patrick.net

Btw, Peter P. You don’t cook? Is that why all the passion for sushi?

Yes, passion for raw chicken and pork too.

(Not dietary advice)

Jack, Marin is Prime. If I want mountain and water views, is Greenbrae or Larkspur any good?

My Marin example is somewhat of a realistic-worst-case scenario. In fact, I don't expect Marin to drop by more than 0-10% in real terms, but there may be a significant drop in nominal terms, depending upon all that other mumbo-jumbo we're not supposed to discuss in this thread.

I did some pretty heavy modeling of Marin a while back, and I affirm your observations. The last 2 cycles caused a

...don't know what happened.

But I seriously doubt you’re going to get that kind of drop in Marin County... Marin weathered both very well, hardly even dipped.

Maybe not that far down, but I'd say this recent boom is nothing like the previous few. And...Marin housing has spiked just as steeply as the rest of the boom areas--so I think whatever happens elsewhere, will happen here too. How immune is Marin?

Perhaps Marin will be an "island of value" while everything drops, but that could also be a liability. Given the internal perception that Marin is "special" (to a degree), I think sellers might hold out and wait for the "right buyer". So if a "price stickyness" props up Marin, while sellers in other nice areas anticipate the market and undercut to sell, what happens to the external perception of Marin housing? Buyers might consider it way overpriced (even w/ intangibles), and decide to buy in Petaluma, Sebastopol, Sonoma, Berkeley, etc; their dollar will go much further. To some people, Marin will be the only place to live, but to many others who don't understand this perception, Marin is just one community amongst many. Of course, people who can afford to live in Ross, Belvedere, or Tiburon waterfront--that's a different story.
Sure, I love this place, but if I can get 50% more house in Sonoma for the same price, I just might consider it someday.

Kurt S is also someone whom I believe is very familiar with these properties, as he is living on or near the water with a view of Tamalpais right now.

Yeah...I'm right there: water, views, etc.
I'll comment on the market, houses vs. condos, intangibles, etc...
First off to hike around Bon Tempe lake.
Enjoy the day!

I wasn't going to go on about price stickyness, although there is certainly a lot of transaction friction in the RE market, so there will be price stickyness.

There is another factor which drastically affects RE markets in down-cycles. That is the proportion of wealth to income. It is for this reason, much more than reasons of the overall market, that "islands" exist. Two examples of this historically come to mind:

(1) RE in the NorthEast during the Great Depression. In both upper class and borderline upper-middle neighborhoods, most RE held its value because turnover suddenly halted for almost a 20 year period. People with wealth just simply don't _have_ to sell, even during the worst down cycles.

(2) Exclusive neighborhoods of Flint MI held most their value while the rest of the area deflated by over 60%. Again, it's not stickyness, but it's wealth that determines seller-side sentiment in RE.

I'll extend this argument beyond Marin. We use Marin because it's the only example of an entire county which has such a high wealth-to-income ration (excluding North Marin and Marin City). The same affect will be present in Woodside, Atherton-Menlo-Palo (excluding the unincorporated areas), Los Altos & Hills, Los Gatos, Sarratoga, and similar areas in the East Bay.

---

I was going to say that I did some heavy modeling of Marin County RE a couple years ago, based on statistical deviation from median-trend of broader median trends. In fact, Marin has been closing back to it's historical "premium" over the past 10 years. Marin held it's value during the past two down cycles in real-terms, and only lost 10% or less in nominal terms. But, at the end of these cycles it is far above it's historical premium, and thus it doesn't participate evenly in the subsequent up cycle.

If this cycle is worse, which I would agree it could well be, then we'd expect to see nominal drops by 25% at the most. The reason being that a drop of 25% in Marin would require an almost 100% drop in the greater area. This just isn't going to happen unless we're in an environment where we're all fleeing for our lives.

I posted this as a response to the suggestion in the title that nominal prices would drop by 92%. I looked up what data was available for the Great Depression, and it seems that SF RE (the only major urban area at the time for which there is accurate data) only dropped by about 25-30%, and rebounded by the early-30s. In fact, since this was a deflationary cycle overall, the price drop is overstated.

The Great Depression was devastating to all assets. General deflation was significant, and contributed to the decline in GDP, which dropped by 54% from the peak to trough.

Real estate got clobbered as well. Prices dropped from 1930 through 1934. Some have estimated the average decline in price at about 80%. Stocks dropped by 90% from their peak in September 1929 to the bottom in 1934.

The wealthy were not at all immune from this financial disaster. Many of the estates of the very wealthy, and super wealthy were not sold at lower prices because there were no buyers at all. Instead many estates were actually abandoned during the 1930s. Prices on many of these properties dropped so low that some eventually were bought for only the back taxes. Of course they were in need of very expensive repairs.

Many of the larger “McMansions” of that era were later divided into apartments. Many of these wealthy neighborhoods never recovered, even to this day.

There was some discussion yesterday about investing. I have a few follow-up comments.

To beat the market averages you must deviate from the average investment mix. This means you must increase your bets on selected segments or investment classes at some or all times. This also increases your risk and reduces your diversification. The extreme case is to put all of your eggs in one basket. This will be the most volatile position, with the possibility of abnormally good or bad returns.

I agree with SactoQT that most people should not put all of their eggs in one basket. The one basket strategy is for people who know what they are doing and can afford the risk that comes with trying to outperform the market. I believe most people should NOT try to outperform the market because they are very likely to fail. They should just put their money in a few diversified mutual funds that are very plain vanilla, such as an S&P 500 index fund.

Most people should focus on increasing the amount of money they save. This is the single most important thing for the average person to improve upon if they are to accumulate wealth.

Re: STOCKS vs. REAL ESTATE

Do stocks and real estate move in the same direction or opposite each other? Sometimes stocks and real estate move together and sometimes not. Stocks tend to lead the cycles while real estate tends to lag. They both tend to do poorly during times of economic weakness. Mostly, they both go up but at differing rates.

Do stocks outperform real estate? This depends on the time frame. For this comparison it is best to look at the broad national markets, not local areas or limited stock subsets. Stocks and real estate both did well during the 1960s. For about 20 years starting at the end of the 1960s, stock returns were disappointing while real estate had record-breaking appreciation. By the late 1980s, anyone looking back in time would conclude that stocks were terrible and real estate was magic. During the 1990s real estate did poorly (on average mostly flat) while stocks appreciated dramatically. So by 1999 people thought stocks were magic and real estate was terrible. Since then real estate has been magic again and stocks have declined. However, stocks have come back nicely since March of 2003, along with continued strong real estate appreciation.

To make a fair comparison of stocks to real estate, one must consider total return, not just appreciation. For stocks this includes dividends, and for real estate this includes rent, net of expenses. Over very long periods of time (such as 50 year blocks during the last 200 years) in the broad market stocks outperform real estate by about one percent per year. Of course, this is without the use of any debt for either asset class, and I have ignored income taxes. Using debt we can leverage these returns to be higher, especially with real estate. Using prudent levels of debt leverage, real estate provides a higher return on investment than stocks in the long run.

Looking back over the last 50 years, stocks and real estate have both beat the growth rate of GDP.

If I want mountain and water views, is Greenbrae or Larkspur any good?

I think the area has a lot of positives, including:
>More clear, warm days than Tiburon or Mill Valley, which are in the GG fog belt.
>Just a mile from the Larkspur ferry, and quick access to 101. In fact, I walk to the ferry.
>Fresh air, water, views of Tam and natural setting. Perfect place if you like exercise...kayaking, bike trails up Ross Valley to Tam, lakes, etc.

Housing: Things are pretty high right now, but inventory is also way up, and few people are biting on the asking price. Waterfront 2BR condos are around $700K; 1BR $550K.
By contrast, you can rent a waterfront 1BR at $1400/mo., 2BR at
Smaller waterfront homes are $1.2-$1.7M. A few of these housing developments are unimpressive; the shoddy construction stands out. And despite realtor confidence; I'd wait for a shakedown, it's the same story as elsewhere.

If there's a downside to living on the water, your home will take a serious beating, due to storm exposure and salt water. Most of the hit comes to paint, exterior wood, and our dock.

Quick observation for Jack:
Driving through Fairfax today, I noticed an explosion of "for sale" signs; one street corner had about a dozen (no joke). They've sprouted like mushrooms over the past few month.
Is this a normal, seasonal trend? Either way, it's quite dramatic; I don't recall seeing this last September.

‘The Tipping Point,’ by Malcolm Gladwell is spot on!

I like "Blink" by the same author better. "Thin-slicing" is very useful indeed.

Jack, thanks for the information about Marin. I will go there and check it out next week.

To beat the market averages you must deviate from the average investment mix. This means you must increase your bets on selected segments or investment classes at some or all times. This also increases your risk and reduces your diversification. The extreme case is to put all of your eggs in one basket. This will be the most volatile position, with the possibility of abnormally good or bad returns.

Excellent advice Zephyr. I haven't looked at the diversification picture quite this way, but it makes a lot of sense. Regarding stocks and RE, I guess you really have to look at what the market is doing NOW, rather than at any time in the past. Clearly both can be great investments if done correctly. I think you said in the past that you buy RE when the market goes through the downturn and then holds steady for a year or two. Again, that makes sense. Do you have any stock strategies or are you primarily a RE guy?

Just returned and have perused the posts made in my absence.

Jack Says:
Thats why Im wondering why Harm did this. I thought maybe it was his way of getting payback for all the extra deletions he had to deal with lately. But that guess is most likely wrong. Anyway, I promise I am done with MP too.

SactoQt Says:
I think Harm’s just poking fun. Maybe if we actually do what we say we’re going to do (ignore) then we’ll finally get some peace.

I think I can settle all speculation as to my motives by clearly stating that this thread was meant to BE FUN! Essentially, it was a creative writing-slash-housing prognosticator exercise. I thought with all the recent posts on rather esoteric subject matter, it was time for a bit of levity, that's all.

No, Jack, I was NOT trying to bait you, or even MP for that matter, though I was clearly having some fun at MP's expense. As you said, isn't a little satiric 'payback' appropriate for all the pain he's put this blog through (especially thread moderators)? Funny how he keeps turning up anyway, considering that he declared he was "banning himself" just 2 weeks ago. Would anyone BUT a troll be this persistent at annoying everyone on this blog?

Whatever --as you say, ignore & move on....

What precident is there for a 92% nominal drop in RE over a widespread area, short of massive devastation from disaster or war? I like the premise, but you’re simply not going to be able to buy a $2.5M home for $200K, even in real terms.

Guys, once again, this topic was meant to be one part comedy/satire and one part conjecture. Never meant a 92% drop virtually anywhere to be taken seriously. This would require a level of housing market pessimism far beyond even my resolute Bearish-ness. Interesting though, that Zephyr noted RE did broadly decline up to 80% in many areas during the Great Depression.

I agree with SactoQT that most people should not put all of their eggs in one basket. The one basket strategy is for people who know what they are doing and can afford the risk that comes with trying to outperform the market. I believe most people should NOT try to outperform the market because they are very likely to fail. They should just put their money in a few diversified mutual funds that are very plain vanilla, such as an S&P 500 index fund.

Most people should focus on increasing the amount of money they save. This is the single most important thing for the average person to improve upon if they are to accumulate wealth.

Excellent advice, Zephyr --and well said. And thanks for your observations on stocks vs. real estate. About the only possible ciriticism I have is that I'm not 100% sure real estate actually does provide a higher return on investment than stocks in the long run --particularly for residential (maybe you meant commercial and residential?). Robert Shiller has argued that it barely keeps pace with inflation over the long run.

Yeah, here's Shiller's data plot from that August NYTimes article:

It shows RE tracking w/inflation fairly well...with the exception of the recent 75% run-up, that is.

Thanks, SJ_Jim --nice graph!

The spike at the end of the graph is a bit alarming, don't you think?

I would think so, ...& I would think everyone else would think so to...except for the fact that...wait a minute, what's the line? Oh yeah, "it's different this time." Or is it: "it's a new economy?"...shit, I can't remember....

If anyone missed it here's a linke to the whole article:
For login, use:
user: onozpwned
password: onozpwned (same as user)
(I got these from the bugmenot.com website)

http://www.nytimes.com/2005/08/21/business/yourmoney/21real.html?ex=1126670400&en=06bbbab74d289302&ei=5070&ex=1125979200&en=b2111856d4b84873&ei=5070&incamp=article_popular_5

Now I just need to learn how to use tinyurl. LOL.

I have seen some people make a fortune by keeping all their eggs in one basket. But like the dot.bomb era, most people don't know when to take the money and run. They get greedy and figure they can do better than a 50% gain, leave their money in the investment and end up losing big. Yes, high risk can mean high return, but the average investor is better to go for the mediocre return (as Zephyr stated earlier) because the average investor is not clear-headed enough to buy and sell at the right time IMO. Truth is, any earnings on your money, even mediocre ones, is better than a loss.

I think Zephyr's advice to increase your bets (risk) on some of your investments but not all is the way to go.

Gee, you might even call that one-time jump in homeprices (1942-1946?) “permanent”….

I recall Schiller discussing how soldiers returning from WWII put a demand on housing, driving up prices. Of course, the difference there was people who bought to occupy, vs. investment/speculation.

Jack,

I'm not sure I see how Shillers' graph makes the case for prices today being perrmanent and sustainable. When prices jumped back up in the early 1940's (by nowhere near as large a margin as today), they were essentially returning to a long-term baseline just above the rate of inflation, established in the late 1800s & early 1900s. It's also interesting to see how housing consistently returned LESS than inflation for 30+ years: 1912(?)-1946.

As for housing achieving a "permanently high plateau" even close to todays prices, I think you've been spending too much time talking to Realtors ;-). Seriously, though, a major “stair step” in RE prices (relative to inflation, wages, etc.) would require --dare I say it?-- a major paradigm shift. Something would need to happen to make RE permanently more attractive as a vehicle for investment vs. other investments, for people to keep paying higher and higher premiums for it, and taking on more and more leverage long into the future.

The evidence for a paradigm shift would come in the form of equally rapid and permanent rent increases (to reestablish equilibrium in the housing PE ratio), even in the absence of wage increases. Remember, if both rents and wages/inflation rise while housing prices stagnate in nominal terms, housing is losing value in real terms. It would also require permanent changes in lending standards that would essentially render down payments and the 15 or 30-year fixed obsolete.

In other words, I seriously doubt it.

For a bit of light diversion--a humorous take on RE in the UK.
http://tinyurl.com/9l5gf

Just for the record, I'd like to add that I don't expect the coming correction/crash to play out entirely in the form of dropping nominal prices, but a gradual combination of both price cuts AND real value erosion (due to rising inflation & rents). Nominally they may drop anywhere from 30-50% over a period of several years in the worst bubble-infested areas (CA, FL, MA, NV, etc.), but the drop in real terms should be considerable higher. This reflects the "stickiness" in housing prices relative to other more liquid assets, and is similar to how the last boom/bust cycle played out in the early 90s. Regardless of the path the correction takes, however, prices will inevitably revert to the mean.

Thanks for link, Kurt S. In a couple of years, I bet someone will be making a similar video using David Lereah, Alan Greenspan & GWB.

When prices jumped back up in the early 1940’s (by nowhere near as large a margin as today), they were essentially returning to a long-term baseline just above the rate of inflation, established in the late 1800s & early 1900s

I'm curious--is there any explanation for that huge slide beginning around '18? Why didn't prices spike after the end of WWI? Was this a precursor to the depression? That trench lasts from ~ '22-43, a very long time. Of course, what concerns me most is the spike on the right: an uprecedented run-up. What happens next could be unprecedented too.

Of course, what concerns me most is the spike on the right: an uprecedented run-up. What happens next could be unprecedented too.

Be very afraid... and position accordingly.

After WWI the boom was in equities, creating the Roaring 20's.

“Robert Shiller has argued that it barely keeps pace with inflation over the long run.”

True, and he also consistently ignores the reality of the prudent use of leverage in RE investing and how that increases returns, i.e., a 10% dp returns 40% @ inflation only rates (though I prefer 20% dp’s).

Mr Right,

I don't know about your own use of leverage in RE --you may be a very savvy investor-- but the picture for average borrowers out there is not so rosy. Most new "investors" these days are either recklessly speculating, or borrowing heavily against their homes for consumption (the housing "ATM"), or both.

On that subject... "Refinancing just for cash creates risks":
tinyurl.com/8g725

"Here's a surprising and somewhat disturbing statistic released Wednesday by the Mortgage Bankers Association: Refinancing accounted for a whopping 44.8 percent of all mortgage applications last week.

I suspect the data is not the result of laggards. Rather, I think it's caused by people who are refinancing to take cash out of their homes — and that's what's so disturbing. It suggests they aren't cutting their interest rates at all; rather, they're just increasing their debt."

Leverage, or the "L" word, is a very dangerous concept.

How much money could we save monthly if society lived within its means?

I think the question is more about where we are spending our money. Living "beyond" its means may not be so bad if we invest in our future. However, we are sadly entering long-term debt to satify short-term needs.

Or, perhaps he believes that, as PeterP says, leverage is a dangerous concept so homes should not be financed? I doubt that is the case.

Leverage is dangerous but necessary. Driving is the most dangerous thing that most people ever do in their lives. Yet we all do it.

@Mr Right,

An average 80-90% LTV on a mortgage would be a vast improvement over the current situation. I can't speak for Peter P or Robert Shiller of course, but I doubt either one really thinks that homes should not be financed.

It's really just a matter of whether the fundamentals suggest it's a good time to buy in a particular area right now. In most urban areas along both coasts, I'd argue the fundamentals are saying "no". A few years from now, they may be screaming "yes"!

Another update...

Inventory on lower-end properties in South and East Bay appears to be climbing with yet more thrust. Do you guys see the same thing? The size of my search list has grown more than 60% in 2 months.

Lori Spiegl--areas served: Los Altos to San Mateo.
Her, and possibly 500 other realtors.

"Crime reduced by legalized abortion. "

Wow, how can a direct correlation between these two things be proven? I mean, we can theoretically look at statistics and perhaps see a drop in crime in X number of years following abortion legalization, but how can it be proven that one caused the other?

I'd love to know which book discussed the issues you mentioned, Mr. Right. It sounds very interesting.

"Be very afraid… and position accordingly.

After WWI the boom was in equities, creating the Roaring 20’s. "

I've been wondering about connections between current economic conditions and the years preceding the Great Depression. I've read that one of the biggest problems back then was the huge gap between rich and poor--wealth very unevenly distributed. Does anyone have any current distribution of wealth statistics to compare? I'm curious.

I agree with Margie that we're living now in the "good ol' days." I've never lived beyond my means, and it makes me sick that it's now become the cultural norm.