patrick.net

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! :)

There are so many things that cannot be covered by statistics.

I believe that the bay area census takes into account illegal immigrants as well. When speaking of grwoth in population, you'd care about the quality of the growth if the current housing price is to be sustained. All the labor working on my neighbor's remodel are illegal immigrants (except for the contractors), they live around Morgan Hill or Gilroy, still a part of Santa Clara county, do you expect them to buy into crappy homes in Mountain View?

I've raised issues with median home price many times before, especially during the downturn, as a measure of seeing how much the market has sunk. Given that we have so much more computing power today, we should really ditch this measure and pair up houses as "comps" and look at the transaction value of comps over time.

As I said before, I bought in the last downturn, and based on my observation, and words from the agents, the west valley community headed down more than 20%, something you won't see in the papers. The reason is because we the buyers have a budget to begin with, which is based on my salary. If I decide to spend 3x, I spend 3x, regardless of how low the market goes, I just buy a better home or buy into a better neighborhood with 3x. That's why the median transaction price is a very flawed measure in looking at how much the market has gone down.

EBGuy and those talking re: traffic and BA job growth,

Here's a recent report on job growth:

http://www.bizjournals.com/edit_special/44.html#l

Well, it looks like SJ is in the bottom 10 in job growth, with only New Orleans (Katrina) and Detroit (auto makers) worse. There has been a slight upswing in the past year (3K new jobs), but that barely makes any dent on the 150K jobs lost after 2000. So much for the more traffic = more jobs theory.

Btw, I also believe that there in fact IS a chance that our salary will increase by a big margin. The logical path of this all, is a serious devaluation of US$.

It doesn't matter that US$ strengthens recently, some stocks did before the 2000 ultimate crash. Of course we don't want a big crash which will upset all sorts of things, but let's say we've exhausted the paths to a slow deflating US$, then what?

If US$ crashes, that means our wages become very low by international standard. That means lots of outsourcing will start to come back onshore. That also means that our assets (real estate being one of them) at the nominal US$ value will look very cheap for foreigners.

If this path is ascertained, the way to play this game is to buy an inflated house locking down 30-year low-rate. In 30 years, the debt burden becomes nothing because you are paying back cheap US$ which becomes so easy to earn.

However, this is not a path welcomed by the international community, especially those saver countries like China and Japan holding on to piles of soon-to-be-waste-paper US$. So as long as they can afford, we will only see a slow motion devaluation, which won't help out the housing bubble by much.

@SF Woman,
We lived in a brownstone in Boston - we tried not to think about the structural unsoundness of those buildings - 100+ year-old brick structures, and it's even worse than landfill - they're built on wooden pilings stuck underwater sitting in the in-filled Charles River or Bay. Think of something like a pile of Jenga blocks sitting on top of several chopsticks immersed in mud. Let's hope there's no earthquakes there anytime soon.

we tried not to think about the structural unsoundness of those buildings

Nothing beats steel-refinforced concrete.

I live in bay area, but travel extensively. Just got back from the Orlando area. Real estate is totally dead in that whole region. Saw price cuts of $100K (from $400K to $300K) and homes still not moving - and you come across tons and tons of them whereever you drive. I looked up some of the addresses on Zillow.com and in 2000, those $300K-listed homes were going for $150-200, so I would like to see another $100K drop before I would remotely consider these homes to be "fairly priced" - and 1998 prices would be even better.

Alas, Bay area will probably drop last. As one pointer, read today's WSJ on how silicon valley is hot again, and start-ups from around the country are moving here. Until a broader economic recession causes tech and ad spending to drop off the cliff, and until Google stock is back to $120, with market cap cut to 2-3x sales, I don't see relief on the home price front. I see that as an inevitability, but my conviction doesn't rise to the level of buying put options on GOOG :-)

If Florida and Arizona take a 50% haircut (very likely at this point), just to keep the "relative valuations" sane (is Bay Area worth 8x Phoenix or Dallas prices?) prices have to drop.

I vote Blue Angels crash.

Although Blue Angels crash is quickly and less painful, a blowfish death involves less collateral damage and it is tastier. :)

I posted this one yesterday back in the "When will the bottom be?" thread, but it got ignored when Face Reality showed up and started spewing his usual bullshit:

Does anyone here recall a "see-saw" interest rate theory proposed by Conor (I think –might have been someone else), whereby the Fed would continue to try to stave off a deep recession/depression by blowing new asset bubbles (by contuining its pattern of slashing rates, then raising before inflation gets too far out of hand), but that this strategy would eventually fail. The “wall” for this approach is that the maximum interest rate the Fed could raise rates to without triggering a recession keeps getting lower during each cycle.

For instance, just prior to the tech/Dot.com bubble, the Fed Funds rate was 6%, as I recall. Then Greedspin slashed rates to 1% (negative in real, inlfation-adjusted terms), and we were off to the races again in housing. Bernanke was only able to go to 5.25% before pausing, and even this historically low level is causing real pain for resetting option-ARMers. If the Fed slashes back to 1% (or .5%/0%?), it might be enough to trigger another mini-bubble in some other asset class, as well as provide a brief refi-window for some FBs. However, if they keep it there too long, they risk hyper-inflation/dollar collapse, so eventually they’ll have to raise rates again… Except this time, they may only be able to go as high as 4% or so before the economy stalls.

This cycle can only repeat until the maximum Fed Funds rate hits the point of “inflation” (or more accurately, the officially reported CPI). Once the Fed can no longer raise rates to or above the CPI without stalling consumer spending/economy, they will face a Devil’s bargain of either: a) triggering a deep recession, or b) triggering runaway hyperinflation.

I hope I summarized this correctly, but this sounds to me like a very reasonable and politically likely outcome. I’d like to hear other people’s take on this theory.

HARM,

I do recall that theory of Conor's (assuming it was him). It does seem like the instinctive course of action for anyone prevented from taking a long term view. I expect some of the FOMC would recognize something this; the question is whether there is enough pressure on them to cause them to try it anyway?

The next meeting is about 3 weeks from now, so it will be interesting to see how the voting goes. October seems to be a month for the market to make interesting moves, and I believe there's been enough data on housing and other areas hitting the news that they'll feel pressured to respond. Will Mr. Lacker continue his voting for a hike, and if so, will he pull others to his side? Can any conclusion about the thinking of the other committee members be drawn from his behavior?

Jobs, you gotta go where that work is (tech, advertising, music, publishing etc.).

Maybe it's just me... but I can't find -any- good non-finance related tech jobs there. :(

I'd loooooooooove to move back.

And even endure "Change at Jamaica" (only a special few understand what that means.)

For fun, I've added two more graphics to the original post

DinOr,

So you go to Vegas often? I'll be at Caeser's Palace this weekend for a TLPA convention. If I see you there I'll but you a drink. Especially if you are gambling.

Gavin,

The "long term average" changed dramatically post the stagflationary 70s/early 80s. I keep referring to this because it is a rare case where indeed a "new paradigm" emerged. What occurred in the 80s recovery were vast inflation/deflation differentials by region, as well as new long-run equilibriums for various averages.

For example, the two metrics we were talking about before:

House price to Income ratio:
Pre 1979* average, below 3.0
Post 1979: average between 6.0-7.0

Total home owner costs as % of real income:
Pre 1979 average, below 30%
Post 1979: average around 60%

Both of those were doublings in the averages, and turned out to not be bubbles, but long-run equilibrium shifts. Of course, you could always argue that everything post 1979 was all just one big bad bubble dream, but my definition of bubbles require that they not be sustained over a quarter century.

So the big question is, the emergent data would require another shift of the above metrics to:

House price to Income ratio:
9.0-9.5

Total home owner costs as % of real income:
65%-70%

Is that reasonable? It is much less dramatic than the 1979 shift, but probably much closer to the maximum resistance point. Of course a lot of people thought that in the early 80s too, and they were wrong.

Another point is that dramatic graphs showing big leaps, while stunning and alarming, aren't revealing of much because they merely indicate geometric growth. That is, as the numbers get bigger, even smaller run-ups cause much bigger absolute numbers to inflate, and those old enough to remember smaller numbers feel like the end is neigh.

Take a log of those graphs to take out this effect, and then you see that the previous runnups, particularly the 79 runnup, were slightly worse to even with today's runnup.

My only point is that graphs, charts, equations and stuff look great, but they really don't tell us squat about what will happen for certain. I think prices will come down. By how much and how fast is anyone's guess. Beware those who claim to "know" the answer.

*Pre 1979 to Post WWII/Depression

Headset,

I would love to take you up on that however; (23rd. anniv.) may not set well w/Mrs. DinOR? The "kids" want to take us out. I know, what a wuss. I get the PA (Pilot's Assoc?) part but what's the TL stand for?

If Boston's allure lied solely with seafood, then Montreal should be an even more desirable city since it has better lobsters.

$12,000/square meters in Montreal!

Extending that thought further, Halifax probably has even fresher and cheaper lobsters...anybody eaten lobsters in Cape Breton or St. John's (New Foundland?

Have I come up with the housing bubble version of the Big Mac Index.

SFWoman,

True. But the amount spent on supplemental sunlight is saved on watering bills.

Randy H Says:

> The “long term average” changed dramatically
> post the stagflationary 70s/early 80s. I keep
> referring to this because it is a rare case where
> indeed a “new paradigm” emerged. What
> occurred in the 80s recovery were vast inflation/
> deflation differentials by region, as well as new
> long-run equilibriums for various averages.
> For example, the two metrics we were talking about before:
> House price to Income ratio:
> Pre 1979* average, below 3.0
> Post 1979: average between 6.0-7.0

It looks like Randy may be using “Income per Worker” data as opposed to “Household Income” data. I have spent a lot of time over the past 20 years (even when it was a lot harder without the web) looking at census data and other than the last few years very very few places in the US were far from the 3.0 Housing Price to “Household Income”.

As a kid growing up on the Peninsula pre 1979 not a single Mom in my public school had a job and even in the Burlingame and San Mateo public schools very few Mom’s worked (I can only think of one). One of the huge reasons that homes have shot up in price over the past 25 years is due to women entering the workforce.

When women enter the workforce the family has more money to buy a nicer home and it drives up home prices in an area until almost all the women “have” to work for the family to afford a home in the area. If you look at Burlingame and San Mateo today you will see high home prices with virtually all the young families have two people working.

There needs to be a reason for something to go to a new equilibrium and women continuing to work in large numbers after marriage has pushed home prices to a new equilibrium just like steroids have enabled the weight of the average NFL lineman to increase by about 100 pounds. It was not long ago that “The Fridge” at 303 pounds was a freak of the NFL when today there are almost 400 players over 300 pounds and guys that are getting close to 400 pounds…

With Housing Cost to “Real Income” (Let’s define “Real Income” as “Take Home Pay”) the percentage can get higher as the income gets higher since a guy taking home $1.2mm a year with have plenty of “walking around” money paying 70%, 80% or even 90% of his take home pay for housing cost. A guy taking home $12K a year will not make it when he only has $100, $200 or even $300 a month left over to live on after housing costs…

P.S. To HaHa Good Job on the Schadenfreude article…

FAB,

That's the HARM-X conspiracy theory. All macroeconomic movements are calibrated to benefit the Boomer generation. The greatest generation's GI Bill built the foundation to ample and cheap Boomer education, the good postwar economy gave Boomers plentiful jobs, the legacy of from an earlier economic system allowed Boomer women to decide whether or not they want to work... Gen-Xers and beyond are forced to mortgage their future to pay the Boomers' recreational drug habit and for their rounds of golf.

The obvious solution to this late Gen-Xer is to resist and boycott Big Boomer. No kids, no home buying, live as frugally as possible and leech off of Boomer mom and dad (and sweeten up to grandpa and grandma so that their will skip ma and pa and go straight to the grandkids) to address this egregious inter generational trade imbalance.

The obvious solution to this late Gen-Xer is to resist and boycott Big Boomer. No kids,

How would not havking kids stick it to the boomers?

When women enter the workforce the family has more money to buy a nicer home and it drives up home prices in an area until almost all the women “have” to work for the family to afford a home in the area.

See Prisoner's Dilemma: http://en.wikipedia.org/wiki/Prisoner's_dilemma

And now with suicide mortgages, the ante is up even further. In the future, we will have to bring back child labor in order to afford our homes.

Race to the bottom, my friends.

One more thing. That young family in Burlingame is not *forced* to have 2 parents working. They currently have the option of renting or moving out of the state and not have any negative impact on their life style.

It's the inflexible and single minded pursuit of an outdated lifestyle and the efforts to keep up with the Joneses that put them in the unhappy two family predicament.

The real pain and tragedy lies with people who make at or below the state average (either median or mean). Both parents must work (often 3 full time jobs) just to make the ends meet. They must also pray hard that no job loss or catastrophic illness happens.

eburbed,

Sorry, Freudian slip. It also deprive Boomers the grandkids they want to crown their golden years.

I'm just kind of amazed that Ha Ha is watching the Colbert Report.

unhappy two family = unhappy two EARNER family

The average annual income for a HiTech job in Bay Area is 126K ????? WTF ?

This is average. I think I am seriously underpaid.

Still, I really doubt this assertion. I do not know of that many people making 126K. And if that's indeed an average income, then hard landing for BA is almost out of question.

No one commented on this. So I guess I am the only one surprised.

StuckInBA,

It's probably the mean income(a rather meaningless number). CEO pay + Googlaires' cashouts knocked it up a bunch.

However, even if the average was 126K and let's just say two earner couples made $250K a year...if they follow the old rules for ownership (3 - 4 years' salary) they could afford $750K-1M. That doesn't buy a lot in BA.

This is average. I think I am seriously underpaid.

Average. Not median.

CEOs getting paid 100M *will* distort the statistics.

Hiding,

What is this *watch* that you speak of? And while we're at it, what's up with those ladies with shiny rocks on their hands? Is that a glass cutting implement or a morse code signaling tool?

(I know, I'm really lame. But I just retrieved my Shuffle out of the dryer... So I'm feeling particularly unmaterialistic)

StuckInBA

You're not the only one surprised; I got the same feeling.

And the statistics are for "high-tech" professionals only.

I would say the compensation for a high-tech worker here ranges from 60K (imported contractor?) to 100M (big-shot CEO). An average (not median) of 126K is not surprising.

Just count the number of Gulfstreams, Falcons, and Challengers parked in SFO/SJC. Other cities may not have as many major HQs so they have fewer extremely well-paid executives.

Anyway, as I've posted in previous threads, entry of women into the workforce by and large did not improve family wealth. It was merely a matter of economic survival. As anecdotes are aplenty, I grew up in the rural midwest during a time when nearly all the kids became latchkey kids and all the moms went to work. Not to buy a McMansion. Not to pay for lavish vacations or expensive second homes. But to keep their latchkey kids off of the school lunch programs because their husbands had lost their manufacturing/farm/defense jobs and become underemployed alcoholics. It amazes me that somehow that is perverted into some kind of anti-feminist pejorative in today's revisionism. These moms were heroes, not bra burners.

Randy,

Yes. But free market also produces plenty of market failures. Isn't that the point of the Prisoner's dilemma?

In case of Gen-X spending habits, a big part of the problem is that the social normative has yet to catch up with the economic reality. Many Gen-Xers are now really priced out of housing (a reality shown by the relatively low rent costs) and buying is quite economically irresponsible. Yet their boomer parents and financial advisors are telling them to buy obscenely priced homes to be "responsible" and to "build equity" with neg-amort ARMs.

The social normative may catch up in time, but I can't help but pity the lemmings who bought because they blindedly wanted to be "responsible." (It really isn't their fault that mom and dad wanted more *hard* testing and less economic/finance instruction in high school.)

Meanwhile, slightly smarter Gen-Xers (me?) decide to maximize personal utility by doing comparatively better value activities with my money/time by travelling, watching way too much TV, eating and talking about eating and just being a goof off. But yet folks like me are called irresponsible! Even though I have a positive net worth and tons of pictures with red rocks!

Randy,

If you're arguing for a "whole new paradigm" type of event, there should be some justification for it; otherwise we have no way of distinguishing them from run-of-the-mill bubbles. In the case of your numbers, it seems possible that the jump is explainable by the addition of a second wage earner. If you were using household income, another explanation would need to be found.

re: poor working moms

I agree that the financial picture gets a lot more hazy when we move outside of the wealth enclaves of Palo Alto, Marin, SF and Manhattan. However, at least in those enclaves, excess wealth was generated and much of it funneled into housing in a manner to benefit long time owners.

The last 5 years have really exacerbated this trend though. The excess money supply has been funneled into housing in a manner that tremendously benefitted builders and anyone who bought before 2001. The current buyers are mortgaging their futures in the hopes of even greater money supply in the future. Even the moms with latchkey kids are getting in on the action because they now believe it's the *responsible* thing to do.

re: latchkey kids due to globalization

Yeah, but there's many ways for countries to deal with globalization. While I'm not particularly happy with Europe/Japan's protectionist approach, I don't think America's "let's turn everyone into lawyers or burger flippers" service worker approach is much better. The social inequalities in this society is truly striking. The culture of consumption and worship of money w/o work is very sick.