patrick.net

astrid,

Perhaps I am wrong (might be time formme to revisit the archives), but some of the comments this guy makes sound quite reasonable, while others border on blatant REIC-speak.

Btw, I just approved "Jimbo's" 1:55 pm post (was in moderation because it contained 2 links).

I'll reserve judgment for now.

SFBubbleBuyer,

I appreciate and respect your candor! It's refreshing, believe me! :)

A properly handled "downsizing" gets filed right along w/all the other stuff we're supposed to do like flossing and showing up at a church from time to time (yeah, right!)

You'd be absolutely amazed at how many people I know that bought a HUGE place they have practically no use for and tell me what a screamin' deal they got on it! Great...... have fun.

astrid,

The email matches, but the IP/subnets do not. Of course, he may have moved, switched ISPs or could simply be posting from a different location. If this is the "real" Jimbo, he has certainly changed his tune from a year ago.

No offense, but you must be talking about my relatives back in Chicago?

Hm, maybe that's the disconnect - I'm not West Coastized enough yet. :)

But it seems like nobody these days :

1) Pays off their mortgage
a) Lives in that house payment free while saving more for retirement.
b) Sells house for smaller house and uses difference to fund retirement.

Hm, fwiw, I actually don't know anyone like that in my circle of Californian friends. But then again, my circle of friends has a collective min salary of $70k, a min age of 25 and a max age of 34.

I guess the one exception is my friend who has a $600k mortgage - but then again it's 30 year fixed and he's a firm believer (as am I beginning to be) that inflation is going to soar in the next few years.

SFBubbleBuyer,

That's the new paradigm. These days, no homeowner really wants to own the home !

All that mushy talk about American Dream is patently false. They just want to own an ATM that pisses money when they are thirsty. In my book they are specuvestors, just one notch above flippers. The BA may not have many flippers, but almost everyone I know is a howmuchamonth specuvestor. They keep talking about the utility/tax benefits etc. But without the unshakable belief of perpetual appreciation, none of these would have bought.

SFBubbleBuyer Posted a link to a ~$1mm Woodside Fixer and Says:

> The owner wants to sell ‘as is’ but will do 70k worth
> of foundation work before the sale completes.
> The foundation report says that the foundation needs
> REPLACING, not fixing, at a minimum cost of 100-200k…

Then PaloAltoRenter (PAR) Says:

> sfbubblebuyer, Things to know about Woodside: there
> are actually two Woodsides. One is the affluent,
> VC-community and the other one is way the hell
> out in the middle of nowhere

Some other things to know about Woodside is that due to the Bay Area microclimates it gets a lot more rain than the rent of the Peninsula and has a lot more mud slides (and the more expensive “home slides”). If you buy on a slope in Woodside make sure the previous owner has put in plenty of drainage (a friend that bought in Woodside a few years back couldn’t afford to do the drainage work right away after spending almost $2mm on a home so now he still has to do the drainage work and $200K worth of work on the end of the house that slid a foot down the hill)…

P.S. Mixed in with the rich VCs in the affluent part of Woodside are a lot of old money girls that like horses…

P.P.S. All my friends that live in the “poor” part of Woodside (and the poor part of Los Gatos) carry shovels and chainsaws in their SUVs all winter and often need to use them to get to work in the morning…

Me, I want a house I can live in for a good long time. My wife's parents sold their lovely paid off house and bought a bigger lovely house with a view. My thought was "WHY would you want to have a mortgage again?" Their house was awesome. Their new house is awesomer, but I still can't help but wonder why they'd want to make mortgage payments again. They moved about 10 miles away from where they'd lived before, I think. 20 at the most. They're still working, though, and plan to be working for awhile, so another mortgage might not seem the burden to them as I think it would be for fully retired folks.

In my parent's case, they moved to a different state. My mom told my dad she was done with snow. Finito! And although they bought a monster sized house, they could have concievably paid cash if they wanted to cash out enough stock. They figured the mortgage deductions would offset the liquidation cap gains costs a bit, and it was 'cheaper' to have a mortgage than to pay cap gains all up front. They built the thing themselves, and installed all the 'home care' stuff they'd need when they're 90 and still living there. (Roll in showers, seperate housing quarters for live in help, etc.) So I can sorta see it in their case, and since I KNOW they have enough cash to live on even with the big house, it doesn't bother me that much.

HARM,

I have consistently said that I thought home prices in the Bay Area have been overpriced and that I expected a modest, long running downturn. I have not really changed my mind about that, but I am certainly open to the possibility that it really is "different this time" and home prices will collapse. I still think that this is extremely unlikely, barring a major recession, inflation shock or other financial catastrophe.

The one thing that I feel differently about is the feasibility of working class or young people to be able to afford a home here: I used to claim that "two bus drivers" could afford a home in the Excelsior. The reason I have changed my tune on this, is that home prices in the Excelsior have skyrocketed in the last two years. If anything, this puts me *more* in tune with the "Party Line" here, since you all seem to think that homes are out of reach.

I think the biggest change has been the change in the outside worlds perception of home price gains. Two years ago, I was predicting a downturn, along with the rest of you, and we were a minority against the world.

Now everyone is predicting a downturn and your position is the common wisdom.

Now I am predicting a smaller, slower downturn, so I am the pariah. *roll*

Earthquake! Maybe that will finally bring home prices down... :-)

Hey......I got popped by the TWO LINK moderation thingy....didn't know that was a no-no.

I made a post about liking McMansions and it never got past moderation, is there a McMansion filter too?

"I made a post about liking McMansions and it never got past moderation, is there a McMansion filter too? "

There should be! :)

I guess the one exception is my friend who has a $600k mortgage - but then again it’s 30 year fixed and he’s a firm believer (as am I beginning to be) that inflation is going to soar in the next few years.

This doesn't sound like the words of a bear!

House prices are going to fall, it's that simple. When the lenders are all bankrupt and no one is funding suicide loans, it will be impossible to pay such high prices for a house; inflation or not. There are alot of people who can pay those prices for a house, but the vast majority of people cannot.

There are only 2 things that can possibly keep prices from falling dramatically.

1) Hyperinflation - This would be worse than housing prices falling for everybody including the FB's. In this scenario we will certainly have a dollar crash. By the time you are done paying for food, gas, utilities, etc. you will have nothing left to pay the mortgage. You'll have to help out your retired (grand)parents who are living on a fixed income. America would be totally crushed. Like Peter Schiff says, "What good is a million dollar house if it costs $10k to fill the refrigerator".

2) Everyone's boss giving a 100% raise (never gonna happen).

Jimbo who Says that SF Housing has “always” been 3X the rest of the US:

> FAB, I am still not seeing your source. If you are telling
> me that it is your own experience, I respect that, but since
> I am naturally a skeptic, I will keep looking for hard
> numbers to back it up. Hope you don’t mind

My numbers are from the US Census and are the “median home price”. The census.gov site has been changed and I can’t find out how to drill down to the data like I could in the past (I used to spend a lot of time looking at changes in specific zip codes and the even smaller census tracks). The 2000 Census data (showing SF at over 4X the national median at the height of the dot com boom) is easy to find with a Google search but the older info is harder to find. I spent some time at on census.gov last night but all I could find (on a bunch of different pages on the site) was 1980, 1990, and 2000 median info (from memory I think that the SF 1970 median was closer to 1.5X the national median). My point is that things tend to revert to the mean and when I drilled down to census track lever “median family income” (that is obviously much higher than the “per capita” income) vs. “median home price” in census data from 1960 to 2000 it is almost always on the 2.5 to 3.5X range…

Jimbo,

The only New Paradigm-ish opinions I've recently read about this RE downturn being "different this time" have mainly come from you. Have any of the regulars here been predicting financial Armageddon or prices dropping 100% in a single year? Hardly.

Most of us have been expecting a long, slow several-year grind of low sales and small, cumulative nominal drops, with the remainder of bubble-era gains being eroded away by inflation. Personally, I doubt this thing will bottom out before 2010-2012 at the very earliest --and it could be a lot longer that that if the Fed tries to re-inflate a-la ZIRP.

If that's what you meant, then my apologies --we have no argument. But that's not what it sounded like to me.

No, interest rates going down another point would prolong the bubble.

If people could borrow money at 4%, home prices would actually go up some more.

I don't think that this is very likely, but that is the other thing that could drag things out even longer.

While I might find it fun to watch house prices crash, I have relatives in retail so I hope they don't actually crash.

However, with a wife whose uterus is a ticking timebomb that dwarfs the sub-prime lending in potential devastation... I hope they crash as quickly and as hard as possible so we're not forced into buying on the downslope to have a home for the babies. :D (And look... I know we don't have to own a home... mkay? But I also have to keep her feelings in mind, and she'd rather overpay for a home than rent.)

All in all, it wouldn't be a huge tragedy, but hopefully I'll talk her into renting until we've seen prices come down or wages increase.

SFBB,

Have you looked into rental houses, especially on places where you might be able to get a longer lease. Tell her you want to rent a house for a while to help you decide what you'd look for when you buy.

"A woman's test is material. A man's test is a woman...if a man could f*ck in a cardboard box, he wouldn't buy a house." - Dave Chappelle

No, interest rates going down another point would prolong the bubble.
If people could borrow money at 4%, home prices would actually go up some more.
I don’t think that this is very likely, but that is the other thing that could drag things out even longer.

I am no Nostradamus but I am willing to bet my money on this NOT happening. It's as impossible as it can possibly get.

And I won't even pretend to understand the bond market. But the various reports very clearly indicate that "prime" very soon will no longer be prime. Duh, even Jim Jubak wrote about it.

So this "if people can borrow at 4%" argument is similar to "if pigs can fly" at this stage in time. Yes, I am going out on a limb here. Credit tightening (if not an outright crunch) seems unavoidable.

Even ZIRP may not solve this problem. And given what BOJ has done, we won't see a ZIRP anytime soon here in US.

Here is a real live situation of what market reality reflects.

“The sub-prime market was designed with a built-in time bomb. In testimony to the Senate Banking Committee in September, Michael Calhoun, the President of the Center for Responsible Lending (CRL), showed an example of the most typical sub-prime loan, known as a 2/28, with an “exploding ARM” (adjustable rate mortgage). Buyers can qualify for this type of loan if the original (”teaser”) monthly payment is not higher than 61% of their after-tax income. At the end of two years, even without a rise in interest rates, the payment will typically rise to 96% of the purchaser's monthly income. No wonder then, that the study conservatively forecasts that one-third of families who received a sub-prime loan in 2005 and 2006 will ultimately lose their homes!”

I didn't realize that these things reset to 96% of someone's income - wow! There's no way people who have these will be able to keep their houses!

Speaking of the stock market, here's an article hot off the press that seems to fit perfectly with this thread.

Stocks fall on mortgage defaults

5:50 p.m. 02/23/2007 Provided by

By Jennifer Coogan

NEW YORK (Reuters) - Stocks fell for a third straight session on Friday as concern over rising defaults in the subprime mortgage industry drove down financial services shares and the price of oil hit a 2007 high.

Shares of NovaStar Financial Inc. (NFI) and New Century Financial Corp. (NEW), two of the major names in the business of making home loans to Americans with shaky credit, extended declines from earlier in the week. That trend spilled over to bigger names in the home loan business like Countrywide Financial Corp. (CFC), Wells Fargo & Co. (WFC) and even blue-chip JPMorgan Chase & Co. (JPM)

Shares of Microsoft Corp. (MSFT) were the top-weighted drag on the S&P 500 and the Nasdaq Composite after a U.S. federal jury found the software maker infringed on audio patents held by Alcatel-Lucent and should pay $1.52 billion in damages.

Adding to jitters in the market, Vice President Dick Cheney said on Friday the United States retains all options in keeping Iran from acquiring nuclear weapons. But the White House stressed it was seeking a diplomatic solution.

"Oil rising above the $61 level will put a cap on the market for the short term," said John O'Brien, a trader at MKM Partners LLC in Cleveland, Ohio. "For financials, it's the fear of the subprime loan and the worry over how much a piece of their book relates to more exotic-type loans."

Subprime mortgages are the riskiest part of the U.S. home loan market, serving borrowers with poor credit histories at higher-than-average interest rates. Default rates have risen as the U.S. housing market has seen slowing sales and falling prices.

The Dow Jones industrial average fell 38.54 points, or 0.30 percent, to end at 12,647.48. The Standard & Poor's 500 Index (SPX) dropped 5.19 points, or 0.36 percent, to finish at 1,451.19. The Nasdaq Composite Index (COMP) lost 9.84 points, or 0.39 percent, to close at 2,515.10.

For the week, the Dow fell 0.9 percent, its worst decline since August. The S&P 500 finished the week down 0.3 percent. But the Nasdaq marched to its own drummer and ended the week up 0.8 percent.

On the Nasdaq, Microsoft shares slid 1.7 percent, or 49 cents, to $28.90.

CRY, MY BELOVED COUNTRYWIDE

Shares of mortgage lenders continued to slide for a third straight day. The stock of Countrywide Financial Corp. (CFC), the top U.S. mortgage lender, fell 2 percent, or 81 cents, to $39.33 on the New York Stock Exchange. Shares of Washington Mutual (WM), the largest U.S. savings and loan, dropped 1.9 percent, or 84 cents, to $43.88.

NovaStar Financial's stock fell 9.2 percent, or 86 cents, to $8.48, while New Century Financial's stock lost 6.2 percent, or $1.02, to $15.52 in NYSE trading. They ranked near the top of the list of the Big Board's biggest percentage losers.

The S&P Financial Index was down 1.1 percent, its sharpest decline since January 25.

Bank of America Corp. (BAC) shares slid 1.6 percent, or 84 cents, to $52.86, while Wells Fargo's stock dropped 1.6 percent, or 58 cents, to $35.63. They were among the biggest decliners in the S&P 500.

Shares of JPMorgan Chase & Co. (JPM) ranked as the second-biggest decliner in the Dow, falling 1.2 percent, or 61 cents, to $51.03 on the NYSE.

OIL ENDS OVER $61 AT 2007 HIGH

U.S. crude oil for April delivery gained 19 cents to settle at $61.14 a barrel on the New York Mercantile Exchange, the highest NYMEX closing price in nine weeks. Earlier, the NYMEX April crude futures contract hit a session high at $61.80.

Sharply higher oil prices usually send chills down stock investors' spines because they increase worries about rising inflation as well as higher borrowing costs for corporations and consumers.

The jump in oil prices gave investors a reason to buy shares of energy producers. Chevron Corp. (CVX) shares rose 0.6 percent, or 40 cents, to $71.07 and ConocoPhillips (COP) climbed 0.5 percent, or 32 cents, to $67.20, both in NYSE trading.

Exxon Mobil Corp. (XOM) added 0.2 percent, or 14 cents, to close at $75.22 on the Big Board. The energy sector's advance helped limit the declines in both the blue-chip Dow average and the S&P 500.

WHEN SAFETY LOOKS SEXY

But the worries about the troubled subprime mortgage market's impact on the banking sector and the U.S. economy as well as the saber rattling over Iran sent investors running for the safety of U.S. Treasury bonds. The price of the benchmark 10-year U.S. Treasury note shot up 14/32 in price to 99-19/32, while its yield fell to 4.68 percent on Friday from 4.73 percent late on Thursday.

Since bond yields move inversely to their prices, the rally in the bond market pushed Treasury yields lower and increased the allure of utility stocks.

Shares of power company Dynegy Inc. (DYN) gained 2.5 percent, or 20 cents, to $8.28 and shares of TXU Corp. (TXU), the largest power company in Texas, rose 4.1 percent, or $2.38, to $60.02.

The Dow Jones Utility Average rose nearly 1 percent.

Shares of No. 2 U.S. home improvement chain Lowe's Cos. Inc. (LOW) soared to a record at $35.74 after it reported a quarterly profit that beat forecasts even as a slowing U.S. housing market hurt sales.

Lowe's shares closed at $34.93, up $1.30, or 3.9 percent on the New York Stock Exchange.

Trading was moderate on the NYSE, where about 1.45 billion shares changed hands, below last year's estimated daily average of 1.84 billion. On the Nasdaq, about 2.08 billion shares traded, above last year's daily average of 2.02 billion.

Decliners outnumbered advancers by a ratio of about 9 to 8 on the NYSE and, on the Nasdaq, by about 9 to 7.

Jimbo and SFbubble,

I shared your thoughts about the bubble, earthquakes, prices, babies, and buying a house with my CFO and CEO....the wifey.

YOU are wrong and your wives are right! You can't have babies and live in an apartment because it's not "her place". You cannot expect prices to drop because you cannot guarantee it or give them a specific buying date. Earthquakes will bring houses down, but not prices because there will be fewer of them left standing so prices will go up. Nesting is a hormonal so you lose. Nesting trumps everything. Prices do not matter when nesting.

There you have it. Bubbles are men problems and women have more important things to concern themselves with such as decorating their new house.

I feel your pain..........

BTW, Dave Chappelle is right. :)

I call the 1.5-2 mil class wealthy in my opinion.

I call them FB's.

Quick survey/question. Do you think it’s harder to buy during an upcycle or a downcycle?

Whatcha think?

Depends on the mentality of the buyer.

"Quick survey/question. Do you think it’s harder to buy during an upcycle or a downcycle?"

Depends on your credit history/cash position.

Doug H.

Well,

It's me who's been telling my hubby that the market will crash. We have two children and I have no urge to buy - I prefer to rent in a better area (and school district) than I could afford to buy in. :-)

I think you will find that lots of people have babies without the benefit of owning their own house!

If she wants to nest, then tell her you'll move to a SFH instead of an apartment and you can buy giant wall stickers (that come off easily) to decorate the baby's room.

OpinionsPlease Says:

> Do you guys really think ‘upper middle class’ are
> those who can afford 1.5-2 mil?

Most people consider themselves as “middle class” and the people that make a little more “upper middle class” (so the truck driver that makes $35K will probably say that he is “middle class” and his boss that makes $50K is “upper middle class” just like the attorney that makes $275K will say he is “middle class” and the partners in his firm that make $1.5-$2.5mm are “upper middle class”)

> I mean, don’t you need to be making $500,000/yr
> and have another 500K+ in the bank to afford that?

It would be a good idea to be making $500K and make a big down payment if you are buying a $1.5mm home, but you can get in to a $1.5mm home these days for little down if you were making less than half of $500K (just over $100K each for a married couple).

How many genuine first time buyers are there in the market?

How much of the market is just people buying based on cashing in inflated RE equity from a previous home? Or buying a second home by borrowing against the inflated RE equity in a primary residence? Or buying with a huge loan/gift from parents, who borrowed against their inflated RE equity?

http://www.nytimes.com/2007/02/25/realestate/25cov.html?_r=1&oref=slogin&pagewanted=all

Another example of financial illiteracy from NYT.

The doctor in this story could practically pay his exorbitant rent from the interest on his down payment.

This doesn’t sound like the words of a bear!

House prices are going to fall, it’s that simple.

You're right! I'm right!

How?

If inflation soars to 8% (we gotta pay back China/Japan somehow) then house prices can stay the same and still "fall" (in a real way). Heck, even if they only appreciate at 7%, they'd still be "falling" (in a real way).

I'm a genuine first time buyer! Well, not really. I owned a duplex in college with my brother that we sold after we graduated.

And back in 98 I owned a house in San Leandro. But I sold it and rented in San Fran because it was way more fun!

(If only I'd rented it out and sold it in 2005, eh?)

But I am a first time home buyer in that I am not trading in any home when I wind up getting one.

eburbed,

That's assuming wage goes up 7-8% a year but nothing else goes up in price. The far more likely scenarios is that consumer price inflation will overtake wage increases, resulting in a squeeze on consumer durables such as housing. -- people can live with less house or even with, gasp, renting. It'll be more difficult to forgo food or medical care or Hummers. :)

That’s assuming wage goes up 7-8% a year but nothing else goes up in price. The far more likely scenarios is that consumer price inflation will overtake wage increases, resulting in a squeeze on consumer durables such as housing.

That's a fair argument. I was thinking that wages and consumer prices go lock step, but I could be wrong.

Of course, when Peak Oil comes, we'll all be screwed anyway. :)

"Of course, when Peak Oil comes, we’ll all be screwed anyway."

Maybe you! My boyfriend and I have a cunning plan to never use AC/heating, live 5 minutes from work/public transit, and buy from the local farmer's market (though baking/braising might spike our energy costs).

I'll be declared an enemy combatant before it's all over.

My bad! If wages and consumer prices go in step, then your analysis is correct - presuming tax neutrality. I got confused by my own self righteousness in regards to the wage increase piece.

Realistically, I don't think peak oil, if it occurs at all, would affect America that much in the long run. This country is hugely energy inefficient. A lot of consumption can be wrung out if the (higher) price is right.

So... if you assume we are headed for high inflationary times, then owning out right would be a good thing in retirement.

Realistically, I don’t think peak oil, if it occurs at all, would affect America that much in the long run.

Uh - how about "there will be nothing to eat"

If we ate more soy and less meat, if we buy locally grown veggies rather than air freighted Chilean whatevers, if we use less plastic packaging...there are a lot of relatively ways to cut energy consumption if this country was serious about it.