patrick.net

"In Belmont by contrast prices have fallen only 20% from the peak. "

I am completely baffled as to why anybody compares current prices to the peak of a bubble, as if they are some valid baseline. Not to criticize you, but I do not think looking at that statistic is meaningful in any way whatsoever.

Here is something I think is more useful: What was the premium paid to live in Belmont as opposed to Hayward in the pre-bubble era? House prices were pretty stable in the mid-90's so that's a pretty good baseline. But 2000 will do to demonstrate what I mean:

In 2000, Belmont was $323/sft. Hayward was $168/sft. Ratio = 1.92

Today? I can't read the chart exactly, but it looks like Belmont $500, Hayward $200. Ratio = 2.5.

So, for some reason, 10 years later Belmont is about 30% more expensive on a relative basis. Some people will say "well the rich are getting richer". Or, when I presented a similar statistic to a real estate broker (and SF homeowner) a few weeks ago, he said "people are realizing how much better it is over here".

I think that is complete BS. It's just that the correction mostly hasn't happened yet in the high end markets. You already half answered your own question as to why: "Another interesting difference is the lowest sales in Hayward occurred in late 2007, early 2008 around the time sub-prime loans stopped being made. The lowest sales in Belmont occurred in early 2009 when jumbo mortgages became very expensive."

Hell, lenders were still writing ultra-toxic Option ARMS in San Francisco a year after the sub-prime market had dried up and it's impending collapse was already headline news. It's all about the finance. Sub-prime tended to have 2 years recasts too, as opposed to five elsewhere. Shorter fuses.

It's also conceivable that Hayward is now "undervalued" a bit, and that part of the normalization of the ratio to (1.92 or thereabouts) is Hayward coming up rather than Belmont going down.

I think in order to validate any ratios between prices, we also need to enter the ratios of all-cash buyers vs mortgaged- buyers. I have not found that data but I think it is relevant to where the market really is. Just saying "sales are up" does not tell the whole story if sales are up because of cash buyers out-bidding each other.

I kinda agree with MarkInSF:

"I am completely baffled as to why anybody compares current prices to the peak of a bubble, as if they are some valid baseline. Not to criticize you, but I do not think looking at that statistic is meaningful in any way whatsoever."

The best baseline is by referencing the time when house prices are not speculative. I projected what house prices "what it should be" in a previous post. That is the baseline I use. Just like when I go to buy stuff in supermarket, unless I urgently need to, I buy when it is on sale. I am waiting for soCal to drop another 25%.

MarkInSF: The reason I included the fall in prices from the peak is to show that in cities where prices went up a lot (like Hayward) was that prices were also likely to fall a lot.

The ratio between home prices in Belmont and Hayward (used to be 1.92 in 2000), now 2.5 is relevant to understanding price changes. I agree that you cannot explain the increase in ratio by claiming it is the rich getting richer. The gains in income have not been concentrated not among the top 30%, nor the top 10% but for the top 1% of earners. In 2006, if we compared the ratio in house prices between Belmont and Hayward the value would be much smaller, about 1.4 and the explanation would not have been “the rich are getting richer”

Marko: It is irrelevant over the short term if buyers are using cash, 20% down payments, or 3.5% down payments. As we saw during the bubble even liar loans are capable of driving up sales and house prices. Over the longer term (measure in years) cash buyers or buyers with larger down payments will lead to more sustainable gains in prices.

What is undeniable is that Hayward currently has some of the highest sales of the decade while Belmont has the lowest sales of the decade.

MoneySheep: If you are in a city where sales are up significantly, prices are likely to be close to a bottom. You can use trulia.com to look at graphs similar to the ones I created for a 10 year history of sales.

If sales are at the highest level ever, it signifies that many buyers have decided that it is a good time to buy houses now. Today’s buyers will also have their incomes verified, unlike the stated income buyers of the past. Also they are unlikely to use negatively amortizing or interest only loans.

Don't you have to look at the current inventory in addition to number of sales to make reasonable judgments? If the inventory for Belmont is at its lowest in years wouldn't it also make sense that the number of sales would be at its lowest in years, and not necessarily mean anything more than since there's less to sell, there are less sales? Belmont had 68 houses for sale back in July '09, today there's only 43. I don't know how many houses Belmont typically has for sale.

Also from your charts, both Hayward and Belmont prices seem to be pretty stable since about March of '09. Doesn't this also prove that number of sales doesn't necessarily relate to prices? Lots of sales versus few sales equals same result -> meaning no direct relationship.