patrick.net

Peter P said :
A 200K household with 20% downpayment cannot afford a 800K house comfortably.

That's what caused me to find this site in the first place. My wife and I started looking, and we are priced out of 'starter homes' anywhere near where we work. I hadn't paid attention to housing until I started looking for one. And ouch. Just ouch.

I think OO is right to some extent. And I do think the job market will slow down as well when people realize that yahoo or google is not gonna gobble up every web 2.0 startup in sight.

Regardless, the housing market has to start spitting back due to the other factors like speculative buying, foreclosures, stated income and other related nonsense.

I don't get it? Why are we debating this?

What makes the defaults and rise in inventory so remarkable is that WE ARE at or near full employment! Prior to the new paradigm in personal finance foreclosures were almost exclusively confined to plant closings.

Most of the people in default have not lost their jobs.

Most recent buyers are idiots… IDIOTS from the East coast
who believe you must overpay for homes in Bay Area.

From the east coast?

SFWoman Says:

> OK, my friend who bought the $2.1 million house last
> October told me she is having trouble keeping up with
> her bills. It is really going outside the sub-prime market,
> right here, in my ‘hood.

When I said “creative financing” and “crazy loans” I was not just talking about the sub prime market I have many friends who are over $2mm in debt and heading for trouble due to the loans they have. I am not friends with idiots like Casey who bought six homes but smart kids with just one home. I’ll change the names so no one will know who I’m talking about but take a hypothetical kid who grew up in “Pacific Hollow” and went to “Cathtown” grammar school and “UHSI High”. After undergrad at “Calford” he got a job at “McBain” and worked his ass off for a couple years kissing ass so he could get a get a couple good letters of recommendation and get in to “HSB”. After graduation in 1997 he was making about one HaHa and working for a big company, but didn’t “buy” until 2003 with a loan that got a lot more expensive last year…

Let’s look at what it would cost to “buy” (aka rent the money to get your name on title) a typical home in the Marina that a young professional would want to live in:

1997: Price of home $400K
2000: Price of home $800K
2003: Price of home $1.2mm
2006: Price of home $1.6mm

The typical way that most people bought these homes are below:

1997: Payment on a 30yr FRM (after 20% down) at 7.75% = $2,292/month
2000: Payment on a 30yr FRM with 5ys IO (after 20% down) at 7.50% = $4,133/month
2003: Payment on a 10% down 30yr VRM with 3ys IO fixed at 3.00% and 10% 2nd TD w 5% start rate = $3,200/month
2006: Payment of the 0% down no doc IO 20/80 Voodoo loan with 24 months of Neg Am at on the 1st and 2nd at 4% = $5,333

NV Says:

> Most recent buyers are idiots… IDIOTS from
> the East coast who believe you must overpay
> for homes in Bay Area.

I’m sure that there are some people from the East Coast overpaying for some homes, but it seems to me that it is my fellow Bay Area natives (who have watched the value of Mom & Dad’s home go from $100K to $3mm in their lifetime) that are overpaying even more often so they won’t be “priced out forever when prices continue to increase by “at least” (according to their Realtors) $100K a year…

FAB,
You worked in the rentals AND got NO allowance...
I was going to apply to the food tester and crossing guard job in 2010 but am starting to believe it might be too dangerous.

For those interested, SF Bay Area Craigslist ReduceOMeter fell slightly to 122 listings for March 2-3.

The latest round of delinquencies has not been because of homeowners losing their jobs. They haven’t even been caused by mortgage rate resets.

The mortgages that have been giving the most trouble were originated in 2006. These mortgages are at most a little over a year old and buyers are still defaulting. The best explanation I have seen is lax lending standards and fraud.

This could include buyers lying about their income and planning for a quick flip of the property. Another possibility is inflated appraisals preventing refinancing into a more affordable mortgage.

I have been surprised at the increase in defaults in the central valley even without a recession. Could it happen in the Bay Area?

OO

I agree with you entirely. So long as people feel like

a) have "good" jobs they feel "good" about, and
b) believe their jobs are secure and their incomes will keep rising

the stickiness will persist. A lot of folks on patrick have a tendency to underestimate the "creativity" of people (especially working professionals in the bay area) when it comes to making ends meet _just a little longer_.

As long as Web2.0_worker_023 believes better times are ahead, (s)he will continue eating raman noodles and borrowing from mom and dad to get by.

And Web2.0 is a full-on bubble at this point, even if it is still small by 90s comparisons. Just look at those dorks running Digg. For you guys not immersed in things Silicon Valley, just go here. There's so much 1999-esque bullshit starting to pop up that even run of the mill web designers are getting $100/hour if they call themselves web2.0 designers.

> Most recent buyers are idiots… IDIOTS from
> the East coast who believe you must overpay
> for homes in Bay Area.

I’m sure that there are some people from the East Coast overpaying for some homes, but it seems to me that it is my fellow Bay Area natives (who have watched the value of Mom & Dad’s home go from $100K to $3mm in their lifetime) that are overpaying even more often so they won’t be “priced out forever when prices continue to increase by “at least” (according to their Realtors) $100K a year…

I agree with both and add "First Gen immigrants" to the list.

I will have to disagree with most of the posters here. Stickiness will NOT go away unless JOB MARKET in BA cracks first.
(snip)
As long as there are still bullshit web 2.0 jobs floating around, housing price will continue to be sticky.

OO,
I couldn't agree with you more. That's a big part of the BA home price stickiness. Am I the only one who looks at all of this Web 2.0 crap and thinks the vast majority of these startups are all about bull$hit?

Take a look at this piece about the so-called "hottest" Web 2.0 companies:

http://money.cnn.com/magazines/business2/nextnet/2007/

IMO their collective productivity, utility and inventiveness is nil. Ironically, the Web 2.0 moniker fits better than people realize. This is pets.com all over again, and I think after this wave of M+A activity, there will be a big stinking pile of BS sitting around Silly Valley, yet again. I mean, c'mon, does anyone really think a startup to organize photos better online or yet another myspace wannabe is going to save our economy?

Here are some numbers on the South Bay Job Market. It clearly shows job market lower than 1990.

True - but that data only goes to 1/2005. Hiring is really picking up. A few of my friends are being cold called again, and interviewing good candidates is hard to find again. 2006 was really a turning point.

a) have “good” jobs they feel “good” about, and

Do engineers feel good about their jobs? I feel really pathetic.

I mean, c’mon, does anyone really think a startup to organize photos better online or yet another myspace wannabe is going to save our economy?

But to be fair, isn't that what a lot of Google's detractors said in 2000?

My wife and I started looking, and we are priced out of ’starter homes’ anywhere near where we work. I hadn’t paid attention to housing until I started looking for one. And ouch. Just ouch.

That's why I started burbed.com :)

I have enjoyed your site from time to time and I watch the alleged housing bubble like a slow train wreck. I live in Castro Valley/Hayward east bay and have noticed one thing indicative of price correction : many for sale signs in comparison to the past few years. As I drive around I see three or four for-sale signs on some streets, condo complex have stacks of for-sale signs outside the gates. This is the same thing that happened in the bay area 1989/1990. On a normal day we could drive a one square mile area and see maybe one house for-sale, now it is five houses or more. My opinion is that it is nothing more than a simple cycle. sometimes there are alot of buyers, sometimes not. One thing I notice never discussed in bubble discussions is the value of housing as an inflation fighter over the long term. A person who pays $500.00 per month on mortgage because they bought in the 1970s is doing far better than ANY renter today. So much is discussed about the absolute monetary "price" value compared to rents or incomes, but it DOES NOT MATTER WHAT YOUR INCOME IS , since you can still get a loan. There fore the absolute price has less meaning as far as what is a bubble. The Bay Area prices will not ever need to come down to get buyers. 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.

But to be fair, isn’t that what a lot of Google’s detractors said in 2000?

Google's current success IMO is well above their product value. Sure everyone and their brother uses Google as a search engine and their related spin-off products, but that IMO doesn't justify their current market valuation. On top of that, their current business strategy appears to be to move into and/or supercede the traditional media. They may very well succeed at that, but that is a new morph outside of the original business plan. Sure, they've been successful so far, but how many of these current Web 2.0 startups will be able to do that? It's the same rational all the dot bombs had 8 years ago: "look at Yahoo and Netscape. Let's do the same and make lots of money too." Only, they turned out to be pets.com and webvan.

I went to http://www.viewfromsiliconvalley.com/id134.html - I don't see any 2006 numbers.

Just to be clear, i'm not saying that employment/population is the reason the prices spiked like they did. Easy credit and psychology was.

But to be fair, employment is definitely on the uptick. Try hiring anyone in tech lately? It's hard. Personal experience.

No but at price at $1.5 Billion the VCs did very well. Im talking about
YouTube as prime example.

NV,
Exactly! It's the "look at these guys that hit the lottery - let's jump on the bandwagon" all over again. And I'm not only talking about the people at YouTube, but the VC's too. How much of their money comes from hedge funds etc who are more and more eager to take on high risk ventures? And how much of that cash also comes from all this liquidity we have due to artificially low rates?

Dont forget those hot mobile software companies that at the end create
games for cell phones… BAHAHAHAHAH… Yea that real all right

Uh, those sorts of things sell really well internationally.

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.

What if you don't have a job?

But to be fair, employment is definitely on the uptick. Try hiring anyone in tech lately? It’s hard. Personal experience.

Allright then, H1-B visas for everyone!

Sure, they’ve been successful so far, but how many of these current Web 2.0 startups will be able to do that?

Well again to be fair, Google didn't have a business model at first. There were some who believed they would eventually resort to using banner ads. But then they found contextually sensitive ads (well... Y! folks would argue they cloned Overture) and that was the homerun they needed.

That's why startups exist - you create a product, create an audience, create a market and then find a business model. or you fail.

Again, I'm not saying all the 25 on that list will succeed, but some of them might. And then you'd have another 4000 millionaires like at google.

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

This issue in fact has been discussed here many times before. It's well-established that taking on debt (as long as you can service it) is in many ways a good thing to do in times of hyperinflation. Your debt gets inflated away, much like your example. However, your example assumes home prices will continue to inflate at a similar rate to earning power, which it clearly has not in the past 5 years. Buying a house in the 1970's and looking at today's resultant low payment is not equivalent to buying today at the peak of a cycle and looking at payments 20-30 years from now. Besides, someone who bought in the 1970's should have paid off their mortgage by now anyway!

That’s why startups exist - you create a product, create an audience, create a market and then find a business model. or you fail.

People tend to over-emphasize effort and idea as the primary reasons of success. In the grand scheme of things, they do not really matter.

Allright then, H1-B visas for everyone!

Speaking of which, there was a bizarre article in the WSJ a few weeks ago about how some towns are at risk of losing their -only- doctor due to changes in H1B laws.

Why?

Because being a general practitioner pays so relatively poorly and are so crappy (vs being a super star dermatologist/plastic surgeon making $300k a year) that only immigrants will take the jobs.

http://online.wsj.com/article/SB117159185862710615.html?mod=hps_us_pageone

The effect is profound in small towns and rural areas, where the dearth of doctors is already acute. About 25% of all physicians in practice or in training across the U.S. are foreign, but in rural areas the percentage is often much higher.

Without J-1 physicians, some rural residents might have to travel more than 100 miles to reach a hospital. "It's a life-and-death situation," says Rep. Jerry Moran, who represents a rural constituency in Kansas where several hospitals haven't successfully recruited an American physician in more than a decade.

Makes sense. If you were in medicine, why go for internal medicine? Helping people who are sick doesn't pay very well, and you have to work in boring places. Helping rich people who want to look better - now that's where the money and cool stuff is. The market at work.

Thanks "MarkOfArk"!

Your posts make for interesting reading too! I've been watching this "alleged" bubble too and haven't seen ANY sign of it yet but if I do I'll let you know, o.k? :)

Oh and if you can loan me your time machine so I can either go back to 1970 (when I was in 5th grade) OR better yet BUY NOW and transport myself 37 years into the future, yeah that'd be great. Yeah.

A person who pays $500.00 per month on mortgage because they bought in the 1970s is doing far better than ANY renter today.

Does such a person still even exist? How large a % of pre-existing mortgages were cash-out refinanced, HELOC'd or both in the past 6 years? Probably close to 100%.

If the price goes down to 250,000 I will gladly step in and bid up to 300,000 — and the cycle continues.

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!

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!!

That’s why startups exist - you create a product, create an audience, create a market and then find a business model. or you fail.

Really? Thanks for the edjumication on what a startup is. 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. I remember the first time I used Google and I honestly thought, "hey, this is actually pretty cool." Especially after Yahoo, Webcrawler, Lycos and all that other crap.

Are you sensitive b/c you work at one of these startups?

skibum,

5th graders can get 30 yr. FRM right? I mean, everyone has.

Uh how many posters here were even born yet in 1970? Sheesh.

ManOfArk: A Real Financial Hero!

@DinOR,

:lol:

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. :(