patrick.net

You could live in a real mansion in Buffalo and fly JetBlue to NYC every weekend for the rest of your life, staying at a nice hotel, and still come out better than buying.

For a lot of people in NY, money doesn't matter. There was a great article in the NY Times a few weeks ago about how a lot of buildings in Manhattan are now half empty - because they're third or fourth homes. (Doormen are outraged - less tips!)

That's one of the things that drives me bonkers when people cite SF real estate as being the next NY.

Uh... no.

There are rich people in SF.
There are wealthy people in NY. That's the difference.

I wrote about that in this entry recently:

http://www.burbed.com/2007/03/18/what-silicon-valley-needs-to-do-to-beat-ny/

Everyone has an angle to make money from the barrios to the skyline glass offices without making any tangible products.

Um... how is that different than anywhere else?

There was a silly offer ‘basically a useless scam’ where banks for a fee would offer to save you 8 years off of a typical mortgage by redesigning you payment plan to be 1 payment every 4 weeks instead of every month.

Actually what I was talking about is a lot more sophisticated than that. It's not simply a pay-more-often thing, but rather a scheme that involves a HELOC.

Top 10 U-Haul Destinations For 2006

Why are people so eager to move to LA? Still!

Actually, it doesn't tell you where they are coming from, it could mean that many are coming from another part of LA. This could be a bunch of renters who have left their apartment to find a better deal.

Oh noes... we've fallen down the list!

http://www.housingtracker.net/affordability/?sort=pct-income

City, State Affordability Percent Income Mortgage/Rent Price/Income Price/Rent
Los Angeles, California 62 1.7 10.4 335
San Diego, California 53 1.7 8.9 343
Oakland, California 52 1.9 8.7 393
Santa Ana, California 52 1.7 8.8 346
Honolulu, Hawaii 51 1.8 8.7 353
New York, New York 50 1.6 8.4 323
San Francisco, California 47 1.9 8 393
San Jose, California 46 2 7.8 406
Miami, Florida 45 1.4 7.6 280
Riverside, California 42 1.6 7.1 314
Tacoma, Washington 36 1.5 6.1 293
Fort Lauderdale, Florida 35 1.4 6 280
West Palm Beach, Florida 33 1.4 5.7 280
Barnstable Town, Massachusetts 33 1.5 5.6 312
Sacramento, California 33 1.2 5.6 248
Las Vegas, Nevada 32 1.3 5.4 262
Reno, Nevada 31 1.2 5.3 245
Atlantic City, New Jersey 31 1.3 5.3 268
Nassau, New York 30 1.5 5.2 307
Sarasota, Florida 30 1.4 5.2 286

We used to be really at the top - now we're further down below. Where has our specialness gone!

http://www.paperdinero.com/CSI.aspx

Neeto chart making widget based on Case/Shiller data.

DinOR Says:
I think the thread was:
Mortgage Acceleration? (Freedom or Bunk?)
Or something like that?
DS alluded to there being “some problem” with them in AU but didn’t have any specifics IIRC.

My earliest post alluded to there being some problem, and then I reseaerched it and put copious specifics down as to why there were problems both in Oz and US. Claire put up a better deal in the UK. It's well worth looking up tat old thread for the details.

Patrick is going to try to put a google site search thingy on the blog pages, at our behest. I'll see what's slowing him down... ;)

In short, the biggest problems were that they usually charged higher interest and also possibly higher fees, with excuses about there being 'more transactions to process'. A misleading calculator was put forward which implied the same interest rate between loan types when in fact the so-called 'mortgage accelerator' rate was higher. This was the case in both US and Oz, altho Claire showed a UK loan which was fair by charging the same interest rate. In US and Oz tho, you would be worse off. Better off making more frequent payments.

They are a HELOC type thing also, where you deposit all your salary againt the mortgage and live off a credit card or similar.

Neeto chart making widget based on Case/Shiller data.
As they say, "a picture is worth a thousand words". How do you find these excellent toys? I was going cross-eyed looking at the S&P C/S Index Excel spreadsheet. The LA chart is priceless (still waiting for Miami to fall...)

I don’t think a nuke will be set off. More probably, they will wait till they have many nukes in many cities, then set them all off at once.

I see, yes. I think I saw this on a documentary on telly last week called '24'. Then it was followed by another documentary called 'X-Files' or something similar sounding... It's amazing what's going on out there right under our noses... But how do the producers of those documentaries get all those close-ups of people's reactions, and always seem to be at the right place at the right time?

Maybe if we got over a century of king-making and expediency in the Middle East and using them as an instrumentality with little improvement in their material quality of life things might get better also...

otherside says:
PAR, this is a follow-up to our argument of a few months ago about the value of leverage in real-estate versus in your investment portfolio… Bottom line: For real estate, leverage helps you on the way up but does not penalize you that much on the way down (“non-recourse loans” as FAB put it or “million dollar call with no premium” as I put it)

1. The avg. down payment in CA is around 9% on a $550k+ median priced home. So let's say the average is $50k down. Not sure how this qualifies as "no premium" but I presume you suggest that we all buy houses with zero down?

2. I'm no foreclosure expert but I'm pretty sure non-recourse applies to primary residence. Plenty of funny money in dumped into the vacation and rental property markets, but we can ignore that segment and pretend as though it's a different "market" if you like.

3. I will allow that some people won't give a flying rat's ass about their credit, especially NINJA loan holders. I think you overestimate the prevalence of this flippant attitude and disregard for obligation, but this is speculation on my part.

Let's assume that you're right about all this. A Bay Area house is just a million dollar call option with zero premium. Let's say the expiration day arrives and your option didn't hit the strike price. The option is now worthless and, according to your theory, you walk away and suffer no consequences.

In this simple world where everyone who owns a home is just a gambler, nobody suffers any losses and we all continue to get rich so long as easy money keeps pouring in and pumping up values. But in the real world, values are declining and the options are starting to expire. And when your neighbor whistles up to the mailbox and cheerily mails in his keys, values in the whole neighborhood drop.

If your theory of the million dollar call option is valid, now that the liquidity spigot is drying up, properties should start to be dumped with reckless abandon, flooding the market with inventory and completely hammering prices. I never realized what a great case you've been making all along for the speculative fervor that's driven this bubble to it's current heights, but I do now. Thanks for that.

Emerging markets are where the growth in the world economy is going to be the next 50 years. If you are younger than 50, you need to have some of your 401k invested there, unless you want to retire poor.

I just put about 5% of my 401k into Vietnam. It is really hard to find a fund that focuses on it, but my broker finally found one.

I am sure there will be gyrations on the way there, probably more gyrations than most who post here would be able to stand, but I am confident that it will turn out to be a great investment in the long run.

PAR

There are so many things wrong with her "free (no premium) million dollar call option" theory that it's almost futile to deconstruct it.

This is what you get when investment bankers drop out to become realtors, I guess. Smart enough to be dangerous. I'll bet that even on this blog forum, her arm waving has convinced at least one person that we're the fools and she knows what she's talking about. All the fancy financial words, and stuff.

"No premium". lol. Yes, that's right. There are big, free, million dollar options lying around on the street, and you get to live in a brand new McMansion to boot! But we're just all tooooo stoooopid to get it.

Jimbo, didn't the Economist just call a bubble in Vietnam?

http://tinyurl.com/yvk8gc

Muggy,

Nah. "Ms. Agrawal says the couches will be moving with her...she said while seated in a SoHo cafe during a break from her job, working in the promotions department at an independent music label. It’s not like me having furniture I like will depreciate the value of the house.'"' The girl is a walking cliche, albeit a very cute one.

Emerging markets are where the growth in the world economy is going to be the next 50 years. If you are younger than 50, you need to have some of your 401k invested there, unless you want to retire poor.

They look too good to be true.

I will not bet on any country without ICBMs. Russia is a possible choice, but it is a jungle out there.

On the other hand, instead of investing on something promising, why not betting against something shitty?

Not investment advice

Its not just the Google stock options that are distorting the local real estate market. They are extending their tentacles to a neighborhood near you. :-)
There are signs that Google's shuttles could be affecting -- albeit
in small ways -- the region's housing market.
When Adam Klein, a 24-year-old software engineer, moved to San
Francisco in 2005 to take a job at Google, he looked for a rental
apartment within a 15-minute walk of a shuttle stop. His walk to the
Civic Center stop turned out to be a bit longer. "I didn't take into
account the hills," Mr. Klein said. Many of his friends are moving
close to other shuttle stops. "Those stops have attracted people," he
said.
The area surrounding one of the shuttle's Pacific Heights stops had
a dozen or so Googlers living nearby in 2005. That number has surged
to more than 60.
Published Saturday, March 10, 2007, by the New York Times
http://groups.yahoo.com/group/BATN/message/34083

Person,

Therein lies the advantage of being a regular listener! When you've seen first hand as a CPA or planner great examples of how *not to do things it's exciting at first! The challenge of turning someone's situation around. After awhile? It starts to wear on you.

DS is right in one regard. The int. IS higher! However b/c they've structured your loans in a way that has them paid off in 7-10 years the effective int. rate is closer to 2.75-3.0%. I'm still learning and attending regular training on-line, in a classroom and working case studies. It's complicated, but do-able.

DS? I have affirmation that the Maquarie Calculator "assumes" every dollar not specifically budgeted for utilities, entertainment etc. is applied to the mortgage (in some cases) giving some pretty outrageous results! "You mean I can pay my home off in 3 years?" Well... uh... it's "possible".

Like most fin. planning calcs it's best to be honest about your lifestyle and expectations rather than "create" the person we wish we were?

The Buyer's Market in SF is over! says this commenter on my blog:

http://www.burbed.com/2007/03/15/sales-tumbling-demand-to-pick-up/#comment-7322

Danielle Says:
March 19th, 2007 at 5:23 pm e
The market seems to be so different, even within the Bay Area….

Looking at your own micro-market is so important. At my company, Zephyr Real Estate, we are reporting 2/3 of properties being sold now with multiple offers and for over the asking price! It’s been like this since about mid-February…

Inventory is very low right now which is causing the return of the seller’s market here in San Francisco.

I, too, yearn for more listings to emerge. As noted on my BLOG at http://blog.sfhotlist.com, if you believe the local papers, you are in for a real surprise. This is no longer a buyer’s market, at least not here in the city. It was notably slower last quarter…

Personally, folks should worry less about timing the market perfectly and more about making smart choices for their own financial situation.

Egad... where's the inventory!

In San Jose, HousingTracker shows this:
03/19/2007 3,663
03/12/2007 4,577

(I hope that's a mistake!!)

In SF, HousingTracker shows this:
03/19/2007 11,406
03/12/2007 11,520

This is totally not what I expected.

Argh, please unmoderate my last post about the sudden return of the seller's market

Oh, and just so we're clear, I'm hardly advocating anyone run out and impale themselves on the biggest mortgage they can find and run up a tab to boot!

Entry point STILL MATTERS and all the hot shot financial products in the world aren't going to change that!

According to the realtor who posted this comment on my blog, it's a Seller's Market again!

http://www.burbed.com/2007/03/15/sales-tumbling-demand-to-pick-up/#comment-7322

Egad… where’s the inventory!

In San Jose, HousingTracker shows this:
03/19/2007 3,663
03/12/2007 4,577

(I hope that’s a mistake!!)

In SF, HousingTracker shows this:
03/19/2007 11,406
03/12/2007 11,520

This is totally not what I expected.

And remember, REAL PRICES don’t change the size of your mortgage or the PITI

Tell that to those with NAAVLP. Many people rely on NOMINAL price increases to pay their mortgages. To start, their payments increase at least 7.5% every year. And then there are "recasts" to worry about.

eburbed, if the sales are going down then it is not a seller's market. It is not a buyer's market either. It is a non-market.

Feel free to post a rebuttal to Danielle who posted that on my site.

Feel free to post a rebuttal to Danielle who posted that on my site.

What is the point?

Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago.

-- Donald Kohn, April 22, 2005.

eburbed,

When sales are down and inventory drops, it means people are pulling their properties off the markets, or aren't listing them because they don't think they'll get a good price.

Inventory = Inv - HS - HDL + HL (Houses Sold, Delisted, and Listed)

From what I saw from DQ, housing sales have dropped again. That suggests that HL is down, HDL is up, or a combo of the two.

I've seen multi-offer houses going down in the southbay area. But it's almost always from setting an initial 'low price' to drum up the interest. One house listed at 749,000 and sold for 815,000. Just down the street, there was a house with the same 'basic' floor plan, but with the obvious additions (master bed and expanded family room)... and it was selling for 998k. And sitting on the market for months. Just recently they dropped the price to 918k, hoping, I suspect, to get a little 'bidding' action. In reality, they need to drop probably to 850 to get the 'sold above asking!' action.

The cagey sellers right now are offering low and pulling in about the best price they can... but still not as good as they could have gotten a year ago, and certainly not as good as 2005.

I suspect there is a group that saw the 'spring bounce' in comparables stay pretty flat and are holding off listing.

For all the criticism of a low asking price to get multiple offers, I will point out one obvious thing. Their real estate agents are encouraging these people to price to sell. And who knows, maybe some houses going on the market now are owned by people with a very low basis from 10 or 20 years ago. A $100K drop might sound like a lot, but if their house has appreciated by $600K in 10 years, why not just take a hit and start your retirement now?

I think folks on this blog often forget that most of the Bay Area homes probably haven't changed hands in the last 5 years. Hence why some homes rent cheaply, and why many people can still afford to sell their house for the slightly lower 2007 price.

When sales are down and inventory drops, it means people are pulling their properties off the markets, or aren’t listing them because they don’t think they’ll get a good price.

I was really hoping for some fear and desperation.

theOtherside:

Really, you're starting to embarrass yourself now. You know better.

Here's a bigger CSI graph for you, with a line on it so you can see how full of shit you are.

Listen carefully. Read slowly...

The Case Shiller Index is benchmarked at 100 for prices in 1890

Look carefully, nearly 40% of the 20th Century was spent BELOW 100, meaning houses LOST VALUE from 1890 through 1945.

And the recent 70s and 80s booms saw the index drop to about 105. Wooohooo! A home in 1984 was worth 5% more than 1890. 1997 prices where a whopping 10% higher than 1890. 10% real return in 107 years. Man, who needs the stock market?

I've written numerous articles on my blog explaining CSI for ex IBs like you, but you're apparently too intimidated to come on there and debate in a no-bullshit forum. I'm still waiting for your input on The Bubblizer, which you promised 6 months ago. You told me you could quantitatively prove my model was flawed. I'm still waiting.

http://www.housingtracker.net/old_housingtracker/location/California/SanJose/

Housingtracker shows inventory is up in San Jose.

"In short, the biggest problems were that they usually charged higher interest and also possibly higher fees" RE mortgage acceleration

One more thing because this made me think of something. Even all things being equal, I actually have heard of people doing entire refinances to do this. Here is some sound advice.

Refinancing to do the 26 vs 24 payments is the stupidest move in finance someone can do. To actually go and get a new loan is an absolute waste of all the fees.

The other really dumb move, and I actually know and have heard people on call in shows talk about; is to refinance a 30 year loan to a 15 year loan with no additional benefit in rates. I hope everyone here is shaking their heads saying 'no one could be that stupid' but there are people who don't know that they can just up their payment by a small amount to do this. If anyone has ever done this, keep it to yourself and learn for the next time.

Brand,

I don't think anybody is hating on the sellers who price below current expectations of 'market value' to drum up multiple bids on their houses. It's EXACTLY what I would do in a buyer's market. Once you get people 'bidding' against eachother, you get a much better price than the one you would have gotten from the eventual winner if he'd been the only buyer... maybe not by a lot, and maybe not always, but on average, yes, a slightly better price... and much faster!

Those are cagey sellers.

The ones that are screwed are the ones whose outstanding mortgage is more than the 'current' market price, and who will 'chase the prices down' the market, losing more and more money to interest.

Newbie mistkake? I posted to the previous thread (reprinted below for comments).

What am I afraid of? Continued stupidity on the part of buyers, head-in-the-sand RE "experts", and new stupidity on the part of the pro-bail-out camp.

(from previous thread post):

I have been enjoying this blog for about a year now. Given the MENSA qualities of the posters, I’ve been intimidated to enter the fray (those econ models and formulas freak me out). But what I can offer, as a true lay person and bona fide non-expert, is my own experience and my ’simple’, common sense opinion about real estate in the Bay Area.

To CMAC’s question about rental rises:

I was recruited to the BA from Southern California in 1997, with all the lure that was so very rampant at that time — the sign-on bonus, the low strike-price grants, the paid relocation, the silly toys and the dorm like environment, etc. — and God was I shocked at the rental market! I mean, it wasn’t like I was moving from an inexpensive area!

My roommate and I basically took the *first* apartment we could find in Santa Clara. We hadn’t even seen it. But given the wait lists we’d encountered, we simply had to take the first place we could find.

Long story short, my company was purchased, I went to another start-up, went IPO and then bankrupt, got purchased, then purchased again by an even bigger fish, and voila, I ended up in San Ramon in 2001. All the while, the H1-B visa holders left en masse. You could easily find a parking spot or leisurely walk the mall at Valco unimpeded. The tech bust became fully realized.

What a lovely surprise to pay less rent for a much nicer apartment deep in the burbs. More shocking, I pay less rent now than I did 6 years ago when I moved in. That’s not a type-O folks. My rent fell every six months for the following 5 years. I did experience one increase (5%) last summer, but still, well below the original lease.

It doesn’t take an Alan Greenspan or a fancy model to see what was happening/ is happening. Rents have been consistently falling while real estate prices have been going through the roof. This unbelievable trend defies all the fundamentals and all known historical models. If it smells like sh*t, looks like sh*t, even tastes like sh*t (which many FB’s are well familiar with), then it is indeed a big, heaping pile of steaming sh*t. Lowly renter that I am, I can move at a moment’s notice, which in the M&A craze of the Silicon Valley is a nice option for an American-born engineer to have.

In addition, *every* weekend for the past year, I’ve seen poor schlubs standing on all the major corners with those ridiculous signs, pointing me, desperately, to the many new developments within the Dougherty valley. For the first time in all these years, I’m seeing “For Rent” signs as well, for the multi-million dollar homes in my subdivision.

I see empty units all around me. I regularly receive flyers from the management, offering discounts on rent to refer friends. And that 5% increase? They returned 1/2 of that increase to me (over six prior months) when I finally signed a 12-month lease.

Rents going up? I think not. At least not in the Tri-Valley area. There are so many new condos and SFHs as well as new apartment complexes, that the increased supply necessarily demands a relative lowering or at least stagnation of rental rates. Considering inflation and my increase in salary (yes, “Uh-Amekican” engineers are still getting courted and paid well in the BA), I am making out very well. Gone are those days of IPOs and VC capital growing from trees. BA software companies have to recruit from the residents who have some how eked by in this area. For sure, foreign investors are still coming to BA to buy, but keep in mind, they aren’t workers, they’re investors. Somebody still has to write the code and evangelize the product to US clients (the insurmountable logistics surrounding outsourcing are a whole ‘nother thread, but not entirely unrelated to RE issues in the BA).

For any FB’s or Happy B’s out there who look upon my cohort with pity and disdain, save it for yourselves. My savings and investments are doing quite well, thank you very much.

Question for FAB: In your experience, have apartment management companies been able to pull off a 10%+ increase on current residents? I have not seen that succeed myself (i.e. lots of empty units appear suddenly) but given the crazy RE economics of our last 5 years or so, I suppose anything is possible. I’m particularly interested in the large management firms, as they have the foot hold in most residential areas, still.

Thanks much,
-LSR

Very right LSR....

Here is a recent take on Tech Economy...

http://www.siliconvalley.com/mld/mercurynews/news/16293878.htm

Private equity set to reshape venture capital industry
By Constance Loizos
Mercury News

Private equity firms, already reshaping wide swathes of American business, are poised to begin shaking up the venture industry, too.

In a new survey of venture capitalists' 2007 predictions, 71 percent of the 200 individuals polled by the National Venture Capital Association said that selling their startups to these giant buyout firms may become an ``attractive option'' next year.

It's a dramatic shift; the worlds of venture capital and private equity have rarely interacted.

SFBubbleBuyer -
You talk about Bidding Action. My question, are you sure these are real or fake biddings. It is almost impossible for me to verify if other bids are real. I found myself putting offers on two homes however on each time I was told to up the offer because other offers... "will you go higher". In each case I was not told how much the other bids. In both cases I declined to counter offer and backed off the deal. The homes stayed on the market for months afterwards and did not sell.

Do you trust these multiple bids we hear of? How are you verifying if multiple bids actually exist?

I can't stand cupertino but I know some of you like it for the schools. Here's a foreclosure for you:
http://sfbay.craigslist.org/sby/rfs/296769918.html

Held on for a year...

eburbed, I've got something for Danielle. She may not realize that there's some extra inventory coming her way. These are NODs sent out through Jan '07, before the lending screws tightened.
http://www.flickr.com/photos/7409273@N03/427735192/

theotherside Says:

> Randy H, The green line (post war trend) on your graph
> is ONLY an expression of your beliefs or crystal ball

Below is a graph that compares homes to inflation:

http://tinyurl.com/2m2wgu

Patrick, I don't think your WordPress site remembered to spring forward. Comments have time stamps that run one hour behind... Not that it matters, but I just noticed.