patrick.net

And long rates are currently dropping, unless my ears and eyes have deceived me all this week.

Long rates may drop to below 4% again. The Fed may have to use the "conundrum" to handle housing and inflation at the same time.

I believe the number of dependent children has also risen substantially, not decreased.

Childrens are net liabilities though, financially speaking.

Childrens are net liabilities though, financially speaking.

I was merely addressing the notion that having children forces people out of this area. It may seem intuitive, but I don't see the empirical evidence.

Traffic has also increased as a factor of rising employment, not just population increases. Bay Area employment has been rising steadily throughout 06.

DinOR:

Your radio idea is a good one. Still, on my station during the day, are realtwhore-huckster-info-mercials hawking their housing/land wares and optimism as if it were still spring of '05.

I wouldn't mind, myself, doing an over-the-phone, round-table discussion on the state of housing in the West (CA, NV, AZ).

It could just be a few people from this site giving their views (Patrick, Randy, you, et al) and taking calls, etc. We could get like three or four people on the phone concurrently and take some calls. I'm up for it.

It would be pretty funny to hear Surfer-x weighing in on behalf of Gen-X. Definitely some fur would fly if a realtwhore called in to counter the negative sentiments of those successful people--like surfer-x--who played by the rules, got educated beyond the call of duty, and are still locked out of BA and other housing markets, notwithstanding the landed gentry (makes for good, entertaining radio).

I would definitely have my sound engineer's finger on the bleep button in case things got a little excited.

Traffic has also increased as a factor of rising employment, not just population increases.

Restaurants are getting overcrowded. This is a problem that is more acute than the housing bubble.

Here is a leading economic indicator in our neck of the woods — traffic.

Last time traffic increased dramatically, a bust followed quickly. Perhaps traffic is an indication of overheating and the inevitable bust?

wo or more years of experience with Sales Supervision within a private client group or Compliance of a retail brokerage firm.

That's not bad as a static analysis. There's a problem, though. The last bust was many years ago, and the population has continued to climb in absolute numbers since then. What happened was a dramatic decrease in the population growth rate, not an absolute drop in population. I think there were only a couple of quarters where absolute pop'l estimates dropped. We did hit a very low growth rate, below .1%.

During that period, very little infrastructure capacity has been added, either roadways or various public transits. So the system may just be more sensitive now. Also note that there are currently a large number of highway improvement projects underway. Infrastructure grows in fits and starts, while population grows smoothly.

Last time traffic increased dramatically, a bust followed quickly. Perhaps traffic is an indication of overheating and the inevitable bust?

should have been the quote. Some dangling copy left in my clipboard apparently. And if you know any PE RE Brokerage sales managers....lol

should have been the quote. Some dangling copy left in my clipboard apparently. And if you know any PE RE Brokerage sales managers….lol

Huh?

Correction:

"...It could just be a few people from this site giving their views (Patrick [i.e. Peter P.] Randy, you, et al)..."

I think since the site is Patrick.net...I call Peter, Patrick.

Ha, ha!

The market was as over-priced when comparing house prices to mortgage rates and income in 1981 and 1989. In both cases affordability improved significantly because of a combination of falling house prices, decreasing mortgages rates or rising incomes. I would expect affordability to improve rapidly once again.

If house prices are flat this time it would mean that either incomes would rise significantly or mortgage rates would fall. Either of the two are unlikely this time.

Bingo!

Yes, the Fed can panic-drop rates again to 1% or 0%, but given how low long rates are already (note how strongly inverted yield curve indicates bond market is already pricing in future rate cuts), I doubt mortgage rates can/will drop much further than they already have. So that's a non-starter.

Incomes rising? Asking your boss for a raise as we head into recession? Good luck with that. We're already seeing all kinds of reports of home builder & mortgage company RIFs/layoffs in the MSM. And this down cycle's just getting warmed up.

So of our three major correction mechanisms, what does that leave us?: falling house prices. Good luck with the soft landing scenario ( NOT GONNA HAPPEN ).

Seamus,
Regarding condo towers and units that are getting built in SF --unfortunately they are selling out quickly. The state of the market is such that it'll have to go from selling out presales -> selling out when the tower is complete -> sitting on the market a couple of weeks before selling -> sitting on the market for several months, before downward pricing pressure is exerted on the rest of the real estate market. Not that this can't happen, but we have a way to go. Supposedly this market is also being affected by the (global) uber-rich buying a pied-à-terre in SF. Some times I think only "The Big One" will be able to effect BA "intangibles".

"In San Francisco, five towers that will exceed 30 stories now are under construction, more than at any time since the early 1980s. Most will pop high above their neighbors on low-lying blocks south of Market Street; one is a hotel, and three are residential, including the 55-story One Rincon Hill rising alongside the Bay Bridge with the marketing slogan "Your life. Above all."

There's plenty of interest in new high-rise units; the developers of One Rincon said 90 percent of their 360 units are spoken for, and the project's 45-story second phase could start construction next year. "
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/09/05/MNGQ4KVB041.DTL&hw=rincon+hill&sn=001&sc=1000

I think prices may continue falling if the Fed drops interest rate again. Who wants to buy when they anticipate lower rates in the near future?

Remember this current boom really got heated up when people thought interest rate was going up in 2003-2004?

Elk Grove is a suburb that’s been growing faster than the infrastracture can keep up with.

It can be *really* foggy there...

Asking your boss for a raise as we head into recession?

Are you suggesting that I should ask for a raise AFTER we are in a recession?

Supposedly this market is also being affected by the (global) uber-rich buying a pied-à-terre in SF.

The uber-rich already have many homes in SF. Many of them hate SF because of earthquakes and its "legacy" in family-values.

There are not too many of them, probably lass than 100K in the Whole Wide World:

http://en.wikipedia.org/wiki/Millionaire

(There were only 70000 UHNWIs in the world in 2003)

Michael Holliday,

Sure, I would be open to that. I still have e-mail so I could forward you a few ideas and v/v! I get a strong sense that as sentiment turns (and the optimism of '05 turns ugly) somebody is going to do it anyway. Why not us?

And yes, if "X" is going to be a guest, your engineer had best be at the ready!

And anyone with 30M qualifies as a UHNWI. If you only have 30M, will you buy a 2M condo in a far-away place with potentially hostile immigration policy?

Randy H Says:

> I’d like to see some reputable, hard, verifiable data that
> shows or suggests that the Bay Area population will
> decrease or already is decreasing. Census and sample
> data show the exact opposite.

Below is a link that shows a drop in the number of kids and public school students in SF over the past 40 years of just about 40%. At the current rate of decline there will not be any kids living in SF in 60 years…

www.spur.org/newsletters/0604.pdf

Census data has the SF population at 775K in 1950, that hit 776K (up by 1,000 people in 50 years due to large numbers of recent MBAs living like Mexicans packed in to crappy apartments trying to cash in on the dot com boom) in 2000 and down to 739K today…

http://quickfacts.census.gov/qfd/states/06/06075.html

"a bust followed quickly"

I can't believe it. All these sophisticated BA types and you need some guy from Oregon to figure this one out?

Ahem, the increased traffic you are experiencing is due to all the former flippers/living off the MEW crowd that are now forced to get real jobs (as in 9 to 5?).

Does SFWoman have to beat us over the head w/her shocking coverage of "Living of the Fat of the MEW" husbands? I've seen it a million times!

We went through something similar in Portland post tech bust. I couldn't believe it? All these people that were now back in the commute were obviously over dressed (as in they hadn't even heard about the HR directive for "casual Monday". Arrrgh.

…but I’d like to see more correction, just to stick it to every financial genius out there that helped to put me in a predicament where I just wanted to sell my wife’s old place, marry her, buy “our” place as a newlywed couple and turn it into a horrible nightmare…F*cking pricks.

John M.,

That's good... GOOOOD... embrace your anger! It gives you focus, it makes your stronger. :twisted:

You've hit the nail on the head for me. I just want to know when can housing go back to being plain old shelter? When can it stop being an "investment"/retirement account/ATM machine/Ponzi scheme, so I can stop worrying about "timing" the market correctly? Why can't housing just track inflation like most other boring commodities? How about just buying/selling whatever my family needs whenever we happen to need it?

Why does buying a house today have to require getting a PhD in economics/finance to avoid getting a dick up your ass by some sub-prime con-man or Carlton Sheets specuvestor a$$hole? Why do I have to wait for that rare window of opportunity (Golden Wonka Housing Ticket) that only comes by once every 15 years?

You're 100% correct --f*ck this shit!

I was referring to the San Francisco - San Jose, Metro Statistical Census Area. Not just San Francisco, which is not a reliable proxy for the Bay Area as a whole.

Again, I was countering the claim that the BAY AREA is losing population, one factor of which claimed being having kids. The BAY AREA, comprised of two effective US Census MSAs: San Francisco-Oakland-Fremont and San Jose-Sunnyvale-Santa Clara with a total population of just about 6 million (2005 estimate). This makes the area the 5th largest mega-MSA in the US.

It has grown, not shrunk, as have the number of children increased not decreased.

Only one MSA in the entire US has lost absolute population, and it's not even on this coast.

Only one MSA in the entire US has lost absolute population, and it’s not even on this coast.

Detroit?

HARM,

Well when you're right, you're right. There's a firm out in Bend, OR of all places that is building homes on leased land. I actually spoke with the guy (Casey Serin hasn't returned my calls as of yet) and he was very down to earth and realistic about Bend's state of affairs. They put you in a "site-built home" for a little over a 100k and you lease the land for 99 years (renewable) for under $350 a month. So...... it's a land bubble!

www.rennieinc.com/Golfside.html

For Randy,

Couldn't you have made the exact same prediction in 1981 and 1989 when home prices were as detached from fundamentals as in 2006?

If you look at the link I posted earlier it explains that houses became more affordable after both the previous peaks.

Are you claiming that it is different this time?

John M. said:
"Personally, at this point, I feel that a country with the masonic symbol on its dollar is going to do everything in its power to make this thing go into soft landing mode and attempt to play the flattened prices game"

Not to worry about such things as we are firmly in control of the situation. Card carrying members of the Fraternity get the word, well in advance, when to get in.....and when to get out.

@DinOR,

We have a number of these here in SCAL as well. They're marketed as a "solution" to insanely high prices. I know of at least one former co-worker in Simi Valley who "bought" one. Personally, I don't see the benefit to the buyer. You overpay what amounts to a fancified mobile home shell (except that it's not "mobile" and is permanently attached to the foundation), but you still have to pay rent on leased land. Oh, and you don't qualify for the mortgage interest deduction, as you're not really a homeowner.

How is this form of "owning" different from renting (aside from illiquidity and huge downside risk)?

Gavin,

My HSBC data shows a real price correction period of less than 10% for both of those periods. I have posted a summary of that data, year by year, in previous threads. One of those corrections, I think the 1989, was actually a very soft, protracted landing lasting 6-7 years and having some years of 0% real price change.

HARM,

Oh agreed, I just thought it was interesting in that when you whittle it down to the 2 X 4's etc. and take "the land" out of the equation what we now have is basically the structure's utility value. Evidently not exactly a staggering figure! Even in Bend (where they're also not making any more land).

Scutter,

During the darkest hours of the Canadian winter I'll let you HAVE my place in Oregon while I'm in Vegas! That wouldn't...... be....... much of an improvement now would it? In May, we get to borrow your boat up there. Well, what do you say anyway?

Scutter,

Fisrt off --welcome to the party!

We’re also not sure how to find a realtor that will truly represent our interests… if there is such a thing).

You won't. FAB posted a very succint and to the point treatment on this very topic not long ago, whcih boiled down to: they are looking for a commmission check (preferably the largest one possible), nothing more. With the exception of a few decent/moral individuals, such as George, there aren't many ethical realtors out there. But, this is true for any sales & commission-driven industry, no?

In any event, two things have made us reconsider. Believe it or not, reading this Blog and others (as well as the Moody report) has had an impact. More importantly, when we look at the economics, they persuasively argue against purchasing). Having looked into renting a condo for a couple of week, I was somewhat struck by the cost of renting the very condos that we were considering purchasing. When I look at the lost opportunity cost of the initial investment, the condo fees, taxes and other carrying costs, we could each easily rent a nice place for 2 to 3 months…. So why purchase?

Congratulations. You are in the tiny minority (~1-2%?) of potential buyers who even bothered to whip out a calculator, crunch some numbers and actually THINK before jumping off the NAAVLP cliff head first. I am pleased that we --in our own small way-- are getting the "message" out.

@DinOR,

Agreed --pretty much all the price inflation is directly correlated with the land, not the cost of the structure itself (though raw materials did experience a smaller mini-bubble of their own until recently).

It's official: it's a speculative land bubble caused mostly by a cheap credit bubble.

One question that I do have relates to leased land versus fee. Should there be a signficant discount in leased land? How secure is leased land in Calfornia? It seems that the price of condos is the same, and I can’t understand why someone wouldn’t chose fee land over leased land. You would think there should be a signficant premium.

Scutter,

I would think so, yes. Which is why I could not figure out why people I know right here in SCAL are paying condo-like prices for what amounts to a glorified trailer shell, all for the privilege of still paying rent.

Randy,

I can now see the difference in your comparison of 2006 with 1989 and mine.

You are comparing real price declines as in the HSBC report. I am comparing affordability as on my web page that looks at mortgage rates and incomes
http://www.crimsonbee.com/house_graphs/sf_house_prices.html

I measure affordability as the fraction of median income required to afford the median priced home. There were real price falls after both 1981 and 1989. In both periods interest rates were high and falling and helped cushion the fall in prices.

This time interest rates are low and unlikely to fall much. If affordability is to rise as much as the previous two times, real home prices must fall more. Also, income is growing slower now than in the past and will not help improve affordability.

By the way I believe home buyers suffer from money illusion and are sensitive to nominal interest rate changes.

Congratulations. You are in the tiny minority (~1-2%?) of potential buyers who even bothered to whip out a calculator, crunch some numbers and actually THINK before jumping off the NAAVLP cliff head first. I am pleased that we –in our own small way– are getting the “message” out.

Always bring an HP 12C with you. It scares predatory lenders away.

"as I am a "mortgage planner"

Oh that's rich. Now they're "mortgage planners"? So....... what's the plan? Oh, o.k a lifetime of indentured servitude on an overpriced POS? O.K I gotcha, good plan, let's do it.

From Godzilla's data,

2004, the "Greater Bay Area" had a statistical estimate of 6,710,380 people, up from 1990 6,023,577. That's 14 years and a pretty healthy GROWTH rate.

2000 data showed 6,783,760.

For those without a handy calculator, that means we lost 73,380 people, net total absolute, for the entire Greater Bay Area, over the 4 years of demographic apocalypse I keep hearing about.

That's not even within the confidence interval of error, assuming an alpha of .05. I don't think it even is with alpha=0.01.

Actually, population in the “Greater Bay Area” has been falling for years.

I guess that depends upon what your definition of "falling" and "for years" is. I call 31% growth in total population over 25 years to present neither.

Oh that’s rich. Now they’re “mortgage planners”? So……. what’s the plan? Oh, o.k a lifetime of indentured servitude on an overpriced POS? O.K I gotcha, good plan, let’s do it.

I guess the future refinancing schedule needs to be precise. It is a "debt-flow" matching problem using equity withdrawal to satisfy debt payment.

Perhaps wedding planner can have mortgage planner desgination too.

Gavin,

I certainly agree that affordability is different this time. But even there the HSBC data reveals that "affordability" itself must be dissected into two alternative comparisons:

- House price to income ratio + real value of future debt service costs with an opportunity cost of house price to rent ratio

- Total home owner costs to income ratio with an opportunity cost of total home owner costs to expected rents over the holding period

The first metric shows that 1980/81 saw a peak House Price/Income ratio of about 5.2, and 1989 of about 8.0, with today being over 11.0. This is bad, but still only within the delta between the two previous episodes.

The second metric, which more adequately captures the cost of debt, tax, and inflation cost factors, shows Total Home Owner Costs as a % of Income:

1980/81: 68%
1989: 70%
Today: 74%

Bad, but again within the incremental range.

**Note, I'm ignoring all threshold factors, which I believe exist. For example, the above numbers can only go so close to 100% before people cannot eat or buy toilet paper.