patrick.net

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!

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...

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.

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?

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... ;-)

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...

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.

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.

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!

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...

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

You are being sarcastic, right?

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.

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.

@LILLL,
(HARM blows kiss)

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.

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? :)

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…

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.

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.

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

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...).

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.

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.

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).

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?

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?

Yeeaah…I though we unanimously elected Randy our ceasar!

What will Randy-style caesar salad have? Ikura?

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..

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 ;)

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.

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.

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...

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

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

I think pre-tax PITI being 28% gross or less is a better measure of affordability.

"I think pre-tax PITI being 28% gross or less is a better measure of affordability."

The dream keeps slipping further and further away...

FRIFY,
Truth be known, Salaries of Graphic designers at least in Austin, Nashville, and Atlanta are about 90% of what they are here, yet the cost of living in each of those areas are around 3 times cheaper. You could compare the BA to another country. 100k here= around 40k elsewhere. I did the math. Whether viewed with typical economic facts or compex equations, the econimics of the BA are SEVERELY out of whack. I think if more people in CA realized that they could just as easily work for 75-80% of their wages yet live better lives somwhere else, the RE here wouldn't be as severe.

A $588,000 home, purchased with 20% down ($117,600) on a salary of $196,000 per year would yield:

19% average PITI-to-AGI
1.30 average holding cost (assuming 5 years)-to-rent ratio

Monthly loan payment would be $3,227, and the present value of the average (amortized over the holding period) total PITI would be $3,254, or not much more than the total P+I.

This is a prime example of the non-linearity of the system due to how the tax-shield iterates and eats away at the rent delta investment.

If you are willing to spend up to 28% AGI on PITI, then you could afford this home with either:

a) $133,243 per year AGI or,
b) $156,502 per year AGI and $0 downpayment (ignoring loan implications and the fact you can't get a 0 down 30-year-fixed traditional loan).

The problem isn't YOUR affordability, it is the guy you think you're going to sell it to next.

He'll have to buy it from you for $1,351,849 or 129.91% appreciation over 5 years (18.12% per year). This puts that poor sap, if he has exactly your income inflated in year 5, at a 61% PITI-to-AGI, with a downpayment of $172,748, and a mortgage payment of $9,403 per month (but a PITI advantage if he can take full interest deduction, at a realized $8,810 per month holding cost).

I think this is a perfect illustration of the real problem. Many people CAN afford at these prices, but they're basing that on a game of never ending musical chairs.

If we want to complain about tax policy causing this problem, it's not the $500K cap gains exemption as much as it is the qualifying home mortgage interest deduction. When the numbers are big, that deduction makes a big impact on the present value holding cost of ownership; when the numbers are smaller, it makes a lot less impact (and not $ for $).

Interesting Randy, thank you.

He’ll have to buy it from you for $1,351,849 or 129.91% appreciation over 5 years (18.12% per year).

Huh?

A $588,000 home, purchased with 20% down ($117,600) on a salary of $196,000 per year would yield:

Ummm... sorry to break up the bull-fest here, but precisely how many recent borrowers actually put 20% down, or had anywhere close to $117,600 in savings? Or for that matter, earned a HH income of $196,000 --or even the more "conservative" $133,243? Now, perhaps there were many cabdrivers/grocery clerks/police dispatchers, etc. who CLAIMED to make this much in or to qualify for their liar neg-am loans, but those who actually did (Ha Ha, please fight the urge to contribute) ?

Flawed assumptions = flawed conclusions.