anthem meets lounge swing arrangement) in the background to get in the proper mood. that rendition of his own composition always brings tears to my eyes for some reason, perhaps not the intended one...

1980’s: Women going to work (as a public school kid in the 70’s not one Mom had a job)

just on this, this is also a feeder into the property boom -- now every 1 bedroom apartment is priced for a double income yuppy, dinky couple, disenfranchising single people on average incomes -- property prices simply soak up extra disposable income like a sponge, and the market doesn't care about actually meeting anyone's need for affordable housing.

the other drivers are of course historically low interest rates, liberalised credit, shaky and untrustworthy sharemarket, etc, etc.

> Worse, again because of Bush, America is very out of favor and in
> many places around the world hated.

I’m no fan of Bush, but I don’t things would be much different if we had Al Gore or John Kerry running the show (what will the Muslims do if we ever elect a woman president?)…

yes, those nasty, nasty muslims. they seem to be everywhere, like the bogeyman. and so inordinately powerful too. funny how the angriest, evillest ones are sitting on most of the world's easily extracted oil. (and hugo chavez is now 'evil' and holy rollin' pat robertson says he should be outright assassinated by the US! o-kay, think we can see things more clearly now. just like allende in 1973. and kissinger deserved the peace prize.) and bin laden is still alive! he didn't die in 2001 of kidney failure or an air strike like some people said -- we have recent audio of him! he sometimes also goes by the name 'emanuel goldstein' and we like to have 2 minutes of hate every morning.

good heavens, charlie sheen thinks the whole thing was an inside job! maybe without the PNAC, the neocons, the 2 rigged federal elections, the impending invasion of afghanistan on behalf of unocal, PNAC intentions for caspian sea hydrocarbon resources and george bush 9/11 may never have happened...
http://tinyurl.com/hfl78

or am i being too harsh?

Mike,

It's never an easy task to convey the landmark economic events of one's lifetime in a few paragraphs but you've managed quite nicely. Because your life experiences span two continents (and a number of decades) it helps put things in perspective. Charles Hugh Smith shares an article today titled "How to buy a 450K home for 750K"! Absolutely hilarious, a must read. The sheer number of articles posted over the long weekend is overwhelming. One realtor in FL observes that if you want to sell in today's market you need to price your home at 2004 levels! Well, that's a step in the right direction but I was thinking more like 2000 (or prior) levels.

I am probably on the extreme low end of what I'm willing to pay for rent. I have never paid more than $600 a month to rent, and have managed to do this simply by always choosing to rent an entire house with 1 maybe 2 other housmates.
I also manage this by living in less "sexy" areas that are off the radar of the chic-metrosexual crowds. Thus I live in Alameda. Close to Oakland, SF, and Berkeley, but always about half the price of living in SF. Takes us 15 minutes or less to get downtown.
I would be willing to pay as much as $800 a month, but the whole idea behind paying cheap rent is that I'm able to save over 50% of my take home pay and save up for that mini ranch in TX or large log home in NC. If rent were to go up past that amount, then the fundemental exonomics of the region wouldn't make sense to me anymore and I'd have to cut my losses and ditch the area entirely, which I wouldn't exactly be that upset about anyhow.

George,
All I can say is that I hope something on the level of Florida's reductions come our way over here in Cali. The big problem here is that everyone makes too much money. I skimmed over a lot of the posts here, and the fact that many people were comfortable paying as much as $2,000 a month on rent tells me that the affordable level in Cali is signifigantly higher than FL.

Funny thing happened this weekend. There's this sort of drab,boring 3 bedroom house in my hood has been for sale since October. There's this kind of older Asian guy that owns it and sits outside next to the for sale sign on weekends. So far, there's been balloons, signs set on top of cars, signs alongside the for sale sign that says:" I'm beautiful inside!" and a few changes in Realtor companies. I figured the guy must be asking too much for the place. Anyhow, I saw a ad for it in the paper that said: "Price reduced!"
The reduced price is... drum roll..... 1.2 MILLION DOLLARS! No, I didn't misquote this. I wish I could find the ad online because if you saw this place, you'd absolutely piss your pants. I think the guy who's selling it just assumes that eventually, some idiot's going to buy it and he can move back to Vietnam and be a bazillionaire over there or something. NOBODY in their right mind would pay even 600k for this place.

George,

I have to agree. One of the most important market dynamic that needs to be in place to "entice" bottom fishers is the expectation of a fairly swift recovery or a "reflex rally". When the first round of bottom feeders comes in and DO NOT convert into near immediate profitablility it scares off the other BF's. (Not to be confused with a FB). BF's are not by any means long term investors. Typically these people are graduates of the "School of Hard Knocks" and have little patience to cover the carrying cost of an under-performing asset.

George,
I took a trip this weekend. The trip took us through Sacremento. As I see it, Sac might as well be Palookaville USA compared to the Bay Area. It seriously looks like a big cornfield with a ballion new ticky-tacky stucco homes. There are literally entire chunks of the city that are crammed packed full of these houses that all look the same. What's odd too is that all of these developments have cheesy flags that surround their perimeters, as if you're really sailing past used car lots, or perhaps a trailer park. I can see why Sacremento's housing market will and is crashing: They did the uttermost to make the area look almost unattractive. Go about 45 minutes down the road and the story in the BA is really diffrent. For one, the only new homes being built are the ugly condos and lofts in SF. Lofts were never meant to be upscale, expensive, or chic places to live. They were and should be for starving artists. Yet in SF, a loft is a status symbol, which to me seems ludicrous. I wouldn't want to live in one of those even if they were free.
The fact that people are willing to pay 700k for a loft in a crummy part of SF is proof that SF and the BA is still very diffrent than Sac. I just had the misfortune of choosing to live here years ago without realizing it was the most insanely priced city in the country.
I think I make pretty good money. According to the BLS, I make almost double the state average. But listening to some of the folks I know, they must make double that, and they too are priced out.
I'm with you on whether California will have an economic fallout. The obvious seems to be there: Wages are double or more for a job that people can do in an increasing number of other cheaper cities, More people are moving out than in, and that the economy here is more heavily tied to RE than anyone dares to admit. This isn't the biggest thorn in the paw. The biggest folly is that most Californians assume that regardless of whatever warning signs exist, the state will whip out some newfangled technology, find more smart immigrants, or find another cash cow to save them once again. There is a feeling that high wages, high tech, and high prices are here to stay, and that just because it's California, then that makes this state alone safe from any economic faults the "rest" of the country might experience. Once this thing comes unravveled, I expect a lot of dropped jaws and looks of disbelief.

Any notion of "salvation" from the bustling throngs of BF's should be quickly disbursed b/c by their very nature if they do not see a "quick turnaround" they will only cut their losses and put it right back onto the market and I do mean post haste! Bottom feeding is all about "living to fight another day". Cutting off a finger to save the hand (if you prefer).

Mike,

LOL! I believe those "Iranians" still prefer to call themselves Persians. I agree that whenever a government starts calculate for fines in its budget, there's a big moral hazard that the fine is not for keeping peace but to get money improperly.

WWII,

I totally agree. Although California has been lucky to maintain an extremely high wage in the LA and BA, there's no guarantee of that continuing. To plan for continued future wage levels to support 4X the national avg RE prices is just a bad planning. While BA does have some incredible advantages for the rich, there just aren't enough rich people, and most people will care much more about jobs, school, and having a decent life -- they'll leave once that's no longer the case. Prop 13 and people who bought in at 1/3 the current price can delay that, but that day of reckoning will come unless California pulls up another amazing save, and that's not statistically likely.

burbed,

That's pretty unbelievable. 500K for a circa 1980 trailer? Does the trailer come with the entire rest of the trailer park?

I was thinking of living in an actual RV. It's a little tricky, since I need to find a safe and quiet parking place and also a place to dump and pick up water. However, there are some advantages to RV living, I could do a lot more roadtrips without packing.

Astrid,
I recall someone else mentioning trailers the other day and I did some research. Apparently, Prefab and manufactored home sales have been rapidly increasing. The reason is that in the case of prefab houses, the quality in some cases is just as good as something built on site. You may also find it interesting that of the majority of the homes built after the 06' quake in SF, most of those homes are prefab. Many came on a flatbed kit from Sears which could be had from 5-700 dollars.
The reason prefabs were chosen after the quake was because they were cheaper. Most families didn't have insurance, so the safest return to a home was a prefab. SF is proof that prefabs work, and what's more, they are still way cheaper than paying someone to build a home on site.
A home such as this one: http://tinyurl.com/npklt
costs around 85-95k. Not bad considering the same home would cost over 3 times this amount to build. Of course the land would be the pricey part, but if you ould find a rental lot, the costs would still be signifigantly less than buying, plus you would own the house.
On the other hand, manufactored homes are more like cars. They are more difficult to update and lose value almost immediatly. But... they can be had NEW for as little as 30k.
I think that under the economic circumstances we now face, mobile and prefab homes could be a good bet.

SQT,
The houses actually look fairly decent. Way better than the Mcmansions that you see back east. But with the degree of anonymity they all have, the prices are bound to come down hard. The only thing that might prevent this from happening is the fact they there are plans to build a high-speed rail system that connects sacremento and SF. If that's the case, then people in SF will move to Sac in masse because it will offer the ability to get to SF in less than an hour at home prices that are as much as 50% less than those in SF.

WWII,

I would like to build pre-fab when I have the money and find a place I'd be happy at for at least 10 years. I'm a glass and concrete freak. Right now pre-fab is at the forefront of the the modernist houses and as you said, they're actually better put together than site-built, especially anything site-built during the rainy season.

I would lose some customization options, but in return, I get a much cheaper product built on a predictable time frame.

I got to hark back to OO's comments on Toyko RE. I think if the prices there could crash, and by as much as they did, a large magnitude BA RE price crash is not only possible but extremely likely.

It's sort of sad that the US will likely partially inflate itself out of this hole. I like the idea of a crash so severe that nobody will ever look at a house as an investment anymore.

Btw, someone on Ben's blog just posted on this very topic! The article shows quite clearly that a rally in the stocks of "pre-fab" mfrs. runs counter-cyclical to "stick built" on site homes and has done so since the 1970's. Another indication of a market past it's peak (like we need one!)

I've had friends over the years that bought raw acreage in Central and Eastern Oregon and started by plunking down a "single wide" that was basically given to them if they would haul it off. Typically used for hunting cabins (and card playing) they upgraded over the years. A better double wide "repo"? Well, yes. Some are now nice enough that the wives will actually spend the night there and the older single wide is still used for hunting, card playing (and drinking) or is hauled off or burned on site by the FD. These folks bought the land for a song (and in many cases would still sell for a song) if not for the almost new double wide situated on the lot today.

http://tinyurl.com/msdup

NY Times story about HS dropouts attending college. Unbelievable!

DinOR,

I really think much of Oregon is suited for pre-fab and trailer type constructions. Parts are really rainy and shouldn't have stick-built. Other parts are really sparsely populated and it doesn't make sense to get a crew to build one in the middle of nowhere.

astrid,

Most Oregonians do treat mobile homes like a disposable item. All up and down the coast you'll see RE adds like, "The value is in the LAND!" Meaning that there's either an aging mobile on the property or there's a house that looks like it was used to make meth. Anyway you slice it mfr. homes make sense for a lot of us. Oh, btw we looked at a 50/50 time share at Otter Crest (on the coast) and it was very reasonably priced. 80K for a 1/2 share BUT the monthly HOA's were $450! Since we'd be lucky to spend 4 nights a month there this would be more expensive than most hotel rooms!

George,
As soon as I saw that the report about rising rents was from the NAR, I had the same exact thought: If they can't get people to buy houses, then the next best thing is to scare em'. There is really no reason to raise rent in my area. There are hundreds of houses, many that have been empty and for rent since the fall. How the expect to rent them for more money when they can't even fill them at market rate is a mystery to me.

burbed,

Perhaps. But rent has barely budged in the BA and barely kept up with inflation in many other places. A one time move is no biggie. Rent can only go up so much unless it is accompanied by wage inflation.

>Apartment rents expected to rise 5%
>Apartment rents are expected to increase 5.3% this year — about double last year’s increase — the National Association of Realtors says.

Yes, the NAR/Liar-reah cartel. Always your #1 source for unbiased, spin-free market information. Let's try using the ol' Patrick.net B.S. filter to parse these rosy assumptions, shall we...

(1) Large numbers of marginal “homeowners” who used to be renters pre-bubble and who might revert to being renters in the near future. Prognosis: possible increased future demand for rentals.

(2) Increasing rental supply from overbuilding (includes new apartment buildings as well as recently "converted" condos that will revert right back to being apartments) and large numbers of SFRs rented out by f@cked flippers who find they cannot sell for the required price.
Prognosis: greatly increasing rental supply in near future.

(3) Forclosed FBs that move away to less expensive region or move in (double & triple up) with current homeowner(s) to share expenses. If unemployment/layoffs really take off in a big way, this is sure to be a significant factor.
Prognosis: decreased rental demand.

So, our rental Supply/Demand equation works out something like this:

Rental DEMAND = those currently renting + those foreclosed on in near future - former FBs who move away or double/triple up with other FBs.

Rental SUPPLY = current rental stock + recently converted "condos" that convert back to apartments + flipper-held vacant unsold property.

Based upon the above, I see rental demand barely budging (if at all), while rental supply is sure to skyrocket. I fail to see where significant premiums can be demanded from a shrunken and not-growing pool of gainfully employed renters.

More fantasy. There are a lot of things that I worry about. Uncontrolled and spiraling rents aren't one of them. My lease ran out in March and I now rent month to month. When the lease expired I didn't hear so much as a peep from our management company! Not a peep. The local paper is flooded with brand new units just like mine (some arguably nicer) renting for $850 a month and they're sitting. Frantic and over leveraged will make flailing efforts to make rent hikes stick but when it boils down to getting some, or getting none they'll suck it up. Sorry NAR, not happening.

HARM,

So true, so true. Good points and perspectives as always! The only thing we may not have covered is the state laws that pertain to former FB's. I don't know how long it takes to evict a soon to be former FB but I'm sure they will live "rent free" as long as they possibly can. Once the lender is done bending over backwards to not take the house back and it goes into FC the bank (and the property) may not be in the best place to "re-enter" the market as a rental if it can not be sold at auction. Well I have faith that rental agencies will be standing by to alleviate the lenders pain by sprucing them up, getting a "For Rent" sign up post haste and begin screening possible tenants ASAP! There's the "growth end" of the industry for ya! Probably won't even need a realtors license.

HARM,

Your rental equation doesn't take into consideration wage inflation. Since wage inflation tends to (and increasingly more so) lags general price inflation, the equilibrium price point in a microeconomic analysis will tend to move upwards for the same supply/demand.

I am also not convinced that the rental market is a price-takers market. I think significant price power lies with landlords, some of it legitimate and some of it collusionary. Even ignoring collusion, the structure of the market is anything but a perfectly-competitive commodity market. That means, loose up, sticky down, as the suppliers capture benefit away from consumers.

I think all this is why real-estate, whether housing or rental markets, escape many common economic analyses methods. It gets complicated fast, and we're even ignoring locality differences.

the National Association of Realtors says.

I typically get all my housing related data from these guys, as they are the choice for unbiased news on housing. I then flip through National Enquirer to catch up on Elvis, Jim Morrison and Bigfoot, as they off the best source of unbiased information on their whereabouts.

$3750/mo - Lower than market rate? see this Craigslist ad:

http://tinyurl.com/pfkce

And they want to reserve half the garage for themselves? Any takers?

Surfer X,

I meant to include in my comments above just how desperate NAR must be to dredge this up. If the National Real Estate Inquirer ran a headline like: RENTS SET TO QUADRUPLE! Better Buy Now (while you still can get in) well then yeah, I could get on board with that.