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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.
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 “normalâ€, 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 bubbleâ€).
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!
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.
eburbed says :
Sounds like $600k is a pretty sticky number. :(
Based on current rates. Don't forget that. As long as rates remain what they are, BA market has a strong buyer pool around that level. When the downturn speeds up, people will buy better houses around that price range. Median will hardly be affected. I will pay more attention to price per SQFT. But this is a very slow process.
Things will get far more interesting if the 10 Yr hits 5.5. The bond market is coming to its senses. So it might actually happen.
DOS attack on Ben.
Wow. Someone out there is obviously scared --and highly motivated.
Hopefully we're doing something to help inoculate. I really expect Spring to be a full-court press. Like FAB reminds us, Spring 2000 was a very hard time to be a dot-com doubter. For a few months there it was very hard to not wonder if it really was going to turn around and start heading back up again.
It's like that last wind part of a roaring late-night binge drinking party. Everyone knows its over, and they're going to feel like holy hell in the morning. But a few guys won't let it die and manage to somehow get most everyone back up and dancing for a few more songs.
I guess my problem is I tend to leave parties early.
DOSers are out en force. I got DOS'd twice in the past 4 days. But that was for pricking an altogether different bubble, which oddly enough, includes "virtual real estate".
@charlie :
Apparently, it’s war. :-)
In more ways than one. Whenever Patrick.net becomes slow, DOS is the first thing that comes to my mind. Since this blog is mainly about BA, I am pretty sure we have made enemies with a few tech savvy bulls. I would have given more odds to this blog being target of DOS than any other.
People seriously dislike housing bears. There is a reason why I keep my mouth shut when my friends discuss their equity wealth.
DOSers are out en force. I got DOS’d twice in the past 4 days. But that was for pricking an altogether different bubble, which oddly enough, includes “virtual real estateâ€.
You have desecrated their holy world. I am not surprised. :)
So will a 1300sqft TH in Sunnyvale stick at 2 middle income tech workers salaries?
Sounds like $600k is a pretty sticky number.
Let us not forget the marginal tax rates on our Silicon Valley couple are anywhere from 33-37%. Yes, they are still throwing out money if they buy, but the "premium" is not horrible (conservatively less than 10% of income).
You have desecrated their holy world. I am not surprised.
That I most certainly have. No one ever accused me of not being evil enough.
That I most certainly have. No one ever accused me of not being evil enough.
Randy, you are not being evil enough. :twisted:
SP says :
Another way to look at it is that this market is ‘priced for perfection’. Easy credit, low interest rates, scared buyers, decent job growth, AND price appreciation. As one or more of those factors start buckling, or go negative, the prices will ratchet down to another, lower sticking point.
The rates are still at historic lows, the job market (at least in BA) is still strong and stock market has done quite well. Everything that is need to keep the housing market strong - according to RE experts - is still in place.
Then WHY IS THE MARKET STALLING/FALLING ? I have challenged the bulls to answer this, and haven't heard any good answer except denial that the market is actually strong.
We of course know the answer. The market did not advance due to traditional factors, but it was actually the credit bubble that morphed into this mania. Now that bubble is bursting, so will this.
Hasn't 600k been the entry price for a sfh in the east bay for quite a while? The outer edges of the east bay is already starting to go down in flames....
I would argue that the vast majority of ppl that can support 600k homes have already purchased a place. Those that will buy at 600k in the future are newly minted 2 middle income tech worker households, which, according to many accounts, are growing at a snail's pace.
Personally, I can't comfortably afford a 600k place anyway, so it's a moot point.
Your tax dollars at work: http://www.msnbc.msn.com/id/16874155/
I'll provide translation for those who don't speak LA corruption and incompetence.....
"I think it's more class than anything, but there's racial issues associated with it also," Nagin said.
Translation: If you are as stupid as I am, always play the race/class cards
"As of Jan. 18, the Federal Emergency Management Agency has agreed to pay for $334 million for infrastructure repairs in New Orleans, but the state only has forwarded $145 million to the city so far.
State officials have said city leaders failed to provide required documentation, which Nagin called cumbersome."
Translation: Receipts? We don't need any stinkin' receipts. You can trust me; just check my track record.
________
With Dems in control of Congress billions and billions more will be funneled into the bottomless pit. Without the historical Dem vote in N.O., Landreiu cannot win re-election and the state will not go "blue" in '08.
New Orleans is the only city I know where the home inspection includes a annual sink rate for the foundation. A "stable" home sinks about 1 in/yr....some as much as 6 in/yr.
Randy, Former Apt.:
Good points. Thanks.
_____
SP Says:
"...Even the greatest of fools can’t hang himself if he can’t find a rope."
_____
Ha, ha! Brilliant!
SP Says:
“…Even the greatest of fools can’t hang himself if he can’t find a rope.â€
But can't he rip his shirt to pieces and tie them together to make a rope? Or is that too MacGyver?
But can’t he rip his shirt to pieces and tie them together to make a rope? Or is that too MacGyver?
Even with a rope (or a shirt) the fool still needs to tie the right knot and calculate the correct drop height.
Not advice of any kind
Peter P says,
Even with a rope (or a shirt) the fool still needs to tie the right knot and calculate the correct drop height.
True, since fools can't do math, he/she/it will just waste more money on a ripped up shirt.
Big A,
Yeah, uh.... I'm still waiting for the big pat on the back (but I don't grudge you yours!)
The bad news is that it will be a long and thankless crawl (at least until mortgage credit risk gets priced in), so better not be in a hurry.
Doh. Patience is not my strongest virtue.
I’m still waiting for the big pat on the back
If prices really start running up again I will get a big kick in the butt.
Big A says ;
Now my wife thinks I’m a financial wizard. Go figure.
Hey, at least that is something to be happy about ! I talked my wife out of buying (actually it's an ongoing process, so I should say - I keep talking my wife out of buying) and still she doesn't think very highly of my financial prowess.
I just told my wife that we can afford a house if she gets a job. That used to quiet her up until we had a baby....
SP,
If only it were "just" a kick in the pants.
Even if rolling bubble markets suffer every bit as much as I've predicted the bottom line (where many spouses are concerned) is that YOU'VE deprived them of 1 or 2 or 3 years of having "their own" home!
Greatest % of vacanices since the Census started tracking this stuff 50 years ago:
http://interestrateroundup.blogspot.com/2007/01/empty-homes-everywhere.html
No cracks in the dam here, people, move along.
For those interested in a refresher on the whole "nesting instinct"/nagging spouse debate, check out Sex and Housing
And who could forget our beloved Suzanne?
HARM,
That is damaging. This mind you with low int. rates and "decent" employment numbers. I wonder though if the numbers might be skewed by "boomer destinations" like Las Vegas, Phoenix etc. where vacant specuvestment homes are lined up in droves?
I had tea today with a couple of friends, one of whom is a Hong Kong raised woman Realtor. She told me there is a tiny bit of Chinese money coming over to park it here. She said she had two clients in the past couple of years who wanted their money out of China because they were worried that the peasants were getting jealous of the new wealth and thought there might be another revolution in the future. There are the periodic wealthy Chinese who want pied-a-terres here, but no storm of Chinese buying investment or second homes.
She also told me that she had a friend of an acquaintance referred to her. She said it was a lovely Hispanic family, 30ish mother and father, a grandmother, and a toddler and baby. They had been pre-approved for (the apparently magic number) $600,000. She showed them around, they found a place, offer accepted. She was with them at closing and the father said he was so ecstatic that he could afford a house on the $50,000 he and his wife made on their combined jobs. My friend said she flipped and pulled the broker into the other room to ask him what was going on.
The broker had convinced them to get some toxic negative-am liar loan with a one year cheapo introductory rate. My friend said she said to the broker "Hey, they can't afford this after the first year, they'll lose the house.' The broker said 'So?' She then said 'They have two babies, you can't do this.'
His response to her was 'Hey, they signed.' She said she was so furious that she reported the broker. I had to run to a meeting so I didn't get to ask if either the deal was completed or to whom she reported the broker.
SFWoman, I do not blame the broker. As consumers, we must take personal responsibility in our choices. The broker did not force the purchase at gun point and the economics of a real estate transaction is public knowledge.
The story is very sad. But that is life.
I know most locals hate zillow but you might want to check out this graph from Lincoln Park in Chicago. I don't see any spring bounce last year and I don't think there will be one this year either.
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I can already feel it coming. A "Spring Bounce". No matter that this bounce -- really more of a pause in the correction -- won't be they type of bounce Realtors point to as typical seasonality. No matter that this bounce won't be based on fundamentals, not even on technicals, but only on hopes. Regardless, the industry message that it's now time to buy will echo through the media and shake the confidence of many who've marginally been waiting out the bubble.
And it should shake the confidence of every one of us. Or at least prod our confidence a little bit. Intelligent people always reserve some room for doubt; recognize that it's always possible that they were wrong. The bubble-sitter who lacks any doubt at all about their choice to sit it out is just as foolish as the blissfully ignorant, debt ridden bubble-buyer.
Economically, this is more an extension of price stickiness driven by market psychology. Sellers are hesitant to sell because they perceive prices are weak now, but they also perceive that prices should stabilize or go up sometime soon. In the Spring, to be precise. This should (and already is to a small degree) stimulate marginal buyers into capitulating. Call it a ratchet on the way down the correction curve.
But, don't be so hard on your fellow bubble-sitters as they inevitably voice doubts. Doubts about how sharp of a correction to expect, how fast prices will come down, how long they will need to wait. Doubts about whether it's all been worth it. These are honest questions many of us will be asking ourselves as the resolve of our convictions are tested, yet again.
Markets have a nasty tendency to remain irrational for longer than doubters are able to remain bearish. After all, if seeing the bubble for the bubble it is were so easy there wouldn't be one in the first place.
--Randy H
#housing