patrick.net

Troll.

:-)

"buyers actually getting into bidding wars again."

Some are real some are phantom bids.

On a plane flight from Chicago, I had a bright young financial engineer tell me that sticky markets are where you can make real money. The stock market adjusts pretty much instantly now. Sticky markets give you time to get in on the action and plan your strategy.

But I conclude that in the end even market psychology always gives way to fundamentals.

Never.

But market psychology can change.

I miss 2001, the year of serenity. :(

9/11 made me very angry though.

I know it can get very frustrating unless people like us on the sidelines change our attitude. If we keep looking for prices to crash so that we can buy, it will be one painful day after another.

I have done the calculations and I know the current prices don't make sense for me. I will rent until buying makes more sense than renting. I have come to realize that owning a house is responsibility with a lot of hidden costs. Honestly, the main reason why everyone is dying to buy a house is because they have seen prices so up year after year.

If prices don't crash I might never a buy a house as long as I live in the bay area. That is fine by me - gives me flexibility in terms of work etc. Last year, I was working in South San Jose. Now, I work in San Francisco. That would have been very hard had I been tethered to a house.

So, if prices seem to be sticky and stupid people keep overreaching to buy a badly constructed box, so be it.

That is a very good attitude to have Sriram.

Are you sure you haven’t bought a property in the past 6 months and are just pretending to be a renter?

I'm quite sure. In fact we're preparing for another year in rented McMansion hell.

Why do you ask? Or are there still people out there refusing to believe prices are sticky, over 2 years running now?

But market psychology can change.

Regardless of which affects the other, the outcome is still the same.

Regardless of which affects the other, the outcome is still the same.

True though.

You know, I don't really believe this Randy, but it is possible that an old economic theory that worked reasonably well to explain events, like the old Phillips Curve, is going to have to be replaced by a new paradigm.

We have discussed ad naseaum how the increasing bifurcation of incomes in America might lead to increasingly great differences between regions perceived as "luxury goods" and the rest of the country.

There is no denying that the Manhatten real estate market is booming again. I have no doubt that nationally home prices will go down for a while, but some regions are going to go down more than others. There is no particular reason to think that the Bay Area is more like Las Vegas than it is like Manhatten.

Shmend, you are becoming a nuisance, someone worse than a troll.

Wow, I misspelled Manhattan. Blame it on the second glass of wine... :-)

hey Sri, I’ll make sure to tell all the high school kids

Wow... who knew that this guy would out himself as a regular pedophile?

Will we be seeing you on a Dateline special soon?

If prices don’t crash I might never a buy a house as long as I live in the bay area. That is fine by me - gives me flexibility in terms of work etc. Last year, I was working in South San Jose. Now, I work in San Francisco. That would have been very hard had I been tethered to a house.

That's one of the things that really blows about California - the sprawl.

Job changes in NY? That's fine, it's still in Manhattan. You can still live in Long Island or New Jersey - just commute in a different way that's all.

Job changes in DC? That's fine, it's still somewhere in DC. You can still live in Baltimore or NoVA - just commute in a different way that's all.

Job changes in SF Bay Area? Congrats! You now get to spend 2 hours a day in traffic, or move.

Yes, this is probably my number one pet peeve about California, too.

I have taken big pay cuts before to avoid having to either commute or live in South Bay. At some point, I may have to give in, but that day hasn't come just yet...

It is possible to live and work entirely in The City, but you have to be pretty stubborn about it. I am in IT and it was a lot harder finding jobs here 10 years ago.

OT, Philip Bowring provides a sketch of the comparative hardiness of several economies in an environment of tightening credit in this morning's International Herald Trib...

http://www.iht.com/articles/2007/03/05/opinion/edbowring.php?page=1

"Just as a decade ago the major Western economies and markets were only marginally impacted by the Asia crisis, so this time around Asia should be able to ward off the worst impacts of global financial disorder stemming from the simultaneous end of the consumer boom and the yen carry trade. But it will not be a comfortable ride for anyone."

Good to see this kind of journalism appearing to counter Bernanke nostrums.

@Randy

SR said:

"hey Sri, I’ll make sure to tell all the high school kids I know to beat the shit out of the [XXX] kids. once people understand your place here, im sure they will help to make your stay quite enjoyable. "

I think the threat of actual violence is crossing a very bright line. Please erase this comment. I'll send Patrick an email later to request SR's permanent banning.

[agreed and editing all references to this]

I think we will need to lead an education campaign among potential buys. Real vs. nominal gains and losses. I think there are a lot of used house salespeople out there who do not grasp the difference.

Well, I've never had a lot of fun (or success) arguing w/Randy H, and he DID warn us that the BA in particular would be sticky. Enjoy your victory lap sir!

What might be more appropriate is to debate if said stickiness is actually GOOD for the BA? Markets that have shed their sticky dead skins like a snake appear to be on a path toward recovery. Vegas is seeing more sensible and affordable housing come on to the market while the high end projects are being scaled back, re-tooled or outright abandoned.

BAPS (TM) (Bay Area Price Stickiness) could mean that while much/most of the country has taken their medicine like a man the BA is still stubbornly clinging to the last tangible remnants of economic superiority. Frankly, I don't see a lot of winners when it's all said and done.

astrid,

Second.

Third

PAR,

I believe Rich Toscano did a great job linking a lot of the coverage from the last great CA bubble over at Piggington's? Surprisingly some of the journalists covering this current debacle were around in the late 80's and early/mid 90's as well. Andrew LePage etc.

It may be more impactful b/c so much of the coverage was CA specific.

Randy H. Started the thread with:

> The bottom line: The Bay Area has annoyingly and
> persistently sticky downwards house prices.

I believe we will soon start to see a rapid decline in home prices (that is much faster than the declines we had in the past) due to the lack of creative financing. The crazy loans have been the engine that kept the boom going and once the buyers of the junk loans go away the companies originating the loans will go away (see the URL below):
http://ml-implode.com/

Here in the Bay Area there is a huge disconnect between housing prices and income and if the loans are not there to allow people to buy where they want to live they will not buy. Back in 2003 when rates hit bottom people making less than a HaHa were buying condos and homes for over $1mm with little or no down with start rates under 4% IO (without the creative loans the one HaHa guy would have to buy in the Bayview or San Leandro)…

In recent years a lot of people have been using neg am “pick your payment” loans to buy the $1mm + homes. As we move in to 2007 we are going to have more people who need to sell due to an increase in their monthly payment while we will have less people who can buy due to a decrease in the ability to get the crazy loans.

Back in the early 90’s we had almost everyone making some kind of down payment (aka equity cushion) and a traditional 30 year FRM and even with rates falling it got ugly ~50% drop in S. Cal and ~25% drop in N. Cal. I predict that the coming price declines will not only occur faster but will be deeper than the last CA real estate bust…

Fremont_renter,

Well...... exactly! And here's the real ugly part, you needn't have been a bubble-sitter to have wound up on that side of the equation. A move locally, brief assignment elsewhere or any disruption in your life can place one in these circumstances. Before the trolls come out of the woodwork, those w/continuous "ownership" aren't in much better shape.

They're in a negative equity situation that worsens by the day. I for one hope that FAB IS right, swift and severe! :)

Without the now discredited 100% loan (or it's variant, the piggyback), how many people will be able to buy a house? How many people buying starter homes have $100k in the bank? Should hit the low end home market in the shorts pretty firmly.

Eventually, it will be cheaper to buy than to rent, just like way, way back in 1999.

Right now, a 3br at Rivermark in Santa Clara rents for $2500. It sells for $800k (or more). When things start to come down, folks will wistfully talk of the days when they thought that 20% depreciation was a worst case scenario.

BTW - it's nice to see the racists on this board getting mocked. Their ignorant filth is one reason why I don't come by as much as I used to.

Oh, and as for that stickiness - YOY Santa Clara appreciation is 1.7%. Prices have been essentially flat for over a year. Know that point in the rollercoaster where you hit the top, and time seems to drag as the descent starts? We're there. By next year, the only stickiness will be all the blood on the streets.

I believe we will soon start to see a rapid decline in home prices (that is much faster than the declines we had in the past) due to the lack of creative financing. The crazy loans have been the engine that kept the boom going and once the buyers of the junk loans go away the companies originating the loans will go away

FAB,
I agree completely. There's been an insidious feedback loop here. All this creative financing was initially pushed to allow marginal buyers to afford homes. Mid-level (prime and alt-a) buyers took advantage of these to get a home or to get a bigger home, and just like the global stock market, when you inject extra liquidity (free cash), prices go up. As your average BA buyer gets cut off from this extra liquidity, one of THE major pillars supporting this bubble will collapse. The high number of BA homes purchased using creative financing in the last 3 years speaks to the magnitude of this phenomenon here.

I agree with FAB's assessment. I think once the decline starts in earnest, it will go down very quickly. There are many people out there who can't afford their homes without property appreciation and regular refinancing. These people can be as emotional about their homes, but they will be foreclosed upon soon enough. Once decline occurs in earnest, even people with ready cash will be hesitant to buy.

A "home" might be an emotional subject, but the emotions can be both positive and negative. I know people who lived through the 1990 NE RE decline and the 1980s Oklahoma RE decline - and they saw a mortgage as a giant albatross.

***

I have removed the inappropriate comments from earlier in the thread, and edited the quoted responses to them.

On my threads, as is true of other authors, I will not tolerate any implied or explicit threats towards violence or encouragement of violence. Encouraging violence against children simply because of their race or country of origin is unconscionable in any context. Those who would spew such hatred, well hidden behind a mask of cowardly anonymity, are worse than cowards, for cowards at least are deserving of our pity, cowardice as it is being a basic human emotion.

Yesterday Larry Kudlow was interviewing a spokesperson for FDIC and for the most part it was a reasonable discussion. The FDIC ind. felt that the subprime meltdown was "an earnings event" *not a "regulatory event". So far, I'm "o.k" with that description but after what had happened with NEW it's going to get harder to spin that way.

I thought it was a little disingenuous for Larry to have claimed that he was unaware that people were getting cash back at closing?

I agree with FAB as well. I believe the longer the stickiness lasts in the BA, the greater the shock will be when prices do start moving. That's the problem with stickiness -- it is inefficiency. In fact, I see absolutely no reason to doubt that the longer the correction waits, the greater overcorrection will be.

It could be that the Redwood City home I wrote about on my blog falls all the way back to inflation adjusted 1998/9 price levels whereas a less sticky correction may have bottomed more around 2001/2.

Even the HSBC historical data I use, which FAB and I have argued about before, shows previous corrections (despite all our disagreements about interpreting them) suffered from overcorrection. And this overcorrection may well be a whopper.

The real key here is the economy. The difference between the contraction today and any other contraction we’ve ever had is that the economy is healthy.

Hi There,

That's funny, because in fact, many signs point to a slowdown in the economy later this year. The economic indicators that keep coming out look negative month after month, who knows where the stock market is headed, and if you believe Greenspan's CYA comments last week, recession is looming. In fact, I recall some data suggesting that housing boom/bust cycles have tracked quite well with periods of economic growth and recession. It may not be clear which is the chicken vs. the egg, but the correlation is clearly there. I don't see why it should be different this time around.

Bifurcation of US income & wealth distribution may well indeed an emerging paradigm shift. If it is, the outcomes are unpredictable. This is because rationality has little bearing on how shifts in fundamentals play out. Politics and democracy (or lack thereof) start to weigh more heavily than mid-term economic forces when new winners and losers are being minted.

As a digression, this is why I am very certain that Peter Schiff has got it very wrong. His analysis assumes a "neutered world environment", or more pointedly, ignores geopolitical military forces. I witnessed just this type of analytical error all through business school. A professor or guest expert would drone on and on about trends and macro direction while stubbornly ignoring the three letter word "war". I always found this incredibly interesting. I concluded that the ever present threat of it, and the inseparability of it from human history is so unpleasant that it's just easier to ignore it and pretend it doesn't exist.

What Schiff never addresses is that no modern (or for that fact organized pre-modern) credible military power with the ability to project their military on other nations has ever suffered from hyperinflation or other sundry wealth evaporating mechanisms. Until this changes the US' assets will not "evaporated into worthlessness" as I heard Schiff say on CNBC yesterday.

It may be unfortunate, but the ability to kill the other guy looms large in determining economic equilibriums and threshold limits.

Jon,

If all the realtors, mortgage brokers, construction workers and Home Depot night managers lose their jobs, the economy will already be in trouble. We can add to that the unemployed retail clerks and waiters due to the end of refi monopoly money.

Randy H,

That's a great analysis! I don't know much about *real world economists* but find that most academic economists I encounter ignore anything without a dollar sign in front. There's a strong tendency to ignore difficult to quantify values such as national security or rule of law.

anonymous_renter,

Yahtzee! I actually got tired of that ON THE WAY UP! Gainfully employed people w/great jobs and even better fico scores leveraging them to the 9's! Even though the use of subprime has exploded just since 2001 much of that has got to be due to the fact that many of these people were "A" paper on the primary residence, "Alt-A" on their 2nd home and subprime on their specuvestment home!

I can get plenty insulting about that without getting into flat panels and tummy tucks! :)

astrid,

I've got to be honest, many of those you describe will just go back to being part of the "black market" undergound economy from whence they came. Most people that have a spouse that work as a realtor or Home Despot employee have real jobs!

For those where this individual is THE bread winner, look out! A solid percentage are just migratory anyway. No offense to dedicated HD employees.

Randy H,

A little late to the topic, but you have my support as well.