patrick.net

The peer pressure of buying a home is really self-imposed. It is more driven from within than induced by practical needs. No friend or colleague is going to ditch you and shun you completely just because you are not a homeowner, if he does, he is no true friend anyway, and what can he do for you in times of need? In fact, if you always proclaim that you "cannot afford" it, they may be over-zealous to help you find a higher-paying job.

The most profitable choices in life always comes with sacrifice, and those who defy the social norm to remain a renter in BA now look like geniuses.

As a homeowner, I'd say without the capital appreciation, home ownership is a bitch in BA, because most houses here in nicer areas have a vintage of 50+years and due to prop 13 constraints, a tear-down rebuild will completely reset your structure part of the assessment to full market value. Therefore, you as a homeowner have to deal with lots of maintenance issues ALONE that comes with the "prided" ownership. On top of this, you may inherit a house with illegal additions done through several owners, and you will have to live within the constraints imposed by those who came before you.

Of course, if you have $2-3M to spare, you can always buy a brand new home in these areas and pay $22-33K after-tax money on property tax. But that just doesn't seem like prudent financial management to me (especially on the tax part), even if you do have that much to spare.

FAB says:

I have learned that well under .01% of the population saves even 10% of their gross pay.

To me, that is a very surprising stat. I have met many military officer couples who lived off "his" salary and banked "hers." I would even suppose many people on this blog know of professional or working couples with a similar arrangement.

I was in the Air Force from 1980 to 1995. During that time, I managed to save up $160k (granted, I was single until 1994). When got out in 1995, I used my $160k savings to pay cash for a house ($138k, 2400sqft 4bed 2.5bath 2car - obviously not in the Bay Area) and pay cash for the 1995 Sentra my wife wanted. Since 1995, I have managed to put $500k into local banks/CUs. All this from a job managing a Cab Company, military retirement pay (we had a drawdown in 1995, so the AF offered 15 year instead of 20 year retirement, at a reduced pay), 3 years of my wife teaching elementary school, and of course no house or car payment. I did go into debt buying 5 rental houses, but I sold 4 of them just before the peak and used the proceeds to pay of the mortgage on the 5th (post bubble, ~$230k). Today, I put $5k/month into the credit unions, which is about half of the total I get from the Cab Co job, rental income, interest on the 500k, and military retirement.

I do not have the hard stats about national savings, but I hope that of the household with $120k incomes, more that a few have discovered they can live confortably on $80k spending or less. I would hate to think that sybrib and I know them all.

Look if you want to make $100k/yr in SF, just go join the Police Department. Starting pay is $73k/yr and in 5 years you will make detective and with just a tiny bit of overtime you will pull down $100k. Benefits are awesome too, with 100% of your salary at retirement after 30 years. You don't even have to go get a college degree. It really is that easy and PD has something like 200 openings right now. I guess if you did too much drugs in your youth, they won't have you, so that is making it tough for them to recruit.

If you want something less blue collar, go get a nursing degree.

People looking for upward social mobility. There are a whole lot of people who start life from scratch. Or even very far behind considering college loans etc. The Bay Area can be a miserable place for these folks, even with a $250K dual income.

I just don't think so Orbiter. I showed up here with nothing but an acceptance letter from the UC and a GI Bill in my pocket and have done just fine. I delayed having children until I could afford them, but that is a good idea for anyone anywhere. My sister who had three kids before she turned 30 has spent her entire life in poverty and this is in low-rent Eureka.

Sure, I lived in a shared communal household for a few years longer than I would have elsewhere and I have lived without a car for longer, but it is hardly "third world" conditions. If you really believe that, you have never been to the third world. Americans in general have been living beyond their means everywhere. Back in the 50's homes averaged half the size they are now, kids routinely doubled up in bedrooms and no one thought that was unbearable. Get used it, because it is going to be like that again.

I agree with you that families making less than $125k/yr probably have a tough time here, unless they are in Vallejo or something, but it is really easy to make sure you don't end up in that situation.

To be fair though, I guess I sort of qualify as someone who "did well in the last two bubbles" since I was into The Internet well before most people and got a job in IT at a pre-IPO company that went public. It did not make me rich, but gave me enough money after taxes to allow me to put down a downpayment on a house in 2002, before the really crazy run-up. I don't really think of it as gambling and winning, just taking advantage of the opportunities that were there at the time.

If there are no more opportunities like that in the future, you are right in a way, that the Bay Area will not be a place where you can get your first foothold on the ladder without help. I sure hope that is not true though.

At the risk of incurring Surfer-X's wrath, here is the income breakdown in my neighborhood, Glen Park:

http://preview.tinyurl.com/3ozeul

As you can see, the peak income is in the 75-100k range, with more on the 100k+ side than below it. Glen Park is a middle income neighborhood in San Francisco, perhaps a little above median, but nothing special.

Headset,

military pay must have fallen off the cliff since the mid-90s. Today I keep reading about multiplying military bankruptcies, and mushrooming payday loans around military bases, and I think there was a law making payday loan to military staff illegal as a reaction to such a phenomenon. 2 years ago, I read in Washington Post that military officers need to go through an extra financial scrutiny to see if they are financially stretched, or they will lose access to certain sensitive information. Such a practice doesn't seem to be the norm prior to this bubble.

I am pretty sure that the foot soldiers we sent into Iraq are only making sub-$20K, even if they have free housing and free healthcare, I still doubt if they can stash away any savings. The surging military divorce rate suggests that they perhaps cannot.

If 1 in 4 homeless are vets, can I safely assume that most military employees are teetering on financial insolvency? This is a very sad and alarming trend.
http://www.usatoday.com/news/nation/2007-11-07-homeless-veterans_N.htm

Actually cockgobbler (ANGER), our stucco masterpiece (BARGAINING) was bought post peak during a distress divorce sale. Not as a fucking investment (DEPRESSION), this might sound quaint to the titans of industry in the Bay Area, we were only concerned with finding a place we wanted to live in (ACCEPTANCE).

Fuck the Bay Area, more importantly fuck most of those that live there (BACK TO ANGER), nothing but a bunch of fucking maggots thinking that their 80K job might turn into a 120K job if they work work work work. The fucking place isn’t that nice, it’s just not that bad (DENIAL).

OO,

I agree with the overall big picture of your discussion. But

"... the social norm (?) to remain a renter in BA.." (?) (?) (?)

Sheesh, you gotta git outta that Fortress. The Bay Area is not The Fortress, and The Fortress is not The Bay Area.

OO,

What percentage of homeowners who bought after 2003 have capital appreciation? Or can be sure that they will be above water after 2 more years of declines?

And why do people who freak out about trace lead content in toys, willingly buy a 50-60 yr old home with so much more lead paint. Try replacing your single pane windows and see how the work crew has to protect itself. It is not safe to drill a hole in the wall in the typical million dollar Bay Area home. This is what I mean by a third world quality of life. Sacrifice everything and get something substandard in return.

Jimbo,

If you did well in any of the tech booms, good for you. I should have qualified the gamble comment for the housing bubble alone.

I wish I can offer a very bubbly prognosis and hope for the near term, but we are in for a long duration of lower living standards. The gravy train for state and city employees is coming to a screeching halt. Vallejo is not an exception, it is just ahead of its time. Thanks to Prop13, California is going through an ossification, to its own detriment. And the income/sales tax increase proposals will not help much either.

If you are a big employer, you already have enough experience with what works in outsourcing and what doesn't. The downturn will provide the window for the next wave of outsourcing. The bottom 90% will actually see wages and benefits deflate as the companies adjust to the downturn. Much of the logic for taking IO loans assumed ever increasing real wages. This will be as much a fallacy as the idea of ever appreciating housing.

My only hope is that the powers that be allow the imbalances to correct themselves, as that will lead to the quickest recovery. We truly cannot afford to be stimulated or bailed out.

Should be no surprise about the Canadian RE bubble.
The whole RE industry and thier crony stooges got busted.

The incoming head of the Toronto Real Estate Board has come out swinging against phantom bidding tactics after denying they even existed when she ran for the job three months ago.

"It's dirty realty, it really is," Maureen O'Neill said of agents who fabricate offers during bidding wars. She is now calling on the Real Estate Council of Ontario (RECO) to yank the licences of agents convicted of using phony bids.

"Boot them out, we don't need them in the business," O'Neill said. "I don't think these people should be allowed to sell real estate."

Phantom bids can be used by selling agents to spark extra rounds of bidding or to spook potential buyers into rushing or raising offers. The practice is considered a breach of ethics under the Real Estate and Business Brokers' Act of Ontario – administered by the Ontario council – and realtors who are caught can face hefty fines.

http://www.thestar.com/News/article/256968

I wonder how fictious the "multiple offers" I hear from realtors in BA are. Anyone else have serious doubts about this?

After deep denial from their NAR equal it in Canada now thier singing a different tune. Has anyone investigated this ?

Sorry, I was going to say.

Has anyone in the California investigated realtors current practice?

Duke said:

What perplexes me is why industry does not fan-out... You can invent pretty good communities on your own if you are: Adobe, Cisco, Goodle, Apple, etc.

I've done some quick back-of-the-envelope figuring on this before, and I think the answers comes down to risk and an aversion to "company towns". Multiple Google-like companies could pull it off, though. About 65% of a company's expenses on average comes from payroll, then the next largest expense is usually office leases. Say about 70% between payroll and office leases, conservatively.

If a corporate-sponsored co-op between several Google-sized companies bought out some land and locked in the land expense to the original cost basis plus operating expenses in perpetuity, then any business transacted on that property enjoys an instant cost advantage compared to businesses that have to pay on constantly asset-inflated land prices. As shelter is the single largest expense in the average wage-earner's household, businesses that use this co-op to cut half of their employees' shelter costs would enjoy an immediate 9% cost advantage in payroll assuming a shelter cost that absorbs 30% of the employees' payroll check. That cost advantage goes up as the percent of payroll absorbed by shelter increases. Moreover, over time, as land values are inflated, the nominal gains become even greater. Businesses using co-op land could actually start paying less yet still attract and retain top talent due to just the differential in shelter costs.

There is substantial risk in creating such a co-op type structure; the expense of building a rail or mass transit transport bridge to the nearest major metro area alone could sink such a project, for example. On the other hand, the alternative of building a relatively isolated community might make it too difficult to attract top talent. The first companies that figure out how to surmount these problems however, would likely enjoy a tremendous expense structure advantage.

OO says:

military pay must have fallen off the cliff since the mid-90s

When I got out, I was a Major on flying status with 15 years service. The pay for such today is:

$5517 per mo base pay
$ 203 per mo BAS (non-taxable)
$1005 per month Quarters Allowance (non-taxable)
$ 840 per month flight pay

The Quarters Allowance is supplemented with VHA for those assigned to high cost of living areas.

If the Major chooses to live in Base Housing, he forfiets the Quarters Allowance, but then has neither rent nor utilities to pay. He also gets extra pay for travel, working in a "combat zone," and the occasional retention bonus. His medical/dental care are free, his family gets seriously discounted groceries at the "commissary", along with tax free purchases at military exchanges. He also has a $400k term life policy for $5.40/mo.

As you can see, the Major makes over $90k/yr plus significant perks. Remember also, the Major will receive "retired pay" after leaving the Air Force, after putting in 5 more years. Even more retired pay if he stays in longer.

How can such an individual be a candidate for bankruptcy?

Jimbo says:

"I figure I can comfortably retire once we have $2M in the bank and the house paid off."

If SOMEBODY doesn't do SOMETHING about inflation you're gonna need a lot more than that!

Duke, Apostasy,

Anheiser-Busch did the "invented community" bit when they build a brewery and a Busch Gardens amusement park near Williamsburg, VA. They had thier "Busch Properties" division construct "Kings Mill." Kings Mill is a gated community with 2900 acres of mostly upcale homes, golf, waterfront, shops, wilderness areas, trails, etc.

I miss a lot of the posters here and I think the overall quality of 'this' particular blog speaks for itself. But after a year long hiatus I check back in for a goof and OO is still contorting reality to fit his drug addicted/homeless/armed and dangerous vet pet theory.

Don't waste your time sharing facts with him. It doesn't fit his design.

DinOR.

Welcome back!!!

You have been missed. Even recently we had statements wondering about the DinOR perspective on an issue and whether someone saw you post at CR, etc.

Headset,

Thanks! We've been really busy with our new grand daughter and helping the daughter out. I'm now set up in my new office and I hate to say it but... it was something of an effort coordinating with the prop. mgr. and all the various utilities. They all LIE to you.

Anyway, I've never had anything against OO personally, and generally he's absolutely spot on in all his observations. It's just when it comes to military personnel he's just got issues. Some of my BEST clients are retired officers and one owns a good portion of the town of Corvallis. He refers other retired buddies and they all seem to be doing quite well thank you.

Myself, I'm drastically cutting the weight and looking forward to going back into the reserves to finish my last 5 years 2 months and 11 days ( but who's counting? ) just so I can hang around the other derelicts.

DinOR, Headset,

I don't think the military you knew back then is still the same today. First of all, there's the difference between army, navy and air force, all of them have their own distinctive culture, payscale. When I went to graduate school in the early 90s, I got to know quite a few discharged officers from Navy and Air Force who got into top-tier Ivy-League business schools and law schools, and they move on to become law firm and VC partners. A lot of them were in the Gulf War I combat, decorated, and they themselves came from very good colleges with excellent grades. If you are talking about these vets, there is not even the slightest danger for them to become homeless.

I can assure you today, the proportion of those from good colleges joining the military is almost next to none, if they have any other alternatives. Iraq War II is basically scraping the bottom of the barrel for the quality of civilians, as compared to the quality of recruits 10 years ago, smart, motivated and well educated college grad with financial or ideological motivations, today, we are getting gang members, or people who have NO other alternatives in the job market. Nobody college grad in the right state of mind will want to waste his life in Iraq today. Therefore, as soon as they get discharged, they wind up on the street, if they become homeless, we should be thankful, because at least they are not blowing up buildings for personal vengeance.

The civilian attitude towards the military, particularly the army, has changed very drastically in the last decade. Prior to Iraq War II, most of the parents I talk to will find it honorable to send kids to West Point, at least it shows you can get endorsement letters from Senators. Nowadays, the parents I know want to keep their kids as far away from the military as possible.

Headset,

See? Won't give it up. He's right ( we're wrong ) EACH branch has their "own" payscale? You gotta be shittin' me, right? OO, you're a great guy and I've always enjoyed your posts on virtually any-other-topic but simply by failing to grasp that Enlisted and Officer Payscales are u-n-i-f-o-r-m across the board, as approved by Congress, shows me you don't understand the 1st thing about the military. Period. Let it go.

DinOR,

I am all ears if you care to educate me on this topic.

There's no such thing as a free dinner. A worker at Google tells us the company is taking evening meals off the menu: "Google has drastically cut back their budget on the culinary program. How is it affecting campus? No more dinner. No more tea trolley. No more snack attack in the afternoon." The changes will be announced to Googlers on Monday. Workers at the Googleplex will remain amply fed, with free breakfast and lunch -- dinner will be reserved for geeks only -- but it's still a shocking cutback.

http://valleywag.com/5040986/googles-food-perks-on-the-chopping-block

OO,

Well sure, but that's where we left off way back when? It just strikes me that you've already made up your mind that these guys are mindless robots wired for wanton destruction! If neither you, nor any members of your family were ever in the service, everything you're getting is 3rd or 4th hand? I'm still trying to figure out why you even care or see it as all that much of a 'problem' to begin with.

I have several friends that have been in Iraq including our local police chief and I haven't met anyone yet that didn't feel they weren't making a positive contribution in people's lives!? Some of these guys are very successful and well into their 50's. So they're a little old to be in a gang.

All that aside Saturday was an EPIC night for me! My SIL's and I formed a cover band and played to a packed house in our local tavern. The place is scary run down so if you've ever been bar-hopping in TJ you've pretty much got the idea. We got free beer for the whole night and people seemed to love it. I called the owner today to thank him and he said "When can you guys come back? It was our best night in a LONG time!" ( Well what would expect, everyone we know, drinks..? )

I actually developed a new found respect for runway models! We do a lot of open tuning stuff so I had to change guitars nearly every song during "the big ending" and be ready to carry the intro with zero time to spare. Very easy to screw up. Anybody that has ever plugged a fully amped cord into an electric will tell you the sound you get will *not* be musical! So I kind of felt like I was "spinning plates" but it was definitely a lot of fun. We'll see if they can plug some of the better stuff into youtube just for laughs?

DinOR,

Can't wait to see that youtube link. And of course, to complete that "scary run down tavern" experience you need some San Miguels!

Uh oh. The Contra Costa County assessor is screaming "housing bottom" and "BUY NOW"!!

http://www.contracostatimes.com/news/ci_10281259?nclick_check=1

Dinor,

I think OO is a Great Observer, he generously shares all his keen observations with us here.

But I think sometimes he's a little too sure of himself. The problem he has is his observations of American Life are clouded by his perspective from The Fortress. He knows The Fortress inside and out, but The Fortress is not the USA. The Fortress is a postage-stamp sized enclave, maybe like the foreign enclave of Old Shanghai.

He shared the details of the vets he knew; not career military enlisted, but instead guys in the officer corps who were elite enough to get into the elite grad school he went to.

The elitest of the officers is not the U.S. Military, and the Fortress is not the USA.

Here is the article text. BTW, isn't is somewhat inappropriate for a COUNTY ASSESSOR to be offering real estate investment advice??? Talk about conflict of interest...

Now is the time to buy real estate

By Gus Kramer
Guest commentary
Article Launched: 08/22/2008 11:02:47 PM PDT Contra Costa Times

AS THE assessor of Contra Costa County since 1995 and a student of the real estate market of the East Bay since 1971, I've never felt more compelled and stronger about advising anyone and everyone who ever thought about getting into real estate to do it now.

Real estate professionals and economists have been watching the real estate market since it peaked in the summer of 2005. Every summer since then, pundants have come out and said, "Oh it can't get any worse." Well, I have good news and bad news. The good news is that real estate has never been more affordable in Contra Costa County. The bad news is that values are probably going to still go a little bit lower until the end of 2008.

So why is now a good time to buy?

Just like the stock market, you can never catch the absolute bottom. Professionals in the stock market refer to this as trying to catch a falling knife. If you are looking for a home to live in, now is the time to start looking for that home and finally find your dream.

You are never going find it more affordable than today. Yes, values may continue to go down a little bit and if you ask for a nice long escrow, let's say 60 to 90 days (which has become the norm with bank-owned properties), you may be able to negotiate a little more consideration for closing costs, etc., right before escrow closes since the market is still in a downward turn.

The other thing that's going to happen is that the Federal Reserve Bank wants to curb inflation and that can affect interest rates. As a result, now is also a good time to get into an investment house or a house you want to live in because if there is any loss in the value it will be made up by the locking in to a lower interest rate today. After all if you are looking for that dream home to live in for a long time, and the market continues to go down even only 5 percent, that's barely a real estate commission and remember the seller pays that commission, not you. So go out and find that dream home!

In Brentwood, I have a friend who bought a house in October of 2007. It's a beautiful home in Brentwood on the golf course, with four bedrooms, three bathrooms, a three-car garage and a pool. This house sold for $890,000 in August 2005. In October 2007, he purchased the house for $530,000. He was dancing on his granite counter tops, doing the Irish Jig that his ancestors had perfected many years ago.

In March of this year, he called me quite upset and said his neighbor's house was selling for $395,000. Now, had my friend lost any money? No, you don't lose money until you sell the home. He still has that dream home, his wife is still happy, his children are elated and he still lives in Brentwood just two miles from his office in downtown Brentwood.

In Antioch, there was recently a two-bedroom, one-bath house listed in the old part of town for $129,000! We haven't seen values this low since sometime between 1998 and 2000. In the price range below $275,000 in Antioch, Brentwood, and Oakley, sellers are getting multiple offers.

Homes above $400,000 are still having a tough time getting offers and sometimes owners are going begging.

If you ever thought about buying real estate as an investment or rental, now is the time. Buying a house for under $300,000 with today's interest rates and soaring rental rates at a premium due to foreclosures, you could actually have a positive cash flow. When the demand comes back for these properties, the escalation of values of the lower-end homes of under $300,000 are going to be the ones that appreciate the fastest. There are other bargains in other areas in Contra Costa County. Two boutique condo projects have been built in downtown Martinez. One of the projects starts at $350,000 and the other starts at $400,000. The units range from 1,400 to 1,700 square feet per unit. In downtown Pleasant Hill and Walnut Creek, there are two very nice condo projects starting in the $400,000 range. From the project in Walnut Creek, you can literally walk out the front of your facility and be in a very nice table-service restaurant or movie or probably drive to where you work in downtown Walnut Creek in a matter of a minute or two.

In San Ramon, there are three condo/single family projects that are offering real bargains to first-time buyers with affordable prices you haven't seen in that area since 2003.

In the city of Richmond on the water, there is a beautiful planned unit development and condo project selling in the $400,000-$500,000 range.

I really don't have a big place in my heart for motivational speakers or cheerleaders, but there has never been more opportunity to invest in real estate than there is now. God knows the stock market isn't the place to be and real estate is definitely bouncing off the bottom and will be heading north hopefully in the next year to 18 months.

I feel so strongly about the market going up that if you buy property in the next year and it doesn't appreciate, I promise you I will not raise your property taxes.

Go back to paying in company scrip?

Lotsa stock options turned out to be worthless scrip.

Tan - how are you basing that real estate will be bouncing back any time soon?
If the buyers arent able to buy today. I doubt they will go back
to prices that were unafforrdable. With free money no longer
available how do you expect any kind of appreciation.

DaBoss:

Those aren't my words. They are the words of the frickin' Assessor of Contra Costa County in Friday's Contra Costa Times newspaper! Funny how he fails to mention the now lack of "free money" that you point out!

It galls me that a county official, the proporty tax assessor no less, is spewing out real estate investment advice in the newspaper - whether or not you agree with it.

And, where was this sage advice to "buy" 10 years ago, just on the brink of when things really started to heat up??

That article from the CA of CC is one of the funniest things I have ever read. I hate to see a good high school education go to waste, but correlating some price declines against probable interest rate hikes to make this the besttime to buy? Hahahahahaha!
Try this, Mr. County Assessor. Get a solid cash poistion. Wait for the stagflation and subsequent hikes in interest rates to spike the 30 year fixed to 10% or higher. The interst rate hike alone will drop prices 35%. There will still be an over-supply of homes in 2 years and tough economic times, across the entire world, will make the future very much more affordable. By any defintion we still have 25% decline left in CC, and given the softest macro-economic prediction it will be likely closer to 35%.
That inflationary catch-up to market only works if people get inflationary pay hikes, and the only place we are seeing that is in Texas where the formerly marginal oil wells are operating at 110% capacity. Pay-packets are up 50% in their mad-rush to get oil out-of-the-ground.

So, Mr. Assessor. Leave home pricing to the market.

Case Shiller is out.
SFO now down to 159.83.
That is -1.76% MOM. (wow - This is May to June!)
That is -23.7% YOY.
SFO is -26.8% from peak.
Using 4.25% annual increase, we get equilibrium in Feb 2010 which will be -43% form peak of May 2006.
Sadly, the "Bay Area beats inflaton by 1-2%" which is why I use 4.25% annual increase is only true when pay packets go up 4.25%. I think this is no longer true. This means any error in this prediction will be an error to the high side.

FDIC data gets worst for the 2nd quarter.

http://money.cnn.com/2008/08/26/news/economy/fdic_banks/index.htm?postversion=2008082615

I wish the FED would make these guys compete for capital from people that have savings instead of giving/loaning them cheap money. I think I should be rewarded for my saving habbits instead of being punished with the inflation we are seeing. It was just about a year ago I was getting 5.25% in my savings account before seeing it fall to 2.75% :(

HeadSet, thanks for the pointer to the A-B community. There are similar communities around the world, but predominantly offshore locations, like the Aramco communities in Saudi Arabia for example. Saving payroll money is not the only benefit, too; I would even argue that such an approach is the least advantageous. If a company owns such a development, by keeping payroll constant but actual outgoing costs for property on a nominally continuously declining basis, then it becomes much easier to attract increasingly better talent. It becomes highly tax efficient to "pay more" to the talent the longer the development is held.

This thread seems to have died out but in the off-chance someone picks this up, I got a question...

I've been looking at the possibility of moving back to the States. Looking at a couple prospects in the Bay Area again.

But I'd tend to think #3 is actually true after having a look at rentals and home prices on the peninsula. I'm not seeing any crash in prices. Or is it just the advertised prices? Can someone give me a reality check?

I moved out of the area in 2002. Things have gone way up even since then. Even frumpy Foster City - homes are 1.5 million and rents for a family home are at least 3K. Had a look on Craigslist and it's all still far more than when I left.

Can someone comment or provide a bit of person-on-the-ground perspective?

Thanks