patrick.net

There is nothing cool about advertising. Thats what Google is monetize search results. Otherwise its very generic search engine.

Aside from the garbled grammar, I agree. The original coolness was in fact its simplicity - no banners, no ads, no preference for advertisers. That's why it's become a corrupted version of its former self.

"Good luck finding a place for 250K –or even 300K– anywhere liveable in CA. However, I salute you for heroically throwing caution to the wind and committing to OUTBID any of us “greedy bottom-feeders” out there! "

According to the bubble-feeders 250k is where the prices should end up when this all shakes out in the bay area. I am not one to go around bidding on properties but someone sure has -- whoever who would be a real estate bidder would never let it fall that far. Nothing heroic about it.

I am not one to go around bidding on properties but someone sure has — whoever who would be a real estate bidder would never let it fall that far. Nothing heroic about it.

You are using today's psychology to understand tomorrow's market. By your logic, financial crashes would never have occurred.

Market is 99.95% psychology and 0.05% fat-finger errors.

According to the bubble-feeders 250k is where the prices should end up when this all shakes out in the bay area.

I'm about as bearish on RE appreciation as they come here, and even *I* don't expect nominal prices to ever fall that far in the mighty "streets paved with gold" Googlaire/Web 2.0, Holiest-of-Holies Bay Area.

Mountain View is not really that nice. Google employees can very easily commute from Los Altos.

Randy,

You strongly believe that working professionals in the bay area will stretch their finances in order to making ends meet _just a little longer_.

What do you think about the increase in the percent of Neg-Am refinancing?

According to First American LoanPerformance, the East Bay's optional-payment ARMs jumped from 0.9 percent of all refinance loans in December 2003 to 39 percent in December 2006. The greater Bay Area numbers were similar, jumping from 1 percent to 38.1 percent in three years. Interest-only loans, both as purchase or refinance loans, dropped across the Bay Area.

http://www.contracostatimes.com/mld/cctimes/16843132.htm

Is this an example of sophisticated borrowers? Desperate borrowers? Or just naive borrowers?

"No matter how badly the market tanks, fear not, sellers! “MarkofArk” will ride to the rescue and bail you out for whatever pie-in-the-sky wishing price you “need” to get! MarkofArk is the Savior of F@cked Borrowers everywhere –Hurrah!! "

WOW, such accolades from one post. However I cant save you from yourselves when it comes to "F@cked borrowing" . My motivation for outbidding on a property would be because I Like it, not because you are a "F@cked borrower". I couldnt care less what your status is when you sell me your home for what price I am willing to pay . No offense intended

My company has hired a lot of new employees (including many who relocated from out of state). Many of them are itching to buy - I think a few of them will drop out and stick to renting for a while, but I expect at least a few will buy.

Your company is really raising the bar and making it harder for the rest of us to buy a place. A few startups I know have cited your company as a reason why salary offers for prospective hires keep escalating. :(

MarkofArk,

You are most welcome! DinOR has even honored you with the title of Real Financial Hero, and I concur!.

My point was merely that my humble non-tech opinion is that I see no Google-like entity out there in the current ranks, and the current crop are over-hyped and funded more than they deserve.

There's sort of this assumption that profit or success is essential for you to be rich. Not at all. It's just like home buying here - you need to find a GF to make your share of the company cash-out-able.

Maybe that's just too cynical. :)

And I agree that the area just isn’t worth it anymore—S’vale is a little Bangalore and Cupertino a little Beiking—no offense, I’m 1/2 Chinese myself.

Well, perhaps this is why Marin is prime.

Randy, Mill Valley will NEVER crash, sorry. ;)

gavin,

Is this an example of sophisticated borrowers? Desperate borrowers? Or just naive borrowers?

All of the above. I should clarify that I believe that market psychology that lasts longer than 10 minutes is always based on some interpretation of fundamentals. The fundamental being interpreted here is jobs (& resultant salaries).

The thing that makes market psychology more of an area of study than simple misreading of data/information is the way it is reflective of itself. In this case, I see the process working roughly like this:

* Companies in the Bay Area are hiring, and giving raises.
* Web 2.0 is bubbling up, causing some euphoria.
* Many owners, sellers, and soon-to-be-buyers feel confident in their choices regarding home prices.
* Many others who aren't directly benefiting from Web 2.0, the finance industry, or other strong employment areas nonetheless absorb the confidence and so feel good about going along with the flow.
* This all keeps going round and round, amplifying the effect.

In the process you get sophisticated, desperate and naive buyers alike. I'm not sure there are all that many sophisticated enough to exploit NA loans though. I know exactly one guy doing it who I truly believe is knowledgeable enough to pull it off. And he is a bond trader.

Mark said:
"am not one to go around bidding on properties but someone sure has — whoever who would be a real estate bidder would never let it fall that far. Nothing heroic about it."

Peter said something that made Mark think:
"You are using today’s psychology to understand tomorrow’s market. By your logic, financial crashes would never have occurred.

Market is 99.95% psychology and 0.05% fat-finger errors."

You have a very good point Peter, if the market actually did tank in a severe type of scenario, obviously bidding and buying would be less desirable , but the Bay Area is a desirable place in the world and in the end that is what counts. So by THAT psychology, the prices will not fall far. I am not predicting anything but I dont see the great calamity that so many others talk about .

There’s sort of this assumption that profit or success is essential for you to be rich. Not at all. It’s just like home buying here - you need to find a GF to make your share of the company cash-out-able.

eburbed,
You are exactly right. That's what annoys me about Web 2.0. It all feels like yet another Ponzi scheme. The GF's now are hedge funds and VC's. Last time it was day traders and Joe Schmoe (not our original Joe Schmoe) who bought kozmo stocks at the peak. Sure, if you're trying to get in on that action and make some dough, more power to you. However, I have no love nor respect for the whole entity.

I should clarify that I believe that market psychology that lasts longer than 10 minutes is always based on some interpretation of fundamentals.

Well, psychology is some interpretation of the *perceived* reality. You may call that fundamentals.

And for the record, I don't see any calamity for the Bay Area. I am very bullish on this area. My first blog post ever on my own blog was about how Silicon Valley is a virtuous circle economy, and will enjoy prosperity for generations to come. Virtuous circle economies arise naturally, are never synthetically duplicable (though many try) and last for very long periods of time.

I expect real estate prices here to correct healthily, but not for the net impact to the local economy to be very negative, in fact quite positive longer term. When bright new tech companies can hire more than just hyper-salary super execs and nomadic 22 year old undergrads because they can actually afford to buy houses and raise their families again, it is good for everyone.

Mark (not MarkofArk),

Nice rant. I wonder to myself about the same things every day.

What I like about the Bay Area (outdoors stuff to do, food, friendly people) is being slowly choked off by people who have no interest in these things and are here for the lure of making money. The quality of life here has gone down the tubes in the last 15 years.

Well, psychology is some interpretation of the *perceived* reality. You may call that fundamentals.

Without some notion of objective, fundamental reality, everything is just all some postmodernist nightmare. And that can't be true because I hate postmodernism. q e d

I don't think anybody seriously thinks 350k is going to be the median sfh price for the bay area.

I expect median prices to eventually drop to 3.5-4 times the median household income, which is about right for 'premium' locations.

Rightnow we're at 6-8 times, which is unrealistic unless you assume that everybody is buying with IPO money, which will never dry up. And given that 20% of the loans in 2006 for the bay area were 0% down, I don't think IPO money was paying for them.

What would be a REALLY good tracking set would be house price vs. household income vs. downpayment. Sure, we can track medians, but at least 30% of the people tracked for income purposes didn't buy. A direct comparison of how much a household makes, how much it paid, and how much it put down over the last 10 years would be VERY useful for showing how far out of the 3x salary 'comfort level' the bay area really is.

In fact, it'd be a smart thing for the government to require Freddie and Frannie to do from now on. If you REALLY want to find a way to offer mortgages to marginal buyers, (what those two institutions were created for) educating yourself and the buyers on the risks would be a good start.

I would execpt SFHs to get down to the 400-450 neighborhood in SV, and 600s in Cupertino/etc. But that could take several years, by which time salaries will have increased, say 10kish, which would make the 400-450k of today be 450-500k.

The fact that the biggest crapbox in SV sells for 600k+ is plain lunacy. The automechanic supporting his family has no chance at buying anything anywhere right now, and a good automechanic makes decent money. Hell, any SINK household would have a very hard time buying any of these properties. When the crapboxes go down to 250-300k, the median will still be 400-500k.

The Bay Area has a weird distinction of having a very narrow gap between most expensive and least expensive houses in cities. Take for example, Cupertino. The absolutely horrible 800 sqft 2/1 teardown sells for 650k, and right next to it the 2600 sq ft brand new McMansion sells for 1.2 mil. Over 3 times the house, if you even want to consider that people are buying the tiny house to live in, for twice the price.

The expensive houses prices are coming down, but not the crapboxes. Median 'sales' stay relatively up even as housing prices slide because people are buying an extra 300 sq ft of house instead of buying a cheaper house even as they watch housing prices slide, hoping they're hitting 'bottom' and buying the most house they can afford (still doing it 0% down!)

I've gone to a TON of open houses. Yes, there are swarms of people at some of them, with bidding wars ensuing. With almost no exceptions, these houses are the good condtion, good neighborhood, good school houses being offered at 'below' what people feel is the existing market, which brings in a lot of the fence sitters who see their chance to FINALLY get a decent house.

You can walk literally a block away and see other houses that have sat on the market for months because the sellers set a 'wish' price and not a 'bargain' price.

So people who figured they could super-duper stretch and pay for a 850k house are not buying 800k houses that have been price reduced from 850. They're bidding on 850k houses that have been price reduced from 900k. They don't see the risk, they see the bigger house.

I know this, because I see it happen in myself. My wife and I have a limit on how much we can spend on a house, and without fail, we tend to like the houses right on the edge of that limit. It's 'more house'. And if the price is down from 50-100k from above that, it feels like a steal, even if I KNOW housing is overpriced.

I just do not like the sound of web 2.0. Numeric versioning is no longer apealing. Call it "Web XP" or something like that and it will have more kick.

the sense of community in the South Bay is nil…so overrated, I’m so glad to be moving—

But... but... but... this site says Silicon Valley is the bestest place in the world:

http://www.paulgraham.com/siliconvalley.html

But Randy, reality is what mind creates. Fundamentals are driven by psychology.

I don’t think anybody seriously thinks 350k is going to be the median sfh price for the bay area.

I expect median prices to eventually drop to 3.5-4 times the median household income, which is about right for ‘premium’ locations.

Um, 3.5-4x $97k is about $350-400k.

So, something's got to give in your claim: you either need to raise the min price, or drop the ratio.

Somehow, I think you're going to need to raise the min price.

The automechanic supporting his family has no chance at buying anything anywhere right now, and a good automechanic makes decent money.

Firefighters in Mountain View make $100k. They all live in the Sierra foothills. On the same block too. They have like 3000k houses or something. I can't find the article in the MV Voice anymore.

SFBubblebuyer,

I know of the $1.2M brand new SFH in Cupertino you talked about, I drove by that place a week ago. It is right next to 85, in fact, it is almost situated at the entry of 85. I was actually a bit confused if I had to drive through that development to get to 85.

If someone is ok with paying $1.2M to live next to a freeway entry, may da force be with them.

Awhile back you said side curtain air bag was important to you, you had me all worried, today I just bought a car with side curtain airbags. I got $7000 below invoice, that tells me the valley’s economy is nowhere near 2000

Congrats! IMO side curtain airbags are more important than front airbags. There are just too many red-light-runners in the area.

IMO Front airbags are very important if you drive on undivided roads a lot.

$7000 below is really something though.

May I ask which car was that?

What I like about the Bay Area (outdoors stuff to do, food, friendly people) is being slowly choked off by people who have no interest in these things and are here for the lure of making money.

Heh, ironically that's my beef, but in the opposite direction.

I don't like outdoor stuff, and I spend most of the daylight hours at work. I even work weekends more than sometimes. Who doesn't? This is Silicon Valley. That's what tech was based on - people who thought tech was so cool that they would give up their personal lives.

So needless to say, I'm not very impressed with when Realtors and others justify the insane house prices with "Great weather! You can go to the beach or Tahoe!"

Who cares? I'm outside my apt/car/office for 5 mins a day during weekdays. On weekends, it's only a little bit more.

I guess great weather would be more attractive if I was born the right time and was a PreProp13er.

(BTW, for friendly people, I'd cast my vote for people in Seattle metro. Even the airport workers are pretty friendly.)

MarkOfArk said :
"If you can afford a house and you know what the expectation is, then you would be more of a fool trying to wait for the magic low-ball day — aint gonna happen. If the price goes down to 250,000 I will gladly step in and bid up to 300,000 — and the cycle continues. Thank you for this web site it makes for fun reading."

Allah asked :
"What if you don’t have a job?"

If you dont have a job, then even if the price falls to $1.00 you still will not be able to afford it. CORRECTION : if you dont have a job then you could qualify for a "stated-income" loan where you could just tell them a story and get a bunch of money. Heck, you could still outbid eveybody even being unemployed !!!

Lexus is a great car.

My only regret is that I should have bought a more-used one for less money.

Please stop envying the people in the startups. Their lives are not necessarily happier despite some hitting the jackpot.

I have absolutely no envy for them. I just think the whole thing is not any better than Web 1.0.

You think it’s bad here, you should see Boston! There, a “red” light means you have 10 more seconds to make it through the intersection, “yellow” means accelerate NOW,

You should go to Baltimore or Houston. It's even more flagrant in those places. I think I once red that there's a strong correlation between red light running and crime rates. Something about the general beliefs in the rule of law (or lack thereof).

You think it’s bad here, you should see Boston!

I have driven there. It was pure madness.

MarkOfArk Says:

> One thing I notice never discussed in bubble
> discussions is the value of housing as an inflation
> fighter over the long term.

Then skibum Says:

> This issue in fact has been discussed here
> many times before.

If you make a 10% down payment and prices drop 10%, but we have 2% inflation you have “only” lost 80% of your equity

MarkOfArk Then Says:

> but the Bay Area is a desirable place in the world and in the
> end that is what counts. So by THAT psychology, the prices
> will not fall far.

Mark might be right and since the Bay Area is a “desirable place” people will just find a way to come up with a $1mm cash down payment and make the $30K a month PITI payments to live in the area I grew up in. The Bay Area was still “desirable” when homes in my old neighborhood were selling for $200K down and $6K a month in 1997, but since almost everyone in the Bay Area is making at least 5x more than they made in 1997 who wouldn’t want to “lock in” a low low $30K a month mortgage payment…

Actually the low wage makers are having good deals. If you make less than $85K household income for 4 persons (Los Gatos), then you are qualified for affordable housing to buy SFHs speicifically developed for that purpose. A 3-bedroom condo under such program sells for $300K in 2006.

There are programs like that in all cities, the threshold is around $75K-90K for a family of 4.

Who cares? I’m outside my apt/car/office for 5 mins a day during weekdays. On weekends, it’s only a little bit more.

If only they could take everything having to do with the high-tech industry here and transplant it to somewhere else with lower cost of living, then everyone would be happy! (No personal offense intended, eburbed). It's just a shame that so many of the people here are merely in a rat race working under fluorescent lights 7 days a week when you could be outside skiing/hiking/biking/surfing or whatever for at least part of the time.

FWIW, I am with DinOR on this one - it's not the jobs, it's the easy credit. Although I am not so sure about rapid declines as FAB says.

To counter OO and Randy, the job market euphoria can be very easily wiped out by difficulty in obtaining cheap credit. All my friends openly admit that they cannot afford their house at the current valuations. Even when they bought it, NO ONE took a 30 yr FRM, they needed an ARM. They also work in IT and have got raises as much as any other person. So I interpret this as another support for saying that salaries have not kept up with price increases, and the pay raises will not stop the decline.

If the rates go over 7%, what will do to this market even with good jobs ? The bond market is keeping the yields low because of fear of recession. If the economy remains strong and everyone gets raises, will the rates remain low ? Doubt that scenario.

But as has been mentioned, the credit related problems are happening precisely in this strong job market. Defaults, foreclosures etc are up. And except the true prime, other mortgage markets are in trouble. Very soon BA folks will feel the pinch due to this.

Employment is not necessarily a leading indicator in all scenarios. It's a lagging indicator in this cheap credit world.

Randy H,

My guess would be that the very fact that more than 30% of purchase and refinance loans are negative-amortization is evidence of overoptimistic buyers (a combination of desperate and naïve). The fact that you have loan delinquencies without a recession implies that the buyers were over confident about future prospects.

The very fact that so many buyers choose negative amortization loans does not inspire confidence that these homeowners plan to stretch their finances in order to making ends meet _just a little longer_ (unless they are sophisticated buyers, which you have ruled out)

Also, if the economy is so good why are fewer people buying homes than during the recession of 2001? Current home sales in the Bay Area are the slowest since 1996.

I would argue that the market psychology in real estate currently is not based on the fundamentals of jobs and income but on expectations of future price growth.

The prevailing ethos has changed from “buy now or be priced out forever” to “do I want to pay twice my rent to live in an equivalent home that isn’t appreciating? Let’s wait and see”

Eburbed :
I was only 'guestimating' what the 2007 houshold income for SV was, as I remember seeing 97k quoted as 'single' income and 110k as 'household' income for 2002ish. I could be wrong on the dates, but I don't think guessing a household income median for SV at 120-130ish was hugely off given those 'pulled out of my ass'umptions I made.

My point was that 3xhousehold income is pretty historically supported. Dual income households can inflate houseprices when you compare individual median income vs. house price. Household income is a better measure, and it has grown faster than inflation as more families become dual income in at least some small way, even if both parents aren't making equal salaries. Typically, one partner makes significantly less, but it still raises the household income substantionally.

Also, bay area/LI/Manhattan/etc all traditionally have housing prices higher than the 3x historical average, so assuming 3.5-4 times median household income for median household prices once things 'settle down' might not be unreasonable.

Peter P Says:

> IMO side curtain airbags are more important than
> front airbags. There are just too many red-light-
> runners in the area.

Side curtain airbags will probably reduce the injuries in a roll over or a minor side impact accident, but if you get T boned by a red light runner bad things will happen (Former State Senator Jackie Speier’s first husband Dr. Steven Sierra, chief of emergency medicine at a San Mateo Hospital died soon after a guy in an old Camaro ran a red light and T boned him in his Lexus LS)…

Employment is not necessarily a leading indicator in all scenarios. It’s a lagging indicator in this cheap credit world.

Stuck,
Precisely. Where do you all think much of the VC funding comes from? Cash from large corporations, hedge fund wealth, institutional investor cash, private equity funds, individual wealth. How much of this cash comes from easy credit? A fair amount I believe.