patrick.net

But my absolute favorite was the jackass in Cayucos who is currently renting his shitbox out for 1400 a month while trying to sell it for 920K.

Wow. Even assuming the most favorable terms imaginable (30-year 5.0% IO-ARM, no HOA or maintenance costs, average closing, 1% prop. tax, etc.) and a full 20% down (FAT CHANCE!), the guy is STILL in the red by over $4500 a month!

Rent vs. Buy Calculator:
dinkytown.net/java/MortgageRentvsBuy.html

When did the guy "buy" this place, Surfer-X? Did he use a $0-down NAAVLP(tm)? Have you checked up on his progress (or lack thereof) lately?
Great anecdotes -thanks.

A P/E of over 54.7! Google suddenly looks cheap now.

Single Family Property, Area: Cayucos, County: San Luis Obispo, Lot is 1 sq. ft., Ocean view, View, Waterview, Single story

I wonder what you can do with a 1 sqft lot. It is too small even for my cat.

I wonder what you can do with a 1 sqft lot. It is too small even for my cat.

lol - maybe that's why there's no photo!
Never been there, but Cauycos is just 6 miles N. of Morro Bay, right off PCH(1). Who knows? Maybe it's actual beachfront property. "Ocean View" can mean oh-so-many many things in Realtor(tm)-speak. Maybe the view justifies the extra $685K above break-even cashflow/rent price?

Sometimes "ocean view" simply means that you can see part of the ocean through the two aligned windows of your neighbor during some time in the day.

In losbanos, lot of new houses for rent. i am renting a 4bed room house for $1250. The new homes 1700 sq ft are going for 400K. There are just building and building as if there is no tomorrow.
however lots of old house listings coming up in the market.
I have decided to wait it out even if i miss this party.

I have decided to wait it out even if i miss this party.

This party is about to catch fire. Good to stay out of it.

Davis used to have extreme rental shortage and very low vacancy rate. I heard that there is no supply problem any more.

I love Davis (go aggies!) but I think the market may drop 70+% there.

Davis is farm-locked though. ;)

Davis has as much land as your eyes can see. Much of its population is transient and demand for permanent housing is mostly for "investment" purpose.

Davis can be fog-locked though. I remember having to drive at 10 mph.

Davis: all the pretensions of the Bay Area, plus the Sacramento weather.

Go _Bears_

I kid. I kid.

Kinda.

Cheers,
prat

My first post--love this site and have learned a great deal from it. Thanks to everyone.

My anecdote is that we just returned from visiting my husband's family in San Francisco, and suddenly all our family and friends there are trying to become real estate gurus, looking for investment homes, buying out of state property, etc. It's astonishing that these people who never thought of real estate investing before are all of a sudden chasing after the bandwagon. My husband grew up in SF but is in the army, so we move around, have never owned a home, and currently live in the So Cal desert, but our past few visits to SF we've had to fend off suggestions from everyone that we need to buy a house in the Bay Area now and rent it out until we're ready to settle down, because if we don't buy now, we'll never be able to afford it later, yadda yadda...

What is everyone smoking that they think we could even begin to afford a house we'd WANT to buy there now, let alone that the prices are just going to go up and up? These are otherwise intelligent, rational people. When I tried to point out that maybe real estate wouldn't be such a good investment, I got the "prices never drop here" comment again and again. One person, maybe with a better memory, said that prices during the last real estate bust in the Bay Area only dropped on high-end homes and one-bedroom condos. Does anyone know if this is true?

One of the articles I read (can't recall which one) spoke about the real estate investment seminar 'victims', amongst them a young woman who was frantically bidding on a place in Boston and she managed to win the auction only to find she had bought a garage for hundreds of thousands of dollars, not the condo she thought she was buying into. Let me do some searching to see if I can find that reference.

Oh and hi Peter P. I'm glad to be back. I was a little burnt out on the subject as we were house hunting at the same time due to lack of living space but we have that on hold for now so I can think sanely again:)

As the bubble stories aren't bubbling over I'll annoy everyone by digressing with some news from the Australian market. I follow a forum over there that is pretty good so I'll put in some of their observations that look interesting. I think they are going through what we might sometime in the future. Their market slowed down about 6-12 months ago and declined in some places. They are going through a slight bump up at the moment and the newspapers (one is very biaised to only give 'good' property news) says the downturn is over. The locals are a skeptical bunch and don't appear to believe this is true. Anyway here are some comments from one poster:

A bounce after a market (any market, shares, bonds etc) falls from its peak is a perfectly normal event.

Market activity does appear to have picked up lately but I am expecting a renewed downturn (the "real" downturn) to start sometime between August and the end of this year.

Only if falling prices are not readily apparent by March next year (by which time activity should have returned to normal after the Summer holidays) will I become worried that we may not see an actual fall.

As for those "triggers" that everyone looks for, personally I don't belive that one is required since overvalued markets have always reverted to the mean (usually with an overshoot) in the past.

But if you are looking for a trigger then I think I have found one. Oil. Firstly, oil itself isn't getting any cheaper. Seccondly, there is insufficient productionc capacity to meet demand towards the end of this year when heating requirements in the Northern hemisphere increase. Thirdly, the Australian Dollar looks very toppy and of course oil is priced in US Dollars so any fall in the AUD will make it more expensive.

Bottom line - petrol at $1.159 a litre (current price in Hobart)is likely to look like a bargain by Christmas. This will strain household budgets and wont be at all helpful to the housing market.

Nor will the new low wages.

Oh and more:

In Sydney, the time taken to sell a property has fallen to 82 days in May from 90 days in March.
(They used to get snapped up ON the day of auction - most houses used to be sold at auction to get the prices up but they are less popular since the downturn)

Good story, Jamie, and welcome to the party!

One person, maybe with a better memory, said that prices during the last real estate bust in the Bay Area only dropped on high-end homes and one-bedroom condos. Does anyone know if this is true?

Well, since I was living in L.A. (and still am) I can't personally vouch for what happened in the B.A., but I know firsthand that prices overall dropped in SCAL quite significantly (the CA statewide drop was 21% in real terms from 1990-96). In general, condos always get harder hit than SFRs during market downturns, largely because neighbors/lack of yard/HOA rules, etc. makes them relatively less desirable and therefore harder to sell. There tends to be a lot more apartment-to-condo conversions towards the end of a bull market as well, so oversupply is more of a problem.

Not sure if I agree about the high-end homes being hit harder %-wise. Actually, homes in "desirable" neighborhoods do tend to hold up a bit better, but, that does NOT mean that prices can't/won't fall at all during down markets. When prices everywhere are as out-of-whack with rents & incomes as they are now, look out below.

Actually here is a post-bubble anecdote from the Sydney market talking about the % downturn in the market http://tinyurl.com/dv6dt :

Some buyers are already reaping rewards, such as Adam and Stephanie Horne who secured a Blakehurst property initially valued at $1.2m for less than $800,000 – a 30 per cent drop.

"It was on the market for about a year," Mr Horne said. "They actually knocked back $1.1m a year ago and it went to auction five weeks ago and I got it for $791,000, so we were happy with that."

-- I wonder if we will be seeing this kind of story next year?

gabby-

Definitely interested in hearing more about the real estate investment seminar ‘victim’. Please post the link if you can find it. And thanks for the stats on Australia. They (and the U.K. seem to be about a year or two ahead of us on the Bubble curve). A glimpse of things to come, perhaps...

gabby, thanks for the information.

Do you think AUD (or NZD) is a good buy right now?

There are always many false bottoms in the housing market, because information is so imperfect. Saying the downturn is over is much worse than saying that "Bay Area housing crash continues." At least patrick is forward-looking. :)

Jamie, it depends on which downturn you are talking about. During the 2001 "correction", high-end homes got hit because of wealth destruction and one-bedroom condos got hit because single engineers got laid-off and they moved out of state. (It is not that single engineers are more susceptible to laid-offs, but they were more likely to move in that case)

The 1991 crash was probably more severe and broad, but I do not know too much about that.

I haven't been thinking about currency too much lately. Things feel a little odd in the Aus market right now. The locals are ranting about the dollar here: http://tinyurl.com/b395x (scroll down near the bottom and there are a few comments).

I have some money in AUD paying off an offset mortgage (pretty cool financing option) so I'm not going to send more over. I'm considering moving some money to some type of EU currency, not sure which just yet. I'm feeling the need to stay fairly liquid with some diversification. Just watching the stock market bounce around is making me seasick and I'm going for the more moderate risk investments at the moment. I think you could get really lucky if you knew what you were doing at the moment playing off of the uncertainty, but I don't have enough time or money to play that game:)

movin2davis, that seems to demostrate that housing supply can and do come out of thin air. Using future demand and current supply to justify price is very dangerous indeed.

gabby, I am not too bullish about Euro in the long run. The idea of having one central bank (hence interest rate) for multiple countries with completely different cultures and needs is questionable. At the current interest rate level, some countries (e.g. Spain) are overheating and some countries (e.g. Germany) are in near-recession. How can monetary policies be effective?

I think you could get really lucky if you knew what you were doing at the moment playing off of the uncertainty.

The problem is that no one knows what is going to happen... we are all speculating. :)

I do think Aus and the UK are good places to watch to get a feel for similar patterns that may signal similar events in the US market. I remember being out there a few months before the downturn trying to tell friends that the market had to go down and would go down soon as it all felt really wrong (like how I feel right now).

They thought I was completely off base and were convinced that the market would at most flatten out due to a lack of housing, immigration, the wealth in the market etc. I felt like an alien looking in as it seemed so obvious taht the wealth was all on paper and in debt, they were living these insane lifestyles (like the time I was offered cakes to have with tea at a friends that were some organic brand and were tiny things the size of a small cookie that cost $4.95 each!) and were oblivious to anything that might burst their bubble.

One theory on the slight bumb recently is that people are so scared of a recession they want to buy before they lose their jobs. It's really starting to look bad over there.

One theory on the slight bumb recently is that people are so scared of a recession they want to buy before they lose their jobs. It’s really starting to look bad over there.

Isn't it counter-intuitive? Won't they be on the hook for the mortgage as they lose their jobs? Don't they lose financial flexibility byentering the market now?

Peter P - I meant other EU currencies not the Euro persay. I agree, the Euro has too many constraints on it right now and the whole experiment is looking a little fragile. I'm thinking more the Danish Kroner or maybe still the pound. I'm only going to invest if I'm doing something creative with my money but am still working out what to do.

On stories - I was at a friends b-b-q recently and he was excited as he'd bought a piece of land in Florida with a friend as an investment. Nothing built on it, not ROI and an interest only loan. He is a QA engineer by day and his wife is getting her real estate license. He is also looking for other great investments. Another thing I ran into recently while looking at houses was that two of the 6 I looked at were owned by people holding a new real estate agent licence. Sound like a disaster waiting to happen?

Sorry for the typo's tonight. Long day at work and all;)

Dipanjan:
I read somewhere that, on average, refinancing and cashing home equity were not as big in Australia as it is in US. Do you have some data on that?

I'll look but keep in mind that you can't get 15-30 year fixed rate loans. They don't exist and seem to be a fantastic bonus in this country. Most people get 3-5 year fixed that then turn into variable rate interest loans. The current interest rate on loans is around 7% currently so it's also a lot higher than here. People don't typically re-finance like they do here as they have the mortgage costs to deal with and it's not so advantageous due to loans not staying fixed. Still, people are doing a lot of second mortgages. I know a couple of friends who have sold their equity for additional mortgages and spent the money on lifestylin'. People over there have a great love for enjoying themselves and are really spending up large. Things cost a lot more as well. Food and general commodities are really expensive.

>Also I think Australian economy being more commodity and export driven will probably withstand the burst better than US where job growth in last few years has been mostly confined to housing - construction, mortgages, realtors etc. What are your thoughts on that?

The US market has a lot of foreign investment, more so than Australia but it's really hard to know what will tip a possible downturn in Australia. Personal debt is incredibly high over there and with home loans not being fixed for long periods of time and interest rates continuing to rise I think there will be a lot of pain. Even though I'm not a big fan of John Howard he appears to have kept the economy going for a long time but the locals think things are really looking shaky and they never had the downturn we did so in some ways it's just thier turn.

gabby, I am looking at some european currencies too, in particular, CHF and NOK. I am still doing some research but my wife is really pushing me. :)

Some people think that they can flip houses at a lower cost with a real estate licence. This is true but a bad flip will still be fatal.

Some good threads from the locals regarding predictions on the Aus. property market and economy (mentioning commoditities amongst other things)

http://tinyurl.com/bbnfw

The houses the real estate license sellers are trying to move start off too high (trying to prove their metal in being a successful flipper) then they have to lower them but the houses have been on the market for a while and don't get enough attention to command a great price so these people seem to do a little worse in the markets from what I've observed.

Peter P - I'm pushing myself to diversify so I don't have all my eggs in one basket here. Your wife sounds like a sensible woman, better than spending it on high fashion right? ;)

Your wife sounds like a sensible woman, better than spending it on high fashion right?

Absolutely. I am quite fortunate. ;)

BTW, many flippers are quite detached from the reality. They somehow think that they are ask for any price and still get a bidding war. It is going to be ugly...

Did you guys notice another big jump in inventory number in the Bay Area? The list that I am looking at is expanding at an unseen rate (~25% increase in two weeks. That particular list contains starter-homes in the larger silicon valley. (IMHO, these homes will be hit first due to buyer exhaustion.)

Davis: all the pretensions of the Bay Area, plus the Sacramento weather.

Truer words were never spoken. 106° today. Auuuuuuuuuuugh!

On the other hand, there are currently 1091 listed properties within 10 miles of Palo Alto. When I sort it by price in ascending order, the first 600K+ property used to be around the 135-th entry (a few weeks ago), it is now the 170-th entry.

Looks like cheaper properties are starting to sit and this may explain the higher median price as well.

Feel free to poke holes in my theory/observations.

Davis is a rather safe place. However, restaurants are not that good. My biggest complain is still the occasional *think* fog. It is lovely otherwise.

Actually, I like Davis too. But the heat the heat.
Maybe it's frying my brain and I'm having my own *think* fog, but I don't really get what that means.

Thick fog. Sorry for the typo.

No problemo.
You guys are so smart, that I tend to think you're making some reference that's totally over my head.

My philosophy is there are no stupid questions. And if there is one, I'll be the one to ask it.