patrick.net

I am not sure how this will play out eventually when 20% of these newcomers eventually cannot shoulder 80% of the load, I wonder if prop 13 is still a political taboo in such a situation.

It will always be taboo because the #1 voting block is always senior citizens.

40 years from now, the people bitching about prop 13 will be defending it to the death!

40 years from now, the people bitching about prop 13 will be defending it to the death!

Yeah, and who would blame them (us)???

Rental yield in BA is very difficult to assess, because most rental SFHs (until recently) are just pieces of crap that get almost no maintenance. If they were to be listed on the market, they would be sold "as-is" and only considered for its land value.

My wife and I looked up and down the west valley for rental when we were considering bubble-sitting about 4 years ago (yeah, I called the top way too early). The problem was, there were almost no decent rental stock in the areas we care about.

The rent-vs-own formula didn't become meaningful until a couple of year ago when the FBs are forced to rent their recently updated homes for cash flow. Now we are seeing a lot more *comparables*. You can look at a house and say, ah, if I were to buy this house today, how much would it go for. Before that, you would look at a rental home and say, WTF, what kind of idiot will buy this piece of crap?

This home, for example, gives a good comparable between rent and own. 1/2 acre land, completely updated, near Saratoga downtown, Saratoga school district, is about worth easily over $1.5M (just for that 1/2 acre land!) but currently is asking for rent of $3400. Zillow has it for $1.2M because zestimate doesn't know jack about homes without recent transaction record. Based on the fact that this home's tax assessment value is only about $100Ks, it must have been owned by an old timer.

http://sfbay.craigslist.org/sby/apa/293517910.html

If I didn't have a home, had enough cash to buy, I'd be thrilled to rent this house for a few years. What a steal.

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/03/15/BUGK4OLR5F16.DTL

Real estate agents say that sales are down in part because there simply aren't enough homes for sale and the usual increase in listings that comes with spring has yet to start.

The lack of inventory is evident in a weekly printout the San Francisco Association of Realtors puts together of all the homes for sale in the city that are open for agents to tour. By the middle of this month the packet typically starts to grow, as new homes hit the market, said Rick Turley, president of Coldwell Banker's San Francisco-Peninsula division.

"There were 28 pages of property tours in San Francisco when we would have expected 40 pages," Turley said. "Pages are shrinking at a time in which they should be going the other direction."

Is that Realtors making stuff up?

Or are listings not that strong? I would've thought there'd be more by now. It's way past superbowl sunday...

eburbed,

the realtors are not exactly lying on this, I've been wondering myself, why is that there are so few listings compared to Mar, 06?

I've been keeping track of Santa Clara County inventory since 5/18/05. This is what my data shows for sfh/condos (using mlslistings.com):

3/15/07 4257
3/15/06 3682
5/18/05 3606

I can't speak to other counties since I haven't been tracking those areas.

The housing tracker also shows decent gains in inventory. So I am not sure what OO means here. The inventory number is increasing. Maybe it is increasing more in fringe areas, and in the fortress it hasn't gone up by much.

For example Evergreen is over 300 already (compared to 200 last year), but Cupertino it is still around 70. It used to be 60 at this time of the last year.

Tossing in the Keys:

Cautiously, I pull back blinds to steal a peek at my neighbor across the street who seems to be making unusual amount of noise for a weeknight.

I see him jumping around out in front of his house like a loon. Apparently, word has it, he bought a nice, big house with an exotic ARM. He's clearly agitated.

I grab a chocolate chip cookie and munch into it. Half the cookie crumbles onto my shirt and the rest tumbles haphazardly onto the floor, but I am too utterly transfixed by the theatrics to move. I cannot take my eyes off the lunatic hopping around and swearing in his front yard. I can hear my own breathing quicken.

I brush the crumbs off my shirt, sniffle, and reach for the Hi-C fruit punch, quaffing down a big gulp. I wipe the red punch mustache off my face with the sleeve of my shirt and sniffle again as I pull back the blinds even further to get a better gander at the fiasco unfolding on the driveway, across the street.

My Boomer neighbor shouts something indeciperable, tells his girlfriend, "I'm finished, I'm broke...F this sh-t! I can't afford this sh-t anymore. Get off your lazy ass and YOU get a job...You're nothin' but a taker...a moocher!"

I think to myself..."G-d almighty. I thought this clown had his act together and was bringing home some serious bread. I guess he's just another yuppie schmuck living above his means, mooching off his credit card trying to impress his low-class girldfriend."

Dude throws the keys at the house and tears out of his driveway in his
B'mer.

His girlfriend shouts, "F you, you lazy piece of garbage" as she hurls a glass of wine at his car....

I think to myself, "I wonder if, as the housing market continues to crash, similar scenes are being played out all across the land?"

Sheesh...

Stuck,

I somehow remember far more inventory (something around 80 SFH) in Cupertino around Mar-April 06, but my memory may be off. I don't think the inventory is out of whack as of now. We will see what the spring bounce will be like.

Btw, when is the official start of spring bounce? (I mean, if there is a bounce at all)?

I was actually born in Indiana, and I'm not offended, so no worries.

@FAB, no need to get snarky. I was just citing my data source and defending my justification for using it. There are plenty of legitimate criticisms of their methods and sources.

You were the one that authoritatively proclaimed that I had everything backwards by offered up a vague reference to realtor.com as support.

Instead of criticizing my data (which you've thoroughly done for over a year now), show me yours and let me criticize that?

the HSBC data includes a lot more than just PITI in the “cost” of owning that push the multiple even higher…

Like the real value of future debt service? Seems reasonable enough to include the real cost of borrowing...I did so in my bubblizer model.

HelloKitty,

I think there is nothing wrong with someone doing the maths and deciding to foreclose on a non-recourse loan and save his lifestyle, instead of working his butt off for an under-water asset (well, more like a liability). It is just taking advantage of the legal loopholes.

Japanese and Hong Kong borrowers "toughed" it out because if their homes were sold for less what the loan's worth, the banks could still bite their ass with the difference, and the banks most definitely would. So they might as well stay in their home and make the payment instead of losing the home and still making the payment.

Ha Ha, what a non-sequitur. Hooray for south indian food.

Everyone who has contributed to this thread, thank you. I learned a lot today.

Hymie

I think the point is - not to brag. No need to mention your good judgement, because it will be obvious. If anyone brings it up, best to downplay your good luck, and make a self effacing funny comment.

hymie: You can't control what other people feel. If prices drop from the peak, then people who bought at the peak will feel like financial fools. Thanks to Zillow it is also pretty much impossible for them to not know what you paid.

I would advise that you simply not brag about your great price. The temptation will be great, but I say this for three reasons. First, people with even a shred of class would never openly mock their own neighbors. You want to get invited to the block party, right? Second, bragging would make you a magnet for the pent-up frustrations of people who paid too much in the bubble. You think the bulls are annoying now? Wait until they have officially lost. Third, you never know what the market will do in the future--you might end up bragging about the great price you got, and then two years later, another market drop puts you way underwater and some "lucky" punk moves in next door and starts mocking you. :)

Classy behavior tends to be worth the extra effort. But you can always brag on this blog. In a couple of years, patrick.net will have to put up a forum just for gloating... :)

Lol

I ran a thread many months ago suggesting that "bubbleheads" should be gracious and humble when the worm turns, for just these reasons.

I was thoroughly crucified. I think I had only one supportive comment the entire thread.

Maybe this is some kind of indicator in and of itself.

Randy, would an uncontrollable urge to gloat fall under the "jaded" or "bitter" part of Jaded Bitter Renter? :)

The bulls get invited to parties during the market runs because they're enthusiastic optimists who always have a reason why everything is going to turn out great. People like optimists, particularly when they want to agree with them. And everybody loves winning.

The bears will have their day, but you can't brag about being a pessimist. Unless you really do want to live in an isolated cave and socially hibernate, then I figure you can go for the gold and swagger around openly mocking the greedy losers. A bear's reasoning and predictions might be right, but wallowing in economic mayhem seems cruel and antisocial. People get hurt when the market goes down; bulls have the luxury that there are few perceived casualties when the market goes up.

When bears stay classy, they look like knowledgable skeptics when things go badly. That's a lot better than being a gloating sociopath who likes financial decay. And you have to stay friends with the bulls... they throw much better parties. :)

Randy H Says:

> @FAB, no need to get snarky. I was just citing my
> data source and defending my justification for using it.

Sorry if I came off as “snarky”, you might find this hard to believe but you are my favorite poster on this BLOG (I really do disagree with you at times, but you always keep it civil and defend your point)…

> There are plenty of legitimate criticisms of their
> methods and sources.

I don’t see any value in using data that is correlated, but not really comparable to come up with a ratio when it is possible to dig a little deeper and find numbers that is really comparable (say comparing the PITI payment when you bought your home on the Peninsula with the rent someone was paying on the same street, or even better looking at the rent for a 2br condo next to an identical condo that sold the same complex). The HSBC ratios for rent to own are about as accurate as taking the average cost to “buy” a car in the SF area (that includes some of the top selling luxury car dealers in the nation) and the average cost to “rent” a car at SFO (that includes a lot of stripped down American cars) to come up with the ratio (why not use the cost to “buy” the Buick with velour interior with the cost to “rent” an identical model?).

> You were the one that authoritatively proclaimed that
> I had everything backwards by offered up a vague
> reference to realtor.com as support.

I talk to young analysts in the rust belt almost every day and not a week goes buy when the super low cost to “buy” a home comes up. Just last week I was talking to a guy in Michigan who “bought” a home with a lower PITI payment than a friend is paying to “rent” a garage in Russian Hill… The realtor.com reference was vague, but even I was surprised to find over 200 homes in Flint, MI under $10K (that would have a monthly PITI of under $50). If you pick any city in the rust belt and look for the cost to rent I’m betting that you can find lots of similar homes for sale on Realtor.com that will have a PITI payment lower than the rents…

I just re-read where Randy wrote:

> There are many reasons that holding-cost of ownership
> (we usually abbreviate as PITI, but also includes a risk
> factor) is usually about 50%-70% higher than renting,
> and some factors are cultural and differ among countries.

I missed Randy’s comment about a “risk factor” since when I talk PITI it is just the P, the I, the T and the I (when you add in all the actual costs like CapX maint., time to deal with the home and the opportunity cost of not getting a cash on cash return on your money the ratio of own vs. rent will always be over 1.0…

@Michael Holliday,

Was that an account of an actual event or a piece of creative writing? Either way, very entertaining (but even better if it was real).

HelloKitty Says:

> I remember they used to do what is called a ‘loan reset’

And also mentioned some other terms that we have not heard in a while…

Since it sounds like HelloKitty (can we call you “HK”) has a lot more residential lending experience than I do I’m wondering if she knows if DPOs (Discounted Pay Offs) or CDs (Cram Downs) were common in the world of residential lending…

Back in the early 90’s a lot of smart Commercial Borrowers did real well gaming the system knowing that the government would not let a bank have many non performing loans on their books and they would have to sell them at a discount. The Borrowers would just stop paying on their loans knowing that the group that bought their non performing loans for $0.75 on the dollar planning to foreclose would be happy to do a DPO for $0.80 on the dollar the day after they took over the pool…

I never really understood the legal support for the cram down, but every now and then we would have a Borrower go in to BK to stop the foreclosure and the court would make us lower (aka cram down) the loan amount so the Borrower could start making payments again (they never gave us any support, just a court order making us lower a loan form say $9mm to $6mm)…

Michael Holliday Says:

> His girlfriend shouts, “F you, you lazy piece of garbage”
> as she hurls a glass of wine at his car….

And brings back fond memories of the dysfunctional but always entertaining white trash neighbors in my past…

Is it just me, or are the news links boring now? It was neat watching the stuff pop up almost over night, but now they're rushing to repeat themselves again and again about the sub-prime mortgages.

Somebody wake me up when they catch the first whiff of Alt-A going down.

FAB

Thanks for the comment. I consider FAB one of Patrick's most knowledgeable regulars, and a rare chance for many of us to learn about the innards of the industry. I have encouraged him in the past, and again now, to author some articles here of his own. They would be well received, I'm certain. For anyone who hasn't read here regularly for the past year or two, FAB does know of what he speaks regarding the mechanics of real estate, even if one disagrees with some of his related opinions. And he has a top-tier MBA, so he's quite capable of crunching numbers and rendering analysis. Many times he and I debate something like the HSBC data, only to find out we aren't really disagreeing -- like in this case.

But I'd recommend that anyone who might be thinking of making a bona fide living of real estate investment, try your best to get to know him. Over a year ago I was arguing about "how to get rich" with a guy who was superficially invoking Warren Buffet (who FAB has met, by the way, I think more than once). I still maintain that "getting rich" is only practically accomplished for most people by following FAB's father's example, not by worshiping someone else's riches. And if I was in RE, I'd still rather buy in as a partner of FAB's business than put all my money into Warren's fund.

I'm heartened to see the weight of comments on mainstream media newstory blogs has turned decidedly bearish.

I tried to post one, but it's not out of moderation yet. I was perhaps a bit too harsh, lol.

I would second Randy's sentiment, FAB is fab-ulous, we are so lucky to have an insider like him on this blog.

Hymie,

let's not start sucking each other's d*** quite yet, this tsunami of realty crash won't be over for at least 3-5 years, if we are lucky. Since the scale of speculation is so unprecedented, I would rather be airing on the patience side. Perhaps by 2010 you may not be ready to commit to a house if a 1931-style unemployment hits America. There are too many variables down the road, and how your neighbors look at your "good fortune" is so far down the list.

If you have savings piled up, protecting your savings and growing it amidst the turmoil of this unfathomable size perhaps should be the first thing on your mind. It is on mine.

Harm said:

Not much has been said so far about the effects of REFINANCING or HELOCs on the borrower’s no-recourse/anti-deficiency standing. As I recall, when s/he refinances, the borrower generally loses the no-recourse protection –even in CA. Is this assumption wrong?

Is this about right?

With all due deference to those who experienced the last bubble crash, I believe that just as it was "different this time" on the way up, it will be "different this time" on the way down.

In past bubble cycles, there were no HELOCs, people made more substantial downpayments and the number of 2nd mortgages was tiny compared to today. And with NINA and NegAm loans, the number of people with significant negative equity is likely to even greater than prior cycles. As a result, the deficiencies will be much larger and, in many cases, may be worth pursuing.

If you owe $50,000 in credit card debt and it is clear that you are broke, most lenders are not going to chase after you for a $3 or $4000 debt. They know that the cost of pursuing the debt will exceed any recovery and that you will likely just declare BK anyways. They also know that if they try to outsource to a private law firm, even a bottom-feeder collection attorney won't take the matter on contingency because the dollars are so small.

But if you owe, say, $100,000 on a HELOC, it is worth it to pursue you. For every 10 cases of this kind that get filed, even if 5 of the 10 declare BK and the creditor only collects 30 cents on the dollar from the rest, that is still $150,000. If the debtor is employable, then the creditor will garnish his wages. Any assets owned (or later acquired) by the debtor can be seized.

Sure, some debtors will declare BK and skate, but nowadays there are some serious impediments to BK. For instance:
1. If you have other assets, forget it. You don't qualify (that means YOU baby-boomer who just inherited $100K from mom and dad).
2. If your income is greater than the state median income, you can no longer file a Chapter 7 (complete liquidation) and you will likely be stuck with a Chapter 13 (repayment plan).
3. Good luck to you if you lied on your mortgage application about your income, assets, job history, etc.... My wife works in BK and she said that creditors are getting very aggressive in consumer fraud cases (creditors can file a "non-dischargeability complaint" in the bankruptcy proceeding to prevent the discharge of a debt if they can prove fraud. As a practical matter, though, they don't really need to prove it because most FBs do not have the resources to defend such an action so the court can automatically enter a judgment for the creditor). My wife has seen companies pursue non-dischargeability actions on much smaller deals than a typical HELOC (like consumers defaulting on installment purchases of a sofa or a refrigerator.) Apparently the credit department at Sears is ruthless. And a lot of these consumers are broke.

Lots of FBs actually have stable jobs and good prospects, but they will still want to mail in the keys. I didn't personally experience the burting of the last bubble in the early '90s, but I understand that a typical strategy even for people who *could* afford their mortgage (but who had negative equity) was to buy a new house for 25% less than your old house while your credit was still good, then default on the mortgage on your first house and let the lender take it. I don't think it will be so easy to use this strategy this time around.

When I bought my place (1994) I looked at a lot of properties in several neighborhoods in SF. Several of the properties were places where the owners had turned the keys back into the bank and walked away. One of them was owned by a Bay Area small time celebrity. My Realtor (the 'It's a dump. Ugh!' Realtor) would tell me that the properties were bank owned, and that if you really liked the property you could usually get a good deal because the banks don't want the hassle of owning them.

I ended up buying a place from a family that wanted a quite large place with a yard and they wanted to move then because the prices had collapsed on the more expensive properties they were looking at. We told them we wanted to buy the place made an offer, they accepted, and then they went to Italy for a month, we went to Italy for about 10 days, nothing really formalized, and when everybody came back from vacation we finished the deal. It wasn't adversarial, no bidding wars, everybody was really honest. It was very different from what I have seen people go through the past few years.

Now- a stupid question. Does your tax base reset if you pull out equity? I don't think it does if you refi, because I am postive we refinanced both places when the rates were really low a couple of years ago, and our taxes are on the old base. But if you pull out money isn't that like selling the house to yourself?

OO,

We here at Patrick.net will NOT tolerate the "random Zillow spying" on of one's neighbor! YOU sir are beneath contempt!

(But uh... just between you, me and the fence post what exactly did Mr. Boomer and his trophy wife pay again?) :)

SFW,

I'm surprised at you? The time honored tradition of robbing one's own home is as sacred to Americans as farm subsidies and pork barrel projects! Remember it's YOUR money!

Itulip had a great article on "Credit Welfare" linked here and as is most of their material, definitely worth a read.

HelloKitty Says:

> I actually plan on tracking the ‘days on market’ and
> compiling the history of price reductions and list price
> vs final sales price on foreclosures and compare by
> bank. The goal is to try to predict accurately how low
> an offer certain banks will or will not accept and how
> soon after listing they will accept such a low offer.

You will get a lot better info buying lunch for admin. people in the bank special servicing/workout departments…

> I’d also recommend to anyone to get their RE broker
> license and perhaps work under a big name office briefly
> to get experience on how to submit offers/list properties.
> Its EZ but you need to know how to fill the forms out.

I’ve said this before, but I don’t think that it is a good idea for most people to represent themselves in real estate transactions. The main reason is that on the buy side you should always work with the listing agent since they sell almost all their good listings. The main reason on the sell side is that “people in the loop” have access to the exchange buyers and others who need to close fast (and pay top dollar) and when you pay a 4% fee to the selling broker you will have “everyone” trying to sell your property…

> Here is what I have done to prepare for the fantasy ‘bottom of the market’:
>1. have broker lic/mls access…

We are not going to rush out and start buying on Monday, but it will be interesting to discuss this more down the road. Where do you live (since Real Estate is local I like to use neighborhood examples that people are familiar with)? There are a lot of different ways to make money at the “bottom of the market”…

> Hey FAB- do you know John T Reed??? He says only buy double digit cap rate properties that seems impossible now.

I have never met him, but he is a sharp guy. I have read every one of his books (the first on buying apartments about 15 years ago). It has been impossible to “buy” double digit cap rate real estate in California for the past 5 years, but it has been possible to renovate and reposition your way to double digit cash on cash returns…

SFWoman Says:

> Now- a stupid question. Does your tax base reset if you
> pull out equity? I don’t think it does if you refi, because
> I am positive we refinanced both places when the rates
> were really low a couple of years ago, and our taxes are
> on the old base.

In California the tax base does not reset if you pull out equity. The tax base will go up if you use the money you pull out to renovate or expand the home (and pull permits so the assessor knows about the renovation and/or expansion). This is why many people think that pulling money out of a home will increase the taxable value…

FAB, Randy,

I really enjoy the back and forth, and I'm sure others do as well.

FAB said: I don’t see any value in using data that is correlated, but not really comparable to come up with a ratio when it is possible to dig a little deeper and find numbers that is really comparable (say comparing the PITI payment when you bought your home on the Peninsula with the rent someone was paying on the same street, or even better looking at the rent for a 2br condo next to an identical condo that sold the same complex).

Randy said: Many times he and I debate something like the HSBC data, only to find out we aren’t really disagreeing — like in this case.

It may be that you've completely resolved your differences, but I'm not sure I follow completely. FAB's comments imply that HSBC's data is comparing apples (nice for sale stock) and oranges (crappy rental stock), thus inflating the PITO/rent ratio. (FAB--I hope I'm not putting words in your mouth).

Randy, would you agree with this interpretation of the HSBC data, or is your opinion that HSBC normalized (turned their oranges into apples so to speak) by adding the 30% fudge factor I saw quoted?

I understand the warning that my home may not be representative of HSBC's average. This is why I value FAB's experience that PITI/rent can approach 1 even in nice neighborhoods. This has extremely practical implications when choosing when to buy...

The funny thing to me about holding the "HSBC Data" as the gold standard is that HSBC themselves got caught with their pants down in this subprime mess just as much as everyone else!

Boston Transplant Says:

> Randy, would you agree with this interpretation of the
> HSBC data, or is your opinion that HSBC normalized
> (turned their oranges into apples so to speak) by adding
> the 30% fudge factor I saw quoted?

Since there is no good source of single family home rents across the country the HSBC data took 2 br apartment rent data and adjusted to come up with the rents on homes that are usually 3 br (and also usually have garages and backyards). If you want to come up with a report for all markets across the country you need to do something like this.

> I understand the warning that my home may not be
> representative of HSBC’s average. This is why I value
> FAB’s experience that PITI/rent can approach 1 even
> in nice neighborhoods. This has extremely practical
> implications when choosing when to buy…

Most people will remember the rent they paid 5 or even10 years ago so unlike HSBC you can talk to people who have been renting in a neighborhood you are interested in and pull the sale information of similar homes over time from Zillow or the title records. If you plug in the average rate on a 30 year loan at the time of sale and know a little bit about tax rates and insurance cost you can get very close to the actual PITI number with a sale price and a sale date.

Looking at Craigslist on the neighborhoods I have been interested in, I can rent for under 2k a house that would cost north of 650k, rent for 2-2.5k houses in the 700k-800k, and 2.5-3k in the 800-900k, and 3-4k in the 900k-1.2M, and 4-5k in the 1.2-1.5M areas.

*NOT INVESTMENY ADVICE*

(Psst) I got an e-mail for a Reverse Convertible. It happened to be for CFC. Nothing particularly odd there (other than the timing).

15% YIELD!

I suppose THAT answers where they are going to seek funding NOW doesn't it! I guess that's to "sex up" the yld. for the retail crowd. Barclays is the lead underwriter in the syndicate for those w/the stomach for it.

Opinions? :)

Boston Transplant,

Adding on to FAB's explanation, think of the HSBC data as more theoretical and macro, and FAB's recommendations as more micro and practical. The whole reason I brought it up was because we were talking about own-to-rent ratio at a macro level, which I contend you need a method like HSBC used to talk about rationally. But I wouldn't recommend trying to interpolate HSBC's data to specific situations.

What I tried to do with The Bubblizer was maybe more what you're looking for. I took HSBC's methods and conceptual model and adjusted them to help make a more individual buy -v- rent decision. My approach was *not* to compare to this or that macro trend, but instead to simply show you just how much _you_ could afford, how much you gain or lose versus renting, and then how much the _next guy_ would need to buy your home for in X years in order for you to come out break-even as if you had rented over X instead.

The beauty of that, in my opinion, is you can make your own practical judgment about whether you think Mr. Nextbuyer will be making a salary high enough to afford your house in your neighborhood, of if he will even want to. This approach allows you to take in FAB's type of data because you can find out how specific neighborhoods have held up over time, and use that to determine if your purchase is reasonable.

Even though the Bubblizer is fairly generous to the ownership case it still is fairly clear that *house prices are way too high*. It's all about cost basis. Once prices come down maybe 20-25% in more prime areas, over 50% in less prime areas, then the ownership case starts becoming very powerful -- long before PITI is cheaper than renting.

And that was my main point. Don't necessarily try to wait until the decision is automatic. Most folks here would buy tomorrow if renting were clearly and objectively more expensive than owning. Peter P might say that it is this reflective psychology itself that keeps rent from dropping below owning for very long in desirable areas.

Saw a house go on the market and off the market in my neighborhood. So I emailed the realtor rep'ing that property. Take a look at this response:
---------------------------------

Baby is due next month. Also, they may not sell after all.

If you have not bought a unit by May, let me know if you are still interested then. Good luck. With the subprime lending going away, there will be fewer buyers on the market and foreclosures coming. Be patient before purchasing and gather your downpayment. At least 20% if you can.

Let me know if I can assist you in any way.

--Realtor