patrick.net

OK Randy H, I'm going to be obligated to play your anti-self.

You wrote . . .
"The events that led up to the Great Depression were a “perfect storm” of factors coupled with a general lack of understanding about economic theory and capital market theory. Remember that Keynes had yet to publish his critical work (the Great Depression was the data he used to form modern theory that led to the IS-LM model)."

I disagree that the Depression was caused by a perfect storm of factors. The depression was caused by the Fed. The next depression will again have been caused by the Fed.
Everybody please save the above-quote. It will be used by economists in 40 years to explain the next ten.

Keynes' critical work. Many intelligent people with very sophisticated backgrounds in economics think Keynes was a fool and his theory even more foolish.

You think Randy H is right? You think modern economics "understands" things better than the economic folks who were pulling the levers back in the 20s?

OK. They ask 100 economists with PhDs what's going to happen over the next 5 years. You'll get 100 answers. Some will say bad bad things. Some will say, like Randy H, good good things.

What does that tell you?

It tells you economics is all a bunch of hooey that provides extraordinarly weak method of predicting the future, which is all we really want it to do.

Economists, investment gurus, and a myriad of others all suck you in with the same technique. They start quoting this and that theory knowing that you can't possibly keep up unless you've been schooled in the same garbage. After enough time, people start believing that the economists must know something.

But in the end economists are just like palm readers . . . They will argue till the end that they know what's going on, but if you ask them for a simple, well-limited prediction, they can't do it repeatedly.

Some will say, like Randy H, good good things.

Just for the record, Randy H is not an economist, and doesn't think good good things are in store. I just don't think a depression is likely, and I study a lot of economics in my line of work (econometrics, actually). Finally, I have never met an economist of any credibility who ever portends to predict the future, only to understand the variables at play. Economics is a sciene insofar as it lends itself to hypotehis testing and falsification. The popular media tends to misuse economics, as it does other softer-sciences like psychology. But, emperical testing is factual, and can reveal interesting phenomena, correlations, and interdependencies.

Randy H, ok, I take your point . . .

I'll throw out that your comment . . .

"Economics is a sciene insofar as it lends itself to hypothesis testing and falsification."

can be extended to read . . .

"Goblin hunting, sociology, and tarrot card reading are sciences insofar as they lend themselves to hypothesis testing and falsification."

I'd define a "science," as distiguished from other things, as a field of study that . . .

"uses the scientific method to move toward conclusions on the basic nature of observed phenomena, wherein those conclusions are verifiable through testing that yields repeatable results."

This definition applies well to physics, biology, chemistry, and so on.

Not so well with economics, which, although replete with elements that individually fit within the definition, becomes less and less of a science when viewed in the aggregate.

In other words, while it is ostensibly scientific to note that "bond yields will fall when investors believe inflation will worsen in the near term," it is, in my opinion, unscientific to use economics to predict the direction of an economy three years down the road.

I guess I derive this from the sheer number of factors, and, in particular, the role of human behavior.

Whereas true sciences like biology are independent of human proclivities, things like macroeconomics are not.

At some point, trying to figure out the ecomony is like trying to figure out when the first hurricane of 06 will reach landfall - it's possible, but given the huge amount of inputs, it's pragmatically beyond reach.

So the only thing that I need from economic theory is a maintained list of those things that cause big problems.

Like fiat currencies . . .
Fed pumping of money into the system . . .
Stupid people overextending to buy houses, thereby putting me indirectly at risk, and so on . . .

Escaped from DC,

I accept your points as well, but I disagree that overwhelming complexity precludes scientific method. The problems with economics also apply to weather-prediction, cosmology, and quantum mechanics, which I hope you'll agree are scientifically driven endeavors. Just because human behavior is an input doesn't mean that models can't be applied. In fact, human interaction directly affects quantum outcomes, yet this is consisitent with quantum theory.

And, the fact that economics is a self-falsifying discipline which replaces old theories with new solidifies the scientific nature of it, not the opposite. I've yet to see a good model for "goblin hunting" which passes the hurdle of occam's razor. If you can point to a more unifying, simpler explanation for economic-phenomena, then I'll jump in with both feet.

Do you know anybody that has lost money in real estate in California, such as the bay area, in last 20 years or so? Assuming that they held onto the purchase for more than 2 years.

I do NOT know of a single person that has lost money in real estate. I am in the market for a condo in San Jose' but they seem so outrageously expensive. Of course, that is what I said last year. But now look at the prices! It's practically doubled in last couple of years. I'm waiting for the prices to drop but if I had NOT taken any of your advice and bought it 2003 or 2004, I'd be sitting pretty!

Are you ever going to get it right?

Phoung, If I had a time machine I'd be mindbendingly rich. If you want to dive into the bucket, kindly do so. No one is forcing you to do anything. Buy that condo if you want.

Do you know anybody that was hit by lightning in a golf course? Assuming that they did not swing a 1-iron in a storm?

I do NOT know of a single person that was hit by lightning.

I’m waiting for the prices to drop but if I had NOT taken any of your advice and bought it 2003 or 2004, I’d be sitting pretty!

You must have missed the (Not investment advice) disclaimer. No advice of any kind was expressed or implied.

Phoung Nguyen, I am not trying to be mean. Can you tell us why did you think prices were expensive back then?

Do you know anybody that has lost money in real estate in California?

Well, didn't LA have a bust in the early '90s, where values dropped an average of 30%?
There was a similar bust in Vancover BC, where the prices tanked by 40%
Once again,

"But now look at the prices! It’s practically doubled in last couple of years...if I had NOT taken any of your advice and bought it 2003 or 2004, I’d be sitting pretty...Are you ever going to get it right? "

I hope you're not suggesting that a healthy level of caution has kept you from buying a home--forever?

Understandably, you're ticked off at these prices, as many are here. Quite a few here suspect the recent RE run-up is not normal at all, but due to a credit-driven speculative bubble. You can poke around for historical data and current figures to make the decision for yourself. The very fact that many people cannot afford a home today (especially here) highly suggests that real estate is abnormally high--and is indeed due for a correction. Unless we think cheap credit, speculation, and double-digit price gains will continue forever. Personally, I do not.

Cathy, if you can afford the condo conservatively and if it can meet your needs for the next 7-10 years, buying is not necessarily a bad choice. It is not an investment property, right?

However, do compare the cost of renting vs owning before you make your decision.

(Not investment advice)

Cathy, can you afford it without a NAAVLP? Your payment is likely to be 3-5X your current rent payment, can you and are you willing to dish out that much?

We are planning to pay 5 to 10% downpayment
Do u think the above is advisable to buy

I'm not qualified to give you "investment advice", but consider this:

Currently you pay $1350/mo.
While a $600K 30-yr mortgage @ 5.75% is roughly $3500/mo, plus taxes and HOA fees.
So, $4500/mo easy.

That's a rather big difference per month; is owning worth over $3K/mo more?
Many people think so, because assuming the market will always go up, they fear being left out in the cold if they do not buy now. Given the wealth of info out there...you should be able to make a decision that best fits your situation.
Caveat Emptor.
(not investment advice)

Cathy, all of the advice from Kurt, Surfer & Peter is good. I'd only add that you should be careful to not get lured into leveraging your way in with too exotic of a loan. My rule of thumb is to use a 30-year fixed mortgage with 20% down as a baseline. If you can afford that, and you have the discipline to put some of that cash away safely, then you might consider an ARM so long as you are ready to refinance into a fixed once rates start heading up. But, I think going with less than 20% down is a mistake, if for no other reason, then to avoid PMI.

A financial planner friend of mine recommends that people only buy homes in this market if they can afford 15-year, fixed, 20% down, no-second, as a way to protect people from over-leveraging themselves and give them some protection from a long downturn in prices.

A financial planner friend of mine recommends that people only buy homes in this market if they can afford 15-year, fixed, 20% down, no-second, as a way to protect people from over-leveraging themselves and give them some protection from a long downturn in prices.

Very good advice. This is one of my personal reference points too.

Use 15YR amortization to determine affordability, but get a 30YR FRM for the flexibility. Make sure that there is no prepayment penalty.

Get hold of today’s New York Times.
They do the maths on the buying/rental dilemna.
I think you will be shocked at the conclusions.

NYT has such a larger reader base...
Psychology is changing...

NYT has such a larger reader base…
Psychology is changing…

Not to mention the great reader retorts to the Wharton "study" in the WSJ.

I have seen at least 3 loss cases in RE in CA, so people who claimed that they have never seen any losses in CA are just kids who haven't been around the block long enough. And mind you, I came to this country only 15 years ago, so the ugly stories I know only represent a small fraction.

One ex-colleague of mine bought a home in LA in 1990, and he didn't even see his home back to the price he bought at in 2000! He had to move for a job so he took a 8% loss on his home in 2000. Had he held it till now, he would have made a small gain, but think about the cost of interest, and the opportunity cost of the money he could have put into something else! Another ex-colleague of mine bougt a home in East Bay in 1987, the price didn't breakeven for him until late 1996.

So the general observation is, in bad times, you need to hold your property for >10 years after a dip. If that is your primary residence, that is probably ok. But how many investors will call it a good investment to wait 10 years to see the price breaking even? How many 10 years do you have in your life?

I have seen at least 3 loss cases in RE in CA, so people who claimed that they have never seen any losses in CA are just kids who haven’t been around the block long enough.

Very well said. One of my father's friend said that his home lost 50% of value after the tech bust. The house of my friend's friend lost millions in value just a few years ago.

Those two cases were in the Bad Area / Silly Valley.

But how many investors will call it a good investment to wait 10 years to see the price breaking even? How many 10 years do you have in your life?

Important distinction this time...RE has become "Dot-Com II". While I think most investors won't hold off until the bitter end, I'd venture to guess many haven't even caught wind of the change (such as my coworker). When investors do run for the door, I anticipate an inventory build-up that will pale past booms/busts.

I've posted examples before of people I know who also had to ride out the down market for 10 years just to see the house return to the purchase price. Also the post I put on this thread about the guy who's already dropped his asking price $100,000 should be a good indicator that right now is not the time to buy, but in 2-3 years you might look at the market again.

Important distinction this time…RE has become “Dot-Com II”. While I think most investors won’t hold off until the bitter end, I’d venture to guess many haven’t even caught wind of the change (such as my coworker). When investors do run for the door, I anticipate an inventory build-up that will pale past booms/busts.

Exactly. It seems that many people are trying to time the top of the boom. They will not hesitate to sell if they are convinced that the peak has arrived or has passed.

500 comments? OMG! We should celebrate!

Cathy, you should use your own judgement. We can only provide decision support. You need to make a decision based on many factors that are unknown to us. Moreover, most sources of information are biased one way or the other.

Cathy, the words of Peter P, just above this post, are the best advice that you could have received.

Sleepless

You sound like I feel. Even though I live in Ca, my area used to be affordable until all the bay area folks came in and bought everything for exhorbitant prices and bid everything up. You're absolutely right that nothing is being solved, only transferred to a new location. I think a lot of these people really don't have a clue. They think they're economically savvy, but they'll end up with multiple properties that will likely go down in value and probably face foreclosure or bankruptcy. I won't feel sorry for the greedy who get burned. I only feel bad for people who got pressured by their peers and their own fear into buying something they couldn't afford.

Frankly, my hope is a very sharp cutback in housing prices due to rising interest rates, but mostly due to tightening of credit, etc. I’m sick of people getting lucky in the market and then further trashing market fundamentals.

Market has its ways to punish excesses.

I realize that most of you are in CA and I apologize, I don’t mean to pick on Californians. It could be anywhere, but it happens to be that most people coming here (and AZ, NM, TX, NV) are people cashing out down there. Can’t you go to Iowa or Kansas instead? Thanks for letting me vent

Cali-phonier deserves such bashing.

Hi sleepless,

I lived in Seattle before. No worries, there will be a big crash up in the Pacific Northwest. In 1989 when many CA residents were driven north by the last bubble, Seattle properties literally tripled overnight. Then in 1991, after two years of flirting with the rain and the 9-month-out-of-a-year-overcast, and lack of jobs aside from Boeing + MS, most Californians had no choice but to move back down. Then, Seattle properties went down 2/3. Ask any Seattle native and he will tell you the same thing, just don't tell them that you are from CA!

Seattle's jobs cannot support the current house price, period. MS is no longer a payroll/stock option powerhouse, Amazon, Starbucks are low-ball employees, Boeing moved its HQs to Chicago. I know how much my Seattle friends are making, but some of the prime areas in Seattle is already at par with the prime areas down here. It is just ripe for an even bigger crash than CA.

I like Seattle, but the current Seattle property valuation just disgusts me. I was reading some article on Seattle Times which claimed that Seattle's property cycle is sustainable because "land is limited", what a big JOKE. Everyone knows that the land supply is virtually unlimited if you drive eastwards along I90 into the Snohomish County. When I was up there, Seattleits kept griping that Seattle was having exactly the same urban sprawl problem as LA. Limited land, yeahright.

"Time to start TAXING people for having kids, not giving them BREAKS (or at least take away the breaks).:"

Amen.

Well, I made an offer on this tiny 1 bed 1.5 loft in downtown San Jose' for $489K (980 sq ft). I could have gotten it year and a half ago for about $300K.

Somebody asked why I thought the prices were expensive back then. Well, 300K is a lot of money! And than I started reading about how Real estate market has maxed out and how people were moving out of the bay area and how doom is near ... Well, last I heard, San Jose' just made the 10 most populous city in the country and I haven't seen an inkling of deflating real estate prices. I guess I'm just tired of waiting. I've been waiting for prices to go down for 6 years.

It comes down to this, no matter what people say, immigrants (like myself) will always come to the bay area (or other metropolis). We're not moving to Lincoln Nebraska. I heard the chinese food there is terrible :). Anway, as long as this great country allows immigrants, the population will increase... mostly in places like the bay area, LA, NY, ... And they're going to need housing. Supply and demand. I predict that housing prices will continue to climb unless Bush builds a wall around North America. I could be wrong, but most of you (especially patrick) has been wrong as long as I've been reading these comments...

Wish me luck...

Well, I made an offer on this tiny 1 bed 1.5 loft in downtown San Jose’ for $489K (980 sq ft). I could have gotten it year and a half ago for about $300K.

Hey man, if you dig the place and aren't looking for an investment device, rock on. If not, you've got big brass balls my friend. Good luck either way.

Damn... I didn't get the place. I got outbid... I really can't go any higher so I guess I'll be renting for rest of my life.

Hmmm... Lincoln Nebraska is looking better everyday.

I could be wrong, but most of you (especially patrick) has been wrong as long as I’ve been reading these comments…

Well, if you expected the market to crash within a day of us putting up the site...

BTW, why downtown San Jose? It is a horrible place.

And Bush is effectively building a wall around America. Greencards are not as attainable as they used to be. There are very few opportunities for new foregin students to stay here permanently nowadays.

For 489K, you can almost get a nice 1BR in Palo Alto. Think about it. Palo Alto. Not crappy San Jose downtown.

Disclaimer: I live in San Jose downtown and I fear for my life every day.

San Jose is tops on my list of places that would benefit from carpet bombing, Berkeley is second. Ahhh San Hosebag, the city without a soul.

San Jose is tops on my list of places that would benefit from carpet bombing, Berkeley is second.

LOL

Ahhh San Hosebag, the city without a soul.

Yep. Zombie city it is.

What is it about San Jose that makes it this way?

I'm going to catch hell for this, but it's the people who are devoid of style and substance, the town which is ugly, filled with sprawl and just ugly, did I mention it's ugly? The gangs, the malise, the police who act like nazis, the polution, the people, the traffic, and now the ass reaming you are taking in housing. Forget it. I don't even buy gas in Santa Clara county, I'll push my car to the next county if I have to.

There might in fact be nice people in San Hosebag, I've just never met them.

What is it about San Jose that makes it this way? I don’t spend much time there, but when I’m there, I just want to leave.

To be fair, I heard that it is much better than 10 years ago...

Still, I do not know what went wrong there. Way too many red light runners. People look scary. Too many younguns. I think it is time to instigate a curfew for teenagers there.

Even Milpitas feels much better than San Jose.