patrick.net

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.

Harm,

I read your "Portland Sucks" link and every word is correct! LOL
The quickest way to get mugged in Portland is to carry an umbrella. It's a dead giveaway you are an outoftowner....no local even owns an umbrella, much less uses one.

One thing you forgot though.......

A person's perspective is tempered by where they are moving FROM. Coming from the Deep South, the PacNW is pretty damn good.....but that's another story.

DinOr,

The TLPA has nothing to do with flying. It is the Taxicab Paratransit and Livery Association. I got out of the Air Force in '95, when a babe 24 year old flight surgeon grounded me for hearing loss. I can still fly private, (I can still pass a Class 2 medical) and did so for a while at Langley AFB Aero Club.

For about 7 years now, I have been managing a company that owns about 300 taxis. Therefore, I been to multi-day conventions in places like Vegas, New Orleans (pre flood), New York, Myrtle Beach, Orlando, and LA. These conventions are really excuses for business owners and selected staff to party in fun areas with like minded folks. This upcoming Vegas Convention will have Aussies and Brits as well. I will check out the housing market while I'm there.

Sometimes we learn stuff, and sometimes trade "war stories." And as in the military, some of those "war stories" are true.

Correction, 28 year old Flight Surgeon. She just looked 24

requiem

What about a fundamental shift in how families derive their income, notably the addition of a full-time wage earner, does not constituted a "paradigm shift"? Just because something is explainable doesn't mean it isn't paradigmatic. I use the very term "paradigm shift" somewhat on purpose to solicit debate, because it has become such a loaded term that it is practically useless.

George,

Hedonic adjustments are justifiable when they are applied to correct for non-fundamental -- or non paradigmatic if you will -- types of things. Or when better or more relevant metrics are discovered. Using EBITDA instead of simple Net Income when valuing public companies is an example of hedonics in action.

Adjusting for a long-run, perhaps permanent, shift in socioeconomic structure and culture by "backing out" to the previous state is useless. Well, that may be harsh. It's not useless if you want to be nostalgic or make a social/political statement of some sort. Myself, I'm not interested in either of those types of statements.

Who's adjusting for technology? Productivity is an economic variable, not a constant. I'll happily amend my position if you can demonstrate for me where a constant should be a variable. You have yet to make the case that the "per household" part of income per needs to variablized.

Doug H, SFWoman,

The biggest problem I had working downtown (I hadn't lived there since the late 70's) was that native Chicagoans in spite of stereotypes do not take kindly to rude behavior in public. I realize that may come as a shock to some here but it really is true. Panhandlers only "hit me up" once.

What the Portland Sucks blog failed to point out is all the "part-time" hookers that work "Fareless Square". It's really annoying when you go to lunch w/your buddies and some gal asks for the time like THREE times! When you're obviously disinterested, they become really loud and abrasive shouting "I was only asking you for the TIME!" Then my buddies get some free lunch time entertainment watching me blow a gasket telling some 20 something gal that her folks raised her better than that and how she probably grew up in a decent neighborhood with everything a kid could want so don't give this mean street garbage and get your butt back to class! They either sulk or get off at the next stop whimpering. So..... you guys have your jollies? Sheesh.

ajh,

Agreed, there are certainly scenarios where re-fi'ng at a higher rate can make sense. However, that is what people were "supposed" to be doing back in 03/04! That was the whole "debt consolidation" stampede.

The part that annoys me is that there are several alternatives out there that require nothing out of pocket from the consumer and the homedebtor would actually become a true "homeowner" decades earlier! It's not exactly rocket science. All I need is a better entry point and I'll deploy my financial strategy on a much lower cost (and tax) basis. You can pay off your mort. in 1/2 to 1/3 the time w/out taking a vow of poverty.

From the US census pages (I forgot to cut the income URL, but I used actual "household" income not adjusted and can find it again) I've been renting apartments and homes for years and get real numbers (with pay stubs) about what people make and very few people today can afford the $1mm piles of crap that are selling in the Bay Area...

1980: Median Income $17,710 Median Home Price $50,000 Ratio 2.8
1990: Median Income $29,943 Median Home Price $62,700 Ratio 2.1
2000: Median Income $41,990 Median Home Price $90,400 Ratio 2.2

Home price info below:

http://www.census.gov/hhes/www/housing/hvs/annual05/ann05t11.html

goober Says:

You’ve been making 160 for a while now, inflation’s kicking your ass….

HA HA!

Randy,

The addition of a 2nd wage earner does constitute a paradigm shift, yes. It also makes it more unlikely that something similar is going on now, unless we see young children also pulling in 80K$ a year for the benefit of the family. Does the data you used to calculate the price to income ratios reflect that second earner? (i.e. is it per individual as FAB suspects, or per household?)

Now, the 60% to 70% jump may be smaller, but that largely depends on basic expenses such as food and toilet paper. As someone mentioned, a person pulling in 1M$/yr (after taxes) could spend up to ~94% of that, and still have left the equivalent of the median income. So, is there a way to make a decent claim that, say, 20K$/yr is the lower limit for household necessities, food, and transportation? If so, we can look at such a number to see if that 60%->70% jump for someone earning the median income hits that barrier or not.

requiem,

But isn't it possible that the Sheeple will eventually wise up and refused to pay those exorbitant house prices? Couldn't they redeploy their income to other (hopefully R & D rich) areas that give a more satisfying pay off? Maybe living with mom and dad and sis at the McMansion isn't so bad if Gen-Yers eat sushi every night...

SQT,

Good point. As Randy mentioned in his comment. In the rustbelt, the moms working were essentially replacing the dad's who used to work paying jobs. In those situations, it wasn't so much a cost of living increase forcing mom's work but erosion of dad's earning capacity. So ironically, those families continue to be one earner families, but mom became the primary bread winner.

I don't think the problem is daycare per se. It's more about the lowly status this society accorded to daycare workers - we pay them near minimum wage jobs, overwork them, don't respect them and make unreasonable demands on them. Is it any surprise that only the most desperate women (immigrants unable to speak English and so on) are willing to staff such jobs?