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Three Californias


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2006 Aug 4, 4:25pm   21,421 views  236 comments

by HARM   ➕follow (0)   💰tip   ignore  

Thanks to Hollywood's cultural hegemony, everyone in the world seems to "know" California and usually has a mental image of what life in the state is like. Sadly, the reality of the typical CA "lifestyle" today bears almost zero resemblance to the popular Baywatch glamor image slavishly promoted by the media.

For most working-class wage earners (especially for post-Boomers) that lifestyle generally ranges from spartan to awful, and seems to be trending worse by the day. Housing is only one part, albeit a very large one, in the overall progressive deterioration in the quality of life here for regular folks. The deterioration manifests itself in a number of ways: environmental degradation/pollution, overpopulation/urban overcrowding, traffic perma-gridlock, rapidly deteriorating physical infrastructure and schools, and --critically-- the inability of a working-class income to provide a middle-class lifestyle.

Ignoring the current housing bubble for the moment, the secular trend for at least the past 30 years appears to be California transitioning to a completely bifurcated economy and society, strictly divided between a super-wealthy elite "haves" and a permanently impoverished majority, mostly made up of illegal immigrants and marginalized citizens. The emerging reality is closer to what one might expect to find in Mexico or Brazil, not in the U.S. The housing bubble has greatly exaggerated and magnified this trend, of course. However, even when you remove it from the equation, this long-term trend towards housing unaffordability, overpopulation and overall lower quality of life remains.

I present you with three distinct visions of California.

California Past (pre-Prop. 13, SMUG/NIMBY, illegal flood):

Hollywood Fantasy California:

California Present:

#housing

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18   astrid   2006 Aug 5, 2:03am  

I wouldn't feel safe renting from a private owner unless they've owned the place for 10 or more years and really want to hold onto it til they die (anyone here knowledgable about CA commercial property sales taxes?). Otherwise there's just way too much risk of getting kicked out at some point with no predictability. To me, the higher likelihood of this hassle is worth at least a 10% discount.

Apartment living does suck in some respect, it's almost uniformly cheap materials, zero insulation, and iffy neighbors. Maybe private party rentals would be superior for these things.

19   astrid   2006 Aug 5, 2:30am  

My parents' lousy ex-neighbors (sketchy subletting, loud music, not mowing their laws) are selling their place. Funny how the exact same model as my parents' former Loudoun County house suddenly grew by about 1,000 sq ft. I guess they decided to consider their roughly finished basement rec room in the total square footage.

Anyone else notice this trend of including basement sq footage in the house? Do these people just think buyers won't notice and feel hostile when they see a much smaller place than anticipated? Or that the square footage for new construction is recorded with the county and a cinch to verify?

20   Allah   2006 Aug 5, 2:36am  

Apartment living does suck in some respect, it’s almost uniformly cheap materials, zero insulation, and iffy neighbors.

Apartment living does suck if you plan to live in one your whole life. You can get bad neighbors, but you also can get bad neighbors when you own. At least if your renting, you can move away from them...If you buy, you buy them too! Not to mention that they also bring your property values down; which makes it even more harder to get rid of them.

I say the best thing to do is to explore different areas. You don't have to find the cheapest place around (my example), but something that is affordable and will make sense for the next year or two. Save up some money and when these FB's are begging you to take their house from them, you can make your kill!

Worst time to buy (aside from the obvious sliding prices), is just before a recession; and I'm sure we will have one. This is the time when good neigborhoods turn to bad ones and vice-versa. People change when they are really hurting for money and I don't want a neigbor who is excessively needy if you know what I mean.

Fact of the matter is that rents will rise if they haven't already. People will do anything they can to hold on to their property (like increase rents), but accepting their increases is as bad (or worse) as giving in and buying because of it. If you stay after they raise your rent 20% or more, you are actually helping the RE industry at your own expense. If enough renters are smart enough and leave the area, the crash will be more severe.

Just my 2 cents...

21   astrid   2006 Aug 5, 2:37am  

BTW, the house is priced about 60K below last year's peak but it's sold "as is." I can't imagine how badly the owners/tenants messed up the place! The place is only 7 years old and a former model home by a quality builder. My parents' home sold last year with zero comments on inspection.

22   astrid   2006 Aug 5, 2:44am  

Allah,

I wasn't advocating buying, I was laying the pros and cons of renting from an apartment complex v. renting from a private party.

I'm pretty sure my boyfriend could rent a nicer apartment with better neighbors for about 200 bucks more a month. But he claims to be indifferent to noise and the current one has much less noise than his previous apartment and doesn't allow for pets. So the current one would be okay if someone without running children with shoes.

I wasn't being very neighborly when I was there either. I was running the washing machine and dishwasher at 3 AM in the morning. But they started it.

23   Allah   2006 Aug 5, 2:55am  

Otherwise there’s just way too much risk of getting kicked out at some point with no predictability.

You should be able to get a lease for a year or two. If you have to stay longer, you shouldn't have to worry as long as you have a good job and some money stashed away. I'm sure when this recession hits, there are going to be alot of renters that fall behind on their rent and people who are good with the rent will be gold. None wants to lose a good tennent when they are very hard to find.

24   astrid   2006 Aug 5, 3:02am  

allah,

I agree with all you've said except for a tiny wrinkle. If I rented from a flipper, there's a good chance I'll be forced out (by their foreclosure) no matter how good the terms are. Indeed, even some longer termed investors may want to lock in the current sale price rather than risk a price drop.

You don't have to worry about me buying any time soon. :) My standards call for owning only if renting is 20-30% more expensive than owning (including PITI and maintenance) with a 30 yr fixed mortgage, and then only if I plan to own the property for a long while.

25   lunarpark   2006 Aug 5, 3:08am  

Astrid, I agree, you do have a higher chance of being kicked out if you rent from a private owner. I have a good relationship with the owner of our place, and we sign a new lease every 12 months. Allah makes a good point in saying that no one wants to lose a good tenant when they are hard to find. Owners who own one or a few places have more skin in the game and are more likely to be flexible when it comes to rents. However, there is the chance that they will cash out.

26   Randy H   2006 Aug 5, 3:16am  

I'll take the other side on CA.

I've lived in quite a few parts of the country, most in the "flyover" regions. I was born in Indiana, mostly raised in Southern Ohio, worked in Chicago, lived in Phoenix, NYC, Atlanta, Cincinnati, Clearwater, and Colorado Springs, as well as Frankfurt Germany and for a shorter time in a small town in Provence France.

California is no utopia and has plenty of problems. But most of the concerns leveled here at CA are equal or worse in other parts of the country. If you want to see a bifurcated society try NE Indiana. If you want to see the hollowing out of the middle class try south suburban Chicago. If you want to see superfund cleanup sites every 3 blocks try NE Ohio. If you want to see intractable social mobility try anywhere in western Europe.

For those of us who can choose where to live -- which itself is a freedom so often taken for granted -- where we ultimately find happiness says as much about ourselves as it does about those places.

27   Allah   2006 Aug 5, 3:21am  

If I rented from a flipper, there’s a good chance I’ll be forced out (by their foreclosure) no matter how good the terms are. Indeed, even some longer termed investors may want to lock in the current sale price rather than risk a price drop.

Well, like I said, alot of things change when there is a recession. People consolidate; they pack up and move in with their parents to share with their friends. Parents move in with there children. I believe there is going to be major vacancies in the near future. If you don't want to believe me, then listen to Peter Schiff. Yes, this housing bubble will be followed by a rent bubble. Anyone who is a good paying renter will be able to name their price. People forget what happens when there is a recession, a little research will help remind you of what happens.

28   hugel   2006 Aug 5, 3:25am  

A little bit off the topic. Just saw this.

Open MLS Initiative Just Getting Started, Says NAR Nemesis Barry
http://tinyurl.com/lwt29

I tend to lean towards things that are "open" because they usually mean fairer market. But why in this case is there such little support for open MLS?

29   astrid   2006 Aug 5, 3:31am  

allah,

However, apartments do provide a bit more predictability than renting month to month during the inital phase of a bubble burst. Getting driven out of your home out short notice, which is quite likely in these times, is not a fun experience. Indeed, not having to move is one of the top reasons to own rather than buy.

I think our wires just got crossed somewhere. I'm really agreeing with the points you've expressed thus far, the only exception I take is that when comparing renting from an apartment complex and renting from private parties in these times, the latter may present a greater likelihood of being forced to move on short notice.

Once the bubble bursts and the market settles, I too am hoping for a non-deadbeat renter's paradise.

30   Allah   2006 Aug 5, 3:50am  

Getting driven out of your home out short notice, which is quite likely in these times, is not a fun experience. Indeed, not having to move is one of the top reasons to own rather than buy.

Astrid,

You did make your point and I do agree with you, the same with "apartment complex v. renting from a private party".

Being thrown out is no picnic, however, when there is a recession and your apartment is foreclosed upon, the sheriff isn't going to kick out a perfectly good renter and whoever takes ownership of the house (probably the bank) isn't going to want to lose the income of a perfectly good renter either and who is going to want to go through the legal expense of throwing you out (which costs money and takes time) when they could just keep getting monthly payments from you offsetting their holding costs? When there are mass vacancies, the last thing anyone wants to do is create yet more vacancies.

31   Peter P   2006 Aug 5, 4:14am  

Rent IS on the rise. A soft-landing for Bay Area real estate is a very real possibilty. This is why timing a home purchase is not necessarily productive.

The good news is, even if rent goes up 30%, it is still quite affordable. On the other hand, home prices are going nowhere, so we still have time.

32   Peter P   2006 Aug 5, 4:20am  

BTW, I am under the impression that 1BR units are in demand. This may imply new entry-level technology employment. In about 2-3 years, these renters will become potential homebuyers. Keep that in mind.

We should pay more attention to any new business development in the area. Of course, if the recession hits soon, the outcome will be different.

33   Allah   2006 Aug 5, 4:24am  

Rent IS on the rise. A soft-landing for Bay Area real estate is a very real possibilty. This is why timing a home purchase is not necessarily productive.

Yes, I'm sure it is, but that won't be for long. The perfect storm is just around the corner. Jobs are already disappearing as we speak. People are opening their monthly mortgage bill and saying "OMG! It went up again! We can't pay this! ". I believe 2007 is going to be a very painful year for many folks.

34   Peter P   2006 Aug 5, 4:26am  

Not sure if you guys are aware of this, the mortgage rate on 30-year fixed is dropping. Someone must be turning on the tap (where did M3 number go)?

Great! :)

The market is pricing in a future recession.

On the other hand, most people do not use 30YR FRM anyway. We want the interest rate for FBs to skyrocket. We want 30YR FRM rate to go down. Ha Ha.

35   Peter P   2006 Aug 5, 4:27am  

Jobs are already disappearing as we speak.

Although I hate new hiring activities (more competition for restaurant tables), I have to say that hiring has indeed picked up.

36   speedingpullet   2006 Aug 5, 4:42am  

Off topic, somewhat:

I've been having a conversation with someone over on housingpanic (amazing, an actual 'conversation, not the normal xeophobic, sexist shouting that normally goes on over there) about the idea of a Blue Book for Real Estate...

Rather than rely on 'emotional' pricing for houses, have a sq footage price, based on what it would cost to build today (for exstisting homes) and a plus-or-minus system for things like location, access to freeways, school districts, improvements, condition, etc...

So many people think of thier houses as a commodity, in much the same way as they think of stocks and share, rather than an asset that appreciates or depreciates with time, like a car.
Car dealers don't use emotion (well, not as much as REAs or homeowners) in selling used cars. If you don't like the price, you can argue it up or down according to the Kelly Blue Book valuation. If they insist that thier car is 'different' and 'unique', at least you have a baseline figure with which to compare.

It may not be perfect, and not all people base thier asking price on the Kelly Blue Book price when selling a used car, but at least you have some idea of a'ballpark' figure for the make, model and year you want.

Am I on crack? Is this a stupid idea?

37   Allah   2006 Aug 5, 5:21am  

Although I hate new hiring activities (more competition for restaurant tables), I have to say that hiring has indeed picked up.

Yes and all those extra waiters and waitresses who used to be Realthores aren't going to get the greatest tips.

38   Randy H   2006 Aug 5, 6:31am  

Peter P,

I concur with your assessment. Both salaries and employment have been strong for the past 3 quarters and are just leveling off a bit now. But the impact is still working into the local economy. Rents are starting to rise more broadly; they have been rising at the top and bottom ends for almost a year now. Further, the churn has leveled and the BA is now receiving net in-migration. And not just because of Google. I'm not sure how many jobs Google has added to Marin or San Francisco counties, both of which also have net in-migration as of 1 or 2 quarters ago.

Add to that the almost certainty of a "pause" in rate hikes, and we're looking at a very sticky ride. Downward pressures from financial debt stress will be slowed by these fundamentals. Remember, inflation hurts savers and rewards debtors (and usually investors). Tightening does the opposite.

I still give hard -v- soft 50-50 odds. It's fundamentals versus psychology, and I'm afraid I believe in both.

39   surfer-x   2006 Aug 5, 9:07am  

I am sure the BA will be bouyed by the 3000 or so googleaires.

40   HARM   2006 Aug 5, 11:48am  

I remember Prop 13 but don’t know what “SMUG/NIMBY” are–any one care to fill me in? [I now live in “Hot”lanta–can’t wait to get the F outta here and get back out West…]

Nik,

NIMBY is an older and commonly used acronymn: "Not In My BackYard". Basically refers to any knee-jerk reflexive reactionary mentality on the part of existing residents against any change that might require some small sacrifice or perceived intrusion on the tranquility of their idyllic lives --especially when it's of benefit to working-class people. Typical examples are: homedebtor opposition to building any new "affordable housing" developments or apartment buildings, opposition to having new power lines or new rail lines built though one's neighborhood, or a new freeway overpass, school, etc.

SMUG = "SMart Urban Growth (see 'Coté-isms' section of the Housing Bubble Glossary)

41   HARM   2006 Aug 5, 12:11pm  

You left out the “California Future” - a truly scary concept to contemplate. Maybe Ebenezer Flipper will be convinced to change his evil ways and start buying turkeys for all the FB’s…

Excellent point, Skibum! I give you a vision of California Future (a.k.a. "Blade-fornia"):

Blade-fornia

42   Randy H   2006 Aug 5, 1:06pm  

That’s the unfortunate reality all of us that read this board must face: the possibility that a combination of factors may stall a hard landing. I don’t like that.

I don't like it either. I would very directly profit from a hard landing. The harder, the better. I am currently positioned with a strong bias towards taking advantage of even a harder-than-soft landing. I'm just not so sure I'll get my way. This could yet take a lot longer to play out. I offer one small example from my own little world: last week I had beers with some b-school colleagues. One of these guys who used to do a ton of MBS industry risk management work is now on to a new company which is creating a bunch of new products to market to lenders enabling them to profit by refinancing "thin" equity owners out of adjusting ARMs. Some of this includes the ability to make lending to negative-equity owners within a range profitable. None of this will work if rates go up another 150bps. But they're hedging their bets in case rates don't go up, at least for a while. And if a guy I know is working on shit like this, then hundreds or thousands of others are doing the same. So I'm not so sure the flood of ARM resets will cause the armageddon that would buy me a 6BR estate in Tiburon 25% of today's prices.

43   Peter T   2006 Aug 5, 1:37pm  

> Not sure if you guys are aware of this, the mortgage rate on 30-year fixed is dropping. (...) the long-term mortgage rate has been dropping since about a couple of weeks ago, originally she could only get 6.7%, now she could lock in 6.3% or so.

Treasury yields are decreasing, due to increased expectations of a recession. Fixed mortgage rates follow 10yr treasuries yields.

After the increase in ARM rates, the trend was to refinance into a fixed rate. If the rates decrease again, the ARMs (not option mortgages) wouldn't have been so bad after all, but the mortgage brokers would have collected less fees.

44   Peter T   2006 Aug 5, 1:40pm  

> when there is a recession and your apartment is foreclosed upon, the sheriff isn’t going to kick out a perfectly good renter and whoever takes ownership of the house (probably the bank) isn’t going to want to lose the income of a perfectly good renter either

But they might increase your rent for the rest of the lease, maybe significantly, because they expect that the renter wouldn't like to move out fast at that time.

45   GallopingCheetah   2006 Aug 5, 1:45pm  

Blade Runner is one of my favorites.

46   GallopingCheetah   2006 Aug 5, 1:50pm  

Peter P Says:

Although I hate new hiring activities (more competition for restaurant tables), I have to say that hiring has indeed picked up.

Let me generalize on this observation. I bet a lot of hirings go to newly arrived immigrants who are willing to work HARD for less pay.

Contrary to many people's wishes, immigration in this country will NOT stop.

The reason is very, very simple.

The economic growth is driven largely by population growth. As the US population ages, there is a (desperate) need to import young and fresh workers to maintain the growth. It does NOT matter what kind of people US imports, as long as they are young and willing to work. Therefore, I believe the anti-illegal immigration stance taken by the politicians are half-hearted.

47   GallopingCheetah   2006 Aug 5, 1:59pm  

A hard landing is still in the cards. There is a denial going on right now. I think those wish to profit from a hard landing (myself included) may actually be right on the money.

The problem is: When the majority of the people -- I think the word PEOPLE will have increasingly significant meaning in the coming turmoil -- are suffering, you cannot just go ahead and profit without inciting a lot of envy and anger. It must be done with great subtlety and in some cases, out-right deception.

A word of caution: Do not boast if you ever profit from the hard landing.

48   Allah   2006 Aug 5, 2:18pm  

But they might increase your rent for the rest of the lease, maybe significantly, because they expect that the renter wouldn’t like to move out fast at that time.

Since when does anybodies rent increase during a recession? When their is a recession, there are many who lose their jobs and do not pay their landlords. There are mass evictions and mass evictions cause rents to fall and when rents are falling and vacancies are rising, the few good renters are gold. I have read stories about landlords during a recession that actually lowered their tenants rent just because they were paranoid that their good tenant was going to leave.

49   GallopingCheetah   2006 Aug 5, 2:23pm  

Repost. I used the V word again.

I believe the low-end housing market will do well, because that’s why the new immigrants can afford. The mid-to-high end of the RE market will suffer, because a lot of middle class workers will be squeezed by (1) layoffs, (2) debts, and (3) rising cost of reputable living (which includes Martha Steward living standards, good schools for children, SUVs, latte every day, vacation every year, a Plasma TV in front of the toilet, daily V pill for the aging fathers, ipods for their babies, blah, blah, and blah).

50   Peter P   2006 Aug 5, 5:57pm  

I’m also worried about the significant rise in rents and recent drops in mortgage rates.

Don't worry. At some point you will just buy something you can afford. We need to figure out the best course of actions for a given scenario. Wishing or worrying about a particular scenario is not necessarily productive.

I am a hypocrite because I worry all the time. :(

51   StuckInBA   2006 Aug 5, 7:00pm  

The rents ARE increasing. There has been more demand because less people trying to buy, less supply due to condo conversion. Other factors like some salary increases may be playing their role.

But get this. $920 per month in Santa Clara is LOW. I used to pay that much in 1996. So let's not expect that today.

The fact is during the last 5 years, rents in BA were super duper low. Rents are still not back upto the levels seen in 1999.

Many people moved to BA during the dot-com boom. Rents sky-rocketed. $2500 in Santa Clara (near El Camino) for a 2 BD / 2 Bath was normal. Many new apartments were constructed during that time. Those were the late comers to the party. Do you remember the Aviere at De Anza and 280 ? Or Avalon at Lawrence and 101 ? Those did not exist before 1998.

Then the bust happened. Huge number of people went out of BA. The census probably did not even get a chance to measure the increase and subsequent decrease in population. Apartment vacancy increased dramatically. Many people started buying home from 2003 onwards, keeping the downward pressure on rents low.

Guess what ? The balance has shifted back to Apartment complexes. Do you know Cupertino Villas near Wolfe and Fremont. It was a rental complex. Now it is condos. Still available to purchase.

So as much as homedebtors got used to "guaranteed appreciation", renters got used to low rents. Now the tide is turning, both groups are complaining. If housing prices need to come back to economic fundamentals, so do the rents need to move up.

That means rents will go up as much as they can, and house prices will drop as little as they can. The rents will catch with reality faster. House prices will take longer.

I do not expect the rents to provide any cushion to house prices. Increase of $100-200 will not force people to take out a loan of 800K+. No way. And if people cared about the price/rent ratio, the bubble will not have happened in the first place.

Hardly anyone cares about those ratios. It's all psychology. Which has reversed. Already. It's not going to turn around 180 second time in a few months. Look for YOY drop in median by this year end in Santa Clara county. The sheeple will force the rents higher then. It will cost you $100 extra per month. But that's the cost of not committing financial suicide. Worth it.

52   StuckInBA   2006 Aug 5, 7:11pm  

The mortgage rates have dropped. Would the low rates automatically mean no drop in housing prices ?

Hardly. We briefly touched on this in previous thread. Low (dropping) rates and low (dropping) prices combination is not impossible. Has happened before. Not too far ago. In CA.

Remember lowering of rates did not save stock market. It became worse before it got better.

Yes, we are different than Japan. And houses are not stocks. But recession, US$ devaluation is also a strong possibility. A drop in house values, makes refinancing impossible for many folks. And a lot of FBs depend on prices going up. Remember that. So the path downward won't be linear, it never is. But the long term trend is already set in place.

53   surfer-x   2006 Aug 5, 7:27pm  

Dear Littleworriedtoo ,

Perhaps your little troll ass should have chosen better, try coding, and being a manager. You should buy now otherwise you'll be priced out forever

Oh, you might consider selling crack. Or a webcam p0rn site with your "wife".

Asshole, go the fuck back to craigslist.

54   Randy H   2006 Aug 5, 11:53pm  

GC,

The economic growth is driven largely by population growth.

False. Population growth does not cause any real economic growth because it is largely offset by capital creation and depreciation replacement. Solow showed the only real source of long-term economic growth is productivity, ie. technology.

Allah,

Rents go up during a recession if there is also present inflation. We once called this stagflation. It can and has happened before. It may well happen again.

55   Michael Holliday   2006 Aug 6, 1:14am  

What's happened/happening to Bay Area housing/prices is scary.

This thing will not end well for many. Sh-t is way out of whack!

Thanks for reading my in-depth analysis. It's all you need to know.

Sincerely,

Michael Holliday (Original South San Jose Corona Beach Club Member, Class of '84 & "State school" guy).

56   Allah   2006 Aug 6, 2:23am  

Rents go up during a recession if there is also present inflation. We once called this stagflation. It can and has happened before. It may well happen again.

Randy,

Rents are controlled by supply and demand. It's hard to raise the rent when the there are two desperate landlords with empty apartments to the left and to the right. When things really get rocking and there are many people out of work, there will be FB's renting rooms in their overpriced shitboxes just to make ends meet, which causes vacancies; Friends leaving separate apartments and sharing, which causes vacancies; children moving back in with their parents;parents moving in with their children. This is going to cause a huge amount of vacancies and the ones that aren't vacant, some of them are going to be a landlords nightmare. It is at this time that the landlords will have NO bargaining power. It is also at this time that those who have jobs and are paying on time are going to have their feet kissed by their landlord.

Remember, when those rents were dropping lower as housing prices rose, more younger people found it affordable to get apartments. Many of them thought it would be COOL to get their own place so they got their own apartment at a younger age.... but, when things get more expensive and walmart decides they don't need as many cashiers, this group of people will leave their apartments causing vacancies.

Yes, it is true that landlords want more when their costs increase and when the supply/demand is in their favor (like it is right now), they can get it. You only see the rents rising right now because their expenses are rising, but there will be a breaking point when people decide to leave the area instead of paying the increased rent and refusing to buy. If this alone doesn't slow down the rent increases, the recession certainly will.

57   Michael Holliday   2006 Aug 6, 2:39am  

bodysurfer Says:

"Here are the facts...Good luck!! I bet you in the year 2017, same bloggers will be saying the same thing on patrick.net … come on guys, after 11 years, admit that you’ve been wrong and that you are still wrong! You can’t predict the future. Otherwise, you’d be a multi billionaire. Oh yeah…. I forgot, all of you are already multi billionaire… who still rents wink wink."
_____

Probably you missed the most salient, earlier posts of Surfer-X: HE ALREADY OWNS 40 F'ING HOUSES. HOW THE F' YOU THINK HE SURFS ALL DAY?

Now clean the sh-t out of your ears at get back to the bathhouse, I mean
housing market.

Sincerely,

M. Holliday (San Jose refugee to Phoenix & "State school" Corona Beach Club Member, Class of '84).

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