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What's Next?

By SP follow SP   2006 Oct 20, 4:54pm 12,456 views   145 comments   watch   nsfw   quote   share    


Start with any generally observable and credible premise. Example: "Rents are up 10%." Or "Inventory is up 135%."

Assuming the premise is true, what impact will this have on the Bay Area housing market?

For instance:
KCBS reported rents are up 10%. Most anecdotal evidence suggests anywhere between 7% to 15% increases. If this is true, it could have the following consequences:

1. Rents go up -> Wages go up -> Wage inflation slows job growth -> Puts brakes on population-driven rent increases -> Rent vs. Buy adjusts a little, not a lot.

2. Higher rents -> People move out of area -> Rents stabilize, maybe fall -> Rent vs. Buy doesn't change a lot, and demand for both rental and for-sale housing softens -> Prices continue to slide.

3. Higher rents + refis -> help to bail out a few homeowners, reducing the overhang of potential FB's -> Could cushion the landing a little.

4. Rents keep going up 10% per year -> Creative renting strategies (home sharing, warm-bedding, etc.) become common, but overall renting becomes an expensive proposition -> People continue to do whatever they can to buy, keeping nominal prices high -> Rent vs. Buy is mainly adjusted by higher rents.

Or another example.
Premise: Punch bowl gets thrown away after Nov. 8 elections.
FB's rush to the exits -> No buyer confidence -> Inventory spikes up -> Prices fall FB's put unsaleable houses for rent, driving rents down.

The above are just examples. You can start with any other credible economic premise and expand it to assess impact on the HB. And even those outside the Bay Area can contribute their own crystal ball visions. And if this turns out to be too arcane, feel free to start a new thread.

SP

#housing

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106   OO   ignore (0)   2006 Oct 22, 1:31pm     ↓ dislike (0)   quote   flag      

I never rented in the city, my first rental was down in the South Bay near Palo Alto. Perhaps my perspective was skewed by the fact that I came to BA after the real estate crash right when the market was still sinking.

107   Randy H   ignore (0)   2006 Oct 22, 1:31pm     ↓ dislike (0)   quote   flag      

TO Lurker,

Again just my opinion which is worth what you paid...

In your specific situation, getting an MBA from a part time program, especially well ranked like Haas EWMBA, might serve you well if you think you'll have a career break for kids but want to return later. Re-engaging a career after a couple few years break is hard enough, but having an MBA should give you a leg-up on the competition; it will also give you a huge network you can draw on when time comes to find your way back into the workforce.

The NPV of the proposition isn't so good though. You'd have to look at it as more of a "real option". That is, you're buying insurance in case you want to continue your career.

108   OO   ignore (0)   2006 Oct 22, 2:06pm     ↓ dislike (0)   quote   flag      

goober,

this only applies to very few suburbs. There are far more houses than 1000+ in the whole BA.

It all comes back to one theme - employment. If we encounter a 2001-style recession again, when an average GSB or HBS graduate of that year even had trouble finding a job, then even the best zip codes will suffer.

I have a friend who graduated from 2001 class of GSB, and we went to his commencement. Many graduates of that year were still struggling for an offer at commencement, some guys remained unemployed 8 months later.

However, whether there will be massive job loss is not determined by the housing stock of a few select suburbs. It is determined by too many things beyond the control of the US government or any government.

109   Peter P   ignore (0)   2006 Oct 22, 2:12pm     ↓ dislike (0)   quote   flag      

Did you meet lots of Chinese students at your Stanford class?

There are quite a few.

I believe they have a pretty good SJD program, if you choose to get one. ;)

110   Peter P   ignore (0)   2006 Oct 22, 2:15pm     ↓ dislike (0)   quote   flag      

But, if they are making $500K a year for say 3 years already, they could easily buy that $2mil condo.

How so?

You are either a troll or a subverter or both.

111   Peter P   ignore (0)   2006 Oct 22, 2:20pm     ↓ dislike (0)   quote   flag      

I think for a family of 250-350K to afford a 1.2-1.5M is not unreasonable (not that I encourage their buying at this stage).

More like 1M - 1.4M if they have 20% down...

4X income is already quite a stretch.

112   OO   ignore (0)   2006 Oct 22, 2:21pm     ↓ dislike (0)   quote   flag      

I am more concerned about the HOA fee and property tax on that 2M condo. These two added up can easily be around $50K a year, and all the outgoing will be after-tax since at $500K you are most definitely taxed at AMT.

113   Peter P   ignore (0)   2006 Oct 22, 2:23pm     ↓ dislike (0)   quote   flag      

Let’s say that the general market starts dropping a lot, all you need is just another 1,000 households with 200-300K income to jump in to pick up the slack.

They can only afford 800K to 1.2M. What can they get?

I have a friend who was preparing to spend 1.6M in PA. Everything was crap at that price.

114   Peter P   ignore (0)   2006 Oct 22, 2:24pm     ↓ dislike (0)   quote   flag      

I am more concerned about the HOA fee and property tax on that 2M condo. These two added up can easily be around $50K a year, and all the outgoing will be after-tax since at $500K you are most definitely taxed at AMT.

Exactly.

115   Peter P   ignore (0)   2006 Oct 22, 2:27pm     ↓ dislike (0)   quote   flag      

Where you live is secondary…How you live is primary!

Where you live is secondary…What you eat is primary!

116   OO   ignore (0)   2006 Oct 22, 2:36pm     ↓ dislike (0)   quote   flag      

Peter P,

just have to say your friend is looking at the wrong place. Palo Alto is the most overpriced (not just expensive, but overpriced) neighborhood in the South Bay.

Try Saratoga, 1.6xM can get you something like this: (Saratoga High)
http://tinyurl.com/yz3xdt

or this: (with Monta Vista High)
http://tinyurl.com/ybq3tq

117   SP   ignore (0)   2006 Oct 22, 3:16pm     ↓ dislike (0)   quote   flag      

@allah,
Thanks for the clarification that by 'whoring', you mean someone who is willing to do a job with equivalent competence for less money. Since you mentioned "swarms of Indians" in your example, I was curious whether your definition applies to only that group, or to say "swarms of Czechs" or "swarms of Angolans", for instance.
SP

118   FormerAptBroker   ignore (0)   2006 Oct 22, 3:34pm     ↓ dislike (0)   quote   flag      

flooded with rentals Says:

> The investment property/2nd homeowners are in a quandary.
> Do I take a negative cash flow every month and try to ride
> out the downturn or do I dump this 2nd home.

Very few flippers/investors have the ability to “ride it out”. A good example is our friend Casey, and he is not the only Sacramento Flipper in trouble:
http://flippersintrouble.blogspot.com/

> The mortgage on owner occupied home will adjust soon.
> In some cases the monthly mortgage will go up $700 or more.
> This puts time pressure on the decision of what to do with
> the 2nd home.

Here in SF I know lots of people that got in when rates are low and have $1mm mortgages that are going to go from about $3K a month to close to $7K a month when they go from IO to fully amortizing. As foreclosures continue to rise it will put upward pressure on MBS credit spreads (that are currently near the all time lows) and some of those $1mm loan payments may go as high as $8K a month (remember this is before property taxes and/or HOA fees that will add another $1K to 2K a month) by the end of 2007…

119   SP   ignore (0)   2006 Oct 22, 3:35pm     ↓ dislike (0)   quote   flag      

One thing I haven't seen mentioned in all this hypothetical speculation about highly-paid, two-income MBA couples is this - many of these jobs appear to be in the financial industry, and in highly specialized, exotic and risky niches.

In anything like a downturn, my guess is that these will be hit harder with cuts in headcount and/or reduced compensation. I don't have the inside data to confirm this, but am extrapolating from what I have seen with specialized, high-income roles in other industries.

SP

120   Peter P   ignore (0)   2006 Oct 22, 3:37pm     ↓ dislike (0)   quote   flag      

If you make 500K/yr for 3 years, you could save about $500,000 net after taxes.

Yeah right. You assumed that people consume the same amount regardless of income. :)

Even if that is true. A 1.6M mortgage is the maximum limit for 500K income.

121   SP   ignore (0)   2006 Oct 22, 3:43pm     ↓ dislike (0)   quote   flag      

I attended a party this weekend at a Haas graduate's house - about a dozen guests were also Haas MBA's. Only two are in finance - one in corporate, one in IB. The rest are just grunts in product marketing.

Based on this anecdotal sample, it would be wrong to assume that all MBA's are raking in 150-200K each. Assuming that they will buy 2M condos is downright delusional.

CR is a troll, and probably a realtor. I don't have a problem since I don't think he has any credibility left on this forum anyway. However, if enough people want me to fumigate, I will take action.

SP

122   SP   ignore (0)   2006 Oct 22, 3:53pm     ↓ dislike (0)   quote   flag      

ConfusedRenter Says:
Not a troll Peter P. If you make 500K/yr for 3 years, you could save about $500,000 net after taxes. 2 mil.. you put 400K down and another 15K in closing costs leaves you 85K. Sure, that’s tight… but guess what? 12 months later, the couple will get another 150-200K net after taxes cash bonus etc, and then it’s all good.

Anyone who takes this stinking, steaming pile of advice and buys a house based on this reasoning truly deserves to be taken advantage of.

SP

123   OO   ignore (0)   2006 Oct 22, 3:58pm     ↓ dislike (0)   quote   flag      

CR,

The brutal truth facing the IB and consulting industry is, up or out. The 3-year-out-of-school salary is not indicative of the 10-year number. In other words, the ramp-up rate slows down tremendously.

The out ratio is 7:1 average, probably 10:1 in bad years and 6:1 in good years. 3 years out of school, you are still at a senior associate to a junior manager level, about another 5 years away from the junior partner level. Junior partners at a consulting firm make mostly 300-500Ks, with a lot of that tied up in the form of vesting equity so that they keep working their butt off until they become senior partners. Only the senior partners at top consulting firms (read: 3 firms in the world total) make more than 1M a year. My cousin is a junior partner at one of the 3 firms so I am just going to trust his words.

What happened to all those senior associates from IBs or consulting firms who don't make it to the next level? Come to industry and make our industry salary, and I can tell you that, your typical 5-year-outta-school MBAs, regardless of which school you are from, don't make higher than 150K, unless they hit the jackpot with IPO. Sure, you can go buy a lotto ticket every week, getting an MBA is not a pre-requisite of winning a lotto.

124   SP   ignore (0)   2006 Oct 22, 4:01pm     ↓ dislike (0)   quote   flag      

ConfusedRenter, who is most likely a realtor or a troll, said:
But, if they are making $500K a year for say 3 years already, they could easily buy that $2mil condo.

Perhaps. But would any unbiased, accountable professional actually advise them in good faith to do something this foolish?

A realtor surely would, because a realtor is neither accountable, unbiased nor professional - they are used-home salesmen who get paid on commission.

SP

125   SP   ignore (0)   2006 Oct 22, 4:06pm     ↓ dislike (0)   quote   flag      

Peter P said:
You assumed that people consume the same amount regardless of income.

I am probably an eccentric, but I have found that my appetite for consumption has actually fallen as my income went up. The more crap I can afford, the less crap I want to have. :-)

SP

126   Peter P   ignore (0)   2006 Oct 22, 4:13pm     ↓ dislike (0)   quote   flag      

I am probably an eccentric, but I have found that my appetite for consumption has actually fallen as my income went up. The more crap I can afford, the less crap I want to have.

Really? I do not think my appetite for food will fall any time soon. :)

Most people who are driven to earn higher income are driven by the desire to more consumption.

Perhaps you are right. It is difficult for anyone to consume more than $200 worth of food per day on a consistent basis without dropping dead. :)

127   SP   ignore (0)   2006 Oct 22, 4:29pm     ↓ dislike (0)   quote   flag      

Peter P Says:
Really? I do not think my appetite for food will fall any time soon.

I wasn't talking about food, although I correctly guessed that you would respond this way. :-)

I am famous for spending all day in a mall without feeling the slightest urge to acquire anything other than an espresso. I feel sorry sometimes - the retailers go to such great trouble to put together elaborate gimmicks to help me spend, and I just go strolling by like Chance The Gardener walking past Eve Rand.

SP

128   Different Sean   ignore (0)   2006 Oct 22, 5:18pm     ↓ dislike (0)   quote   flag      

Are you voting DEMOCRAT?
Sorry, I like to keep my political preferences private.

so do i. i don't think i would ever talk politics in here normally.

however, maybe it is time for regime change...

129   Peter P   ignore (0)   2006 Oct 22, 5:44pm     ↓ dislike (0)   quote   flag      

I am famous for spending all day in a mall without feeling the slightest urge to acquire anything other than an espresso.

I can do that too. But there is not much to buy in the mall.

130   Peter P   ignore (0)   2006 Oct 22, 5:44pm     ↓ dislike (0)   quote   flag      

however, maybe it is time for regime change…

Are you suggesting patrick should no longer lead this site? How dare you!

131   Randy H   ignore (0)   2006 Oct 22, 11:48pm     ↓ dislike (0)   quote   flag      

Only the senior partners at top consulting firms (read: 3 firms in the world total) make more than 1M a year.

Partners or equivalent with implementation consulting firms, accounting firms and boutique firms can also make +1M/yr. There are probably over 2500 boutique firms worldwide which are primarily comprised of the guys you're talking about who've for one reason or another stepped out of the big 3 strat firms and taken a couple narrowly focused client relationships with them. I used to work at KPMG back in the early 90s in consulting; there are guys who were Manager level then at BP now making in the $1M range.

Come to industry and make our industry salary, and I can tell you that, your typical 5-year-outta-school MBAs, regardless of which school you are from, don’t make higher than 150K, unless they hit the jackpot with IPO.

Not to beat a dead horse, but even leaving MBAs aside, jobs in the $150K range are not rare for middle/middle-upper management at big corps for 5-8 years of experience. IT is generally not well compensated compared to finance, accounting, corporate development, certain companies' product engineering, and many companies' marketing/product management. My wife has to pay over $125K to hire a competent payroll manager with 5 years experience.

A guy with 5 years of GS or BCG experience shouldn't have too much trouble finding a better salary if he/she's flexible on where they'll work and who they'll work for.

If they're having trouble, they should visit glocap.com or any of the other places that feature F500 companies practically begging for IB/Big5 experience to fill corporate development posts.

132   FormerAptBroker   ignore (0)   2006 Oct 23, 12:17am     ↓ dislike (0)   quote   flag      

SFWoman Says:

> I too agree that ConfusedRenter is in the real
> estate industry in some way. There often
> seems to be a Realtorish turn of phrase in
> the posts.

I say we pull the plug on Confused Renter since I don't think any of us care if a single Cow Hollow condo sells for a million over list next week...

133   astrid   ignore (0)   2006 Oct 23, 12:26am     ↓ dislike (0)   quote   flag      

I just avoid the mall altogether. Outlet malls are one thing (I can get bulk shopping done in a couple hours) but normal malls do nothing for my consumerist instincts.

The internet and Costco takes the bulk of my money...it must be conditioning.

134   FormerAptBroker   ignore (0)   2006 Oct 23, 12:33am     ↓ dislike (0)   quote   flag      

SP Says:

> Peter P said: You assumed that people consume
> the same amount regardless of income.
> I am probably an eccentric, but I have found that
> my appetite for consumption has actually fallen as
> my income went up. The more crap I can afford,
> the less crap I want to have.

I've noticed that many people spend less as they make more. My parents are a classic example of a couple people who make more in a day now than they made in a year when they got married but they don't even spend everything they get from Social Security each month. When I look in my closet and see thinks like my Dunhill cashmere overcoat I don't think I could spend that much on a coat today and when a friend called recently telling me that he found a great deal on a set of ceramic brakes that would fit on my car he was surprised when I said I really wouldn’t even want them if they were free...

135   FormerAptBroker   ignore (0)   2006 Oct 23, 12:42am     ↓ dislike (0)   quote   flag      

SFWoman Says:

> FAB, I wouldn’t pull the plug. Confused presents an
> alternative point of view, albeit one that is fairly easily
> refuted with data at the moment. If Confused is a Realtor,
> and is hiding the fact, the deceit is sad, but I don’t think
> we need to be the type of forum that automatically
> cans anyone with a viewpoint that differs from the
> one most of us espouse.

I don’t have any problems with different points of view… I have often had different points of view than Randy H but I still think his posts are intelligent and well thought out. CR just throws up crap without any support and wasted our time. As a Libertarian I like to discuss politics with partisan Republicans and Democrats, but I walk away from the people who can’t say anything but “Slick Willie is an idiot” or “Shrub is a moron”…

136   DinOR   ignore (0)   2006 Oct 23, 1:00am     ↓ dislike (0)   quote   flag      

SFWoman,

Your statement regarding HF's above is almost 100% accurate. That one sentence should read; Everyone and their "long lost" brother!

What this has really been about is an effort to A, skirt securities law, and B, a desire to get out of "production". (Production meaning the "sales" end). Can't say as I necessairly blame anyone there but just b/c you're tired of selling (and who isn't) doesn't mean you're qualified to run any fund, let alone something as complex as a hedge fund. The lure was that (for a time) all you had to do was mention you were starting one and everyone would form a line to throw money at you!

I've heard your husband's sentiment echoed throughout the industry as law firms re-evaluate the situation. He's absolutely right, many of these guys will become a liability b/c they've seen the power of billing clients qtrly. for fees and only had to sell ONE time to raise the initial capital. Now flush w/fee driven income, hell they can hire some "wash out" to raise capital for them to fill the hole in the assets they've lost. See, every thing works out.

137   skibum   ignore (0)   2006 Oct 23, 1:47am     ↓ dislike (0)   quote   flag      

SFWoman Says:

I wouldn’t pull the plug. Confused presents an alternative point of view, albeit one that is fairly easily refuted with data at the moment. If Confused is a Realtor, and is hiding the fact, the deceit is sad, but I don’t think we need to be the type of forum that automatically cans anyone with a viewpoint that differs from the one most of us espouse.

I agree with SFWoman completely. Not only do we need to stay away from silencing dissenting views, but it's nice having a straw man to knock down every once in a while!

138   skibum   ignore (0)   2006 Oct 23, 1:48am     ↓ dislike (0)   quote   flag      

Italics corrected:

SFWoman Says:

I wouldn’t pull the plug. Confused presents an alternative point of view, albeit one that is fairly easily refuted with data at the moment. If Confused is a Realtor, and is hiding the fact, the deceit is sad, but I don’t think we need to be the type of forum that automatically cans anyone with a viewpoint that differs from the one most of us espouse.

I agree with SFWoman completely. Not only do we need to stay away from silencing dissenting views, but it’s nice having a straw man to knock down every once in a while!

139   Randy H   ignore (0)   2006 Oct 23, 1:59am     ↓ dislike (0)   quote   flag      

I vote we allow Confused Renter until he/she clearly crosses the Troll line, or he/she turns out to really be Face Reality with a new costume. The last couple of CR posts read very similarly to FR, right down to the way he/she made pseudo-quant claims to support flimsy arguments.

140   astrid   ignore (0)   2006 Oct 23, 2:13am     ↓ dislike (0)   quote   flag      

SFWoman,

Congrats on getting your guest bedroom back!

141   Boston Transplant   ignore (0)   2006 Oct 23, 2:18am     ↓ dislike (0)   quote   flag      

Confused Renter said: "Boston Transplant, in 3 years, you and your wife will be making $400K or thereabouts i’m assuming if you are at $250-300K now. In 3 years, you could easily afford a nice $1-1.2 million condo/house. And in 5 years, you could easily afford more."

I'm afraid CR has turned us into poster children for spoiled over-consumers of real estate, which we are not. For one, we don't make assumptions about growth of our income in the future, and secondly we would like to have the freedom to live on 1 to 1.5 salaries. We know that this will mean less space and that's fine. I hope we didn't come across as a rich a**hole couple, because that's not who we are. Mainly I just wanted to inject a real data point into the MBA salary debate...

142   Randy H   ignore (0)   2006 Oct 23, 2:18am     ↓ dislike (0)   quote   flag      

New Thread Bouncing Dead Cats

My apologies to cat lovers, I didn't coin the term.

143   astrid   ignore (0)   2006 Oct 23, 2:42am     ↓ dislike (0)   quote   flag      

CR's perspective appear to treat housing utility function as "the more the merrier" and does not consider the tradeoff from other utility derived from job security, flexibility, not having to suck up to a horrible but lucrative client, etc.

144   TOLurker   ignore (0)   2006 Oct 23, 10:03am     ↓ dislike (0)   quote   flag      

*unlurks*

OO mentioned something about "up and out" in IB and consulting firms. Here's a paper on "up and out" as explained in economic terms, for law firms (but plenty applicable to IB and consulting).

http://www.marginalrevolution.com/marginalrevolution/2006/10/why_law_associa.html

The page opens to a general summary of the paper, the paper itself has some nice equations. I know Randy H will love it!

*relurks*

145   astrid   ignore (0)   2006 Oct 23, 12:21pm     ↓ dislike (0)   quote   flag      

The law is actually a much less cruel mistress than IB or consulting as described on this blog. There's usually a fairly broad swatch of work outside of big corporate law firms (though the highest paying jobs will be in those firms).

TOLurker, you might consider law school too, if you can stand doing what lawyers do on a regular basis (as long as you avoid litigation, writing/research/drafting/counseling). Law firms are probably a little less discriminating about where your degree comes from (as long as it is in the top quartile of programs) and it's a broader track than finance/consulting. It is also easier to find work outside of major finance centers and easier to do parttime work. You said you have a technical background so IP work is a possibility (have you considered being a patent agent as another job insurance course? They can make $80K+ in the DC area - lots of flexibility).

A teaching certificate is another possible job insurance, but teaching is a path that some people love and others get very burnt out from.

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