patrick.net

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.

Scutter,

Dittos on the welcome. I, too, am pretty new here and found Patrick's Blog by accident.....glad I did.....as I've learned a lot from the regulars.

I'm in the market for a house, have spoken with about a dozen realtors in several states and have not found ONE who was (a) willing to actually work for the commission, (b) was open and honest, and (c)wasn't a waste of my time. The ONLY benefit from working with a buyer's agent is to gain access to the MLS.....other than that, they are as worthless as teats on a boar hog. However, if you do decide to make a purchase in the States, you'll have to get some really good legal and tax advice to make sure your purchase is sound and properly done.

Based on your comments, your caution and good sense saved you and your friends a boat load of "looney's and tooney's". Since we discuss real estate here, what's the chances of our friends from the north swapping us Vancouver Island for North Dakota?......LOL

trophy city aspect of NYC and SF and Boston

Well, these cities have good restaurants...

Boston is a bit weak other than fresh seafoods though.

Agreed, although the seafood is yummy. I think Boston’s allure is the sixty zillion colleges and universities and the architecture.

Yes. The scene of Charles River in Fall with foliage is very pretty.

Very good seafood indeed. Best chowdah.

Did you get a chance to have some live Aussie lobsters yet?

"It is a "debt-flow" matching problem using equity withdrawal to satisfy debt servicing"

Only a guy studying for his CFA would describe this laughable situation in those terms! I actually use HARM's "Zip down, serial re-finance, musical loan" calculator and the results are pretty predictable. Screwed.

Btw, CFA=Real Designation

"mortgage planner"=fictitious bullsh@t

Doug H,

Well you got me on that one! It's actually much worse than that. The folks that can't make the leap just yet rent an apt. in "The Couv" and get cable service hooked up (TV optional) just to establish a "presence" as a WA citizen to get out of our income tax until the make the move all official like. Freaking sad. I can always use more drinking buddies but please tell me you're not seriously considering Oregon?

SFWoman Says:

> I think the trophy city aspect of NYC and SF
> and Boston means they maintain a price
> premium, but they are still subject to the ups
> and downs of asset bubbles.

SF and NYC will always be many times more expensive than Detroit and Cleveland because people in SF and NYC on average make a lot more than the people in Detroit and Cleveland.

What has driven prices in SF NYC so high is that people have been doing crazy things to get leveraged returns of over 100% (with rare exceptions every home buyer in SF and NYC has been getting a six figure 100% + return on their down payment) since 2001.

Since leverage is a double edged sword it can also wipe out a six figure life savings in a matter of months. Even small drop in SF and NYC values will hurt a lot of people (more than ever due to the “creative loans” put in place by “mortgage planners”).

There will be a lot of people sitting on the sidelines as inventory grows and the people that “have to sell” will finally start to close escrow one by one lowering the bar increasing the leveraged paper losses for thousands of SF and NYC residents…

Michael Says:

> Randy, IMHO, the run-up in prices in 1980/81
> is nothing compared to where we’ve arrived
> at today. Take another look at this (removed URL since the BLOG does not like 2 URLs in a post)

Below is a link to another good graph:

It “is” different this time, it is way way above inflation…

http://www.housingbubblebust.com/OFHEO/OFHEO-NorCal.html

What better way to die than in a Blue Angels crash!!??

Blowfish poisoning?

FAB,

The OFHEO chart is positvely scary. It would appear that prior to 1997 values were actually on a downward trend.

Randy,

I am NOT arguing that homeowner costs as a percent of income in 2006 is extraordinarily high when compared with the values at the two previous peaks. Your numbers repeated below are similar to what I calculated

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

The question I have is how this figure goes back to it’s long-term average.

The main inputs to this figure are income and mortgage rates. Income growth is relatively predictable. It is currently growing more slowly than in 1989 and much more slowly than in 1980/81 (Growth is measured by averaging over a few years). As far as interest rates are involved, the Federal Reserve has a smaller margin from which to decrease interest rates than in either 1980 or in 1989.

SFWoman said: "The Blue Angels are flying over San Francisco today and tomorrow through Sunday."

They were up at an air show here a few years back. We were all out on a local lake (and state park) having a big picnic, and we ended up getting buzzed the whole day by Blue Angels practicing low altitude pivots over the water. Absolutely incredible pilots and machines.

My favorite was two pilots practicing high speed passes in opposite directions. You shoulda seen all the kids screaming and covering their eyes! :)