patrick.net

Housing can be decomposed as suggested. However, the value of the land is driven by the economic forces that you seek to remove from your equation.
The POS houses that sell for a fortune are often worthless structures that should be torn down. The lot is often 100% of the property value.
It is true that we have plenty of land for building more houses. The problem is that most of that available land is very far from where most people demand housing.
As for regulation, if you want less of a good, regulate it or tax it. Either way you drive the cost up.

The Bank of Canada study (first link) I think makes an important distinction in separating the cost of the house itself (physical structure) from the land, and in pointing out that most of the recent growth in prices is due primarily for the rise in "demand" for the land, and not due to a rise in either the cost of construction material or labor. This notion is reinforced by the fact that in the most Bubble-impacted areas (CA, MA, FL), land's share of "house value" is much higher, vs. areas that are not so Bubble-impacted (most of the Midwest & South).

I think that for the purpose of debating over RE and the Bubble, we can use the terms "housing" and "land" as virtually interchangeable.

Also interesting how raw land's average share of "house value" starts out very low in new developments (11%), then tends to rise steeply as the surrounding area becomes more developed and therefore more "attractive" as a place to live (MP will no doubt have something to say about that ;-) ).

Yes. The most extreme example of this is Manhattan.

Of course, the paper also argues that these "prime" areas with high land-to-value ratios are also much more sensitive to interest rate fluctuations and experience more price volatility overall in BOTH DIRECTIONS.

Sorry MP, looks like the Marina's not 100% invulnerable to economic cycles after all... :-(

Btw, welcome back Zephyr --haven't seen you posting in a while.

It is true that we have plenty of land for building more houses. The problem is that most of that available land is very far from where most people demand housing.

So true. I've often wondered what would happen if telecommuting/business decentralization ever really caught on in a big way. Image how cheap housing would be if you could take your job with you literally anywhere? Alsakan wilderness, Rocky mountains, remote island off Puget Sound, etc...

Of course, the flip side to this is outsourcing. If jobs become infinitely mobile, then labor costs could fall even faster than housing costs, as businesses are able to find (or train) enough skilled workers in third-world countries.

Telecommuting and globalization both will have similar fundamental effects. In theory what should happen with such dispersion of labor is that labor rates around the world will converge. With this we would expect to see property values also converge. And this is what has been happening. Even as the most expensive places become more so the cheapest places are rising in relative terms (if they have attracted some of the jobs).

HARM, Thanks for the welcome. Actually, from time to time I lurk, but recently have not felt inspired to comment.

Zephyr, do you see a possibility that some very expensive cities that are expensive mainly (or solely) because of a relative abundance of jobs (L.A. & Las Vegas come immediately to mind) may see a significant decline in RE prices as telecommuting/globalization accelerates?

Personally, if I could take my job with me anywhere, I wouldn't stay one day in L.A. beyond my 30 days' notice to the landlord.

HARM, Thanks for the welcome. Actually, from time to time I lurk, but recently have not felt inspired to comment.

Gee, I can't imagine why.. :roll:

Personally, if I could take my job with me anywhere, I wouldn’t stay one day in L.A. beyond my 30 days’ notice to the landlord.

Ditto (husband's job, same desire)

Harm
The thing I don't get about this topic is does it really matter what the land value is in relation to the structure in a bubble? They're both over-valued. And would land value make a difference in a decline? I guess my point is that in a mania no one is looking at the real value, they're just trying to make a quick profit.

Gee, I can’t imagine why..

Are you implying that a thoughtful mature poster like Zephyr wouldn't want to parry such brilliant arguments as: "Anyhoo, gotta go --have squash with my broker in 20 minutes", or "there are TONS of people making 10 gazzillion dollars/month in the Bay area!", or "prime locations NEVER lose their value".

I just can't understand that...

Are you implying that a thoughtful mature poster like Zephyr wouldn’t want to parry such brilliant arguments as: “Anyhoo, gotta go –have squash with my broker in 20 minutes”, or “there are TONS of people making 10 gazzillion dollars/month in the Bay area!”, or “prime locations NEVER lose their value”.

I have this mental picture of MP whenever he's in his office/wherever he really spends his time and someone/mom says something he doesn't like. You know, holding his hands over his ears, loudly saying "la la la la I can't heeeeeeear you!"

Isn't that what he essentially does whenever we post something that disagrees with his pov?

The thing I don’t get about this topic is does it really matter what the land value is in relation to the structure in a bubble? They’re both over-valued. And would land value make a difference in a decline?

SactoQt, this was a requested topic I copied verbatim off the "Lurker's" thread. Point taken, but I don't think it's really the topic that matters as much as the debates & comments that follow. Personally, I think it's one of the better researched topics that's been posted so far.

As I said above, "I think that for the purpose of debating over RE and the Bubble, we can use the terms “housing” and “land” as virtually interchangeable." Even so, I think that considering what role zoning, population density, taxes and interest rates play in land values is useful in determining which areas are most bubble-prone and overvalued. In other words, I think there's some value in this subject.

As I said above, “I think that for the purpose of debating over RE and the Bubble, we can use the terms “housing” and “land” as virtually interchangeable.” Even so, I think that considering what role zoning, population density, taxes and interest rates play in land values is useful in determining which areas are most bubble-prone and overvalued. In other words, I think there’s some value in this subject.

I do get your point. But here's the thing. Out here in Sac, there has been so much building that it's hard to see how our prices have skyrocketed like the BA. To some degree housing here has been affected by people who can't afford to live there, but that doesn't begin to explain all the price increases. If the argument is that areas that have a higher population density like the BA are more bubble prone or least more likely to see higher spikes in prices due to inability to build to suit demand, then wouldn't places like the BA be more likely to see a sharp correction despite density, intangibles etc.?

And I'd have to go back and look at the stats, but hasn't Sac seen a similar percentage increase in home values to the BA despite the land and building that's gone on out here?

In fact some lists I've seen say the Sacramento area is more overvalued than San Francisco. That's not hard to believe, but the point is that Sac has seen a huge surge in prices despite a lower population density and lots of land to build on.

If the argument is that areas that have a higher population density like the BA are more bubble prone or least more likely to see higher spikes in prices due to inability to build to suit demand, then wouldn’t places like the BA be more likely to see a sharp correction despite density, intangibles etc.?

Exactly --and that's precisely the conclusion the BoC study comes to: In areas with high land-to-value ratios, there's more price volatility in BOTH DIRECTIONS. (Look out below!)

Exactly –and that’s precisely the conclusion the BoC study comes to: In areas with high land-to-value ratios, there’s more price volatility in BOTH DIRECTIONS. (Look out below!)

Ok, that helps. Less confused now. :?

Zephyr, welcome back. We really missed you.

@SactoQT: but hasn’t Sac seen a similar percentage increase in home values to the BA despite the land and building that’s gone on out here?

I believe the percentage increases were even higher in Sacramento..! There are only so many potential buyers at each price stratum. in 2000, most of SF was already out of reach for most buyers. Bernal Heights, as the last place left, got a big bump until it was out of reach too. Then the East Bay, then Sacramento, Stockton, Vallejo, etc.

Sacramento still has room to expand...but it didn't expand as quickly as the pool of buyers expanded (due to the availability of credit), so prices went up. I think it's clear that that relationship is changing.

The same buyer with the same amount of money to spend will always prefer the higher quality product. Quality is somewhat subjective (and as someone noted before, for my tastes, the Marina is just like the Richmond district with (slightly) less fog...), but historically speaking it's clear that the "quality" of a property can be measured by its distance from SF.

The best Modesto, etc can hope for is that the people who moved out there, somewhat disappointedly, are finding that the lifestyle suits them more than they expected. Or that a critical mass of similarly-minded neighbors has turned the hood into a better place than it was before. This can't happen everywhere.

So yes, Marina is Prime. All of SF is Prime, except Bayview which is still too scary for most people, despite having the best weather and some of the best views in the city. But Prime or not, there's heavy weather ahead.

The best Modesto, etc can hope for is that the people who moved out there, somewhat disappointedly, are finding that the lifestyle suits them more than they expected. Or that a critical mass of similarly-minded neighbors has turned the hood into a better place than it was before. This can’t happen everywhere.

Modesto, Stockton, Elk Grove-- all those areas have that in common. I think that's why I'm so baffled at the run-up in a lot of these places, desirability just doesn't even enter my mind when I think of them.

I guess the article is basically making the case that land is the most volatile component of housing prices, because it's the most intangible component. You can determine the replacement cost of the structure itself quite precisely (raw materials + labor), but how do you precisely determine the "true value" of the land itself?

As many of us have pointed out before, equivalent rents (PE ratios) and historic rent-to-income ratios are pretty reliable measures of this, but it's hard to pinpoint an exact dollar figure for most properties. The inherent imprecision in determining the underlying value of land also makes it more prone to being influenced by purely psychological factors (the aforementioned greed, fear, euphoria) and credit factors (low interest rates, loose lending standards, etc.).

Speaking of undesireable locations... My Dad's friend has a guy who works for him who bought an 800 sq ft house in Rio Linda (the hood) for the low $200,000. That may not sound too bad by BA standards, but this is a bad area, bars on the window kind of place. But what really doesn't make sense is that he could have bought a condo in Roseville, which is a nice suburb of Sac, for the same money and it would have been bigger. But the guy was born and raised in the area and never bothered to look beyond his back yard when buying. I can't imagine what the value of the place is going to be a few years from now, but it won't be good.

Oh, btw… just in case nobody believed me about rental pricing power. Here’s a NY Times article talking about just that.

This could be the much predicted rental uptick preceding a housing crash. When potential buyers finally give up the idea of getting in at any price, the supply of buyers will dry up fast.

@SactoQT: bars on windows? Heh. You pay extra for that in the Bay Area.

Daly City, South SF, Crocker Amazon, Richmond, San Pablo, San Leandro...even parts (most) of Berkeley and El Cerrito...I challenge you to find a house with bars on the windows for less than $500k. :-)

MP, As so many of us here have pointed out oh-so-many-times:

1. Rents in most bubble areas are NOT going up (by much): patrick.net.
2. If both rents AND home prices rise beyond the ability of most households to pay, then either incomes must rise, or prices & rents will have to fall (due to people being forced to leave the area and lowering demand).
3. You would expect SOME increase in rents at the tail end of a housing boom, due to priced-out families turning to renting as a cheaper alternative (and thereby temporarily boosting demand for rental units).

As your article says:
"A government report yesterday also offered new evidence that the housing boom could be reaching a peak. The median price of a newly built home fell to $203,800 in July from $219,500 in June, after having risen in the winter and spring, the Commerce Department said.""

As I said, completely predictable. If you think rents are going to go up 300% to match current prices, you're dreaming....

(yes, with bars on the windows. If you find one without bars on the windows at that price point, it's considered "deeply deferred maintenance"...i.e. active crack house.)

@HARM: back a few months ago, I think the general consensus here was that a mild housing crash could mean broadly higher rents.

What's your take now? No soft landing? The falling tide beaches all boats?

(yes, with bars on the windows. If you find one without bars on the windows at that price point, it’s considered “deeply deferred maintenance”…i.e. active crack house.)

Er, I'm guessing your 'hood' is a bit more extreme than mine.
My familiarity with the hood is sketchy at best. I know Rio Linda is not too great because my Dad's office used to be right by the welfare office out there, and boy was it busy. Mostly I hear about what area's are bad by word of mouth, usually by those who live there.

Apparently the only real life that exists is on MP's street. The rest of the world's real life examples are pure fiction.

@HARM: back a few months ago, I think the general consensus here was that a mild housing crash could mean broadly higher rents.

What’s your take now? No soft landing? The falling tide beaches all boats?

Don't recall (do you remember the thread)? But, I agree with Peter in that I'd expect some uptick in rents at the end of the boom as priced-out people give up on trying to buy and switch to renting. However, as I said, I don't think the average increases in rent will be either large or sustainable as the bubble pops.

Reason: when prices begin to plateau & fall in a given area, this puts more housing stock on the market, either via "investor" rentals (trying to cover some of their monthly payments while seeking a greater fool to buy the house), or foreclosures. The flood of new inventory on the market will increase supply for both renters and buyers.

Good luck trying to raise rents in that environment.

@MP. I don't know what maths they required of you in school... But in the first few minutes of Stats 101, they bring up concepts like "sample size" and "selection bias" and "unwarranted extrapolation". Maybe you didn't take statistics. Check it out.

You can believe what you want about this article and that article, but i’m posting a real life example. There’s no better proof than something that’s real, that is why i post examples of properties going through the roof.

Like we've all said, MP, a slight uptick in rents at the end of a long housing boom is predictable, expected --and temporary. Even in those areas in the NYT article that showed the largest rent increases were only a point or two ahead of inflation --not a giant leap by any standard.

Your "my neighborhood, blah-blah-blah" anecdotes do not impress, my friend.

SactoQt- I’m only telling you with great confidence of what i know in my hood(s). Is that bad?

Not at all, but there are a lot of neighborhoods in the world and what goes on in one is not representative of all-- that's all I'm saying.

But, as a homeowner, a landlord, AND an ex-renter, I believe i have more working knowledge than someone who has only been a renter. Is that not fair to say?

How long have you been a homeowner and landlord? Have you been through the up and down markets? Going by your age I'm guessing you haven't experienced and survived both just yet. When you've had time to mature in your role as an owner/landlord I'll be very interested to hear what you have to say.

Peter P - Regarding our inverted yield curve bet, let’s make it fair and simple on the deadline. January 1st. You’ve got 4 months.

Fine. Let's use the spread between the 2YR and 10YR note. If the yield curve ever inverts between now and the end of the year, I win.

Which sushi place?

My, oh, my --that yield curve is sure getting thin: .18

US Treasury rate site;
tinyurl.com/79u6u

@HARM: I don't recall the thread.. I may have been cherrypicking comments to reach my supposed "consensus" (see above re: selection bias!)..

Reason: when prices begin to plateau & fall in a given area, this puts more housing stock on the market, either via “investor” rentals (trying to cover some of their monthly payments while seeking a greater fool to buy the house), or foreclosures. The flood of new inventory on the market will increase supply for both renters and buyers.

Agreed. I guess the builtin assumption there is that rent levels presently reflect (a large percentage of) recent buyers' cashflow positions. Which sounds reasonable under normal circumstances, but I'm not sure it's true today.

I'm seeing houses and condos in SF that rent for about 35% of their theoretical sale PITI amount (20% down, 30yr fixed). If things got really heavy and sale prices dropped 50%, there would still be room for rents to rise to meet in the middle..

AFAIK, "affordability" for rental qualification is still the traditional 30-40% of income. The median household income for SF is $70k...does anyone know the "median" rent in the city?

http://patrick.net/cache/rankrent.html

San Francisco $1983

@SiliconValleyRenter,

You should have no problem negotiating them down --I know lots of people on the peninsula & East Bay, and rents are flat to falling. See average rents by city I posted above.