patrick.net

Also, the median income is only important for home BUYERS not home owners in general -- thanks to inflation and Prop 13, and soon Prop 58 as the boomers start dying off en masse.

I'd love to be a kid standing to inherit a $1.5M house with a $700/month tax bill, though having those numbers be an order of magnitude less is good enough.

Just to randomly show some sales in Mountain View, CA:

267 Bonny St - Sold on 11/23/10 for $380k, cash.
1772 Vassar St - Sold on 11/5/10 for $490k, 25% down.
875 Washington - Sold on 11/23/10 for $525k, cash.
330 Velarde - Sold on 11/4/10 for $905k, all cash offer.
1610 Yale - Sold on 11/19/10 for $1 million, 27% down.

I randomly pulled these 5 sold properties and 3/5 are all cash offers.

I don't see when you will ever get the luxory of paying a low price, and use a 20% down. The money doesn't seem to stop coming in there.

Troy says

I don’t think there’s that much debunking to be done. There is indeed a great impedance mismatch between the top 1% of Asia and the available quality housing stock of the Peninsula fortresses.
The top 1% is 25 million people. If 1% of them want to move here that’s 250,000 properties of new demand.

why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?
Education for kids? there are plenty of areas outside of CA with much better education. Prestige of Silicon Valley? puhlease! people think where they live is the center of the universe. get over yourselves.

I've repeated this many times. The real majority of the immigrants in the Bay Area come here though H1B visa and worked their way to green card and citizenship . yes they work hard and save money fast, but they do not have unlimited pockets.

Serpentor says

why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?

Be close to their grandkids. Plus life in the fortress is 1000X better than life in China or India.

Troy says

Serpentor says

why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?

Be close to their grandkids. Plus life in the fortress is 1000X better than life in China or India.

right.. in Chindia, life is way worse because in the US, you can hire a team of servants to tend to your every need for $1/day and health care is dirt cheap if I get sick. On wait, its the other way around! Oops!

do you think a billionaire chindian grandpa is going to want to move to a middle class house in CA and have to do his own dishes and laundry? Picture this old guy who is used to living like he is the mutherfuckin MAN in India and he moves out to CA and he can hardly speak the language, has to do everything himself, and can't go anywhere because he's always had a personal driver to take him anywhere.

Do you have any idea what a million dollar can buy you outside the big cities in Chindia? You can buy multiple villages for a million dollars.

anon says

you’ll find more $1.5M+ houses than sub-$500k houses (too lazy to link to redin map).

There you go again, insisting that only HOUSES are valid places to live. You do know redfin has options for condos, townhouses, and multifamily? It makes absolutely no sense to look at the income level of the population as a whole, and then insist a SFH is their only housing option for purchase.

What you say is FLAT OUT FALSE when you consider all housing options available for purchase.

Here is a link in the region for under $500K..... http://tinyurl.com/2c7kjov

(edit: meant http://tinyurl.com/29whum3)

1760 listings

Here is a link in the region for over $1.5M.... http://tinyurl.com/2c7kjov

294 listings.

vain says

Just to randomly show some sales in Mountain View, CA:
267 Bonny St - Sold on 11/23/10 for $380k, cash.

1772 Vassar St - Sold on 11/5/10 for $490k, 25% down.

875 Washington - Sold on 11/23/10 for $525k, cash.

330 Velarde - Sold on 11/4/10 for $905k, all cash offer.

1610 Yale - Sold on 11/19/10 for $1 million, 27% down.
I randomly pulled these 5 sold properties and 3/5 are all cash offers.
I don’t see when you will ever get the luxory of paying a low price, and use a 20% down. The money doesn’t seem to stop coming in there.

Interesting to read the surnames of the purchasers.

and I have said for the Bay Area fortress people to get over themselves. Bay Area fortress is desirable but its not world class. Paris? London? yeah right.

you are comparing upper middle class suburbs to a metropolitan city? are you freaking kidding?

The Peninsula has the best doctors and other professionals you'll find anywhere.

I'd be perfectly happy living in Los Altos 'til I kick the bucket. Happier than Bellingham I think. The fortress areas are just nice places to live unostentatious upper middle-class lives.

SF is a 40 minute blast up 280, a freeway basically built to take fortress people into the city.

wrong, I work in the medical industry. The best doctors (world renowned) are in the Midwest, South, and East Coast. if you are talking about Standford Hospital being the best you are uninformed.

any other myths to bust?

Troy says

Serpentor says
why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?
Be close to their grandkids. Plus life in the fortress is 1000X better than life in China or India.

Once they move here, they are no longer connected to Uncle Ho, who sits on the Central Committee, and can no longer benefit from the Chinese economic boom. Its like a founder of Google walking off the job to settle down in Brazil. Its just not gonna happen. The Chinese, or more correctly former natives from Hong Kong, you see in the Bay Area are the ones who fled BEFORE the 1997 hand over to mainland by the British. They moved here many years earlier.

robertoaribas says

most of the wealthy people I met in Shanghai has 0% interest in buying a home outside of Shanghai…

If any did they most likely purchased it in Australia. Spend a Chinese winter vacation during a warm Aussie summer. And it only takes half a day flight time.

Of course since when can any Chinese citizen move currency (illegally smuggle) funds out of the country. The most they can carry outside is $5,000 and only for business reasons.
LOL! anything higher would risk the firing squad. I dont know why people keep missing the last point on currency restrictions.

yep, I mentioned this many times and Sybrib keeps ignoring it.

Why do you think real estate shot up so much in China? They keep printing money to keep their currency down to help exports and there are not a lot of place to invest other then real estate. They can't invest outside of China.

"The Fortress"

A term never spoken or heard by natives in decades prior.

God almight, nobody gave a rats ass about Palo Alto or Menlo Parks. There isnt anything special then and nothing special today for the "Market Branding".

thomaswong.1986 says

“The Fortress”
A term never spoken or heard by natives in decades prior.
God almight, nobody gave a rats ass about Palo Alto or Menlo Parks. There isnt anything special then and nothing special today for the “Market Branding”.

thomas, I am a native East San Josean, a lifelong resident of the same zip code in EAST(*) San Jose. All but three of the colleagues in the department I work in are Fortress residents. Of those, all but one a Fortress Homeowner.

Of the other three, one is a resident homeowner a satellite Fortress enclave deep in NIMBY zoned Almaden Valley.

That leaves the other two plus myself, the Three Natives, living modestly in East San Jose or a similar such neighborhood in another nearby town.

Why do I refer to it as The Fortress? My colleagues are too busy working hard to pay for that Fortress Life to fritter time away on the blogsophere. They are smarter than us Three Natives and so they have better, more productive things to do with their time than blogging. Besides, they have to. So they dunno about the "Fortress" appellation, but they talk of it a lot, their smart investment. They are after all very smart people. They've been told so all of their lives.

It's not just the address, it's everything. It's all a wise investment. It's the schools, it's all about the schools. Not sure I understand it, but an expensive model of car is also part of the value proposition.

This is what happens at those schools:

http://www.metroactive.com/papers/metro/02.19.04/saratoga-0408.html

(*) got that, Realtwhores? It's EAST San Jose, not Evergreen.

sybrib.... why do you keep basing your entire life outlook on a few bragging coworkers? You bring up the same stories and the same theories again and again. Why is that?

why do you worship the mythical chindians?

Serpentor says

sybrib…. why do you keep basing your entire life outlook

Entire life outlook?

This is a blog, for entertainment purposes only.

sybrib says

Why do I refer to it as The Fortress? My colleagues are too busy working hard to pay for that Fortress Life to fritter time away on the blogsophere. They are smarter than us Three Natives and so they have better, more productive things to do with their time than blogging. Besides, they have to. So they dunno about the “Fortress” appellation, but they talk of it a lot, their smart investment. They are after all very smart people. They’ve been told so all of their lives.
It’s not just the address, it’s everything. It’s all a wise investment. It’s the schools, it’s all about the schools.
This is what happens at those schools:
http://www.metroactive.com/papers/metro/02.19.04/saratoga-0408.html

A very screwed up generation with skewed sense of reality.

Yea! these BRAT JAPs will grow up just fine... LOL!

"Jewish-American Princess or JAP is a pejorative stereotype of a subtype of Jewish-American female. The term implies materialistic and selfish tendencies, attributed to a pampered or wealthy background."

MarkInSF says

anon says

you’ll find more $1.5M+ houses than sub-$500k houses (too lazy to link to redin map).

There you go again, insisting that only HOUSES are valid places to live.

that's right. i'm insane for thinking a professional making a six figure salary that earns in the top 10%-20% in the bay area should be able to afford a tiny starter home in the peninsula. THAT'S INSANE!! peninsula shacks should only be affordable for the ultra rich!

tents, mud huts, caves, are all valid places to live... more or less. I'm selling my tent for $400k, I will even pay closing costs.

anon says

i’m insane for thinking a professional making a six figure salary that earns in the top 10%-20% in the bay area should be able to afford a tiny starter home in the peninsula. THAT’S INSANE!!

the problem is simply that Mr Professional has to compete with all the previous Mr Professionals, and their children, and grandchildren who've already bought their homes in the Fortress.

There's simply not enough stock for everyone, and the flow is limited, thanks to Prop 13, and especially thanks to Prop 13 for non-owner-occupied SFHs.

Troy says

anon says

i’m insane for thinking a professional making a six figure salary that earns in the top 10%-20% in the bay area should be able to afford a tiny starter home in the peninsula. THAT’S INSANE!!

the problem is simply that Mr Professional has to compete with all the previous Mr Professionals, and their children, and grandchildren who’ve already bought their homes in the Fortress.
There’s simply not enough stock for everyone, and the flow is limited, thanks to Prop 13, and especially thanks to Prop 13 for non-owner-occupied SFHs.

i heard the same argument for all the other cities in the bay area back in 2004, 2005, 2006.
prices were high because there's too much much demand, not enough supply. at the time it was true - demand outstripped supply. even in the oakland ghetto people were jumping on crack houses for $300k-$400k. today not so much; demand has waned and prices have adjusted nicely downward (that oakland crack house is worth less than $100k today).

for second tier cities like belmont, san carlos, millbrae and san mateo. it is true today. there's high demand and not enough supply. but as these "investors" don't see their 10% annual appreciation, the demand will fade and prices too will drop. in fact, REOs in these cities in the last month or two are being sold much more aggressively (price drops in the $50k-$150k range). this is the first time i've seen reductions to this degree. it's a complete change of the bank's sales strategy.

as i mentioned earlier, RE deflation is a function time, measured in years. not weeks, months or quarters.

housing bubbles, and this one is the biggest we've ever seen, take years to adjust downward. while it's deflating we will have single years where prices are up nominally, and the bulls will announce RE is back, like they do every week, month or quarter there's positive news. this is just noise. long term the trend, measured over many years in the peninsula(not the entire BA) is down.

look at the previous largest US housing bubble(which is tiny compared to this one, less than half the size), some areas took 7+ years before prices returned to their peak prices. Japan housing prices are still in decline, they have been in decline for 19 straight years. this most recent US housing bubble is larger than both (in terms of dollars). we're only in year 3 of price declines.

I don't buy into the wealthy Asian investor causing prices to be inflated in the Bay Area, but if you look at the desirable places (Cupertino and Los Altos for example), the percentage of Asians has increased. In 2000, Cupertino was 44% Asian; in 2008, 57% Asian. Maybe it's because they were duped with option ARMs or maybe they have the money to buy there. I guess we'll see over the next few years - although the timeframe for the option arm explosion seems to get pushed back each time it doesn't happen.

http://www.city-data.com/races/races-Cupertino-California.html

anon, can you at least answer what price you expect starter houses in these areas to come down to? To narrow it down, what price do you expect/want/would purchase at for the town of Palo Alto? Right now the median house/condo in PA is $1.3M.

does anyone deny we've had a housing bubble?
if we can all agree there was a RE bubble, do the bulls have any clue about financial bubbles?

even a fast liquid stock bubble like the dot com bubble took 3 years to deflate(negative s&p500 returns in 2000,2001,2002).
why does anyone think a slow illiquid housing bubble, which is the biggest we've seen would deflate as fast as a stock bubble? we're in this for many more years.

anon says

look at the previous largest US housing bubble(which is tiny compared to this one, less than half the size), some areas took 7+ years before prices returned to their peak prices. Japan housing prices are still in decline, they have been in decline for 19 straight years. this most recent US housing bubble is larger than both (in terms of dollars). we’re only in year 3 of price declines.

I agree with this analysis. Prices will probably slowly deflate for years yet.

I just don't agree with your analysis of what a SFH, "should" cost on the peninsula, and I think you will never see that degree of price fall happen, unless there is a repeal of the interest deduction & prop 13.

All of the arguments you've make here for why SFH should be cheaper on the peninsula you could have made in 1996, before the bubble. Prices are still about double what they were then, but interest rates are lower, inflation has made everything 40% more expensive anyway, and compensation of skilled professionals has outpaced inflation.

ch_tah says

Maybe someone else can answer since anon appears to be afraid to. What do you hope/expect Palo Alto prices to come down to? And if they reach that level, will you buy there?

I like to compare the ratio of prices in different cities pre-bubble, and post bubble. The ratio of home prices in the fortress areas to east bay is 20-30% higher than it was pre-bubble. (e.g. if a Palo Alto home cost $500K in 1996, and $1M for the same home in 2010, and a Fremont home cost $250K in 1996 and $415K now, the ratio was 2.0 pre-bubble, and 2.4 today - 20% higher)

Assuming the ratios hold, over time, the fortress is 20%-30% overpriced compared to the rest of the bay area. But we could easily see it meet in 10 years as the rest of the bay area increases in price. There are also some valid reasons to expect that fortress/elsewhere price ratio to have increase somewhat since the mid 90's (widening income gap).

robertoaribas says

klarek: I think the credit defnitely affected the bay area wide pricing, and the oft quoted case-shiller statistics about the bay area. However, I honestly doubt the credit had much effect on the penninsula prime areas particularly, as near million dollar purchases are not likely made based on an $8000 credit. than investment.

i believe the credit actually had a significant impact on the high end housing market, not financially but psychologically.

the credit spurred low end sales through the financial incentive of "saving" $8k.
bay area sales volume was quite high in all price strata during the life of the tax credit.
this created a euphoric feeling for buyers at the low end which affected the high end home buyers as well.
open houses were packed.

the tax credit created an environment where all buyers, including high end buyers, felt buying a house was a safe bet.
it boosted confidence and provided to high end buyers, not a financial benefit, but a psychological benefit.

now the tax credit is gone, sales have tanked, houses aren't moving. buyers appear to be cautious. the psychology of the buyer (at least on the low/mid market) has turned 180 degrees from last year.

MarkInSF says

I like to compare the ratio of prices in different cities pre-bubble, and post bubble. The ratio of home prices in the fortress areas to east bay is 20-30% higher than it was pre-bubble. (e.g. if a Palo Alto home cost $500K in 1996, and $1M for the same home in 2010, and a Fremont home cost $250K in 1996 and $415K now, the ratio was 2.0 pre-bubble, and 2.4 today - 20% higher)

For PA it went well above $1.5M. As for Fremont we went well above $1M as well. $250K would have gotten you a 1800-2000 sq ft home. No joke! Today $400K doesnt get you much.

37779 Alta Ct
http://www.redfin.com/CA/Fremont/37779-Alta-Ct-94536/home/1350365

Property History for 37779 Alta Ct
Date Event Price Appreciation Source
Oct 15, 2010 Listed $995,000 -- BAREIS #21029431
Sep 01, 2004 Sold (Public Records) $845,000 10.2%/yr Public Records
Jun 05, 1992 Sold (Public Records) $257,000 -- Public Records

http://www.redfin.com/CA/Newark/6242-Jasmine-Ave-94560/home/871719

Property History for 6242 JASMINE Ave
Date Event Price Appreciation Source
Nov 30, 2010 Listed $625,000 -- MLSListings #81056013
Nov 30, 2010 Listed $625,000 -- EBRD #40498928
Nov 29, 2010 Listed $625,000 -- EBRD #40498769
Aug 16, 1996 Sold (Public Records) $197,000 -- Public Records

robertoaribas says

klarek: I think the credit defnitely affected the bay area wide pricing, and the oft quoted case-shiller statistics about the bay area. However, I honestly doubt the credit had much effect on the penninsula prime areas particularly, as near million dollar purchases are not likely made based on an $8000 credit.

While you're right and there were probably very few cases in that range that got the credit, every person that did get the credit at a lower point in the spectrum created a move-up sale or two or three. It's just like the money multiplier effect. One sale might actually create several more, well beyond the target range of the credit itself.

Still, another explanation for the higher tiered homes might be interest rates, but I contend that it was the tax credit and the immediate shift in demand it created. We saw how wild prices got when easy-sleazy lending stimulated demand.

Not all of them were foreclosure sales. Besides, we're talking about the aggregate impact. Were it not for that demand shift forward, there would have been less sales at the higher tier. Whether 0% or 50% of those 1st time purchases were foreclosures is largely irrelevant in my opinion.

robertoaribas says

Time will tell what happens to the upper tier, however on a risk/reward basis, I’d say it looks pretty terrible.

The fundamentals certainly don't support those high prices. Large increases in equity pushed a lot of people into the homes, and that has kept them from going into default (hence no significant price discovery).

it has been in the news for so long its no longer news. Did you miss the whole robo-signing scandal? according to the chart we are about the at the tip of the smaller peak as far as rate resets. Since there is now a about a year long lag to foreclosures, we are still at the low trough of the chart as far as feeling the actual foreclosure affect. This isn't the stock market where you can see thing happen every second on the computer. There is a significant lag which the US goverment is actively pushing farther and farther back with the suspension of mark to market accounting rules.

The reason why subprime was such a shock was because we had all these major banks fail, and even then, it didn't all happen all at once. It took a couple years starting from small grumblings of weak banks failing (that nobody in the main stream media paid attention to) to full scale collapse of AIG and Lehman (which shocked a lot of people but came as no surprise to many people here).

Actually, almost all of the people foreclosed by robosigners deserved to be foreclosed. The banks have no incentive to foreclose if the owners can pay. My point is the sheer number of foreclosures required robo signers to process the paperwork and there is STILL a huge shadow inventory that is being held back.

will we see another string of collapse like AIG and Lehman?... I doubt it because now the government is aware of the affect and will most likely hand out generous loans to any of the "too big to fail) who is short of cash (B of A and Citi) because they are already committed.

This doesn't mean real estate is out of the woods by any means. What I'm predicting is a long painful slow drop for the desirable areas until the PRICE RATIO BETWEEN THE DESIRABLE AND THE NON-DESIRABLE AREAS DRIFT BACK TO HISTORICAL RATIOS. people keep predicting prices to drop down to 1998 inflation corrected levels, I think its a pretty good guess. However, its not inconceivable that prices can drop BELOW that. people need some time to re-adjust their expectations from the bubble years and it could take years of beating and frustration before capitulation.

best guess time frame? (peak of option arm/alt-A reset + 12months) = 2013

it may take much longer...decades like Japan... or quicker in some neighborhoods depending on local employment or if robo-signing puts enough foreclosures to a halt that it totally freezes the market.

The truth is, real estate is not black and white. There are gradients of desirableness and some neighborhoods will change faster then others. I'm sure there are some areas in San Jose and Peninsula are good buys NOW, as income properties. For me, the areas I'm looking at are still overpriced and will surely drop lower if I'm patient.

One thing that should be recognized is that total payrolls is less now than in 2000:

http://research.stlouisfed.org/fred2/series/PAYEMS

(same chart since 1996)

We've got $600B of hot money scheduled to flood into the system over the next 6 months, and thanks to fractional reserve lending that might be a pretty decent shot in the arm as far as business funding goes -- banks should be totally flush with cash and looking for money to lend out.

But if that doesn't work then there could in fact be another leg down from here. Initial unemployment claims peaked 1Q09, so these people who haven't found work will be purged from the rolls over the next 3 months.

Should California's finances start going haywire -- vendor vouchers, bond rate increases, abandonment of high-speed rail and other stimulus efforts, medicaid cutoffs -- things can get pretty bad here.

As for good news coming, what is there? I suppose a weakening dollar would help our food exporters, but said weakening dollar might also prompt domestic food inflation as producer prices increases and we lose more of our food supply as exports. To save housing we need WAGE inflation, not PRICE inflation, LOL.

That money is not intended to be spread around. (they might say it is) its to keep the banks solvent. Hmm where I've heard this this story before. Oh yeah, konichiwa! Welcome to our lost decade.

Troy says

I suppose a weakening dollar would help our food exporters,

A weakening dollar would help the entire manufacturing sector, not just food exporters...

Anon.

Here is my observations about your observations.

While salary/affordability is important, the real factor whether people can afford these homes are net worth. The top 10% of the population is doing better than ever as demonstrated by a 16% growth in new millinionaires in 2009 and another robust growth in 2010. These people do not live in places like Vallejo even if it is free and these people's wealth here are tied to the various financial markets, which for the most part is signficantly up.

The mortage interest deduction in the peninsula is the most lucrative in the nation, In Nevada, Texas, FL and 40 other states it is worthless or near worthless. The ratio does not account for many variables. I see no reason why a family cannot take on a conforming loan at 120K salary level based on current interest rates.

Super-Metro areas like Tokyo, New York, Singapore, London, etc. have one thing in common, large income/wealth disparity gap among the population. The Pennsula enjoys this same phenom as well there are a bunch of people working at fast food, Walmart etc, but there is a tremendous class of households making over 200K, 1M and large income gap/wealth gap as well. From that sense, it is not unreasonable to compare Penninsula region to a major metro market where 1,000 sq ft is the starting point for decent pocket of private housing.

Median salary should get you nowhere close to a decent house in the decent part of the penninsula. This represents about 20% of the housing stock and of that 20%, 90% have bought years ago and hold the propety til death. Then there are those who built wealth over time to compete with.

In the areas you mentioned, there have been essentially 0 new single family homes built in three decades while bay area population zoomed from 4 million to 7 million. These areas, once considered working class naturally are making home to upper middle class and upper class to elite class as more people come into the mix and make things competitive. That's just the demographic evolution and why true prime property is the last to fall and first to recover.

The most important factor in buying is safety, school, and proximity to job centers. These values grade out well in the areas you mentioned and that's why 6 milllion out of 7 million here would love to live in the area you mentioned cost nonwithstanding. 3,000 square feet mansion is way down the list of things people value as easily seen in places like Brentwood, Mountain house that tries to upscale market based on size and golf courses alone.

Foreign buying is very subtle. While these things are hardly published, do you even doubt that Canadians, Europeans, Asians and Middle East expat own more of US than ever and that the trend will continue. Foreignors buy prime.

SF ace says

Foreign buying is very subtle. While these things are hardly published, do you even doubt that Canadians, Europeans, Asians and Middle East expat own more of US than ever and that the trend will continue. Foreignors buy prime.

Sanchez, Wong, Nyugen, or Tran dont indicate foreign buyers. They been here for a long time.

SF ace says

The most important factor in buying is safety, school, and proximity to job centers.

So why in heck didnt buyers in past decade think like this? All these factors keep changing year over year most of all proximity to your next job is a huge unkown.