patrick.net

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. :(

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.