patrick.net

I sympathize with your plight, CB, especially since we will be in the same one ourselves this year.

The Republicans don't care about us since we are primarily concentrated in "Blue" states and the Democrats don't care because we are "rich." The WSJ complains about how upper-middle class homeowners are increasingly snared by the AMT, but I don't think anything is going to be done about.

The one small solace is that we are racking up AMT credits that we will eventually be able to use to lower our tax burden, if we ever fall back under AMT (probably upon retirement).

Okay I found this:

http://www.realestateabc.com/graphs/calmedian.htm

Which comes out to about 8%/yr overall apreciation since 1968. There was a bigger "bubble" in the mid-late 70's, after which real esate under performed for about 17 years. The increase from 1981 to 1997 averaged 3% a year.

Notice there were no big drops, as so many on this blog have predicted, though there was one eight year (!) span over which prices dropped.

These must be nominal prices, too, so the inflation adjusted numbers would look worse.

Perhaps that is how the "bubble" will play out: 20 years of no real growth in real esate prices. I think that is much more likely that than the Big Bust everyone is hoping for.

If the Bay Area has 10-20 years of no real estate price increases, then buying a house was a terrible investment for any normal person. You have a huge negative return from inflation, taxes and maintenance. Renting was by far the better alternative.

I believe that prices will come down, because that is the inevitable outcome of a bubble. Things generally cannot plateau at an astronomical price. Perhaps Randy or others can cite instances where this has happened. Buying a Bay Area house doesn't make financial sense unless you can assume ongoing appreciation. I don't believe there are enough people for whom the emotional premium of owning is denominated in $100,000 increments.

When HP, Dell, and other major tech firms were overvalued during the bubble, their stock prices didn't stagnate at the high levels. They eventually came down. Housing as a market may be highly inefficient, but it is not immune to the laws of economics. ANY time people start touting that a particular sector, commodity or ANYTHING else is immune to the laws of economics, or that the laws are "different", THAT is the sound of a canary dying in a coal mine.

Jimbo Posted a link to a great graph and said:

> 8%/yr overall apreciation since 1968.

Around 1900 the median home price was just over $1K in 2001 after 100 (One Hundred) years of massive job growth and quite a bit of inflation in California the median price went up just $250K, then in the next 4 (Four) years in a period with many high paying jobs leaving the state and very little inflation the median price went up by over $250K to $524K (looks like a bubble to me)...

By "real" growth, I mean inflation adjusted growth. But yes, renting would be better, assuming rents stay stagnant, too, but that is a big assumption.

Rents will probably go up about as fast as incomes, which should be a percent or three faster than inflation.

I agree that this is a bad time to buy, if you are primarily interested in real estate as an investment.

Whether it is better to buy or rent depends on how long you intend to stay, what you think t he inflation rate is going to be and how fast both rents and home prices are going to appreciate.

I did this math about two years ago and came up with home buying making sense if you intend to hold for 10+ years.

Of course it would make no sense at all to buy a declining asset.

FAB, you and I have very different definitions of what a "bubble" is. Just the normal boom bust cycle of California Real Estate is not a bubble to me. You can see from that graph I posted that home prices actually increased at a faster rate for longer in the mid to late 70's than they did recently.

A "bubble" is when prices increase at an increasing rate, to the point where they are disconnected from all financial fundamentals. Usually prices are 10X or even 100X what they should be worth based on a rational valuation.

Good examples of bubbles include Dot Com stocks in the late 90's, the South Sea bubble, the Mississippi Finance bubble in France. Other examples are the "Nifty Fifty" stocks in the 70's and the Japan land market bubble in the 80's.

In all cases, prices dropped 75-99% after the bubble popped and always quite rapidly.

I don't think that describes California Real Estate today, but I know that puts me in the minority here.

Brand Says:

> I believe that prices will come down, because
> that is the inevitable outcome of a bubble. Things
> generally cannot plateau at an astronomical price.
> Perhaps Randy or others can cite instances where
> this has happened.

I have never heard of any “bubble” hitting a “plateau” without a solid reason (say the average wage in a remote area going up after a large company moves there).

Looking at the link Jimbo posted with median home priced reminded me that high end homes in La Jolla, Hillsborough and Ross were selling for ~$1mm in 1989 (~5x the median) and dropped a lot more than average/median homes by 1994. In the current bubble cycle I’ve noticed that high end homes in La Jolla, Hillsborough and Ross are pushing $5mm (almost 10x the median). I’m wondering if these homes will drop as much this time and if watching the price of homes nearby drop by $500K a year will make more people run for the doors (and sell making things drop even faster) than the drop of “only $100K a year” back in the early 90’s…

FAB, you really can't compare gold standard prices to "currency" economy prices. The gold standard stabilized the prices on durable goods for a dozen decades.

btw, someone at work said that FDR actually took us off the gold standard? I thought that this move is oft attributed to Nixon? But gold was siezed by the government in the 1930's, IIRC. Perhaps one of our resident goldbugs can clear up the history at work?

FAB, yeah I thought it would work itself out that way, too, that is why I bought TOL puts.

I did okay, but I would have done better buying KBH puts.

I guess the global redistribution of wealth upwards has helped maintain the price of high end homes. Let's see if that continues.

My dream house is "only" $2M anyway, so I don't think I am going to be helped much either way...

Jimbo: One thing I have often wondered is how many super-expensive homes get resold? They are often uber-customized for the original owner. It seems just as likely that someone who wants to build a $4M home would acquire the appropriate land and then build their own "perfect" home.

Of course, if you're going to buy or build a $4M home, then money probably isn't a concern anyway...