patrick.net

True in 1996 mortgages were much more traditional. However, "piggy back" loans were still quite common. People commonly used 2nd mortgages to meet the 20% downpayment needed to avoid PMI.

Rents are rising. No question in my mind. Too many people I know or work with are bitching about getting hit with 6%, 10%, 15% increases in the past year.

Even single-family-houses for rent are increasing. All the "theories" that the increasing supply of FB's trying to rent out their houses would hold down rents have proven faulty. When an equity-rich owner rents out the house at a reasonable price, it is descended upon like a rotting carcass and gone inside a week. All the rest are listed at a price that looks surprisingly exactly like the cost of a mortgage written around 2005.

sfbubblebuyer,

Oh, I wasn't really "throwing down the gauntlet" by any means. The only exposure I've had to these types of loans is from some breathless rookie from Quicken Loans gushing from a sales script! Trust me, if you labeled a 55 gal. drum "Toxic Waste" it requires no further investigation where I'm concerned.

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/07/12/BUGP3QUSH41.DTL&tsp=1%22

Bay Area defaults, auctions, repossessions nearly triple

"Subprime loans, which grew in popularity over the last two years" (from SFGate article)

Uh... you sure about "the last two years"? I'll give you a chance to re-think that and you can get back to me.

OT but equally funny is Patrick's video link to "Discover Kauai" (at the bottom). Sure, it's an island and the funny money loans that enabled unabated construction/speculation are going to appear more pronounced but sorry Mr. "Local" you're hardly the only victim of the housing bubble. Line forms to the rear and since you were admitted "The Union" last...

Other than hard-bitten, rust belt states with neg. pop. growth what DOES look/feel "pre-bubble"? (Certainly not Oregon).

SP

I have lots of friends that I would categorize as "not stupid" but when it comes to financial decision, their thought process is incomprehensible to me.

I know people who bought in despite having all the information at their fingertips that should have cautioned them to wait. But they got caught up in mania and they were thinking emotionally not logically. Now, of course, they have a mess on their hands.

My husband is seeing some interesting fallout too. He has a guy he knows through business contacts who is a mortgage broker. This guy took out a Neg Am loan and he's only paying half of what the amortized payment would be. The terms of the loan state that when it hits 115% of the original loan amount he'll have either pay it off in full or start making the amortized payments. This guy knowingly took out this loan. Every month approximately $2500 goes on the back end of the loan. Can you imagine? $30k a year getting tacked on to your home loan? It shouldn't take long for this thing to blow up in his face.

My husband mentioned this to another mortgage broker he knows and she told him Oh, mortgage brokers are the worst for taking out stupid loans.

Btw, anyone else get an email from Casey Serin?

Randy H:

Bay Area real estate was also "cheap" in 1996 not only because of tighter lending but because California was still coming off of its worst recession in memory. There was virtually no demand for California housing circa 1990-96. California real estate was higher in 1989 than it was in 1996 - a statement which pretty much holds true throughout the state (Bay Area included). Also, of course, salaries were lower and people didn't have the dot-com $$ yet.

I would dearly love to see a chart showing how the distribution of various mortgage types has changed over the last 30 years. Were negative amortization, 100% interest, 100% finance, no doc (et al) loans more or less prevalent at the peak of previous real-estate booms in the '60s, '70s, or '80s? I am NOT referring to sub-prime, per-se (althought that's interesting too).

I suspect that the degree to which people are using dodgier mortgages today than in past bubbles will be the biggest determining factor in how deep our current down-turn will go. Even areas that have seen little appreciation may experience severe price drops if the use of exotic financing has become prevalent.

Regarding rents, there was an interesting thread on rising rents over at www.seattlebubble.com. We discussed whether rising rents are actually an indicator that a real-estate market is topping and about ready to collapse (i.e. because more people decide to rent than buy, etc).

http://seattlebubble.com/viewtopic.php?t=454

DinOr, I doubt anywhere looks pre-bubble these days. The foreclosure 'heat map' seems to suggest a few states (NH, VT, ND, SD, MS, WV) are closer to some sort of normalcy, but I can tell you that although West Virginia didn't experience the escalation in prices experienced elsewhere - and it appears it's been spared some of the worst symptoms of collapse - residential real estate sales in Charleston slowed to a crawl in 1Q06 and are worsening now.

CRW is hardly the hub of the universe, but it's a refreshingly sane sort of place where most people live within their means. Which leaves me completely mystified by the number of sales reported nationally. Who is buying these
houses, and where on earth are they doing it?

Even single-family-houses for rent are increasing. All the “theories” that the increasing supply of FB’s trying to rent out their houses would hold down rents have proven faulty.

Uh... Randy, you really *do* need to get out of Marin once in a while. I think it's warping your perspective. ;-)

In all seriousness, I have seen rents around my area (L.A. County --a very high demand and densely populated region that is *still* getting a net influx of people, BTW) going up around the rate of (true) inflation: about 5-6%/year. At this rate, it will take a long time for the rent-vs-buy equation to correct through rising rents alone, but we've already covered that ground before.

Another critical factor is the time-lag issue. One of the Credit-Suisse charts depicts the average time it takes for a house to go through the process of foreclosure, from late payments to NOD to NTS to REO to market. Basically, it will take a minimum of several months to a year, and that's under normal conditions (when the system's not already backlogged with a flood of foreclosures).

We are in the first (or at most, second) inning of the current correction cycle. The RE market doesn't turn on a dime, people. Let's not all lose our cool, ok?

SQT,

Are you serious? What did it say?

Bruce,

I want to say up front, I'm -not- without empathy for the native HI's. The HI I remember is from the early 80's even before the Japanese flooded the islands w/yen. The brand of "development" being practiced there is particularly acute due to limited capacity and infrastructure.

What makes it even more ridiculous is that very few people levering themselves into those 1-2 mil. homes are there any more than a few days/weeks out of their busy year. Few will adapt into full time residents. The handful that -do- will become nimbyists.

I believe it is their native practice to build homes only substantial enough to last their lifetimes. (Why does a dead man need a house?) Which only makes our attachment to permanence all the more silly to them.

Ok, I just got an email from Casey as well re: "shutting it all down for good" on August 3rd. Can't tell if this is *yet another* one of his dishonest going-out-of-business publicity stunts, but odds are, it is.

Anyone have any knowledge about the 2nd peak of resets that will occur in 3 to 4 years. How likely are they (the Alt-a/Option/prime ARMs) to default as compared to the sub prime ARMs? More or less likely? Will they reset sooner due to evolving credit issues?

I got a last call email too.

Oh well, that's what blogging email accounts are for.

I suspect its a too little too late attempt to pacify his wife.

@astrid,

Probably so, but I'd take anything that comes out of that socipathic, publicity-addicted fliptard's mouth with a grain of salt. I'll know it's *really* Game Over when I turn on the evening news and see him in handcuffs doing the FBI 'perp walk.

OT, but followed the link for little gem and wanted to share it. Apparently, our suspicions were correct:

http://blogs.wsj.com/economics/2007/07/10/report-illegal-hispanics-bear-housing-slump-brunt/

Report: Illegal Hispanics Bear Housing Slump Brunt

Why has the housing slump taken so light a toll on employment? In a new report, economists at Deutsche Bank estimate construction employment should have fallen about 900,000 since early 2006 when in fact it’s only down 150,000. They conclude 500,000 of the unexplained gap is attributable to layoffs of illegal Hispanic workers. They say this means, first, that there is not a surge of job losses waiting to show up in the data. But it also means the job market is not as tight as the low unemployment rate suggests. They say the unemployment rate would be closer to 5% than its current 4.5% if these layoffs were properly accounted for.

Probably so, but I’d take anything that comes out of that socipathic, publicity-addicted fliptard’s mouth with a grain of salt.
It will be interesting to see how Casey is viewed by the public in the next year or so. Will he go from hapless perpetrator of a victimless crime to the guy who brought down Bear Stearns ( destroyed your pension, raised your insurance rates, and ruined your neighborhood)? If that becomes the case, he may have to go into hiding as the Haterz may become a bit more... shall we say, vitriolic.

Do Rich Fund Managers Pay Enough Tax?

honest hard working, disciplined savers like us are doomed. i read the other day warren buffet was talking about how the system is broken. he earned close to 50M for 2006 and paid

got cut off.

honest hard working, disciplined savers like us are doomed. i read the other day warren buffet was talking about how the system is broken. he earned close to 50M for 2006 and paid

Long time observer (much of the last 2 years), first time commenter. I am optimistic by nature, but am stunned by the leverage that people take on to live a life they cannot afford, and pessimistic because it seems inevitable that the house of cards will collapse. I am one of the hard-working, saving types and own a home in the northeast that was purchased in early 2002, probably have about 50% equity in it. I have been contemplating upgrading to a nicer community and nicer home since 2005, but the education from this site and others has convinced me that such a move would be terribly timed. It is bizarre to see the stock market have the best day in 4 years when it seems obvious that the economy is at the precipice. How long can this go on? My wife will kill me if I keep us in our current home & town for years, awaiting the crash that never comes. ;)

PessimisticOptimist.

I also recommend:

http://badmacro.blogspot.com/

My wife will kill me if I keep us in our current home & town for years, awaiting the crash that never comes.

PO,

There's plenty of evidence that prices (lagging indicator) are modestly falling nearly everywhere, with sales way down and inventory way up (leading indicators). Take a look at some of the charts posted above if you need some reassurance.

If you are looking for a dramatic, rapid NASDAQ-style meltdown, then your "crash" will never come. Real estate market busts are excruciatingly slow, grinding, watching-paint-dry affairs. Even the early 1990s bust (which was mostly confined to the west coast, vs. the current national/multi-national one) took a full 7 years to play out, which is lightening fast by RE standards.

Consider it took a full 16 years for Japan's bubble to deflate (and prices may *still* be falling in some major cities, Tokyo, etc.). This was largely because the central BOJ adopted a ZIRP policy and kept it there for many years. This, plus China's Yuan-dollar peg are also the cause of the carry-trade and much of the MBS-CDO mess that led to our RE bubble. Their overnight rate is still only 0.5%, as I recall, vs. the Fed's current 5.25%.

Again: patience, people. This super-tanker does NOT turn on a dime.

Many of you may have already seen this, but I wanted to share it just in case:

http://tinyurl.com/38nj6v

If you look at the Shiller graph, it looks like prices shot up in the '50s, then sort of hit a plateau for about 50 years. Maybe this will happen again--ie prices could level off for a few decades in inflation adjusted terms. Anybody else concerned about this possibility?

If that happens, Glen, it the later you buy, the better off you are in theory as you'll have more salary to support you. In theory. Buying at the beginning of a plateau kills you with opportunity costs. Especially with a long plateau. In that situation, buying when you're sure you're not going to have to move again is the only reason to buy as moving during a plateau costs you money.

HARM Says:

If you are looking for a dramatic, rapid NASDAQ-style meltdown, then your “crash” will never come. Real estate market busts are excruciatingly slow, grinding, watching-paint-dry affairs. Even the early 1990s bust (which was mostly confined to the west coast, vs. the current national/multi-national one) took a full 7 years to play out, which is lightening fast by RE standards.

True, if it's a florida/las vegas style bubble you would have already seen 20-40% drop in prices. not sure about NE, if the economy/job market is good then it might be a little slow to deflate. all these years with appreciating market, it had become glamorous to own a house with shiny/glittery stuff. equivalent of stock portfolio in dot com times. it takes a while to get it out of people's mind. one thing i fear is the # of immigrants coming in, it might change dynamics of market. look at population growth and consider that as part of your decision making too.

If you look at the Shiller graph, it looks like prices shot up in the ’50s, then sort of hit a plateau for about 50 years. Maybe this will happen again–i.e. prices could level off for a few decades in inflation adjusted terms. Anybody else concerned about this possibility?

Please keep in mind that the Shiller chart doesn't depict NOMINAL prices, but represents an INFLATION-ADJUSTED index of same-house values tracked over a 115 year period. Now, I don't recall exactly how Shiller adjust for "inflation" (the official CPI, PPP, GDP deflator), but assuming he's using a somewhat accurate "inflation" measure, what he's really representing here is the RELATIVE PRICE of the houses being tracked vs. other goods and services.

This is really at the crux of why we *know* we're in a massive bubble fueled by easy credit, and the huge price- run-ups are *not* some sort of sustainable boom, reflecting real growth in demand for shelter. The cost of purchasing real estate is up --way up-- over the relative cost of other things --especially equivalent rents (an economic substitute) and supporting incomes.

IF someone could demonstrate to me that equivalent rents and household wages also shot up 250-300% over the past 6 years as house prices have, then I would be forced to concede that there is no bubble.

IF someone could demonstrate to me that there is a *real* housing shortage out there and that inventory levels were actually falling (not rising sharply as they are now) and that prices reflect a real demand-for-shelter (not speculative excess & easy credit), then I would be forced to concede that there is no bubble.

IF someone could convince me that we are somehow entering a permanent New Era of hyper-expensive housing, where people will forever be required to devote upwards of 90% of their gross incomes on PITI, while eating out of dumpsters and shivering in dark, empty rooms, and equivalent rents and incomes will somehow never catch up, then I would be forced to concede that there is no bubble.

HINT: I am not holding my breath.

Oh, and to address that "trough" period on the Shiller chart, keep in mind that inflation-adjusted prices were relatively stable from the beginning (1890) to about mid-WWI, then fell roughly ~30% though the roaring 20s stock market boom, Great depression and WWII.

One could argue (and I believe Shiller does) that this period represented somewhat of a historical aberation. Investment money mostly flowed out of RE (into buying stocks on margin) throughout the 1920s, and then the entire economy (and housing demand with it) tanked through the 1930s, never fully recovering until post-WWII and the G.I. Bill.

@sa,

Yes, illegal immigration is a bit of a wildcard --especially in regions absorbing high concentrations of illegals, like CA, TX, AZ & FL. However, as high as the inflow is, it is *still* not enough to explain the astonishing 5-year run-up from a purely demand-for-shelter perspective.

The extra demand is probably contributing to the slow speed of the contraction here in CA vs. other regions, but that's about it. Also keep in mind that the illegal influx (and associated strain on our infrastructure, taxes, overcrowding, crime, lower quality of life) is a big factor in driving many native Californians to leave. Indeed, without illegal immigration, we would now have a net population *loss* statewide.

http://www.mercurynews.com/ci_6355707?source=rss&nclick_check=1

Google's moving in again - this time to one of Silicon Valley's premier and historic addresses, the site of Hewlett-Packard's first company-owned building.

In a real-estate spree that shows no sign of stopping, upstart Google has leased 395 Page Mill Road in Palo Alto.

The office building, which served as Agilent Technologies' headquarters for six years, was the site of HP's original 10,000-square-foot campus, built two years after founders Bill Hewlett and Dave Packard left the famous garage.

"Bill and Dave designed it as an open system - without interior walls - so the space could be flexible," according to Agilent's Web site. Built in 1942, the campus was later torn down to make way for headquarters for HP spinoff
Agilent.

Now the giant search engine company will plant its flag on the historic 11-acre site.

The 225,000-square-foot office building can accommodate up to 850 workers, according to Phil Mahoney, a broker with Cornish & Carey Commercial, who represented the owner, Jay Paul Co. of San Francisco, in the deal that was "recently signed."

Those Google workers will have more sq footage per employee than some SFHs (EXTRA PARKING) in the BA have for their occupants.

RE: the Bay Area foreclosure story in the Chronicle, here's an interesting side note. Check out the "Comments" section for the story - people posting in response. There's a tool named "Creamy" who starts off with the usual Bay Area is special, RE only goes up, tax advantage, blah blah blah. He/she gets promptly pummeled by the rest of the posters. It's a mildly entertaining read:

http://sfgate.com/cgi-bin/article/comments/view?f=/c/a/2007/07/12/BUGP3QUSH41.DTL&o=1

sfbubblebuyer Says:
Those Google workers will have more sq footage per employee

Not really. Most closed offices have 4 occupants - 1 to a corner in a 12x10 cube. Smaller offices (8x8) have 2 people. Open cubicles have 4 to 6 in a bullpen.

SP

"Creamy"

LOL.

News out of San Jose:

http://www.mercurynews.com/breakingnews/ci_6360248

"Cambrian Park residents warned of West Nile virus"

I'm glad they reported this, I was so close to buying a house in prime Cambrian.

I used to live in Cambrian Park. It's probably the drought year working on Ross Creek. I'm sure there are stagnant ponds there this year.

HARM

I wasn't saying that rents are anywhere near parity minus historical premium yet. Just that rents are *not* going down, and might be going up at a healthy clip here in the Bay Area.

About a year ago I was having daily smack-downs on here with a crowd who quite smugly assured me that:

a) Real estate was not sticky, and the crash would happen _fast_

b) Foreclosures would happen _fast_. What did one of the "experts" tell me, something like 45 days from seizure to market? When I pointed out that even a small increase in the volume of foreclosures would overwhelm the bureaucracy, I was informed of my naivety.

c) Rents would go *down*. Yes *down*, in nominal terms. We were educated about the "laws of supply and demand", if I recall.

I'm just sayin...

But no worries. We've resolved to keep on renting for at least 6 more months, probably more like another 18 months or longer. I certainly won't buy until my rent is at minimum less than half of PITI, which right now is 3.5X my rent.