patrick.net

Randy, is this a CYA? ;)

Or a pre-emptive strike against trolls?

Ironic, my entry on Burbed today (which I wrote last night) was kind of the same:

http://www.burbed.com/2007/01/29/spring-bounce-is-here-people-lining-up-for-open-house/

BTW, check out this rambly piece on Silly.con valley.

http://www.financialsense.com/fsu/editorials/jain/2007/0128.html

Example quote:

If there is any doubt left that the dynamics of the residential real estate in Silly.con Valley, over the past dozen years, has been very different from the rest of California, outside of the Bay Area, one need only to look at Fig. 9. There are people, in the Bay Area and outside, who think that the Bay Area is special when it comes to housing and bought homes in the Bay Area during the recent bubble for investment purposes. The Bay Area has been by far the worst housing investment over the past seven years compared to the rest of California. Actually, the ridiculously high prices in the Bay Area, relative to rest of California and the nation, driven by the tech bubble, was the single most important factor in people moving out of the Bay Area to the rest of California and to other states.

Ouch! Other parts of Cali are more special than us?

"really more of a pause in the correction"

There's certainly an "earful" there! Those of us in tech (or have peddled tech stocks) know that even a DAY's reprieve from the onslaught of bad news is welcome!

But I gotta tell ya'..... I just don't see it happening. On the outer fringes (Oregon) and other rolling bubble markets sellers seem to be reeling from the sober realization, they grossly overpaid. Gone are the days when they couldn't wait to sell to get on with their next RE project/projects. Now they are selling b/c t h e y w a n t o u t! Now, of course they want to walk away without so much as bruise b/c after all, this is RE! NOT the stock market.

I'll go on the record as having said "Other than a few select markets and the last few "odd and angry shots" this will be.... Silent Spring-The Bailing!"

I believe Randy H would describe these as price TAKING *not* price MAKING sellers.

Peter P,

The latter. We're getting ready to abandon the rental option on this place and secure another more suitable to camping it out as renters for a while longer.

But given the stress this decision has caused us, I can imagine others similarly grappling with very understandable pressures from friends, family, coworkers, spouses, etc.

patient,

But we're all human. And if we're honest and intelligent, we leave room for doubting ourselves. I'm not so sure the others are as honest or intelligent, and many certainly never dare to doubt themselves.

I'll be the first to admit there were definitely times I had my doubts. There were definitely moments when, watching the rest of the country (and much of the world) binge of mortgage debt and partying like it was 1999, I began to doubt my own reasoning and sanity.

However, most of my doubts were early on (2003-2004), before I understood the root causes of the bubble, and before the really big NAAVLP price surges took us into truly "uncharted territory". Once I had done the reasearch and mentally connected the dots (Fed Funds rate at 1%, explosion in sub-prime MBS risk transferrence, 40%+ speculative buyers, 24-month club, etc.) any serious doubts I had melted away forever.

Yes, JMK was right --markets can stay stay irrational longer than you can stay solvent. Even so, the "surprising" recent spike in NODs and foreclosures along the coastal states, plus the rapid demise of sub-prime shops (Sebring, YouOwnIt, MLN, etc. --see http://mortgageimplode.com/) should be proof positive to any doubter that everything we predicted here is coming to pass --and perhaps even a bit faster than we expected.

Trees do not grow to the sky.
Gravity reasserts its influence.
There is no New Paradigm (or Santa Claus).

Randy, I believe that buying now is not necessarily a laughable option in your situation.

Stress costs you a bunch, you know.

I have many doubts. But doubts about the housing bubble is far down my list.

I afraid I have wasted a good portion of my life. :(

Methinks it's time to find a pliable agent - and there should be a lot these days - tell her you have cash and tell her you're not going to overpay. The instructions are to find houses in particular areas that are (a) for sale, (b) meet minimum physical specs, (c) were purchased long ago for far less than today's "Look, Ma, I won the lottery" prices, and (d) haven't been refinanced to fund consumption. (Stay away from FBs. You won't be able to buy those houses until they're REOs.) This is the sort of grunt work that an agent is supposed to do.

Then stink bid. Do it 20 times or 50 times if you have to.

"New listings at last years prices"

Charlie, that in and of itself is something of a victory! Over the last several years it's been standard to see what the neighbor sold for and then add 30-50k ON TOP of that!

Randy:

I heard financial radio guru Bob Brinker on the air yesterday.

Basically, his position was that if you're in the "there's a housing bubble ready to explode" camp, then you're some kind of "the-sky-is-falling" nut.

I wasn't impressed with Brinker's weak analysis of the situation.

And his attitude was, as usual, on the arrogant side.

What's with Bob Brinker? Is he just another oblivious, squawking pudit out of touch with reality, or are we the outcasts from reality?

I think he's behind the eight-ball and doesn't like upstart "expert" websites, outside of traditional media sources.

Perhaps he's threatened?

@Hi_there,

You are correct in pointing out that the the old 3:1 / price:median HH income ratio is NOT the only rule-of-thumb that tells us whether or not a bubble exists in a given market.

If a specific neighborhood has truly gentrified, or has some physical limitations on space/construction, then the old 3:1 ratio may not hold up. In CA, NIMBYism and Prop. 13 have mostly worked to artificially limit supply, while illegal immigration is working to drive demand up. This has indeed changed the historical 3:1 to an average ratio closer to 5:1 over the last 30 years (in California). Of course, even by this newer, more generous standard, things are still ridiculously out of whack.

However, price-incomes is not even the most reliable indicator. Even better is the carrying costs:rents ratio, aka "price-rent" ratio, which is somewhat similar to the price-earnings ratio for stocks.

Why is CC:rents ratio better than price:incomes ? Simple: rents represent the most direct measure of ROI possible in real estate. I housing --all housing-- has truly achieved a new paradigm vs. wages and the costs of other goods, then eventually this will be reflected in rents as well.

Another wonderful thing about rents is they are basically IMMUNE TO CREDIT BUBBLES. There is really no way for renter to indefinitely defer rent payments or "overbid" on a rental by using debt. There is no renter's HELOC, neg-am, or cash-out refi for renters. Renters must pay their rent with REAL MONEY --either income or savings. They are, therefore, beautifully free of the distorting influence caused by massive Fed/GSE-induced credit bubbles.

Right now, rents in the bubbliest areas of the US (CA, FL, NV, Pacific NW, New England, etc.) are running ~35-40% of the carrying costs of a "real" amortizing mortgage. Big-assed Red Flag if there ever was one.

Punchbowl,

I've been making reasonable bids, well above the most likely "real" market value, for quite a while now. The problem is those are still considered insanely insulting joke lowball offers, even by equity rich retirees looking to move to the community.

Psychology is very strong. All that mental accounting stuff. Framing, perception of losses versus gains, etc. Ethel wants $1.5m because Edith got that last summer. The fact Ethel and her late husband paid $185K for the place decades ago, and haven't put a penny into it since, is irrelevant. She perceives a $1.0m offer as a $0.5m loss, not a $815K gain. And don't even think of factoring inflation. Ethel still thinks paying the neighbor boy $5 to mow her lawn is overly generous.

Randy H,

You are a lowball pioneer and I salute your balls of steel for jumping into the (still) shark-infested waters.

However, as you say, greed, denial & MA still hold sway over most sellers and will continue to do so for a very long time. Personally, I don't plan on making any serious bigs until I see ~50% drop in real prices. Which, based on previous cycles, won't be until 2010-2012 at the earliest.

Seller psychology may be a powerful force right NOW, but as Peter P used to say, "reflexivity works in both directions". Fear is the powerful filp-side of greed.

Randy - This sounds like my friend who finally sold her place for asking price in Cupertino. She actually turned down an offer that was just $3k under asking. The house had been on the market for months. And she really wanted out of this house for lifestyle reasons, though she could afford to stay there indefinitely.

Harm - I'm with you on rents. And if somehow the gap between rent and buy remained the same as it is now, I just wouldn't buy. For me, it is that simple.

Punchbowl,

(d) above (for me anyway) is absolutely paramount! My sense for the last year at least has been for us to look at absolutely NOTHING that has been built or refinanced since 200_. I leave the last digit blank b/c I keep moving it back. If all goes well it might shift to 199_!

Over the weekend the wife and I looked at a 1995 built, 1,500 +/- single story in a very quiet neighborhood. At $215k I'd have to say price wasn't really the issue. It belonged to a retired college prof. and you just knew with all the "research" she'd done she wasn't going to budge an inch! The flooring was showing it's age and it's been FSBO for almost a year. Given all the research most of us here have done does it make sense to buy any home where you aren't getting a real bargain? The place had changed hands a surprising number of times in those 11 years and yet everyone will have made money on it, except me? I don't think so!

Michael Holliday,

I actually used to subscribe to Brinkers newsletter, many years ago. He's kind of a self styled value investor who also thinks he can time major market cycles. He hasn't done all that bad, although I think most of his gains came by calling the great bull market of the 90s and riding up some good mutual funds and MSFT and others.

A lot of people made huge gains riding up the 90s bubble, and then getting out before the stubborn retail investors. I'm not so sure that makes them geniuses, but then I'm not really in a position to criticize. They did better than I did.

I could launch into a much longer conversation about why there is a reasonably logical value-based argument that can be made that this real-estate bubble appears larger than it really is. I've made a lot of those points before. Global growth, corporate growth, etc. There really is a ton of good news which a lot of people on this blog tend to wave away. And some of this is relevant, and will serve to blunt the correction. It's already happening, and expressing itself as price stickiness in the stronger economy bubble markets, like the Bay Area. There's enough good happening here to gum up prices.

But even all that still won't stop the correction from occurring. I've said before, no one here really knows how much, long, or deep the correction will be. For every claim it will be [only 5%; greater than 50%] an equally credible criticism of that prediction can be found.

Heard the latest NAAVLP wonder ad on the radio this morning. The highlights:

--$20/month payment per $100K of mortgage ($200/mo. for a $ million loan).
--this neg-am period is locked-in for 10 years
--requires minimum 60% owner equity (good luck finding CA loan-owners with that)
--requires FICO of 668

They seem to be done chasing after the Casey Serin no-money-down types, and now they're heavily going after the few equity-rich idiots left who haven't already HELOC'd/refi'd themselves to death.

End game is nigh.

SP,

Agreed. Any time I watched a movie where the birds in the canopy were disturbed, something truly awful was sure to follow! And yes, without a rope, belt or bedsheets it must be difficult to hang one's self.

1. What is the percentage of investors who bought in bay area in the last 2 years?

@Hi_there,

Here are some links that quote the NAR & NAHB saying that up to 40% of surveyed purchases in 2005 were for speculation. They distinguished between admitted specuvestors (28%) and people buying "second homes", many of whom are probably small-time speculators. Either way, this is way above the historical averages, which is normally single-digits.

http://www.usatoday.com/money/economy/housing/2006-04-04-real-estate-usat_x.htm
http://www.freerepublic.com/focus/f-news/1556456/posts?page=4

This statistic also does not inlcude address people who bought only ONE home, but could not truly afford it. According to PIMCO, 82% of new-purchase loans at the peak (late 2005) used I/Os and neg-ams in California:

http://www.ocregister.com/ocregister/money/housing/article_902994.php

I could launch into a much longer conversation about why there is a reasonably logical value-based argument that can be made that this real-estate bubble appears larger than it really is.

Another logical explanation of illogical human behaviors?

If you read one link today, read this one:

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2007/01/housing_fetish.html

One of Jim's best pieces ever. The irony of spending so much on housing, when all we do is work to pay for housing, and sit in traffic.

Great blog - add it to your list.

Michael Holliday Says:

> I heard financial radio guru Bob Brinker on the air yesterday.
> Basically, his position was that if you’re in the “there’s a housing
> bubble ready to explode” camp, then you’re some kind of
> “the-sky-is-falling” nut.
> I wasn’t impressed with Brinker’s weak analysis of the situation.

I’ve been catching a little bit of Bob’s radio show on KGO most weekends for almost 20 years and he did seem a little out of it yesterday when talking about Real Estate…

> And his attitude was, as usual, on the arrogant side.
> What’s with Bob Brinker? Is he just another oblivious,
> squawking pudit out of touch with reality, or are we the
> outcasts from reality?

Bob has been a little arrogant the last few years, but he was the only guy with a national radio show to go on the records and tell everyone to liquidate their stock portfolios in early 2001 and get back in a couple years later…

I wonder how many people in the BA who got some money from stock options and used it to help buy “that slightly more than they can really afford house” are now going to be hit by back-dating problems - how much extra tax will they have to fork over that they weren’t planning on?

I don't think it's that many. Most of those were executive - I doubt they had a problem affording a house to begin with. Most certainly, they're not the ones inflating condos in San jose.

Hi_there :

I asked similar questions when I discovered this blog 1.5 years ago. I understand relatively more about this RE bubble now.

Yes, there are many high-income families, who spend an enormous amount of their income on their housing costs. IMO, they will feel a whole lot poorer when it's time to send the kids to college or when they are going to retire. But they will definitely survive the RE crash.

On the other hand, they cannot control the housing prices. Their purchases are now past history, not guarantee of future prices. These will be controlled by the marginal buyers of past and future. NOT ONLY INVESTORS AS YOU CLAIM.

Buyers who overbought using exotic mortgages will find trouble as the rates start to reset. Due to credit crunch that's happening slowly, new buyers will not have as much freedom. The rising foreclosures, reducing buyer pool will result in higher inventory and slow price erosion. This WILL change the psychology. There will be false bottoms along the way. But the downward path is certain.

Not a single soul on this planet knows how much and how fast. But there is no debate on the direction.

Hi_there said
Price will definitely fall when there are speculators who are trying to bail out . Is that the case for bay area?

No. That IMO is not the case for BA. But SP answered this question succinctly.

Even the greatest of fools can’t hang himself if he can’t find a rope.

The 10 Yr touched 4.9 today. And 30 Yr is pushing 5. The BA market needs as much funny money as any other in US. Take that away, and the debate is over.

Back dating options does not affect the employee's taxable gain on an option transaction. Employees with back dated options will not have issues with the IRS. The back dating lowers or eliminates the charge against earnings the employer has to take for issuing the options. It's as if the employer paid the employee $10K higher (and put the $10K on the employee's W-2) than the employer recorded in it's books. The employee's taxable income isn't changed by the fact the employer incorrectly accounted for the compensation expense.

@eburbed :

Regarding your mention of the open house. I am NOT surprised at all. 595K for a 1321 town home is at current market level. Hence it seems reasonable to many. I think it will generate multiple bids. Smart Realtor.

I believe that 600K is a MAGIC number for many buyers. It does not matter to many what they get in that price. It does not matter what price it sold for 3/4 years ago. This is why median price is not a good indicator.

Silicon Valley booming again after 5-year slump

If rent goes up 30%, it may not take much more than a mild correction over a few years in the housing market for prices to "reasonable" again.

SP,

Got Rope?

The Silivalley bounce is interesting. the gold rush stink never seems to leave that place. a corollary: graduation rates are down 3% yoy for the area (I believe this is correct). not exactly a lot of families moving in.

"the speculator that doesn't know he is one"

Exactly. In a way it's fitting that the very buying demographic the equity deep owners were cheering on from 2003-2005 will be the same ones that unravel their well laid plan. These "weak hands" ensure plenty of turn over and will crush "their" comps.

The same goes for things up at Lake Woebegone where foolks (TM) that "probably" were o.k to have a primary home but had no business in a vacation home are mucking things up in that market as well.

Randy’s post about a spring bounce reminds me of the solid late spring bounce that that NASDAQ had in 2000. In Feb. of 2000 when the NASDAQ was at 4,600 I had been telling people that I thought the bubble would soon burst for “two full years” and felt like the only one in N. California who was not expecting the NASDAQ to hit 6,000 by summer. When the NASDAQ dropped to 3,400 by May I figured that it was on it’s way back to “normal”, but the late spring bounce pushed it up to 4,200 (before it fell to about 1,200 in Sept. 2000 officially ending the “dot com bubble”).

Back in 1999 a friend from HBS gave me the e-mail address of a classmate named Whitney Tilson who like me has the crazy idea that “maybe” the NASDAQ is overvalued (and companies like “50 Pound Bags of Pet Food dot com” may not be worth 1,000 times next years “projected” earnings). In early 2000 Whitney wrote a great column called Valuation Matters (Google "Whitney Tilson" "Valuation Matters" to find it.

The column started with a great quote from Buffett:
"The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

In 2001 Whiney wrote a great follow up column called Valuation Still Matters (Google "Whitney Tilson" "Valuation Still Matters" to find it). The NASDAQ may hit 4,200 again before I die (remember from 1971-1991 it only went from 100-450 or 175 points per DECADE), but then again it might not just like I think there is a good chance that I never see another home in Marin sell for $2,000 sf (the high price that some tiny POS tear downs hit in 2005)…

FAB,

I wish I could find the sound bite but in the Fall of 1999 I was watching a Monday night game w/ Al Michaels and Boomer Esiason. Al somehow in the middle of a football game worked in the topic of "trading tech stocks on-line" and asked Boomer if he was trading on line as well. Boomer just LAUGHED! He said "Al, I have a guy that gets me bonds and annuities, stuff like that" and laughed again. Al said "Well I'M trading tech stocks!"

If the shoeshine boy and cab driver didn't scare you off the "jock sniffer" was your final warning!

Vacant homes up 34%

http://tinyurl.com/25ce4b

I'm with you Wood River.

Okay, I forgot to account for the $300-500 HOA fees, but it doesn’t affect the end result in my example - just pushes the household income to about 150K, which is still in range.

The HOA for the TH featured on burbed was only $240 a month.

That's an interesting way to think about things: working backwards from a typical income.

That reminds me of DinOR's thought piece: A corvette = 1 year of Plumber's salary. A 911 = a medicore lawyer.

So will a 1300sqft TH in Sunnyvale stick at 2 middle income tech workers salaries?

Sounds like $600k is a pretty sticky number. :(

I went to an open house yesterday here in Chicago. The house was packed with people. When we left the place, my wife said "wow the buyers are really out in force". I replied, "what makes you think some of those people aren't getting ready to sell their house and wanted to see the competition"? As for the property, I would say it's nice to see some improvement in the quality and a bit lower price in the listings. However, while it's much cheaper than CA, It's still overpriced at over 2 times rent.

FAB

Thanks for the great post.

I remember reading both of those articles. The first I read while I was a CTO of a dot-com. The second, after I'd bought all the company's servers, the $3,500 white boards, a conference table, some kind of super fancy copier machine, a cool old fashioned Coke vending machine that spun cute little bottles around, a Foosball table, a designer dog bed, and some quite comfortable chairs for about $0.10 on the dollar (less for the Foosball table), assumed half of their leased space, and started a business doing stuff businesses really get paid to do.