patrick.net

Dryfly,

Excellent analysis!

Let's also not forget that probably the most reliable way to determine if housing prices are way out of line with "fundamentals" in any region is to compare monthly carrying costs if you bought today (PITI + maintenance + Mello-Roos/HOA - MID) vs. going market rent on an equivalent/comparable property. If MCC is a lot higher than rent (NI/cash flow) a property can generate, it's dicey.

The beauty of using rents (not incomes) to determine relative "bubbliness", is it allows for regional variations in home prices and demographics. In CA, the long-term average incomes-to-price ratio is much higher than for the rest of the country, and has been for decades. Likewise for high-density "destination" cities and places with lots of NIMBY building restrictions, regulations & high taxes (HI, NYC, Boston, Miami Beach, etc.). Obviously, cities will almost always be more expensive than rural areas, whether buying or renting. However, rents can show whether or not that area's RE is just "normal-expensive" or 'ridiculous-expensive".

The old rule-of-thumb is spend no more than 100-120X monthly rent. Using cap rates is another rents-based calculation method, and many long-term investors won't buy properties with cap rates below 10. But of course, you also need to consider other factors like overall interest rates (high rates = > opportunity costs of not investing your money elsewhere vs. lower rates), and as Randy likes to call it, the "utility premium" of owning over renting, which varies from person to person.

Right now in most CA cities, rents generally cover around 30-50% of MCC, depending upon your location. This gives us some idea of how much they need to correct long-term. Exactly HOW they will correct (inflation erosion vs. nominal price drops) or how long it will take, of course, is still anyone's guess.

However, Let's not forget that balancing the price-to-rent equation to balance solely through inflation would almost certainly require wages to rise significantly. Why? Simple: people can't take out HELOCs, 2nds or cash-out Refis on their apartments. They have to pay the rent with cold, hard cash. All the funny-money loans have basically allowed home"owners" to devote 100%+ of their income towards the "real PITI" by indefinitely deferring both principal & interest. Colossal shell game. Try THAT with a rental.

There is a limit to what % of their total net incomes families can devote to rent because they must also eat, drive, wear clothes, get medical care, raise children, use energy, etc... Hint: it's less than 100%.

SP - sorry, mouse not scrolling properly and I'm skimming so thought it was you, instead of eburbed

I want to be able feed my family too -

Oh... well if your family is the kind that eats food, you might want to live somewhere else.

http://www.burbed.com/2006/11/23/how-to-save-20-on-your-groceries-for-thanksgiving/

Wow.

So after a glass of port (ok 2), and a bowl of tobacco, I decide to read the blog. Here are my conclusions:

1. There are some smart people that post here

2. They are completely fooled into thinking they can predict the future.

3. They are relying on historical data when we are in a climate we haven't seen before.

4. surfer X likes flacid penis

5. Arguments for a specific point are almost always "proven" by a sound but narrow focus logic

If someone can actually build an argument from ground up, as to why this is a bubble, and what will happen in the next 3 years, then I challenge thee. I'm talking about a real argument. Not one that focuses on one single economic indicator or phenomenon, not an anecdote, and not a reference to another vague and insubstantial thread on this blog. Not even a surfer x style "go suck your own cock" post.

My mind is open to be converted. I am your quintessential guy "on the fence". Convince me or your viewpoint is $hit.

bring it.

@Fuzzy Math,

You win!

It’s a new paradigm, and everybody who doesn’t buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

thanks for a nonargument HARM. You are proving my point.

Where in my question did I claim housing will increase at 30% a year?

So, to get this straight, your argument is the following....
-housing cann't continue to rise at 3o % a year
-therefore it is doomed to crash

solid

@Housing Bubble Research,

Save your breath (or is it fingers?). FM is a troll impersonating a skeptical newbie. Re-read his statements. He basically just ignores everything anyone else says, then declares New Paradigm, followed by "bring it". CuriousCat, LittleWorried, WoopAss, Boomtime, whatever... all the same. Not worth the time or trouble.

surfer X likes flacid penis

Wow, if you are going to resort to Sophomoric name calling at least be clever. For instance, fuzzy math has to suck the John's cum out of his mother's corn filled ass with a straw and then sell the sperm in order to afford his interest only san hosebag stucco $hitbox. That's what your patent is in right? Fluid delivery?

A trolling we go a high ho a merrio a trolling we go.

HARM ;)

something else on inflation and interest rates as the topic du hier:

Taming the dragon - Money - Business - Home - smh.com.au

gittins is quite good at explaining econ. and why does increasing short-term interest rates reduce inflation? still want an answer in 1 word or less...

uh oh

US bound for recession, tips RBA board member

AN INFLUENTIAL Reserve Bank board member, Warwick McKibbin, says the United States is heading for recession.

The chairman of the US Federal Reserve, Ben Bernanke, expects a smooth slowdown, but Professor McKibbin predicts a housing-induced contraction will make 'the Fed's job very difficult'.

'I think there will be a recession in the US next year because of the housing market coming off and consumers slowing down their spending,' the Australian National University economist told the Herald."

A US recession would cause global long-term interest rates to drop and encourage central banks to cut official short-term rates.

The pressure for lower rates will increase if, as Professor McKibbin believes, commodity prices are poised to fall.

"I think commodity prices will soften," he said.

His modelling, with economist Andy Stoeckel at EconomicsScenarios.com, shows a US downturn would divert capital from US housing to other markets. A US recession would be offset by a surging China.

A recession would also assist adjustment of the US and Chinese current accounts by weakening the US dollar, lifting US exports and slowing Chinese exports.

Like the Reserve Bank governor, Glenn Stevens, Professor McKibbin is more concerned about persistent underlying inflation than weakening global growth.

However, Chinese growth should not be taken for granted.

"China again is always on the precipice … you hope something doesn't go wrong," he said.

"But there's a lot of adjustment going on in China … I think there's still enough surplus labour that you're not going to get a massive surge in wages in China that's going to cause a global inflation."

Fuzzy Math Says:

If someone can actually build an argument from ground up, as to why this is a bubble, and what will happen in the next 3 years, then I challenge thee...Not...a surfer x style...post.

My mind is open to be converted...bring it.
_____

Scope out any of the innumerable charts that demonstrate significant deviations from the historical averages in housing--a picture is worth a thousand words, not to mention a thousand mathematical formulas.

Then deny what you see with your own eyes, disregard the immutable laws of market physics and go "all in."

In other words, put your money where your mouth is & walk the walk.

FUZZY HAIKU:

Fuzzy Wuzzy was
a mouse. Fuzzy Wuzzy bought
a house...trap. Whap! Squeeek!

"Most of the old regulars on both sides of the argument have stopped participating here"

Really? Google Housing Bubble (hint) we're Number 1!

"Unfortunately, you will now have to wait another 5 years to disprove the more recent crash predictions".

No need to wait another minute. The crash is all around you my friend. The lapping sound you hear is now at your doorstep. If sound personal financial planning involves borrowing the better part of a million dollars with a loan that can never be repaid you Good Sir are counting solely on appreciation. Based on this flimsy arrangement all that's needed for Fuzzball to go belly up is for homes to stop appreciating. We're there. End of game.

True believers in the housing boom have had nothing but the wind at their back up until now. Every conceivable advantage. Heavily subsidized, tax friendly, cheap/free money environment. Not ONE obstacle. Even a natural disaster like Katrina played to their advantage driving demand (and prices) for lumber. We've defended the bubble at all costs, even at the expense of watching our currency become a laughing stock. We've gutted and revamped our entire national financial structure to protect our REIC-based economy. Could we have possibly bent over backwards any further to accomodate our precious bubble?

See? This is why these clowns come back HERE time and again! They won't even try to ply their trade over at Ben's Blog where things have a n a t i o n a l focus! It's forever with their touting the BA and how they don't see any blood in the street? Go over to Ben's guys. "Bring it" over there and tell people in FL, MA, San Diego, Phoenix, Las Vegas and Sacramento all is right with the world.

DS,

I enjoyed your post about "the original hand held GPS"! I'd read a similar article where a Norseman's artifact in the Smithsonian (long thought to be a button or "seal") was actually an early navigation device that with reasonable accuracy mapped the northern hemisphere! I'm told it was moved to a prominent display.

SP,

Your #4 above was subtle..... but hysterical nonetheless!

Dollar sliding against the Euro "more than usual"!

Like...... they didn't think we'd notice or......what?

FR,

That's the whole point. The "OR" in DinOR tends to imply I'm from Oregon? I'm hardly intimate with the BA (other than 3 mos in the service in the 80's) so I'm no expert and I don't portray myself as such. But it's like you guys are painted into this teeny tiny corner and tout endlessly about these few select communities that (up until this point) have remained largely unscathed by a bust that's affecting the balance of the country. Really, I dare you to go over to Ben Jones' Blog and tell everyone there about how "rosey" things are. Dude...... they'd eat you ALIVE!

FR,

Let me put it to you this way, o.k? Why is SO important that your home continue to appreciate? (And in a wild fashion I might add). Why is that so important to you? If we're so obsessed with "affordability" why are guys like you so determined to go "double or nothing" ensuring that future buyers will be forced to use even more rickety financing than you did? How is that "progress"?

Surely you have other investments? WE all do!

SFWoman,

Thank you and good morning! Exactly. The value derived from having a storm cellar is in one's being in there "before" the storm. (They're of little use to the dead).

SFWoman,

I sometimes get concerned that folks here might get the wrong impression. I'm a stock "trader" not an analyst. Big difference. Now..... I DO get my "dope" from analysts but I want to make sure that much is clear.

What is also clear is that RE momentum players are on their feet cheering for ever more "creative" loan products b/c they know. They know it's over. The only way any GF could possibly "afford" their overpriced hovel is with even greater leverage. They know. They're barely making the payments now, no one of any prestige lives in their neighborhood/complex so their GF HAS to come from within their own ranks. They know.

And you don't have to be a REIT analyst to see that.

FR,

O.K whatever.

So it's "o.k" for equity locusts to migrate endlessly in their pursuit of easy money taking their "road show" to Vegas, Boise, Bend and Billings, MT but it's NOT appropriate for us to comment on it? Where do you think all of the money that drove those markets came from?

None of us lives in a vacuum. In spite of your deep and debilitating state of denial, neither do you. How is it possible to have a serious and undeniable market correction from coast to coast and yet have the BA walk away without so much as a scratch? Look, I've put several credible questions before you that you've conveniently chosen to ignore. You've refused to address the core issue of just why constant and unceasing appreciation is so damn important to you yet for some reason can't fathom my frustration? Next time change your screen name to "Get Real" o.k?

SP,

your post clearly spells out what this website appears to be all about.

"I am pretty certain your mind isn’t open, but in denial - and based on the data you provided, you are NOT “on the fence”."

I meant on the fence as to whether I believe a serious correction is coming in the BA douchebag.

"Your data, if true, means you are a Fucked Borrower, who has put his finances at risk to buy a shitbox near the peak of the bubble — and is understandably desperate to see this bubble continue (at the expense of other people), so that your bet doesn’t go sour and put you deep in the shithole."

awwww, SP can't buy a house. Another solid argument.
Anyhow, I guess I rest my case. At least a couple of people tried.

To those that did, your arguments seemed to speak mostly of the yield curve. Which is a good indicator, for a recession. However, for some reason recession does not equal BA housing correction. ie... dotbomb, housing continued to go up in the area. I remember reading an article in the San Jose Mercury in the 2001 timeframe which was title "Housing continues climb, but at a slower rate".

Imagine me sitting there in 2001, 23 years old, with a good engineering job, wondering why I couldn't buy a house. And I WAS SURE that the dotbomb bust was going to make housing go down. In fact, everyone WAS SURE. But it didn't.

So, yield curve is good for predicting recession. But is recession good at predicting housing collapse? It wasn't 6 years ago.

Fuzznuts,

Talk about taking two personally selected data points not making an argument!

You're outta here!

DinOR,

note that I did not say recession never causes housing to go down.

Anyhow, I'm not saying any of this to get in an argument about arguments. I'm looking for someone on the board to tie it all together.

The zombies are out this morning.

Trees grow to the moon. Every asset which has ever undergone unusually high appreciation has continued that appreciation indefinitely.

It's been mentioned many times before, but I suggest reading "Devil Take the Hindmost" to get a historical sense of bubbles. Those of us predicting a bust are partially basing it on the psychology of man. Groupthink affects bulls much more than bears. It's a fantastic party, but when they take that last step of the staircase... bang.

Through Google cash source pumping $$$ onto the penisula, the BA bubble may be the last to pop. As DinOR points, out, a survey of Ben's blog shows that the rest of the nation is popping hard right now. If the BA defies gravity, the solution is to leave the area. Painful from a personal perspective but not as bad as the nightmares BA owners are going to have over the next 5 years.

Yeah, Fuzzy Math and Confused Renter....

....shift yer arse off the chaise longe, tell the Houris to stop handing you peeled grapes for a mo', and explain to us why we're wrong?
You can't just wander in somewhere and demand the locals prove 6 impossible things before breakfast with out doing a bit of hard graft yourselves.

I admire your chutzpah for coming here and being contrarian, but, as a minority, its up to you to argue your point to us, not for us to argue our point to you.

If not-then despite the flood of housing data to the contrary - there are still bullish sites like the SDCIA Messageboard, or Bloodhound Realty - which would be more your cup of tea.

dryfly,

Typically I don't care to start my Friday's out w/ he said she said either (myself being the "he" here) o.k?

You just can't get these bulls to give it up as to why RE has just gotta gotta go up! (Other than they bought at or near the peak and all things considered are already screwed).

I know it might be tough to see the impacts of the "rolling bubble" from Guttenberg, IA but if you shared a border w/CA you'd definitely be feeling it! Bend and our coast are awash in bubble bucks and even dives like Ashland and Medford have become unaffordable to locals. Do they give a rip? Pffft. They'll ditch their specuvestment in "wet hell" like an ugly girl at a dance!

"It's a fantastic party"

FRIFY, like I always used to say, "Relax...... the cops won't be here for another 10 minutes!" Or:

"Quick, somebody give me a drink before I pass out!"

You know, no one appreciates more than a self-educated person such as myself the value of being disrespectful to your mentors when you're not getting the answers that suit your agenda!

Nobody, and I do mean NOBODY calls my pal SP anything other than SP alright!

Contrary to trolls insistance this is hardly a "love fest". There's a constant and spirited difference of opinion. As events have unfolded before our very eyes that difference has greatly narrowed as a function of market conditions. Oh btw, ISM #'s says the hopes for a soft landing got lost behind us on the last bend in the river along with "free lunch" and his rowing partner "anti-gravity".

"despite the flood of housing data to the contrary"

speedingpullet, well said. The entire post. I'm really at the point where I don't feel I have to prove anything to any bull. If you're the guy pitching an upside down asset in a declining market YOU make the case to me! Absolutely.

Oh btw Merrill Lynch's RE analyst used the term "barrage" not flood. Either works but "flood" might mislead the reader into believing that all that's required is hiking up one's pant cuffs. ""Barrage" OTOH tends to imply that ducking and hiding would be more appropriate.

dryfly,

My HS buddy got a job w/the Milwaukie Road (when they were still in bus.) and slept in a caboose in G-Berg! For kids from Chicago it looked a lot like "Children of the Corn" so we would do a road trip to cheer him up. As I look back it really was neat little town. He married a bar owner gal and they live in Calamus.

My HS buddy got a job w/the Milwaukie Road (when they were still in bus.) and slept in a caboose in G-Berg! For kids from Chicago it looked a lot like “Children of the Corn” so we would do a road trip to cheer him up. As I look back it really was neat little town. He married a bar owner gal and they live in Calamus.

Is this some kind of code? Coptic?

X,

Yeah! LOL! Actually G-Berg is a town that time forgot. It's pretty backward and I think we were the only "crime" they'd ever had.

Face Reality said :

Care to tell me where exactly the crash is in the Bay Area? Sunnyvale? Cupertino? Palo Alto? San Mateo? Where?

Welcome back.

I will tell you where crash is. If you accept BA as more than those 4 cities. The crash has begun. It has started in Tracy. Pleasanton/Dublin is following suite. It has started in Gilroy. Morgan Hill is falling.

Even your San Mateo "median" is down YOY. I am sure you know median distorts the picture on the upside. So individual houses are down much more than that.

Search the archievs of this blog for "Evergreen". You will see posts detailing individual houses, MLS number listed with their history of reduced prices over sitting on market for 6 months.

You might have noticed that inventory has stayed high and has not gone down as much as seasonal patterns would indicate. If you search for reduced priced listings, you will find such in Cupertino as well.

This is just the begining. It's equivalent to nasdaq dropping from 5K+ to 4900.

This is in spite of a strong job market in BA and low mortgage rates. Come spring there will be more inventory, -ve YOY median - even in cities you mention, and a tremendous change of sentiment. Come 2008, you will have ARM resets. You will see price drops even in Monta Vista, how about that ?

That's my prediction. So come back here next summer and then in summer of 2008. And we will ask each other, where is crash.

No one knows the speed and depth of "crash". Why pretend in predicting exact numbers ? As long as numbers keep going down, bears win.

3. They are relying on historical data when we are in a climate we haven’t seen before.

I missed this one. Every victim of previous bubbles has thought the exact same thing. Newton held off from the South Sea bubble until he could no longer resist the pull of the tremendous gains everyone was bragging about. Then it all came tumbling down once he committed his money.

Like Newton, you're only human Fuzzy. These bubbles are castles in the air created by mass psychology of people saying "It will not go down... it will not go down..." and they're right for a lot longer than anyone expects because people on the sideline start chanting the mantra and the cult grows until there are no more converts to the ponzi scheme. Once you break the growth pattern and the mindset behind it, everything comes plunging back to earth. This is happening RIGHT now if you just open your eyes. Devil Take the Hindmost charts this same psychological pattern for 350 years and there is nary a decade or two without a bubble. "Those who do not study the past are doomed to repeat it."

Remember the scene in Empire Strikes back? Luke is losing his concentration as we speak... "Han?! Lea?! Greenspan? Bernanke?". R2D2 is about to plunge into the swamp.

StuckinBA,

Thanks. (Where were you guys at 5:00am this morning?)

I told the guy, I don't have the lay of the land on the BA b/c I don't live there! I could not have been more open about it!

What these yahoos also fail to realize is that for bubble watchers right now it's like we have an 8 car NASCAR pile-up unfolding in front of us (FL, MA, SAC etc.) and they keep trying to divert our attention to the pits. When the we get the flames put out and dust settled we'll let you know!

Post #173 posted at 2006-12-1 @ 10:12:52 am by Jon seems to be in moderation because of two urls. Can someone let me know how to approve it for publication? Or just go ahead an unstick it, please?
TIA
SP

Perhaps all of you are right, and there will be a crash. As some have pointed out, it is already in our midst. That much seems to be obvious.

As to the extent of it, the soft landing seems more likely. Although cults like yours attempting to spread fear could feed into a more abrupt crash. That's where the psychology comes in. How bad will people freak out when their house drops 20%.

The BA will certainly get hurt, but will probably still continue to defy gravity on the affordability front. Lets be real, a large majority of the people priced out at $750K will be priced out at $600K (a 20% drop). For the most part it means people like me who with creative financing can afford $750K, will be able to grab a safer loan for the same house.

Anyhow, as the crash slowly plays its way out, we will all be 5-10 years older. Are people gonna sit and wait until their 50 years old to buy their first house? Probably not.

Randy's Bubblizer is based on the time value of money, which will stand to increase any loss over time realized by the difference btw. owning and renting. Is there a time-value for quality of life? Is quality of life more important now than 10 years from now? It should be, as the chances we will be alive goes down the further out you look.

DinOR :

No problem.

Did you notice the change in the tune ?

- BA will not go down, strong job market, great weather, everyone wants to live here
- Cupertino and Pal Alto are not down (who cares aboue rest 98% cities)
- It's down only 5%, where is the crash ?
- You said it will be down 20% in 2 years, but it took 4 years and it's down only 15%

Yeah right. Dude, we were wrong. I admit it.

I agree with HARM. Time has come to ignore Fuzzy Math.

The constant change of arguments is tiresome.

Jon,

In spite of our age differences I find myself in very similar circumstances. The only other variable I could assign would involve going back to all of my clients and renegotiating fees which would totally screw them over and conflict with everything I stand for but...... I would be able to swing that $5,800 a month payment!

It's all about values Jon. You know that. Other than treating people ethically and fairly there are other perks as well. Like being able to afford to be generous once in a while! How many neg. eq. FB "owners" will be kicking in this Christmas when it it means the difference of being able to afford gas to get to work next week or not?