patrick.net

@SQT,

I certainly relate to your frustration, but consider the greater (as in, "more than nothing") scrutiny to be a good thing --and a healthy sign the mortgage market is (finally) returning to sanity. Also, the "new" rules (which used to be the old rules) apply to everyone --not just you. Pretty much every borrower must now subject him/herself to full doc and a proctological exam.

And this eventually means... lower prices, as $0-down neg-am NINJA Howmuchamonth financing slowly becomes extinct. And that's certainly not a bad thing, right? I think the key is not to jump the gun too quickly and be a too-early falling-knife-catcher. There are plenty of quality rental houses out there in most communities (Marin notwithstanding), and vacancies and inventory levels are rising sharply almost everywhere.

If you happen to find a true "deal" that's fine, but I wouldn't pay more than 10X annual equivalent market rent, or more than 3X local median HH income. Don't become a Jealous, Bitter Money-Renter out of desperation. *Do* be a Smug, Rich Renter with dry powder and an eye to the Credit-Suisse ARM-reset chart!

@SIBA,

Yup, new conventional wisdom: "when in a hole, keep on digging to China". Literally (as in, who is buying our bad debt?).

$0-down 6-year loans are sooo, like, yesterday. 50-year, serially refi'd neg-am NINJA car notes --here we come!

DennisN,

I'm sure they have them up your way, right? Adair Homes? They usually do budget advertising and claim if you have the land, they'll deliver a "dry shell" for like $30-$45 a sq./ft!

Whenever I show my wife the ad she just gives me the eye-roll. We had one built just blocks from us and to say it's.... spartan, would be accurate. I point out this how tract homes used... to look. You know, complete w/ (1) "mason jar" light fixture for the driveway?

Here's what a LOT of people don't seem to understand about turn-key packages. Sure, it's great to have upgrade this and all appliances included, but they only last so long? Chances are when that dishwasher is rotting away in a boneyard (some poor guy is STILL making payments on it!)

"(which used to be the old rules)"

Yeah, kind of noticed that. This is why Bill Gross was wearing his pink PIMCO hat today. To plead for the new lending "standards" to make a come back. The only reason I can surmise he's clamoring for MORE first-time-buyer tax incentives is to enable move-up buyers to support his flagging portfolio.

?

He is now taking his marching orders from the REIC. The REIC knows (now) if there is to BE a recovery, they have to re-ignite the base of the pyramid.

StuckInBA,

I have noticed that the cars, on average, in my area are starting to age a bit compared to the boom years. I think you just told me why.

DinOr - when I was a kid some people in back of us lived in a Quonset Hut. I dunno how the adults felt but I thought it fuckin ruled. Kids think everything is fun - I remember doing the "olympic long jump", over our open cesspool! A botched jump could be tragic, take that, Jackie-Joyner-Kersee! And our own place was a nightmare, a bare light bulb per room for light and the neighbors hooked up to our electric, I'm sure of, looking back.

Still, Quonset huts are pretty darn cool, do one up right and it could be a really nice place to live.

So, why pay all this money for vinyl and stucco and chicken wire?

Urgh, and this place I'm living in now is a turn-key - made to be nice to live in for a few years while you get your real house built. It's ok, but everything's cheapo and it's not as well insulated as it could be.

My friends and enemies,

I was in SF last weekend. Beautiful city I must say.

>> I am a principal engineer (R&D) at a large tech company

SP,

What is the salary range of a principal engineer? Is it like 160K to 190K?
And what is the salary range for a tech manager? Is it the same like principal engineer? One HaHa = 150K. You said you folks earn 2.5HaHa = 375K. What is the price you paid for your house?

How much does a good townhouse cost in a good (but not pretentious) neighborehood of SF?

2.5 HH in the Bay Area is nothing. I don't make much. But my buddies who are at the director level in MSFT make 1.5-2 HH alone. And there are hundreds of these people in MSFT. Some of their spouses make more in the health care industry. The Silicon Valley is over-rated. It attracts the type of people who are drawn to lotteries.

HARM said:
SP & wife are not representative of what “normal” people earn

That is not the issue. I am sure I am not the only one in this situation here. The question is only the size of _this_ set and its impact on a specific market segment. "Average", "median" and "normal" aren't quite so relevant in that context. Sorry if that was not clear, and I won't beat this horse anymore.

The fact his family derives any income from patents, stock options, or an ESPP (I actually had to look that one up) says volumes about how “not average” he truly is.

I will grant that patents are an anomaly, but options and ESPP are actually very widespread in the tech-industry. Again, I was not saying any of this is normal or average - but when you look at the market participants, you can't just ignore its impact. That's all.

HARM said:
“extremely rich”

I have said it before and will say it again - it may be a very nice wage, but it is still a wage. I wouldn't call _any_ wage-slave "extremely rich".

If it were true that most people in the Fortress areas of S.F. Bay all made 2-3 HaHas, then the median price-to-income ratios in those areas would be a lot closer to 3:1, instead of the current 11:1.

Most people in San Marino might pull down 7 figures, but they're not buying 900sft bungalows in my neighborhood. And the plural of "anecdote" is not "data".

I wouldn’t call _any_ wage-slave “extremely rich”

Ok, how about "Mr. 1%" then? ;-)

I earn 160K as a tech manager. With my wife's income we come to 225K = 1.5 HaHa. We are not able to buy a Cupertino home with 225K annual household income by paying 25% down and 25 year FRM. So we rent in Cupertino (zip code 95014).

Why don't you guys move to cheaper places such as Idaho and the South? With the money you made and saved in the Valley, you can afford a pretty decent life elsewhere. Most of you don't even live in SF, what's the point? The rest of the bay area sucks. And I doubt many of you are true city slickers who thrive in a real city such as SF and NYC. A true city guy/gal would rarely consider living in a suburb. A country house is a different story. Most of the people I know are incapable of appreciating the subtle beauty (and the intoxicating feel) of living in a city.

@SP,

I'm tired of beating this horse too, but I'm also tired of *still* hearing variants on the "rich people will save prices from falling in _____" argument.

Here's the thing: rich people tend to live in rich neighbohoods and will indeed bid up prices in those specific neighbohoods. And when you look at the long-term historical price-to-income median ratios in rich neighborhoods, it would not be surprising if they *also* roughly tracked the same 3:1 (or 5:1 in CA) ratio you see in poor, working and middle-class areas. When that ratio more than doubles (like it did from 2000-now), we're in uncharted territory --regardless of how many Googleaires are living next to you.

>> The rest of the bay area sucks.

Bay Area is like a big hotel ... there is no community feeling and sense of beloging. There is no there there .........

Finally, a pithy statement. I like that.

Australia is suffering through its worst dry spell in a millennium. The outback has turned into a dust bowl, crops are dying off at fantastic rates, cities are rationing water, coral reefs are dying, and the agricultural base is evaporating.

But what really intrigues Glenn Albrecht — a philosopher by training — is how his fellow Australians are reacting.

They're getting sad.

In interviews Albrecht conducted over the past few years, scores of Australians described their deep, wrenching sense of loss as they watch the landscape around them change. Familiar plants don't grow any more. Gardens won't take. Birds are gone. "They no longer feel like they know the place they've lived for decades," he says.

Albrecht believes that this is a new type of sadness. People are feeling displaced. They're suffering symptoms eerily similar to those of indigenous populations that are forcibly removed from their traditional homelands. But nobody is being relocated; they haven't moved anywhere. It's just that the familiar markers of their area, the physical and sensory signals that define home, are vanishing. Their environment is moving away from them, and they miss it terribly.

GallopingCheetah Says:

> How much does a good townhouse cost in a good
> (but not pretentious) neighborhood of SF?

When I think “townhouse” I think of a split level condo with an attached garage. SF does not many townhomes, but you can get a decent condo flat in a decent (but not pretentious) area for about $750K. Single family homes in the decent (but not pretentious) areas start at about $1.25mm…

Thanks, FAB. $750K isn't outrageous, although it's probably 30-50% more than I would pay in SEA. How big is the flat?

A SFH in SF is too much for me. I wouldn't buy anything that requires me to worry about my job security. I'd prefer a mortgage that I can afford while working at an SBUX (or a grad student).

New tee-shirt for the Patrick.net store?:

"I make more money than 99.9% of America, but I still can't afford a house in the Fortress"

I believe I got a flu while in SF. Is there one floating around there?

HARM Says:

> SP, I’m tired of beating this horse too, but I’m also tired
> of *still* hearing variants on the “rich people will save
> prices from falling in _____” argument.

More and more rich people have decided not to buy (and some have even decided to sell) now that prices have stopped going up and have started going down in almost every area.

I know a lot of smart people who make more than SP who are not buying (or selling) since it does not make much sense to buy a home in Burlingame for $2.5mm and pay over $15K a month to “buy” when you can “rent” for $5K a month and invest the extra $10K a month while you wait for prices to drop…

It will not be long before the people who paid $2.5mm for Bay Area homes and condos that sold for $500K in the 90’s will seem as dumb as the people that paid $100 a share for the dot com that was going to make millions selling 50 pound bags of dog food over the internet…

This is why Patrick.net is not a representative sample.

Principal Engineer is pretty high up the technical food chain. Considering the size of SP's company, the fact that only 30-40 are at that level is indicative enough.

In one of my previous companies the Principal Engineer earned north of 200K. But he was the only one. Rest of the code monkeys earned significantly less. For then 100-125 was the range on the bell curve.

Similarly, Permarenter being a manager makes him higher in the pyramid.

Still SP's point is valid. Median/Average etc statical numbers do not capture the distribution. This area has many tech companies, which results in many people with high salaries. Hence expensive housing. No disagreement there.

The only debate is how much expensive is fundamentally justified and how much is speculative. Another factor that muddies the water is, the historical norms of 3-times your income doesn't apply as salaries increase. Because basic living costs do not increase proportionally. That's why a 2 income techie family can in theory afford 1.3M home on a 30yr FRM with 300K dp. I know one such family and I had posted about them before. The problem is RISK of phenomenal proportions. There is ZERO cushion.

We don't need job cuts for the drop in price. They could afford it on a 6.5 FRM. They wouldn't if the rate was 7.5+ (for example). The wouldn't if dp size needs to be 30%. They wouldn't take the risk if the psychology is what is today or would be tomorrow.

For some reason, even we here are calculating affordability using maxing out the housing expense. That's plain wrong. Putting all eggs in one basket is recipe for disaster. Since time immortal. Just because it hasn't happened yet doesn't mean it won't.

Job recession is part of business cycle. It can happen in 2 year or 5 years. But it will happen. What then ? For many of these folks it will happen at the WORST moment. When they are over 50, and need money for their child's college - the job recession without cushion will be devastating. There is ample age discrimination in the valley, so forget getting a job in a recessionary environment if you are over 50.

The valley has gone nuts. Unfortunately it will be a while before the realization hits and it will be very late by then.

I am not sure if the good neighborhoods drop that drastically ever in history. My personal experience is, the so-so neighborhoods drop faster and by bigger % in the last cycle. That is just the way things are.

I think SP represents the typical profile of people looking at areas along western foothills, and although he is a bit on the high side, it is no exaggeration that current buyers of these areas are making $250K median or average income, if not much more. So demand and supply for the entire BA is irrelevant for this sub-market.

It is just like people here are mentioning Cupertino all the time, and if you are making 1.5-2HH as a household and you are looking at Cupertino, then don't complain about why a shitbox there costs that much, because lots of others in the same financial situation are doing the same.

Well, the fact of the matter is, BA along with NYC, Boston etc. are a few centers for high-pay jobs around the world. If you are want to live in a coveted area, unless we head into a job-loss situation, housing value in the fortress will not see drastic correction.

FAB has been here much longer than me, so I am going to ask him about how badly the high-end places fared in the last cycle. Atherton, Hillsborough, Los Altos Hills were obviously so out of my budget back then so I didn't look at all.

FAB,

I took a walk on Chestnut and Union. I noticed a large latte and wine-bar crowd. But, not bad. The cab driver complained that there are a lot of brats in that area. True?

The Powell square area reminds me of the busy centers of major European cities.

My favorite places in NA: NYC, Montreal, SF and SEA and Vancouver.

GallopingCheetah Says:

> Thanks, FAB. $750K isn’t outrageous, although it’s probably
> 30-50% more than I would pay in SEA. How big is the flat?

On average the prices of homes on the Peninsula, SF and Marin are just about twice as expensive as a similar home in the Seattle, Los Angeles or San Diego areas. Most condos and homes in decent parts of SF are about $750/sf, and prices are close to $1,000/sf for most of the newer high rise condos. Prices for nice places around me (in Presidio Heights) have cleared $2,000/sf in the past couple years…

OK, just to prove my point, I am going to list the numbers here.

Here is the range of number of SFHs that changed hand in the fortress from 1998-2007 each year
Los Altos: 289-462
Palo Alto: 393-595
Cupertino: 296-566
Saratoga: 248-473
Los Gatos: 299-466
Mountain View: 303-430

So in SCC alone, the range of transaction is 1800-3000 each year. Now that is NOT the effective supply, because lots of these houses are in the "undesirable" parts of the fortress without the access to the coveted public high schools although they have the same address, parts of Los Gatos/Saratoga/Cupertino on the wrong side of the freeway etc. So the transaction # of the houses in livable condition, desirable part of town, with access to the coveted high schools is quite a bit smaller, perhaps only half of that number.

Now, do you think we can find 1000 households each year who CAN afford to buy $1.xM home in the fortress? My answer is definitely yes.

Thanks for the reality check, FAB.

Therefore, as I have always argued before, the only way for the fortress to crack is through serious job loss, so that the # of 2HH families gets cut by half, or the other half left standing start to worry about the security of their job.

the only way for the fortress to crack is through serious job loss, so that the # of 2HH families gets cut by half, or the other half left standing start to worry about the security of their job

Which should be getting started right about... now.

OO Says:

> I am not sure if the good neighborhoods drop that
> drastically ever in history. My personal experience
> is, the so-so neighborhoods drop faster and by bigger
> % in the last cycle. That is just the way things are.

From 1990-1995 the homes in Los Altos Hills, Atherton and Hillsborough had a bigger % drop than the homes in Cupertino, Redwood City and Burlingame. In 1993 one of my best friends left his job as a commercial leasing broker to take a job as a residential appraiser (since he needed a steady income) so I was talking about Bay Area home values on a regular basis back then…

> I think SP represents the typical profile of people looking
> at areas along western foothills, and although he is a bit
> on the high side, it is no exaggeration that current buyers
> of these areas are making $250K median or average
> income, if not much more.

I was up at Sugar Bowl this weekend and while walking through the shareholder parking garage (looking at the signs with the names of the families that run the Bay Area hanging above a bunch of very unimpressive cars and SUVs) I commented to a friend from High School (who is a descendant of one of the Big Four) that it is interesting how the people that can’t really afford the flashy home and cars are the ones that buy them. I bet the average guy in the Bay Area that makes $250K has a nicer home and car than the average guy in the Bay Area that is worth $25mm…

OO,

I will say that lending standards will tighten and mortgage rates will go up before you see any job losses. And that will hopefully prove my assertion that these prices are not sustainable even with full employment.

We had more people and stronger job situation in late 90s during the dot com boom. But prices are now higher at least twice in all desirable areas. Salaries (including perceived stop option worth) has not gone up by that much. How do you reconcile that ?

The cost of borrowing money has played far far more impact than the increased earning power. I am amazed when people argue otherwise. Are these prices sustainable if the rates go to 8%+ as they were during dot com boom ?

Guys,
Let's keep some perspective on the income thing. Even though 2+ Ha Ha's is a high salary, keep in mind that even in nutty Silly Valley, at most this should translate to looking at homes in the 8-10 Ha Ha range, or about 1.2 to 1.5 M. In today's insane environment within the Fortress, that barely gets you a shitty ranch in Los Altos or Saratoga. So your talking about the cream of the crop salary-wise looking at run-of-the-mill housing stock using traditional metrics.

Frankly, that salary range and management level should be able to reasonably purchase these Western Foothills homes, which now run about 15 to 20 Ha Ha's, which is just plain ridiculous. Only here in the Bay Area do these people have to chose between renting, buying a house that was built for a lower-level worker bee, or getting a retarded mortgage to get that better home. Similarly, lower-level professionals such as associates at law firms are buying in places like Fremont, San Carlos or Belmont.

I mentioned this fact a long time ago here, but it's truly fucked up when professionals and execs are buying in neighborhoods that were built for blue collar workers.

Stuck,

it is all about expectation. I have heard so many times fresh grads committing themselves to houses that are clearly beyond their current earning ability just because they "believe" their pay will ascend fast.

Committing one to a 30-year mortgage, come hell or high water, is obviously about what you think you will earn in the next 30 years, not about how you do today. People tend to draw a straight-line projection from their starting base today and believe they will only do better from now on.

Houses in the valley jumped a lot from 97-00, when the interest rate was rising. And to be honest, I believe that cost of borrowing for ARM (the main channel of mortgage borrowing for CA) will only be getting better in the next 2-3 years.

OO,

Only time will tell. The expectation about future is seriously affected perceived risk which is affected by cost of borrowing money. It's the mad risk taking that has caused this. It's always at the core of any bubble.

So let's agree to disagree on this and see if prices drop without job losses. We are already seeing some softening. Let's see if that continues.