Get comfortable until Spring '08 (Bay Area)

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by Randy H     💰tip   follow   2007 Sep 11, 8:30am  

I know other markets have already started correcting at a healthy clip. Others might even be nearing the end of the cycle. But much of coastal California, and especially the San Francisco Bay Area, have barely begun to see the downward hill in residential real estate prices.

It is my current opinion that nothing significant will break in prices -- and I mean significant -- until next Spring. In fact, I really don't expect the nicer areas of the Bay to start going down meaningfully until early Summer, '08.

My reasoning is that everyone who can, by any means possible, will hang on until next Spring's "selling season". They're being told by a lot of pretend "professionals" that they should hold out, that by next Spring the storm will be over and they'll get their price, or better.

There will, of course, be plenty of foreclosures and the sporadic forced-sales (divorce, job change, etc.), and some of those may be good deals on prices, but they'll be very hard to come by, in my estimation. Agents are doing everything they can to hide the real sales prices of those deals with some agencies outright not reporting those sales to the CAR statistics because they don't qualify as "standard sales". Foreclosures may not even be priced all that attractively. A lot of banks are still trying to figure out what to do with their growing inventory of houses on their balance sheets. Right now banks aren't really in a position to start marking down hard assets, and they don't have enough inventory to make a material difference yet anyway.

Cometh the Spring I expect that prices will be right around where they are today, maybe a few points lower, but nothing major. On the ground we'll all see the same old houses sitting there, or relisted, for the same prices they left off at after the Summer of '07. Then the real fun begins, as I finally expect by the end of Spring a number of sellers will capitulate and take their lumps. Once price cuts really start, then it should turn into more competitive pricing by sellers, each trying to out maneuver the other as they all chase each other down the market.

I should briefly qualify what I mean by "lower prices". I mean price cuts from the true peak, which given your specific area should be anywhere from Q4-2005 to Q4-2006, even Q1-2007 for a few super prime areas. Fantasy wishing prices listed between your area's peak and today are nonsense, and cuts off of those prices are essentially not cuts at all. Assume the price is listed at your area's peak price, and ignore any goofball premium some real estate party latecomer tried to squeeze out of the waning days. For example, there's a home here in Mill Valley the current owners bought the end of 2005 for $1.895mm, which they listed the Summer of 2007 for $2.45mm. In my mind, that home peaked at $1.895mm, and is at best likely to sell again for around $1.48mm, the price a nearly identical home on the block sold for in early 2005.

--Randy H


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1   HARM   2007 Sep 11, 8:38am  

Window shopping and toying with clueless greedbag sellers is one thing. However, anyone who assumes Spring 2008 will be a good time to tender an offer is begging to become a knife-catcher. Based on the famous Credit-Suisse ARM reset chart and previous RE cycles, this thing is not likely to truly hit bottom until 2011-2012.

You might get lucky and find that rare, equity-rich long-time owner who hasn't HELOC'd the place to death and doesn't mind selling 30-50% below comps, but... I wouldn't bet on it.

2   sfbubblebuyer   2007 Sep 11, 8:41am  

You really think 1.4? I'd be surprised if most everything that wasn't in the millions in 98 to be back below the millions (minus a few trophy houses) back under the million dollar mark again.

3   Randy H   2007 Sep 11, 8:46am  

"Knife Catcher" is somewhat pejorative, implying that the buyer is somehow taking an unnecessary, irresponsible risk. I'd rather not see us hold everyone to a market-trend standard. Each person has their own economic utility break even point. Your knife is their spoon.

Were I investing in real estate I'd be much more concerned about the market momentum and the best laid predictions of mice and fools. As I've argued, a primary residence house is *not* an investment, despite what realtors squawk over and over. It is a place to live and a structured savings plan in the form of an amortizing mortgage, with certain tax benefits.

4   Randy H   2007 Sep 11, 8:48am  

You really think 1.4?

Yes. It's in the hills of Mill Valley, where homes have been over $1mm in adjusted dollars for some time. Maybe $1.05mm, maybe $1.45mm, maybe even $1.55mm. I can't predict the future. But it won't be no stinkin $2.45mm, I can tell you that.

5   HARM   2007 Sep 11, 8:49am  

Those who --as Sir Randall has often pointed out-- are not interested in gettting as close to the cycle bottom as possible may find *reasonable* bargains in abundance considerably some time before that, perhaps as early as mid-2009, but I doubt any earlier. Too many NINJAs & option-ARMs have yet to reset, the NOD-to-foreclosure-to-REO process takes a very looong time, and REO inventory is just barely starting to trickle in.

Expect to see several years of slowly declining prices, snail-slow sales, sky-high (mostly above-market-clearing-price) inventory and largely abandoned exurban McStuccovilles with brown lawns and attractive mosquito ponds.

6   HARM   2007 Sep 11, 8:52am  

“Knife Catcher” is somewhat pejorative, implying that the buyer is somehow taking an unnecessary, irresponsible risk.

At this point, IMHO most buyers are taking an unnecessary, irresponsible risk, and I believe the term fits 99% of them. Yes, there are a few truly deep-discount "bargains" out there, but they are still very few and far between, especially here in the Land of Eternal Appreciation.

7   skibum   2007 Sep 11, 8:52am  

Randy H,

In other words, you're saying "I told you so" re: the stickiness of downward price movement in real estate... :)

Seriously though, I'll add a few factors.

I think there is already a significant amount of "hiding" of real prices that's been going on for some time. I'm talking about relisting as "new" after being on market for long periods so the price reduction doesn't show, incentives on the part of new homes (not so much an issue in "prime" BA), and cash-back at closing deals and the like.

There are still plenty of clueless idiots in places like Palo Alto willing to pay the "wishing prices" on these crapboxes. A steady stream of these people will become the knife catchers of 2007-2008.

I am very curious what the DQ numbers for August, and more interestingly, September and October (reflecting closings on transactions made after the credit crunch). A massive decline in sales volume is a gimme. The effect on prices will be interesting too.

8   skibum   2007 Sep 11, 8:55am  

As I’ve argued, a primary residence house is *not* an investment, despite what realtors squawk over and over.

On the other hand, the utility question can be turned around by asking, is waiting x amount of time worth it if, for the same cost, you could get that much better a home than you could get today? Is that wait worth it for you, Mr. Eager Buyer?

9   HARM   2007 Sep 11, 8:55am  

But, hey if any of you out there want to catch that knife or find personal "utility" in purchasing an illiquid asset for 2-3X its true (supported by economic fundamentals) value, go right ahead. Who am I to stop you?

10   HARM   2007 Sep 11, 8:58am  

Premature buyers caveat:
Go right ahead if you want, but just remember you were warned.

11   Randy H   2007 Sep 11, 9:01am  

I rephrase HARM's comment as a warning:

The earlier in the correction you buy the more at risk you are if you become a "forced-sale" yourself. You should weigh that in your decision. Any of us can be unexpectedly forced to sell despite our best preparations. Few people really expect and plan for divorce, major illness, structural job loss, or otherwise compelling changes of family situation.

As such I'd recommend the earlier in the cycle you buy, the more cushion of savings you should have. That way you can sell for less than you paid should you have to a few years later. And that might be ok, depends upon what it's worth to you all things considered.

Remember, we bought our first house in Redwood City for around 10% less than the previous owners paid for it 7 years earlier. That loss wasn't terrible for them, they went on to trade up nonetheless, I think because they'd had a couple kids and outgrew the place.

12   Different Sean   2007 Sep 11, 9:04am  

Peter P Says:
We definitely need a welfare reform. Welfare is meant to help people getting back on their own feet. It is not designed to sustain social parasites.

Aren't landlords social parasites? Using their control over land to exploit others for a passive income?

13   Randy H   2007 Sep 11, 9:08am  


You also have to factor in the fundamentals driving your specific target area. Superprime, prime, average, borderline, and givemeabreak areas play by different stickiness rules. Lots of prime areas tend to simply see sales drop to near zero during bad downturns. I've argued before that there's a lot of underestimation on Patrick's about how much wealth and resource some people have. During the previous downturn in Marin a lot of homes simply ended up being owned by mommy & daddy rather than clear the market at a lower price; many others ended up as perma-rentals. Already we've seen at least 4-5 homes turn into rentals on my street alone. These are folks who grew up in Marin, their folks live in Marin, and they aren't about to be chased out any time soon, even though PropertyShark would convince you that they are all FBs.

The answer is to either move to a more dynamic neighborhood, or take your best guess as to where you think you're comfortable climbing in. I'm not sure I'll even buy in Mill Valley for that reason. If prices keep falling in Novato, for example, I'll buy there and instead use the $1mm I'll save to hire a personal drive to ferry me to the City every day.

14   Glen   2007 Sep 11, 9:22am  

I have noticed some deterioration in pricing. Mostly, there is just a lot more inventory out there. However, homes in my area (Pasadena area) have dropped a bit.

Probate sales and "bank owned" properties seem to be leading the market down. In the summer of '05 you could not buy a SFR anywhere in a half-decent part of LA for less than $500K. Now I am starting to see houses in Tujunga and Altadena in the $400s. Entry level houses in nicer areas like Montrose, La Crescenta and the Glendale hills are in the $500-$600k range. Still quite steep, but not as bad as two years ago.

I would estimate that a selective shopper could get around a 20-25% discount off peak prices, even though the price drops are not reflected in NAR stats or Craigslist wishing prices. Although it doesn't seem like it, we might already be at the halfway point.

15   Randy H   2007 Sep 11, 9:32am  

The Second Chapter of "my" Stickiness Argument

I'd like to take credit for being so prophetic, but there were plenty of analysts and economists out there describing stickiness before I ever uttered it here (and got into a whole barrel of fights over it).

But there's a Second Chapter to the story:

The stickier prices are -- the longer they stay stuck -- the more traumatically they will heave during periods of movement.

Skibum described it a long time back as pulling a big rubber disc along a long rubber mat by a rope (or something like that). The more friction there is between the disc and the mat, the harder it is to pull, but the more wildly it will "hop" when force overcomes friction.

So the moral is, don't make the same stickiness mistake on the other side of the equation. Assuming the correction will be a long march downwards is just as flawed as those who assumed the market would efficiently return prices to earth as long as a year or two ago.

I see lots of lurching and jerking, but I also see those moves to be substantial, with silent plateaus in between. It will be *very hard* to tell if that last big hop was just one of a series, or covered half the ground in a single event. Using fundamental analysis only goes so far because you cannot rationalize it easily to the time series.

16   Peter P   2007 Sep 11, 9:32am  

Perhaps it is wishful thinking, but I have noticed that restaurants are not as busy.

17   FormerAptBroker   2007 Sep 11, 9:40am  

Different Sean Says:

> Aren’t landlords social parasites? Using their control
> over land to exploit others for a passive income?

In America anyone can buy land (you can buy a decent home in Ohio or Michigan for less than $100 a month).

Since no one needs to rent a place landlords are business people who need to create value for others so they continue to rent from them.

P.S. With the exception of land leased to long term credit tenant leases owning land does not provide “passive” income (it takes a lot of work to keep the income coming in)…

18   skibum   2007 Sep 11, 9:44am  

Randy H,

Yes, there is clearly a subset of sellers nee owners who have the resources to "stick it out" during a downturn and hold out. But on the other hand there are the classic "FBs" who have leveraged themselves in the $1M-$2M range on 10% downpayments or less. This significant fraction of current owners who bought in the last 2-4 years will have significant selling pressure if any of the typical financial supports fail - job loss or even job change, one of the two income earners stops working, ARM resets, and the like.

In "prime" areas, there are more than just a few of these families. These are the families who stretched in a huge way to get into the good school system, the good neighborhood, etc.

19   Randy H   2007 Sep 11, 9:45am  

tax definitions aside,

Landlord profits = Active income. You have to invest in your business operations, replace depreciated assets, manage cash flows including collections and losses.

REIT investors = Passive income. You pay someone else to do all that for you and you get a return on the money you "lend" them to do it.

20   skibum   2007 Sep 11, 9:47am  

Randy H,

This is probably obvious, but I'll add to your comments re: the herky-jerky nature of downward price stickiness, that unexpected stresses to the macro-economy will certainly "grease" the downward movement of prices. The crunch on jumbo mortgages may be one of these. Recession and significant job losses would be another. Hyperinflation if the Fed slashes rates yet another.

21   Randy H   2007 Sep 11, 9:51am  


Agreed with the following modification to the analogy:

Macro factors don't so much change the coefficient of friction; the stickiness stays about the same, it is based on mental accounting and a whole host of pretty much immutable psychological factors. It changes the elasticity of the rope.

More favorable macro conditions means you're pulling the disc with a bungee cord. Less favorable means you're pulling it with a steel cable. It's the "give" in the system.

22   skibum   2007 Sep 11, 9:53am  

Peter P,

I have noticed that too. The first weekend I noticed this was over the Labor Day holiday, so I assumed everyone was out of town. However, last weekend was the same. Downtown Palo Alto's faux-trendy restaurants were half-full as a rule. We had a nice dinner at a half-full Zbibbo on Friday night, walked by a nearly-empty Mantra, nearly empty Junnoon, and only Miyake was near full. Tables were even available at Evvia, something I haven't seen in a few years. But that's a bunch of young, single renter-types most likely! ;)

Other casual observations about local consumer sentiment:

- Stanford shopping center is still as crowded as usual
- Costco lately has looked like a ghost town, even on Saturday
- Ikea was likewise near-empty on a weekend

Yeah, yeah, I've been at too many box stores lately - trying to catch up on a LOT of errands. Besides, we're trying to do our part in being "True American Heroes." (TM)

23   skibum   2007 Sep 11, 9:57am  


I like the extension of the analogy... Now you just have to somehow work in the current favorite Fed analogy of "pushing on a string" re: reducing the Fed funds rate in current credit conditions...

24   Peter P   2007 Sep 11, 9:58am  

Besides, we’re trying to do our part in being “True American Heroes.” (TM)

Yes. Do your part. Being fiscally responsible is un-American. ;)

25   Different Sean   2007 Sep 11, 10:02am  

which all really makes my point that it's apparently OK to invest in 'passive income' earners where you have to do little or no work for a return, as long as you're 'respectable folks'. altho 'investment properties' do require some work and monitoring, no-one would do it if it provided the same sweat equity return as a regular paid job working for someone else.
some people find out the hard way it's more work than they bargained for, which the RE guru never warned them about in the seminar. the other thing they hope for these days is massive, unearned capital gains on said properties, of course. but, now i think of it, 'investment properties' are being spruiked all the time in other states, using a property management model, so you simply hand over all the work to a remote RE agent for a fee...

more on this later, i'm going out the door...

26   OO   2007 Sep 11, 10:07am  


I was at Miyake when you were strolling the downtown on Friday. We noticed the same thing.

Why was it full at Miyake? PRICE.

I can probably speculate on why Stanford Shopping Center was full. In the last couple of months, I have already received 3 visiting pals from Asia who were doing last-minute shopping at SSC before they returned. It is to me more of a touristy place for out-of-town consumers.

27   Peter P   2007 Sep 11, 10:08am  

Miyake? I need my noise-canceling heat-set. :)

28   HelloKitty   2007 Sep 11, 10:13am  

It seems like the 'selling season' ended a couple months early this year. Normally Oct is the end of the main inventory turnover.

August 2007 will live forever as the 'end' of the credit bubble IMO.

So since we are only 1 month away from the end of ez cheap money....we got a loooong way to go to bottom.

iTulip.com predicted 15 (fifteen!) years from 2005 as the bottom nationally. Thats the longest time period I've seen predicted. They back it up with logic an graphs and data too, check them out.

Also dont forget in CA it takes 11-12 months to foreclose from when mortgage payment is stopped. Then add 1 to 3 months for the lender to put the REO on the market (it may not even hit the mls but sell to insiders-i saw this recently).

So if an FB stops making payments TODAY then you won't see the house for sale as an REO until 12 to 15 months from now, possibly longer if they do some 'workout' or crummy gov bailout delays the inevitable foreclosure.

The recession will eliminate a large number of jobs, plus boomers retiring=less demand and more inventory. In los angeles the countrywide layoffs should add some inventory very soon.

29   skibum   2007 Sep 11, 10:17am  


That's funny re: Miyake. I haven't been there since I was in school. I have to admit, we've become too snobby about good sushi, so we don't go there. The place makes me feel old anyway. ;)

It's not just price there - it's a hangout for those twenty-something, moved here from out of town, working at a startup, single, worker bees.

30   Peter P   2007 Sep 11, 10:21am  

I have only been there once. Dragged by a friend.

Let's say there are many better places for sushi. And there aren't that many good sushi places around.

31   Zephyr   2007 Sep 11, 10:21am  


Interesting thread and initial post – and I think you provided a great overview of the market conditions and likely outcomes. Consistent with this blog’s makeup, your comments are weighted more towards the SF bay area.

I am not very informed about the bay area markets (this blog helps me in that regard). However, many (most?) other areas peaked in the summer of 2005, some later, and a few (like Manhattan) are still rising.

I have been closely following and investing in the real estate markets for three decades. I have had the good fortune to buy and sell with very good timing through three cycles now. I think it is still a bad time to buy, and that the time to wait will linger for a while.

Those who buy before the prices stop falling will pay more than necessary. Why buy today when it will be cheaper tomorrow? The best bargains are yet to be seen.

I do not think there is anyplace in the US where it is a good time to buy today. However, when we reach the bottom of the cycle it will be a great time to buy (and I will). However, most people fall prey to excessive pessimism as the market reaches its bottom, and they foolishly think the doom and gloom will never end. So they continue to wait – frozen in fear. I think the bottom for prices will come in 2009 for those markets that peaked in 2005.

Real estate price always recover slowly at first. So people should wait for the prices to start rising before buying.

32   OO   2007 Sep 11, 10:22am  

skibum and Peter P,

well, the price is good at Miyake, that's what I have to say re: that place. Actually I know the owner too, who also owns Yoshida in Cupertino, which serves much better food, but was shut down due to sashimi embezzlement (no kidding, they were having inventory problems with fresh fish because the cook took them home). I heard it was re-opened but didn't get a chance to visit.

Fukisushi is the place to go if you want quality sushi in Palo Alto. Sorry for attempting to morph this thread into a food discussion.

33   Peter P   2007 Sep 11, 10:24am  

Fukisushi is the place to go if you want quality sushi in Palo Alto. Sorry for attempting to morph this thread into a food discussion.

There is also that place in Menlo Park that I am not allowed to talk about. ;)

34   SFWoman   2007 Sep 11, 10:26am  

I was technically a knife catcher in 1994. The prices bottomed out in 1995. I found the place I wanted at the price I was comfortable with, so provided prices have come down enough (which I don't think will be by next spring) being a knife catcher isn't all bad.

As to the landlord thing, they are providing a service. My father rents despite being affluent because he thinks it's easy. I have friends who are small landlords who have had to leave dinner parties to unclog toilets. The smaller landlords seem to do a fair amount of work/maintenance. The larger landlords with maintenance companies/etc. may not labor, but they are selling convenience to some, and shelter to others who may never have the wherewithall to own a property for some reason or another.

I think Peter P. may feel that the welfare recipients are parasites because he feels he doesn't have a choice in paying tax dollars that he believes go to them. I do feel that way sometimes, when I see an idle young able bodied man in the projects in particular, but I feel much more strongly that way about the Halliburtons, KBRs and Blackwaters than I do some single mother trying to feed her kid on WIC..

35   Peter P   2007 Sep 11, 10:28am  

I think Peter P. may feel that the welfare recipients are parasites because he feels he doesn’t have a choice in paying tax dollars that he believes go to them.

Exactly. :)

36   skibum   2007 Sep 11, 10:35am  

Peter P,
Yes, do not mention the place in Menlo Park. Unfortunately, it's already gotten a lot of press. I'm not a big fan of Fuki Sushi. I like Naomi better.

37   Peter P   2007 Sep 11, 10:47am  

Yes, do not mention the place in Menlo Park. Unfortunately, it’s already gotten a lot of press. I’m not a big fan of Fuki Sushi. I like Naomi better.

Also try Nami Nami on Castro in Mountain View. The food is pretty good. And I like their low-density layout. I need breathing room. :)

38   GallopingCheetah   2007 Sep 11, 10:51am  

To all those silly middle-class dimwits (including CEOs, entrepreneurs, managers, and whoever strives hard to make a dime or two):

It's better that we the welfare recipients live out our meagre but carefree existence; for therwise, there will blood on the streets. Keep us fed and we'll leave you (the pencil-necked, the pale-faced, the chubby-tummied, the grey-haired-over-stressed-youth-wannabe-american-CEO-that-is-Larry-Ellison) alone.

BTW, you forgot that the largest welfare system in any country is the armed force. They are our brothers, although I admit they take more risks.

Now, pale-assed monkeys, go back to work and pay us the food stamps.

39   OO   2007 Sep 11, 10:51am  

I think people like David Ranson should be taken out and shot for sake of raising our national average IQ. I pity those poor souls who put money in his company.


Is he trying to say something outrageous to attract eyeballs?

40   cb   2007 Sep 11, 10:55am  

In my neighborhood there seems to be plenty of 200K household income, but holding a 600 - 1M mortgage (depending on when they purchased their homes). I think these people will stand to lose the most if anything happens and there are a lot of them.

Before Syrib chimes in :) I'll have to qualify that I don't live in Cupertino. I do look up people's mortgage in propertyshark, especially those parents of my kids pre-school class who come up to me telling me that their kids are going to private school for a better education. Looking at the propertyshark data, some of these parents are not very good at retirement planning.

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