patrick.net

Troy says

When horribly overpriced meets horribly overpaid, you have an equilibrium

Yep.

Troy says

But I don’t know where fortress prices are going. 15% down from here is possible I guess, but I wouldn’t count on it.

What is your metric to determine housing price? Please clarity it first. 15% of what? Median price? Price per sqft? Comps?

As you mentioned Palo Alto, I picked zipcode 94306.

Price per sqft dropped from $904 to $785 between 2008 summer and 2010 summer.

My favorite is of course, comparing the current sale/listing price with 2004-2008 sale prices.

Here one nice 3BR/2BA in Palo Alto: 3948 La Donna Ave
2006 purchase price: $1221K
Currently listed: $1190K
That's only 31K less, right?
But it is already 50+ days market with 2 price reductions. I don't think it will even sell above $1100K, it it sells at all. $1221K was 2006 price. I am pretty 2008 price for similar comps were much higher than $1.2M.

So I do see 10-15% drop (some area even more) already in some of these fortress areas.

Call me crazy, but I think prices in the fortress will actually drop back to 1998 prices, slowly, over the next decade. Very much like the Japan experience.
Things are still so crazy compared to rents that I know two families that dumped their houses in the area and are renting now, just to save the extra, oh, $3000 per month or so. They just can’t pass up that much money, while living in the same area and same quality house.

Patrick. When you say 1998. The rents should also fall back to that level. Isn't it?

No amount of real data is going to convince these guys. The myth of the Fortress is like a religion to them.

dadab says

Call me crazy, but I think prices in the fortress will actually drop back to 1998 prices, slowly, over the next decade. Very much like the Japan experience.

Things are still so crazy compared to rents that I know two families that dumped their houses in the area and are renting now, just to save the extra, oh, $3000 per month or so. They just can’t pass up that much money, while living in the same area and same quality house.

Patrick. When you say 1998. The rents should also fall back to that level. Isn’t it?

I think rent in some parts are down to 98 levels inflation corrected. I think corporate housing is below 08 levels in absolute terms. When I moved to CA in 97 my company paid for a few months of corporate housing. I was shocked at how much it cost. It was like 2500/mo for a one bed room small furnished apt. A 2bd was like 3k according to my neighbors.

Serpentor says

dadab says

Call me crazy, but I think prices in the fortress will actually drop back to 1998 prices, slowly, over the next decade. Very much like the Japan experience.
Things are still so crazy compared to rents that I know two families that dumped their houses in the area and are renting now, just to save the extra, oh, $3000 per month or so. They just can’t pass up that much money, while living in the same area and same quality house.

Patrick. When you say 1998. The rents should also fall back to that level. Isn’t it?

I think rent in some parts are down to 98 levels inflation corrected. I think corporate housing is below 08 levels in absolute terms. When I moved to CA in 97 my company paid for a few months of corporate housing. I was shocked

Good point. I just did the math on my rent in 1998. $675 1 BR unit. It now rents now $950. That comes to 3% YOY increase. Does this seem in line with inflation?

P2D2 says

What is your metric to determine housing price? Please clarity it first. 15% of what?

uh, Selling Price?

Let's take this random house on the market:

http://www.zillow.com/homedetails/3001-Bryant-St-Palo-Alto-CA-94306/19504084_zpid/

Here's the 10 year history:

In the current interest rate environment it wouldn't surprise me to see this house get beat down to the 2003 level.

Should 3% interest rates become available, we should see an upswing in the value. If bad things happen and interest rates hit 8%, we're probably in a wage-price spiral and $1M will soon be the bid on EPA homes, just like the 1970s-80s inflation added a 0 onto home prices.

Serpentor says

There were plenty of people that got rich before the bubble, IBM, HP, the old Apple, Cisco, Yahoo, etc etc. hence the price premium compared to the rest of the country. The bubble portion of the price must drop just like every other part of the country.

Its rather a myth that public companies were given out stock options before 2000. I have known lots of Apple folks all the way back to early 80s and they are not rich by any measure. Many are still struggling today and cant afford not having a job today. Stock options were more common with small pre-public companies, where a handfull went public, 1 out of 5. However since SO need to be expensed and many SV got stung with 'Back Dating Scandal" such practice has been replaced with "restrictive options".

Google itself had to reprice its many "restrictive stock options" since many were underwater... worthless.

Troy says

Here’s the 10 year history:

It would be nice to have 20-25 years... we been in a bubble well over 10 years now.

Serpentor says

I think rent in some parts are down to 98 levels inflation corrected. I think corporate housing is below 08 levels in absolute terms. When I moved to CA in 97 my company paid for a few months of corporate housing. I was shocked at how much it cost. It was like 2500/mo for a one bed room small furnished apt. A 2bd was like 3k according to my neighbors

Lots of money floating around from private funding-VCs. So companies were burning cash like toliet paper. Rents did decline by 30% after 2000-2001 and so did corporate housing costs.
Demand was cut severly.

thomas.wong1986 says

Serpentor says

There were plenty of people that got rich before the bubble, IBM, HP, the old Apple, Cisco, Yahoo, etc etc. hence the price premium compared to the rest of the country. The bubble portion of the price must drop just like every other part of the country.

Its rather a myth that public companies were given out stock options before 2000. I have known lots of Apple folks all the way back to early 80s and they are not rich by any measure. Many are still struggling today and cant afford not having a job today. Stock options were more common with small pre-public companies, where a handfull went public, 1 out of 5. However since SO need to be expensed and many SV got stung with ‘Back Dating Scandal” such practice has been replaced with “restrictive options”.
Google itself had to reprice its many “restrictive stock options” since many were underwater… worthless.

Restricted stock options? I've only heard of restricted stock units (RSUs) basically stock grants that gets vested. Much less potential for gains but you are sure to make SOME money unless stock price drops to 0.

Troy says

uh, Selling Price?

Let’s take this random house on the market:

http://www.zillow.com/homedetails/3001-Bryant-St-Palo-Alto-CA-94306/19504084_zpid/

Here’s the 10 year history:

Great! Your chart itself demonstrates that prices are down quite a bit. For that specific home, 2009 value was around $1.15M. Now it is above $1M. What is your rational that it trend will not continue?

I think corporate housing is below 08 levels in absolute terms.

Oops I meant 98 levels

Serpentor says

Much less potential for gains but you are sure to make SOME money unless stock price drops to 0.

Yes, you can make some money but they are adjusted based on some conditional performance.

def:
Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.

I think we're talking about the same thing

Owned

At what point do you finally realize it is not possible to know the future? By the way, did you all know the Titanic is unsinkable?...oh wait a minute....

lets just keep that train of thought going and ask: why won't rent in Fremont go down? Just because a scenario sounds too terrible to YOU doesn't mean it won't happen. 50% of $1.5mil is still $750k, much more then a tract home in Fremont is going to cost ie $200-300k.

Nothing would surprise me at this point. There may be unprecedented government intervention, propping prices up forever or there may be half-assed intervention, or they run out of bullets and everything goes to shit. Lets keep in mind if mark to market wasn't suspended, every single bank who holds a mortgage business would be insolvent right now.

And why would these rich investers want to buy homes that would drop, as you say "as much as 20%" if they can safely make money in a bank account? Who's going to manage and maintain these individual homes? that sounds pretty damn expensive and labor intensive to me.

Serpentor says

lets just keep that train of thought going and ask: why won’t rent in Fremont go down?

Two years back you could not find this kind of rental below $3000 in Monta Vista neighborhood. Yes, rental price has gone down already.

it won't require an all out collapse to cause 50% decline. It just means price going back to pre-bubble levels just like its neighbors. Not very hard to believe since the world operated fine before the bubble.

Serpentor says

it won’t require an all out collapse to cause 50% decline. It just means price going back to pre-bubble levels just like its neighbors. Not very hard to believe since the world operated fine before the bubble.

That would burst all the "get rich quick" myths regarding the Bay Area many have been led to believe.

Quick poll: Anyone who invested in re during the past 2 years are glad they did it? If so, why?

A quick back of the envelope REO ratio calculation for Lafayette; there is approximately 1 house in some state of foreclosure (NOD, NOTS, bank-owned) for every 2 homes for sale (56 to 115). That amount of distress should help keep the sellers honest...

Looks to me that even the best got hit pretty hard... avg decline near $1M in HB.

http://www.pacificariptide.com/pacifica_riptide/2010/08/more-housing-bubble-value-wiped-away-assessment-declines-slow-in-2009.html?source=patrick.net#banner-inner

The figures in the reports imply that higher-value properties were in faster decline, as can be seen in Atherton's numbers. In 2008, the total assessed reduction in values was almost $121 million on 131 properties in the wealthy town. In 2009, only 59 properties were reassessed, but the reduction was even larger at $125 million. Hillsborough, the other small and wealthy enclave in the county, tells the same story: 2008 saw 164 properties reassessed downward by $106 million, but in 2009, 124 properties were dropped by $148 million...

From Another parcel tax may be coming for Lafayette School District
Lafayette residents voted in 2007 to increase the district's current parcel tax from $132 to $313, with 3 percent annual increases.
Residents of the Acalanes Union High School District pay $301 yearly for two parcel taxes, both approved within the past year.
By my estimate, these folks are still 'underpaying' on their parcel taxes (though the 3% annual increase is impressive).

Serpentor says

Price to income is the key.

Interest rates are ~half what they were 10 years ago . . . that really helps the "affordability" part.

lending standards have tightened up. Interest rates won't stay low forever.

Serpentor says

As to whether it will drop to 1995 levels? I don’t know because I don’t have income/price levels back to those levels. I do know that back in 1997 when I came to the area, the economy was roaring, people were getting bonuses left and right, interns were getting free cars, furnish apts, and a fat salary. I don’t think “house price to income” ratio dropping down to 1998 would be so hard to imagine, in fact it is inevitable.

All thanks to investor money from VCs from 1998-2000. To the tune of $150B made many folks feel rich. But then by mid 2000 to 2001 it pretty much dried up and so went the salaries and bonus. There was too much money chasing too few good ideas.

You will find details on PWCmoneytree.com Left hand side.. Historical Trend Data.

Cvoc13 says

I disagree, I think we will in fact see 1997 or back to 1993 type prices in all of these areas. Might take until 2014 or so, but when the trickle down goes up to those 6 figure incomes types and knocks them down. Now of course there are PRIME properties, one off's I am not talking about those those are the exception not the rule. I do in fact expect to major declines as I have said before why. But what they heck we all have our own thoughts, and frankly none of us has a crystal ball (I don't anyway) But I feel strongly at least.

Wow - talk about delusional. What the hell was wrong with these people?

The tiger moms will take flamethrowers and burn down homes until the demand makes the prices go back up again.