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HARM to Peter P and Randy H: I find your lack of faith disturbing.


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2006 Jun 4, 7:50pm   16,828 views  238 comments

by HARM   ➕follow (0)   💰tip   ignore  

Darth Bubblehead

Seriously, guys, just when public psychology and the market is finally starting to turn to such an extent that --even the brain-dead, NAR-bought MSM has to acknowledge it-- NOW you guys have decided to puss out and capitulate??

Yes, the recent uptick in asking rents since March is significant (and as Surfer-X continues to point out, that's ASKING rents, not ACCEPTED rents, boys). Even so, didn't Mr. H himself predict this very phenomenon several threads ago, when he (accurately) applied the "escalation of commitment" theory to increasingly desperate FBs? Aren't the many testimonials by renters in the previous thread (while not statisticially significant) evidence enough that landlords have not repealed the law of Supply and Demand and can dictate rents at will? Not only that, but we've only just begun to see the barest start of apartment-to-condo conversions that are slowly reverting back to apartments. This alone will help flood the rental market with new inventory, right as Joe Homedebtor begins to give up on the concept of house = sure-fire investment.

As John Haverty FRIFY, To BA Or Not To BA and countless others have pointed out, there is just not going to be much in the way of real rent inflation UNLESS WAGES ALSO GO UP. This is for a very good reason: you cannot pay your rent with an NAAVLP. And what's more, rent-to-income ratios for most major metro areas of California are already hugely above the median/mean for practically every other state. It's already not unusual for CA working class households (or what's left of the middle class) to pay over 50% of take-home pay on rent. Exactly how much more can people possibly devote to rent --are they going to pay 90%? How about 100%? If this is true, I think I'm going to invest in the companies that make Ramen Noodles and peanut butter, becuase that's all people are going to be able to afford to eat after paying the rent. Or better yet, I'm going to heavily invest in housing OUTSIDE California --because that's where people will be headed in droves if this really comes to pass.

Peter P, tsk, tsk, tsk... Aren't you the guy who Face Reality used to call "Darth Bubblehead"? For shame.

Look, I'll be the first to admit that in my early phases of Bubble investigation, I was far from certain, and that I've experienced occasional bouts of self doubt. We all do, and it's really quite natural for sane people (only megalomaniacs, zealots and idiots lack the capacity for self doubt). Even so, I would recommend taking a moment to set aside all your complicated NPV/cash-flow discount models for a minute and reconsider the current situation in terms of old-fashioned COMMON SENSE. There is such a thing as being "too smart by half" and missing the forest for the trees, my overeducated gentlemen!

Now, suppose the perma-bulls' ultimate wet-dream "soft landing" scenario actually happens: price/rent correction ENTIRELY through wage & non-housing inflation. So what?? We all just got a 100-200% pay raise, boys --woo-hoo! And now we can all afford to buy a decent home for our families without taking out an insanely toxic loan. Is this an outcome I'm supposed to be afraid of? Hardly.

Personally, I don't care whether prices correct entirely through wage inflation (while nominal RE prices stay flat) or through big, nominal price drops --or some combination of the two. Either way, I win. I get the opportunity to purchase a depreciated asset tomorrow at a much lower real cost.

Have a little faith, gentlemen. The housing market moves excruciatingly, glacially slowly --but move it will.

#housing

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55   DinOR   2006 Jun 5, 5:39am  

marinite,

I just think there are those in the BA (I'm in Oregon) that have developed a slight case of "bubble envy". They need only to drive as far as Sacto to see it first hand but the need for a bubble bursting is a lot like for the need for sex and air. (They're no big deal unless your not getting any!)

56   DinOR   2006 Jun 5, 5:44am  

Can someone find the post with the "airline analogy"? It was great, well written and I'm sure I can't do it justice but they said it was like being shoved out of an airplane at 30,000 feet! True, we're not as high as we once were and we're losing altitude rapidly BUT; we are certainly higher than when we left the airport and man are we MOVING!

(Direction not withstanding)

57   DinOR   2006 Jun 5, 5:53am  

John Haverty,

For the most part mfr. housing has no negative image in Oregon. I'd say they're definitely our 1st choice for 2nd homes as well as primary res. for many. There were some financing problems back in the 90's where mfrs. offered "free space rent" for a year to create volume and just like today's IO loan they went back to the lender after the free ride was over! Now we have a glut of repo's out there for as cheap as $15 a sq. ft. Prices have firmed somewhat now that our traditional homes have gotten so expensive. Btw, a rally in mfr. home builders is usually a sign for the "begining of the end".

58   edvard   2006 Jun 5, 6:00am  

John,
I'm a big fan of modular and manufactored homes. They're built in a controlled environment, are for the most part earthquake proof( since they're built on a metal frame that rolls) and cost between 35-185k. I'm very familiar with these because the biggest maker of them is located in my home town of Knoxville, TN. Clayton homes makes some really amazing stuff. double wides, triple wides, modular 2 and even 3 story houses, all less than 200k, and all made out of good materials. Jim Clayton, the founder has won a lot of awards for helping to build homes for a more substainable economy by offering these at a fraction of the cost to build on site.
Why don't Californians want these in their neighborhoods? Because they're afraid it'll wreak havoc on their precious home values. Surprise surprise.

59   DinOR   2006 Jun 5, 6:01am  

SQT,

I would turn her on to the Seattle Bubble Blog and I can say that things have become equally "un-hinged" there as well. And homes are sitting. There really shouldn't be any sense of urgency for her at all. Inventories are building, prices are stalling, MSFT isn't turning out any newly minted millionaires and the weather sucks. Seattle is Portland only wetter and colder and you get to deal with the arrogance on top that! Their summers are shorter than ours (if you can imagine that) and they suffered some of the worst and persistent unemployment during the last recession. Is it late to ask for a transfer somewhere else?

60   FRIFY   2006 Jun 5, 6:03am  

Hilarious post.

I have the faith. My wife has the patience.

Renting blues? Look around and move. Toss the consumer crap and empty the fridge. Housingmaps.com will show you the way.

Good rentals are always hard to find. I'd call my last 3 good. You need to keep an ear out for the real deals. Be a superb tenant and drive a hard bargain. Buy some decent tools and fix what you can't stand.

With two kids, we're not as light on our feet as we were, but we're far better than an $800K albatross 2BR/1Ba around our neck. Kids have their own room, Mom's at home, the cash we save each month keeps adding to our sense of security. When they're both in school and the missus re-enters the labor force, we'll be well positioned.

A few friends have bought recently with either generational transfers or equity from a previous house. These are the last buyers out there. When the ability to sell the previous house disappears with the freeze-out and surging inventory and when the grandparents finally buy-in to the bursting scenario ("Read the paper, gramps!"), there will be nothing left to support it except Randy's crowd. He'll be fine either way, but for those of us with not quite as much moola, we can't screw this one up.

If I'm wrong, well, I've got two great kids. Life could be much worse.

61   Peter P   2006 Jun 5, 6:11am  

With two kids, we’re not as light on our feet as we were, but we’re far better than an $800K albatross 2BR/1Ba around our neck.

True. But aren't there 800K 3+2.5 out there in not-so-bad areas?

I rather have a 1BR/2BA than 1 2BR/1BA.

62   DinOR   2006 Jun 5, 6:12am  

SQT,

Bummer. I hear they have (as do we) higher incidences of everything from MS to cancers and everyone has SAD. Seasonal Affective Disorder. Actually they should make that a standard feature in all high end homes. Oh, I just don't know what I would do without it! You're supposed to sit in front of this light for like 20 to 30 minutes a day to "trick" your body into believing you're not in HELL!

63   FRIFY   2006 Jun 5, 6:19am  


With two kids, we’re not as light on our feet as we were, but we’re far better than an $800K albatross 2BR/1Ba around our neck.

True. But aren’t there 800K 3+2.5 out there in not-so-bad areas?

I'm not sure what's true about it. I appear to be quantitatively comparing my family to a house! Must start proofreading...

I haven't checked south of Palo Alto, but for equivalent areas in San Mateo county, that appears to be the strike price. Lose a BR, gain a mortgage...

64   DinOR   2006 Jun 5, 6:25am  

FRIFY,

"we can't screw this one up"

In truth, very few of us can. I've seen quite a moderation in asking prices just since last fall. Even though our kids are really in a place where they need us the most that "fury" will quickly pass. I feel confident that right from where I sit we could probably talk ONE of these desperate FB's into accepting our terms. But that would make me out to be an a$$hole. (Even though I would be doing them a favor). If we finally take the property off of someone's hands in late 06 mid 07, well then we're seen as heros! Right now I'm just having way too much fun watching it all fall apart to take the plunge. I've done "damage control" before and it's not half as fun as damage.

65   DinOR   2006 Jun 5, 6:31am  

Can I get a ruling here?

In the very near future we may need to create a distinction between FB's as in f'd "borrowers" and FB's f'd "builders". Or should one simply go with SB as in Screwed Builder? Somehow doesn't seem near strong enough. Suggestions?

66   FRIFY   2006 Jun 5, 6:33am  

BTW - Sorry about dropping Randy's name as part of the monied crowd. We all know he sold in 2004, is a smart guy, has a smarter wife and thus pulls in good dough. No slight intended, I'm just pointing out the obvious. I also read all his posts reverently... ;-)

67   Peter P   2006 Jun 5, 6:36am  

BTW - Sorry about dropping Randy’s name as part of the monied crowd. We all know he sold in 2004, is a smart guy, has a smarter wife and thus pulls in good dough. No slight intended, I’m just pointing out the obvious. I also read all his posts reverently…

Randy is our leader. Follow the Leader...

68   marinite   2006 Jun 5, 6:37am  

A fierce crash would be better for the area and economy than a painful, drawn out slowdown.

Just think of the massive revitalization that would come to the BA if a "fierce crash" were to happen? Carnage and blood on the street at first. No fun for sure. Then all the new businesses and talented people who move in as a result.

69   Peter P   2006 Jun 5, 6:38am  

Carnage and blood on the street at first. No fun for sure.

Let's hope that restaurant wait times can improve. I really hate to be denied a table.

70   DinOR   2006 Jun 5, 6:40am  

SQT,

The PDO (Pacific Decadal Oscillation) may or may not exist. Perhaps NorCal got their first taste of it this past winter. Over the last several years I've done a little informal research and would have to say that in spite of our milder winters in Portland that on average Chicago has more "nice days" per year than we do. No, I'm not forgetting about shoveling the driveway from November until March! All you have to do is watch the "Weather Channel" during spring and fall and you'll find even Duluth for crissakes has more "nice days" per year than we do!

71   FormerAptBroker   2006 Jun 5, 6:40am  

Red Whine said:

> The silicon chip manufacturer trades at 60:1 P/E,
> and the potato chip manufacturer trades at historical
> norms, 15:1 P/E. I still have a hard time understanding
> why I should pay more for a dollar of profit from Intel,
> than from Pepsico

I just went to Yahoo Finance:

Intel TTM P/E: 13.98
Pepsi TTM P/E 16.76

Home prices in most of the US have been ~ 3x for well over 100 years for the same reason that P/Es have been ~15x for over 100 years. Home prices will revert to the mean just like Intel has...

72   marinite   2006 Jun 5, 6:41am  

Thank you for your awesome blog dude! You inspire me to continue to be a hemorroidforhousing.

You are being sarcastic, right?

73   StuckInBA   2006 Jun 5, 6:44am  

Red Whine,

I am not sure if I follow your anology of stock prices. It has always been the case that P/E ratios of different companies to be different. And by a wide margin. Hence some are called expensive stocks, while some not. The stock price is based on expectations of future. But then, even the P/E/G ratios are not same for all companies. That's due to risk premiums associated with different businesses.

That has nothing to do with any "New Paradigm". In fact that's the old paradigm.

In RE, the analogy is location. Different locations command different sqft rates. It has always been the case, and it will always be the case.

In a secular bull / bear market, most stocks would go up / down, but there will always be exceptions. And not all stocks would move by the same %. I expect the same in RE. Not all markets will fall the same.

The new paradigm would be, the % of income people are willing to spend on mortgage. That's the ownership premium we as a society will pay to buy a home. Can that change ? Who knows.

74   HARM   2006 Jun 5, 6:51am  

Randy H said:

Your calculation is wrong. It is NOT LINEAR. The “gap” closes faster than that because of the iterative nature of the interest tax shield, the time-value nature of the alternative investments, etc. This is basic finance stuff, yet I’m being cast as some kind of obscufator for pointing it out.

Of course you shouldn’t use a NAAVLP. But, for those who can afford a traditional 15 to 30-year fixed and have a 20+% downpayment, the gap takes around 7 years to close, not 20. This is because of the way the “curve slopes”.

Ok, let's assume I buy this (I don't, but for the sake of argument, let's just say I do). So, let's assume it takes only 7 years, not 20, to close the rent-vs.-buy gap. And that it can be accomplished solely through wage & non-RE inflation. Again, this would be OK with me.

While underwater FBs are struggling with the dual whammies of rate resets + amortization payment resets, taking the bus to work and eating Ramen by candlelight, I get to continue to rent an equivalent unit at a steep discount, sleep soundly and invest my savings in T-bills, S&P or Euro stocks, or anything else that pays a premium at or slightly above true inflation. And at the end of that 7 years, I get the full benefit of inflated wages and depreciated housing by having a much lower real cost basis than the previous owner PLUS my savings/investments.

How is this hurting me? Sounds like a pretty good deal in my book.

75   HARM   2006 Jun 5, 6:55am  

@LILLL,
(HARM blows kiss)

76   Peter P   2006 Jun 5, 6:59am  

I would think that it depends on how you measure “nice days”, because I cannot imagine Chicago has as many nice days as Portland. How did you measure?

To me, a nice day is a dry, overcast day.

77   Peter P   2006 Jun 5, 7:03am  

Homma’s Brown Rice Sushi is very tasty, by the way. They have to fly stuff in from Florida they told me

Where is this sushi place? :)

78   FormerAptBroker   2006 Jun 5, 7:05am  

HARM Says:

> I’m convinced CA median prices will never return to the
> 3X HH income ratio common in other states. It’s not
> beyond the realm of possibility, however, for it to fall
> to 5-6X HH incomes (it’s currently about 12X).

When I do research on the income to housing multiple I do it at census.gov on the census tract level (a census tract is smaller than a zip code). It is important to remember that census data for the income of real rich people is almost as bad as it is for real poor people, but it is dead on for middle class areas like Burlingame, Mill Valley and Danville…

To BA Or Not To BA Says:

> I am not sure if I follow your anology of stock prices.
> It has always been the case that P/E ratios of different
> companies to be different.

There will always be companies (like those with a lot of growth potential or in BK) or homes (like those designed by Frank Lloyd Wright or those next to a crack house) that sell at multiples higher or lower than average, but most homes like most stocks will trade within one standard deviation of the mean…

79   StuckInBA   2006 Jun 5, 7:07am  

Face Reality,

I am the one who keeps talking about Cupertino. I use it as one of my gauges on how things are going. I consider it to be the real core of South Bay bubble. It attracts middle class, upper middle class and affluent parents alike. It has one of the lowest inventories, and highest price/sqft. Hence my gauge.

Yes, the market is "normal" in Cupertino. We agree there. But it's the direction that I am interested in more. No bidding wars, room for negotiation, and inventory slowly but sure creeping up. Has it crashed ? Hell, no. Will it "crash" ? Depends on what one means by crash. My prediction, it will be one of the last one to crash, and be the softest landing possible.

Other area like, Evergreen, Morgan Hill, Dublin will fall "harder". I don't know what you mean by prices holding steady. They are already coming down in those areas. I have posted numerous times about the inventory, price reductions, relistings and specific instances price reductions.

This is just the beginning. It's slow. And these things always take longer than you expect, even if you think it will take longer than you expect.

I do not think the prices will crash by an obscene number, and will revert back to 1998 or whatever. But I do expect prices to revert back to 2003 prices. Maybe Cupertino will avoid that.

Even if I am wrong, the worst case scenario seems to be prices remaining steady. I am happy to rent for one more year, save more down payment, and buy the house at the same price next year. I sleep very well these days.

80   edvard   2006 Jun 5, 7:09am  

Robert,
You have to admit that the word " trailer" has a certain negative stigma attached to it. People associate "trailer" with " trailer trash" and lord knows Californians have a frenzied paranois af anything remotely resembling bastions of conservatism- classical trailer trash stereotypes included. I can gurantee that even if population density were not the problem, residents would still not want to have a trailer park next door. The knee-jerk reaction is one of disgust.
The stereotype of trailer trash is so heavily outdated. There are many people I know back home who now live in one, and you'd be hard pressed in some cases to tell the diffrence between the manufactored home and the real deal.

81   edvard   2006 Jun 5, 7:11am  

Jon,
the middle class in California are already done. Sorry to say that they're leaving in hordes.

82   HARM   2006 Jun 5, 7:11am  

FYI: The yield curve is now flat-to-slightly negative on the 6mos./10yr. spread:
http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Based on his recent comments, sounds like ole' Heli-Ben is prepping the markets for another qtr. point hike (or 2, or 3...).

83   edvard   2006 Jun 5, 7:23am  

Returning to Bay Area,
I think all one has to do is look at your last post to realize why some people are wringing their hands. Why in the hell should you have to wait 10 YEARS in order to put a down payment on what will likely be a smallish, 1950's house? Am I wrong or is there something amazingly out of whack with that equation?
By the time you're 40, you should be well on your way to not only having your fianances and housing situtation figured out, but you should also have a majority of your retirement saved up. Otherwise, you'll be one of those guys who's suddenly 55 years old, invested most of their money in a freakin' house, and thinking of retirement, but can't because you blew it all on a house. That's what is happening now- people who waited until they were already well on their way to retirement to do what most people in this country do at the age of 25; buy a house, and suddenly realize they have zilch saved up for what really matters, which is what are you going to do at the age of 60? work 10 more years?
Maybe I'm old fashioned, but if I realize that I'm going to have to wait for yet another 10 years just to buy something in an area that will likely have deteriorated even further , then I hardly see the point in buying anything at all. If you're dead-set on practicality and wage-saving, then you'd probably be better off just to rent, grow old, and go to the retirement home. Otherwise, other states beckon and offer more than what CA could/will offer. We want this thing to crash sooner than later for very obvious reasons.

84   Randy H   2006 Jun 5, 7:30am  

FRIFY,

No worries. I don't consider myself "monied", because to do so would be inconsistent with my Midwestern roots and I'd be forced to hate myself. The truth is that my wife and I both worked hard to crawl out of very modest beginnings. Every bit of what we have we earned, except for what we got out of home equity; that was just luck. I have no illusions that I in anyway did anything to earn my home equity winnings other than sleeping there for a few years during a lucky time.

85   HARM   2006 Jun 5, 7:30am  

Peter P Said:
Randy is our leader. Follow the Leader…

Even on those rare occasions where I disagree with him, I always respect Randy H's intelligent and carefully argued analyses. Randy will probably forget more about economics and financial markets than most of us will ever learn. If I had to make a short list of people I'd go to for professional investment advice, his name would probably be at the top of that list.

And yet, still I do not think anyone can predict the future with 100% accuracy. Not even Buffett. Only time will tell how the crash/correction will play out (or how we were both wrong and how we've truly achieved a New Paradigm where debt = wealth).

86   ScottJ   2006 Jun 5, 7:30am  

So how is DEBTPRESSION not different than stagflation? If people have to stop consuming because of overwhelming debt, wouldn't that contribute to a slowdown in the economy? Are you guys also saying that the Fed will shield the US economy from a lot of inflation?

87   DinOR   2006 Jun 5, 7:32am  

Returning to BA,

Well it certainly wasn't scientific by any means! I think that's the reason I put "nice" in parenthesis. Having lived in both places about equal amounts of time I felt somewhat qualified to render an "off the cuff" opinion. To me if you have to wear a coat (not a jacket) and KNOW it will rain? Probably not a real "nice" day. Well it seems the days of our "indian summers" are over and last year the very weekend after Labor Day? Yeah, raining. Chicago by contrast has seen many days in the 70's and 80's right up to and through October. Right now we're into June and it is STILL overcast and raining in Portland! I hate to say it but I have come to take summers for granted. I mean at what point can you plan an outdoor event in Oregon without the threat of rain? May? No. June? No. July? Maybe. August? O.K. September? Maybe. Se what I mean? Is the BA in for a dose? Who knows?

88   Peter P   2006 Jun 5, 7:36am  

Yeeaah…I though we unanimously elected Randy our ceasar!

What will Randy-style caesar salad have? Ikura?

89   edvard   2006 Jun 5, 7:42am  

Randy,
What you said earlier about:
"I don’t consider myself “monied”, because to do so would be inconsistent with my Midwestern roots and I’d be forced to hate myself."
Is sort of the way southerners think too. Anyone that drives a bimmer, mercedes, or looks/is rich is eyed with immediate suspicion. I kind of hate this kind of implanted stereotyping I was bred in because even now, If I see a bimmer drive by, my instant reaction is: "Look at the asshole."
If you're rich in the south, the best way to be about is to act as gentleman and be extremly humble. I even feel somewhat wary of mentioning what I do when I visit. We're supposed to be "gawds" children after all..

90   Randy H   2006 Jun 5, 7:44am  

HARM,

How is this hurting me? Sounds like a pretty good deal in my book.

It's not, it's helping you. This is not where we disagree.

I'm just pointing out the non-linearity of the system that causes accelerating "gap closure". Every dollar a house drops = more than 1$ in benefit for a future buyer. Every dollar that income goes up = more than 1$ benefit for a future buyer. Every dollar that rent increases = more than 1$ benefit for a future buyer. That means a little of each goes farther than common sense would otherwise tell you.

The crazy thing is that, even given all that, prices are still way too high to be justifiable, and MUST revert to the mean. We just disagree about what MEAN means ;)

91   Randy H   2006 Jun 5, 7:50am  

WW2,

Well said. I still remember when I got my first job after graduating college in Chicago. When my mom found out what my salary was -- which wasn't really all that much to boast about looking back in retrospect -- her immediate reaction was "you make sure you keep your mouth shut about that and don't go showing off all your money; I don't want people to think I raised you to be like 'those people'".

By the way, that big whopping richy rich salary she was referring to would be exactly $30,519 per year in TODAY's dollars.

92   Randy H   2006 Jun 5, 7:55am  

eeaah…I though we unanimously elected Randy our ceasar!

What will Randy-style caesar salad have? Ikura?

Ugh.

After 1 month in office you'd all be arguing about who got the privilege of being my Brutus, and more importantly, what kind of gourmet knife you'd prefer to use.

93   lunarpark   2006 Jun 5, 8:01am  

Using the measure of 3x annual salary for housing affordability, you would need to make $196k per year in order to afford this gem:

http://www.mlslistings.com/common/properties/propertyDetail.asp?open=0&page=1&mls_number=615647&type=property&name=

It's just barely out of our price range. But maybe if we keep saving and get that raise this year...

94   FRIFY   2006 Jun 5, 8:02am  

By the way, that big whopping richy rich salary she was referring to would be exactly $30,519 per year in TODAY’s dollars.

That's part of the craziness of the BA. You guys bust on Haha, but I know engineers who make more than his claimed salary (consulting). While we lesser mortals all scramble like mad to figure out this housing game, the truth is if you can hang on out here, many expenses (cars, TVs, computers) and savings (401K contributions, educational accounts) are simply not nearly as significant as they are if you're working elsewhere. If you don't fall into the keeping-up-with-the-jones BA crowd, you can bank serious coin here. You'll be monied (and perceived an a$$hole perhaps) if you take that elsewhere after struggling here.

Part of the Fed's problem is they have one lever for the whole nation. The coast bubblezones need a major tightening but the red states could probably do better with a looser policy.

BEGIN PARROTING ECONOMIST ARTICLE
Europe's been having the same problem with the Euro and their Rabbits (Ireland) and Tortoises (Germany).
END PARROTING ECONOMIST ARTICLE

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