patrick.net

I am a realtor, so I have access to daily data here in Phoenix AZ. I have noticed an interesting and unexpected trend I would like to share with this group.

6 years ago, I bought a fixerup home in a nice north scottsdale neighborhood. I paid $200K, though I made the seller pay closing costs and leave 8K in escrow for needed repairs. It was the last sub 200K home in that neighborhood, and in fact needed a fair amount of work and every bit of the 8K even though I did all the work myself, suffice to say it comped around 230K but was in bad shape and months away from foreclosure.

3 years ago, I sold that same home to a Cali investor for 369K. I just couldn't see the basis for those prices, as the home would rent for maybe $1450 at that time. I moved into another home in Tempe I had owned for 10 years as a rental, rehabbed it from the fraternity boy damage it had sustained, paid it and another rental off, and relaxed.

But the truth is, I miss my old neighborhood. Yeah my neighbors were mostly stuck up rude shallow people, but I could mountain bike out of my garage up spectacular desert trails, watch sunsets at night, swim in the heated community lap pool year round and walk back to my house.

So, I have been watching that neighborhood as real estate starts to unravel. So many of the residents there were real estate agents, title agents, mortgage brokers that it seemed to me it should be almost an epicenter for dropping prices.

But it hasn't! While inventory has skyrocketed, prices are holding firm from 400K and up. When I check the records on the owners, most bought years ago with original prices 200K and more lower then todays asking, so it would seem they could just lower the price and sell it now, but that isn't happening. Instead, what is happening is that rental listings are growing by leaps and bounds. In the past, there would be 2 or 3 homes at most for rent at the lower price points, (under 2000 a month) and these would rent quite fast. Today, there are 15 homes there for rent under 2000 a month, and they seem to get rented at about 4 a month on average. While waiting 3 months to sell a home isn't bad, most landlords get ulcers over those kind of things, believe me!

So, it seems many many people are going to try to wait this market out, and rent their homes out, until the market comes back.
If this trend continues, I would predict that at least in this particular neighborhood, rents will be under pressure almost immediately...

I am kinda thinking of writing some lowball rental offers for say a 4 year lease... Heck, that would be almost like owning the home anyways, I only stayed 3 years in the one I bought!

actually, I agreed with GC that time...

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 and graphs and data too, check them out.

thanks for including the link ;)

I am not planning to think about looking to buy till fall of ‘08. At that point, I will make an all cash, low-ball offer to the seller who writes the best essay on why I should choose him to feed me squirrels from the backyard.

Funny you said that, I wrote a letter once (advise from realtor) to the seller asking them to sell us their house. It is the most ridiculous thing ever, who would care about a letter when there many other things to consider (down payment size, days to close, etc.). I swore I will never write such letter even if it means I can never buy in the BA.

Randy,

I also think there's a housing bubble in the anglo world, in the USA, in California, and in the Bay Area.

But Marin County, especially that part where you want to live, is a small and coveted area. Even though I am a lifelong resident of the Bay Area (South Bay), I wouldn't pretend to understand the small area you are interested in. Because I would see it from the perspective of living in Santa Clara County.

Did it occur to you that maybe since you looked at things from your perspective of the midwest and Redwood CIty and elite biz school or whatever, that you didn't really know what you were getting into, and that all of your predictions might come true in the aggregate, but not in the particular area that you are interested it? Because what you write sometimes sounds like you are arguing with or getting frustrated with the facts that you share your share from your observations.

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

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.

The only thing missing from this is an outline of other variables in Michigan or Ohio such as:
- what is the typical income?
- what is the job market like, particularly with relation to casual or precarious employment/layoffs?
- how large is the rental market there as a % of housing, compared to more in-demand places like CA, given how it's so affordable'n'all? -- if it was just as easy to buy as to rent, there should be very few rentals indeed going in those areas -- you may as well cement equity than keep renting, if you don't intend relocating interstate any time soon.

all of those missing factors above make the supplied comparison suspect and irrelevant (like many of FAB's supplied figures and anecdotes, it grieves me to say).

the usual reason housing is cheap somewhere is simply demand factors: there are no/low paid jobs, or it's rural, or whatever. Even I'm aware of the economic situation in places like Ohio and Michigan, the declining industries, massive residual unemployment, etc...

The 'control over land' aspect means that market conditions have allowed equity and capital-rich people to acquire more and more property in sought after areas, and in doing so keep property prices high and thus maintain the existence of a pool of renters who can never afford to buy at the asking rate.

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)…

as per my earlier remarks. A rental manager takes a 7% cut of the earned rent to manage the whole thing for you if you like.

Re the iTulip prediction (Housing Market will Keep Declining for Another Five to Eight Years - iTulip.com Forums), and on topic for a change, I had an interesting discussion with a financial guy last night, comparing housing corrections to stock market corrections -- he pointed out that there could be a point where owner-occupiers who bought at or near the top will have to sell down just to avoid a huge negative equity hit, just like a stop loss on the SE -- so they will not necessarily just hang in there in their own house, unless they are comfortable with their repayments and the 'it doesn't matter what price you paid, as long as you're happy with your home' view. I personally think he may have his head in the financial clouds on that one, as people don't treat their own home impassively like a stock investment to be dumped if it loses value. There are other reasons that people in this position will be a very small volume subset of the market. Any thoughts?

sybrib

Yes I'm getting frustrated with south Marin, I have been quite open about that. Earlier in this thread I also said that if prices north of the "wall of traffic" drop by enough to overcome the commute factor we will very strongly consider moving somewhere like Novato. A million dollars saved pays for a lot of private schooling and commuter comforts (like a Z8 carefully checked for subframe damage).

But not all of south Marin is superprime. The so-called "Mouth of Mill Valley" is entirely outside of our search set. But Tam Valley, Strawberry, a good swath of Corte Madera and parts of Larkspur are certainly not superprime, just good old prime with some average tossed in here and there. There is a school district premium, but nothing significantly more than you have in Santa Clara county's best schools. There are plenty of homes in Tam Valley which I fully expect to lose well over $1mm in value. It's already apparent because comparable things in the superprime areas are now listing for very close to the perma-listings in Tam Valley, so clearly it is due for correction. The question is how much goes to rental, how much to mummy, and how much really clears market to buyers.

By the way, we continually reevaluate moving back to San Mateo Cty, but prices there so far have been exactly on track with here, so there's no advantage as of yet. I'd happily move back to Redwood City (or rather maybe Emerald Hills) if prices commanded it--same analysis as Novato, except maybe in that case I'd want a private chauffeur, so I'd need to save more than just a million bucks.

or, in other words, I can see how ARM resets all at once would cause the jerkiness described below -- but what else would cause it? without single, discrete, catastrophic events such as ARM resets, or a sudden credit squeeze from lenders (ahem), why not a smooth descent? what real world psychological beliefs or events would cause jerky corrections? or did I just name them?

(this is a bit like charting vs fundamentals)

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

Because there is a market, not just isolated one-off sales. In simplified econ terms, there are a number of willing sellers at different points on a very jagged supply curve with discontinuities (or near discontinuities). I'm agnostic as to which direction the macro moves come from which reach the various market-clearing points. Shifts in the supply curve, sellers jumping across discontinuities due to ARM resets, other distress, or psychology -- it's irrelevant to the market per se. Similarly (though it will pain some I dare utter this), the demand side is also affected from macro variables like inflation, tax policy, government intervention and psychological perception of opportunity costs.

An example of the last point would be the different likely behaviors of buyers if you tell them they should wait 1 year or 5 years before buying. Many will view waiting 5 years as a greater cost than buying in 1 or 2 years and losing money for the next 3. Similar for sellers, only harder to get over psychologically since they are actively "experiencing a loss" whereas buyers are "potentially risking a loss".

"It is my current opinion that nothing significant will break in prices — and I mean significant — until next Spring."

Many things happen out of the Blue...not many did see the subprime blow up. I expect some of another earthquake not to mention the rest of ARM loans in the Bay Area.

svcaysguy,

I thought you're a local. Earthquake?

1989 quake did not really rattle the houseprices around here. If it made any difference at all, it exacerbated a shortage of housing. Prices did start doing down in 1990 for other reasons, but not because of the earthquake. Remember?

Same kinda thing happened down south with the Northridge quake, which kinda coincided with the "bottom" of the house prices there.

DS,

I think the credit squeeze is the key,

Sure prices will be sticky, as long as there is at least some buyers acting at the current price level, and must-sell sellers are outnumbered by can-buy buyers.

The real question what the current tightening in Jumbo (>$417k) mortgage underwriting will do to all of this. With no buyers (because of the squeeze), the must-sell crowd has no choice but reducing price.

It was the loose credit that made the prices go up, and likewise one could speculate that the severe credit tightening will be what makes the prices go down, perhaps faster and sooner than what ARM resets will do.

You should probably specify whether predictions about cuts are in nominal dollars or real dollars. We've already seen 2 years of inflation from the 2005 peak. And it could be about to get a lot worse, as all the ingredients needed for another bout of stagflation are present, including job losses in an important economic sector, a looming recession, while at the same time we have rising commodity prices and a falling dollar. Shucks, we even have another energy crisis brewing - can polyester leisure suits, bell-bottom pants, mood rings, and disco music be far behind?

A cut in the funds rate to 4.5% now seems in the bag, possibly by year's end. Before the cycle is over we could see 4% or lower. This won't be good news for the dollar, or US savers holding cash equivalents. At some point foreigners will refuse to lend long at today's ridiculously low rates and the game will be up, long rates will soar as the market finally prices in the inflation risk that it's ignored for so long. The only winners will be debtors with fixed-rate loans, and owners of tangible assets.

So my bet is that there will be an optimal point sometime in 2008 or 2009 when mortgage rates will hit the sweet spot, and nominal house prices will be down just enough, to create an opportunity for buyers. I don't think that will be at fire-sale prices, at least not in desirable areas (e.g. areas where you, Randy H, would consider living), simply because I don't think that many houses in those areas were bought with exploding loans. People with fixed-rate loans or 5-year ARMS can hunker down to ride it out, rein in their spending, postpone their plans to trade up on the property ladder, or whatever. People forced to move can, if necessary, rent in their new city and rent out their bay area home. My guess, which I'm pulling out of my @$$ and is for entertainment purposes only, is a 10% nominal haircut from 2005 prices in 2008, perhaps another 5% in 2009, and then everything depends on whether Ben's Huey can fly him out of the stagflation trap or not.

Randy,

Is Emerald Hills western Redwood City bordering 280? I think it is a very up-and-coming area. If I were to bet anywhere in San Mateo county that will have a great appreciation potential, I'd say that is the place.

DifferentSean,

you miss out one thing about California real estate - anti-deficiency protection. I doubt if Oz has such a thing.

In Japan where it took 16 years to unwind, there's no such thing as anti-deficiency. If you sell and you owe the bank money, you pay till you declare bankruptcy or die, whichever comes first. Here, one can just walk without even triggering a bankruptcy event. I am sure that many FBs will take advantage of such a wonderful protection.

Did Japan go to ZIRP because of the property crash? Was property implicated in the overall economic doldrums Japan might have been facing? (Too lazy to google it -- but there could be some prognostication value in it...)

Here is a update about house prices in Stockton that demonstrate the stickiness in prices as well as the factors that overcome stickiness.

Single family homes, 3 bed, 2 bath in the area I am familiar with, were selling at their peak between Mid 2005 and Mid 2006 at about 370K. The sellers were very slow to reduce prices and have been chasing the market down. The median price in Stockton has fallen about 10% while existing home sellers have only been gradually reducing prices.

The foreclosures and REOs on the other hand have been much quicker to react. I have seen comparable 3 bed 2 bath homes that have been foreclosed listing for 330K six months ago. The prices have been aggresively reduced to the 260K range, about 25% drop in six months. If there are enough foreclosures. They can drag down existing homes prices reducing the stickiness.

OT, this is a 1-year running thread (!) from Ireland on the crash:

Dublin property prices falling by €4,500 a month :: Politics.ie

RandyH said:
It is my current opinion that nothing significant will break in prices — and I mean significant — until next Spring.

You may be correct - however, I have said referred to this Masai saying before and I will say it again. The birds will show you where the leopard moves, not the grass.

In this case, watch the credit market, and not the prices. From everything that I am seeing, many sales are falling apart due to financing issues. In other words, no Jumbos for the Dumbos.

SP
test

what do we think of Dr Kurt Richebächer at patrick.net? Passed away at 88 last month, the patriarch of the 'anti-bubble' camp. I'm surfing all manner of strange money sites for the first time and turning up all kinds of oddities...

Ron Paul-love having him in there for the sake of debate, like his foreign policy proposals, scary, scary domestic agenda.

Different Sean,
My cleaning lady bought rental property in San Francisco (Potrero Hill) in 1995. She lived very frugally, scrimped, and bought in an up and coming area when just the first few gay pioneers were living there. Now she has a couple of rental units and lives in the small unit (now that her kids are in college). It can be done, it's just not easy or comfortable sometimes.

OO,
Probably 10-20% of the houses and condos I looked at in 1994 were places that owners had walked away from.
There was a difference between then (still falling market) and now (psychology has finally changed, fallen a bit in real terms, not so much nominally)-there was a TON of stuff on the market. It will be interesting to see when the number of things for sale really starts picking up.
I was in southern Oregon this summer, there was so much for sale there it was unbelievable. A lot of new spec stuff and tons of two year old houses for sale.

re: Ron Paul

That maybe moonbat craziness is exactly what the doctor ordered?

Actually, no. I think a lot of things he wants destroyed has some value. He seems like a decent guy and I would agree with many of his points over a beer, but what he proposes is impossible and rightfully so.

DJM

I like your analysis. I am talking about *NOMINAL* prices in my original post. The reasons are (a) it is a lot easier for people to think about; (b) I learned in my brief foray on the Zillow discussion groups that realtors are trained to attack anyone using the words "adjusted dollars" or "real prices" with folksy, belittling "common wisdom". If a reader in a forum like this doesn't already know a little bit about inflation, or at least want to know a little, then arguing about it only makes them think you're trying to pull something over on them; (c) I assume in my economics analysis that inflation is a macro force largely affecting the buyer-demand curve.

We've been talking about stagflation for a probably a year and a half now. It emerged during the "deflation or hyperinflation" debate. I see neither of those as likely, but stagflation is probably just as likely as a true soft-landing, maybe moreso now.

I think your nominal price cuts guesses are in line relatively, though I'd argue that the 10%, 5% could easily be 25%, 15% respectively. Truly, none of us can know until after we get there.

i think there are a lot of well funded housing speculators in san francisco but they still borrowed the spec money and they are not going to be able to flip in the spring 08. everyone says that RE will be sticky on the way down....well just give it awhile. we are going to see a massive collapse when we start falling in this country. we are going to have a massive depression as people lose their 'service' jobs in the next several years. we dont have anything to fall back on now. 40% of the jobs got shipped overseas. 90% of the manufacturing is gone. we have no savings. our 401k's are invested in mbs, cdo, cds, and siv's so they are gone!

all the illegals in the more hostile states the ones passing laws to fine landlords and employers for hiring illehalss) are moving to socialist california where they can get social benefits. california will see massive tax hikes and stealth taxes to pay for all the illegals and unemployed people associated with the RE industry...i.e. all those laid off tech bubble workers. rents will fall like in 2003 and then plunge 50% farther.

california infrastructure is worn out. raise taxes. stricter auto emission standards will prevent lower income people from keeping their older dirty cars. insane gas prices because of the stupid special calif blends. you will lose your last refinery. calif refuses to build new power plants so you are going to get higher and higher utility bills.

can you say pissed off lower classes. higher crime. i checked my old cow hollow apartment rent and it is now 150% higher in 3 years. cool place to live but i am paying 90% less rent for a 500% larger space in the midwest. i miss the ocean but i dont miss paying a tax for a frwaking plastic bag at the grocery store or paying $100 for my auto emission inspection.

does california have rent tax yet? i cant remember seeing a story about it but i am sure it is coming. californians are going to get eaten by taxes. all my friends in the financial area downtown are scared to death they are next in the layoffs. all my friends that are left in the tech companies just manage visa workers that will be dumped (again like in 1999) at a moments notice. they all live 15 to a 2 bedroom apartment inpalo alto!

california is rolling over and it wont be a slow slide ...it is going to be a parabolic fall whe it gets going.

skibum Says:

> 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!

I was one of the renters that just walked in to Evvia last Saturday and couldn’t believe it when they had a table available. I was at Zbibbo last month on a weekend night and the place was barely half full (I walked in through the back door and the place looked like it was closed)…

> 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

The reason I ended up down in Palo Alto last Saturday was to see some of my Formula Ford friends who were showing cars at the Palo Alto British Field Day (across the street from the Stanford Shopping Center). I bet that at least 250 of the shoppers in the mall on Saturday were wives, girlfriends and daughters of guys at the car show…

Randy H,

I don't want to imply that your entire basis for this thread is faulty, but we may be glossing over some major issues? Recently there's been quite a stink from the SAC area where it seems more often than not the abandoned repo with weeds and a mosquito farm can be traced back to a BA address. Sure, it's easy enough for specuflippers (TM) to ditch their failed investment like an ugly girl at a dance but then in turn re-re-refinancing your BA home to avert your impending reset may not be so easy? In fact w/ a foreclosure (or 9 delinquent payments) it may be damn near impossible!

With as many as 8 in 10 NOD's having ties to the BA you've just gotta' believe it will equate to more forced selling? Or perhaps this will be like so much water off a duck's back.

GC spoke an ugly truth about race and the welfare state, and therefore must be silenced, lest protected groups are offended.

No asik, GC has a long history of intentionally saying anything offensive, regardless of who it offends, simply to ruin the thread. That will not happen on my threads.

DinOR

So what are you implying the effect of that would be? Faster price correction in the BA? It seems we're seeing a polarization of folks who think the correction will take until some time around 2167, and folks who think it will happen much sooner. I do think you're talking about a small percentage of BA'ers who own SAC investment property. Probably well under 1%.

I wrote:

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

Then Different Sean Says:

> The only thing missing from this is an outline of other
> variables in Michigan or Ohio such as:
> what is the typical income? what is the job market like?...

Why does that matter, since if you make the minimum wage (or even less) you can afford to buy a home in America (You won’t be able to live in South Marin, Emerald Hills or Woodside where vacant lost cost over $4mm but no one has to be a renter in America).

P.S. I wish making a profit in real estate was as easy as hiring a manager and paying 7%...

Is Emerald Hills western Redwood City bordering 280? I think it is a very up-and-coming area. If I were to bet anywhere in San Mateo county that will have a great appreciation potential, I’d say that is the place.

I worked for this guy in 1997 who built a home in Emerald Hills for 900K, he was happy when he finally could use Emerald Hills instead of Redwood City on his address, I think it's still un-incorporated.

SFWoman Says:

> 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.

I sometimes feel like I’m the only one in America that does not like to see $100mm programs that allow pregnant Welfare Moms to sit around smoking pot in the Housing Projects “AND” $100mm no bid contracts for contractors in Iraq. Most “Conservatives” only get mad about the waste of money on “Social Programs” while most “Liberals” only get mad about the waste of money by “Big Government Contractors”…

P.S. I dream of a day when the politicians pay for the “poor single mother problem” by forcing the “irresponsible baby daddies” to pay for their kids rather than just letting them hang out on corners doing nothing all day while the rest of us work paying for all their kids…

DinOR,

That is a very interesting point. If BA residents are getting foreclosed on their Sacramento speculation objects, for certain they will have trouble refinancing their local BA digs.

I can see it now, trying to explain it to the bank. "Well, yeah, I foreclosed on that Sac Shack, but don't worry, I won't happen again".

Perhaps real estate is not quite as "local" as certain professions would like us to believe?

FAB,

>“irresponsible baby daddies” to pay for their kids

Do you think that in this day and age, a woman gets pregnant unless she wants to? I'm not so sure about that. I have a hunch that quite a lot of accidental pregnancies are quite well-planned, if you catch my drift. So then who is being irresponsible?

We almost ended up in Emerald Hills in 2002. I like the area a lot. It was unincorporated then which had a lot to do with school districts, if I recall correctly. There was also some ruckus about garbage collection and water & sewage. But RWC was always full of politics; reminded me a bit of a little Chicago in the way it was run, only without Daley.

P.S. I dream of a day when the politicians pay for the “poor single mother problem” by forcing the “irresponsible baby daddies” to pay for their kids rather than just letting them hang out on corners doing nothing all day while the rest of us work paying for all their kids…

FAB,
Here's a solution to both of your problems: if you have a kid and the kid and the mom go on welfare, you get shipped off to Iraq.

That is a very interesting point. If BA residents are getting foreclosed on their Sacramento speculation objects, for certain they will have trouble refinancing their local BA digs.

Even though we've all seen the news stories about Bay Area "investors" using MEW off their primary residences to buy "investment" properties in Sac, LV, AZ, Central Valley, etc., I think it's not a large enough portion of FBs in the Bay Area for this cascade phenomenon to have much of an impact. On the other hand, I DO think there are more than enough 2 earner families with $1M+ mortgages living on a razor thin edge around here that their financial distress WILL have an impact. Of course, if you predict a "Black Swan" moment, it's not really by definition a Black Swan, but I think that moment will be severe economic downturn from the credit crunch leading to recession that hits the tech industry harder than most predict.

FAB,

Believe it or not, I agree with you completely. I do admire the permanent welfare mother niche. These women have more spending money, free time and security than a good chunk of the middle class. And they can actually afford to have kids...I don't think I can afford to have kids.

"correction will take until some time around 2167" LOL!

I've heard those arguments too! Still I wouldn't be so quick to dismiss it as a factor. It's hardly just SAC. Elk Grove, Modesto, Tahoe etc. From an anecdotal standpoint, and I can't say as I don't live there, how many times have you overheard people boasting about their "investment properties"? A few may have been talking about Aruba but look at what an impact it's become for L.A where PHX and LV are concerned?

All that excess Cali equity had to go somewhere and everyone I know considers themselves a RE investor. I just wanted to point out that the 40% of sales in 2005 that were "2nd homes" will have to have implications for major metro areas. I imagine most folks SFWoman knows own RE elsewhere in CA or beyond. Some will be able to weather it better than others.