patrick.net

Peter P,

I think the high P/E has something to do with wealth distribution. I am uncomfortable to admit that we seem to be heading towards more concentrated wealth distribution. The rich gets richer and the middle class gets poorer. In a few very desirable spots of the world (aka London, Sydney, Auckland, BA, NYC, etc.), while some of the pricing is based on collective stupidity, some of the pricing finds support in the riches around the world who can more conveniently buy and sell and hold properties in another country. These "riches" include many nouveau riches from developing nations like China, where wealth is notoriously concentrated in the hands of a few.

Also, new immigrants are more likely to bid up prices than the long-time residents (watch out ya old dogs). Today's new legal immigrants to these English speaking countries are more likely to be highly educated, competitive talents who did well in their home countries armed with more cash and resources than average old-timers. New immigrants have no idea what these properties should go for, and they just assume the current price is the norm. As long as they can find a job to support the mortgage payment, they are fine.

So, the globalization of both capital and skilled labor, coupled with AG's money creation policy in the last few years, have contributed to the global asset appreciation.

OwnOcp, how many non-resident RE investors do you personally know?

Given the current situation of RE in California, ie, rents so far out of whack with prices, why would anyone outside of the US buy a single family home in CA for an investment? Or why would they buy it as a vacation home? Surely the money you are dumping down the toliet each month could more effectively be used to just rent a hotel or buy a time share for your annual visits. Sorry, but I'm just not buying the rich foreign investor proping up Ca RE.

I think the high P/E has something to do with wealth distribution.

But P/E ratio is a pure function of opportunity cost and expected appreciation. Unless you believe that extraordinary appreciation is sustainable, the ratio will revert to historical norm.

Sorry, but I’m just not buying the rich foreign investor proping up Ca RE.

MIRAGE!

I don't know of any in BA. I have friends who hold 2+ properties here as investors but they all live here.

But I do know of plenty non-resident RE investors in WA, OR, Sacramento, NV, all BA residents who felt that they are priced out of BA and need to grab on any RE anywhere so that they don't miss the boat.

But I do know of plenty non-resident RE investors in WA, OR, Sacramento, NV, all BA residents who felt that they are priced out of BA and need to grab on any RE anywhere so that they don’t miss the boat.

Titanic is sailing to New York. Last Call. Do not miss the boat.

I am not arguing for high P/E here. We are the center of the bubble. What I am arguing for is, we, the all-mighty-godfather-of-all-bubbles, priced out of BA and go around creating bubble elsewhere.

BA is certainly not relying on foreign investors, most of the world's VC money sits here. But the BA residents ARE foreign investors in neighboring states or even down under bidding up properties passing our bubbles overseas.

OwnOcp, are they non-residents or foreigners? I just don't see some schmuck from the UK or where ever coming here with their suitcase of money to buy overpriced CA RE. P/E way to out of whack. Things will revert to the historical norm. This is all bullshit, I repeat this is all bullshit. Homes in Ca will become what they've always been, a place to live.

Owneroccupier, if foreign wealth was the main cause of the boom, then we would see higher appreciation in exclusive and desirable locations. However, the markets for 2M+ houses in many areas are pretty much dead in the water. Yet fixer-upper $hitboxes in transitional neighborhoods had the most appreciation.

How would you explain this?

Surfer-X,

The BA residents I know are mostly first-generation immigrants, just like myself, from all over the world. Some of them come with a suitcase of money, and some of them come empty-handed to realize their CA dream.

I always admit that there is a bubble, and a norm needs to be restored when the bubble pops. But the norm that we are restoring to will be quite a bit higher than CA is always used to. This is the case because we are sitting on a rather nice piece of realestate here. I have traveled around the world and have to say, this is about as nice as it gets. So there will be more and more people with means coming here to reside. If you are well-off, you can live anywhere in the world, and I am convinced that many rich people will choose to live here.

This is painful for long-time Norcal residents, I am aware of that. But as I argued before, when money and skilled labor are allowed to move around, they tend to seek the best place our globe has to offer. Unfortunately there are not as many nice spots as Norcal.

Owneroccupier and Randy,
You guys have traveled around a lot. How do you feel the U.S. and CA in particular, property prices compare to desirable places in other countries?

Owneroccupier covered English speaking countries accurately and quite nicely, in my own opinion and experience. I can't really speak to Asia with a ton of knowledge (and I've never really considered buying there).

Mainland Europe is a harder question. There are some restrictions to how you can buy there as a foreign owner, but it is possible and somewhat common in places like France and less so Germany. The problem with most EU countries is that they have a much more narrow RE market, a lot less use of debt financing, and a general "rentor culture". There are parts of Germany (particularly in the Eastern states like Thueringen) where home ownership is being actively encouraged by the state governments, but there is very little new development and a lot of landlords only very slowly selling off "homes" (homes are often not single-family properties).

If my family ever decided to vacate CA permanently and move to Europe, then I'd have to very carefully consider if it would be worth it to buy at all given I could rent with a lot of protections. And oh yea, there are capital restrictions to moving your assets in whole out of the US. It is generally not possible to take your .5M (or whatever) and just jump ship. You can invest in a 2nd home/vacation property, etc. in Europe, but you can't just leave and take all your money. If you have enough money, you can try to cycle it out through creative investments and a few "businesses", but it's a tough game with high transaction costs.

So I'm not sure that free-flowing, globalized capital will effect RE all that much except in the form of local, fragmented inflation, real interest rates, and PPP.

The problem is how do you calculate the earning part for a desirable property that can not be comparably rented.

Most condos are pretty much apartments with less amenities and less management. They are almost comparable. Moreover, owning is more risky, so there should be a risk premium.

Also to be comparable to owning you have to have a long term lease with guaranteed limit on rent increases.

This is correct.

If anyone can convince me that Bay Area rent will be 50% higher in 5 years, I will call my RE agent immediately.

I have traveled around the world and have to say, this is about as nice as it gets.

Vancouver is much nicer if you can bring a job with you.

And oh yea, there are capital restrictions to moving your assets in whole out of the US. It is generally not possible to take your .5M (or whatever) and just jump ship.

I am not aware of this. Randy, can you explain?

OwnOcp, sorry man, while I agree that Coastal Ca is it, buying into the "new paradigm" bullshit just isn't going to happen. Hard to argue with over 100 years of historical data. What you are suggesting is akin to the crap spewed on us during the dot.bomb, "ITS A NEW PARADIGM", no it's not, it's the same old one, transfer of wealth. Easy Al has to run the printing presses non-stop, what to do with the cash? Make RE loans. This aside, Ca will go back to it's historical average, roughly 3.2-4X income. Yes Ca is nice, but if for example you are from Buffalo NY, fuck man, you can live anywhere, and given enough pain, you'll move away, trust me. Besides, the immigrant bs might explain high prices where there are jobs, but how does it explain the ass raping were taking down here in SLO county? No jobs unless you count picking grapes and that 3/hr isn't going to cut it.

If you are well-off, you can live anywhere in the world, and I am convinced that many rich people will choose to live here.

Hmmm, I don't think that suitcase of money buys you citizenship exactly. You can't live whereever you want, yes you can visit, but immigration is a whole different animal.

all BA residents who felt that they are priced out of BA and need to grab on any RE anywhere so that they don’t miss the boat.

I plan to miss any boat sailing out of "Cape Fear;" you never know who may be piloting it.

Hmmm, I don’t think that suitcase of money buys you citizenship exactly. You can’t live whereever you want, yes you can visit, but immigration is a whole different animal.

Quite true. I have a good friend who is an immigration lawyer. He told me that many researchers and rich businessmen have trouble getting greencards.

Apparently, the US welcomes illegal immigrants more than people who can make major positive impacts.

I am not aware of this. Randy, can you explain?

For a while, a bunch of US wealthy citizens started bailing and taking all their assets out to avoid taxation. They shut the door on this buy implementing severe capital controls in the form of special expatriation taxes. I don't know what the limits are now, but they used to be pretty low, like $100K per adult, the rest being taxed away. People still do it, but they have to commit tax evasion fraud to facilitate the movement of their funds. They can never come back to the US, either, or they'll be arrested on tax fraud. They also have to be careful when traveling because some countries like the UK have reciprical agreements, and you can be arrested there and sent back for trial.

First of all, how will you define a rich foreigner? 1M networth? 2M networth?

Merill Lynch publishes a report on high-networth individuals, and allegedly according to their economic modelling, there are 7M of them. The definitnion leaves out all property holdings and counts only the liquid assets. Coming from Asia myself, I have to say this grossly under-estimate rich Asians. Most Asians put their money in properties, not stocks. A typical Asian portfolio is at least 50% property, less than 50% stock and cash equivalent.

In the last decade or so, most of the growth is concentrated in Asia, and the growth did benefit quite a few individuals. Rich Asians don't trust their own countries, so parking money overseas in a developed nation is a common practice. A lot of them are not that rich by US standard, their networth is probably between 1-2M, not much higher. Therefore, you won't see them buying 2M+ properties. But they are a buying force in certain neighborhoods in SoCal. Immigration from Taiwan was a major force behind SoCal's 1990 property bubble, or so I was told. Immigration from Hong Kong was another major force behind Vancouver's property bubble in 1991.

Of course, these "rich foreigners" alone won't make the bubble. But they set an example in a low-interest rate environment that is extremely conducive to realty speculation. In a way, they are sort of an opinion leader in the property market, and their behaviors were emulated by colleagues and friends. When the general public catches on, there is no looking back.

Surfer-X,

I am not saying that the future home price in CA should be 5X your income. But be prepared for 4X or even 4.2X.

First of all, how will you define a rich foreigner? 1M networth? 2M networth?

100mil. Everyone in the BA is worth over 1M, shit, my cat makes 2M.

I am not saying that the future home price in CA should be 5X your income. But be prepared for 4X or even 4.2X.

That I can handle, but what is it now? Like 10-12X income, this is bullshit and where the bloodletting begins.

Surfer-X,

I don't think it is 10-12X. I looked up household income and median home price data of neighborhoods that I am familiar with, I am seeing something like 5.5X around here. Where do you live?

I am not saying that the future home price in CA should be 5X your income. But be prepared for 4X or even 4.2X.

My guess is 3.75X. :)

Loan amount of 3X income with 20% downpayment = home price of 3.75X income.

OwnOcp, Pismo Beach, median income around 50K, median SFH around 650K, about 12/1

I don’t think it is 10-12X. I looked up household income and median home price data of neighborhoods that I am familiar with, I am seeing something like 5.5X around here. Where do you live?

From Patrick's site:

"My dad made money on his house, and it will work for me too."

FALSE. Your dad bought his house when houses were cheap compared to salaries, maybe 3 or 4 times annual salaries. Go ask him. Things are different now. Here is a chart of median house price vs median income in Palo Alto:

Year Median House Price Median Income Multiple
1980 148900 24743 6.0
1990 457800 55333 8.3
2000 910000 90377 10.0

I don’t think it is 10-12X. I looked up household income and median home price data of neighborhoods that I am familiar with, I am seeing something like 5.5X around here. Where do you live?

Sorry man, median home price in the BA, 685K, median income 88K, roughly 8/1. Ahhh the BA filled with nothing but dot.com riches and googlebucks.

That's interesting. Somehow I saw much higher median household income on realty sites. Can they be lying? I remember seeing most West Valley communities making in excess of 200K median household income.

Or did you quote median income per person? Most families have dual incomes now.

That’s interesting. Somehow I saw much higher median household income on realty sites. Can they be lying? I remember seeing most West Valley communities making in excess of 200K median household income.

Or did you quote median income per person? Most families have dual incomes now.

Median household income.

Where did you see the 200K number?

I'll just say this: Once this little RE party is over and the market turns, foreign investors won't want to keep their money in our housing. Their best laid plans will not matter. And I agree with X-man, a "new paradigm" is BS; this won't go on forever.

However, in the meantime, I say let the investors buy up every single property: from $1M waterfront condos in Belvedere just sitting there to the sh!tboxes littering hwy 80 into Sacto. Buy it up, buy it all. Then, pack those (lighter) suitcases and turn tail homeward.

OwnOcp, this type of BS I do deeply dig. The median income of the BA is NOT, I repeat NOT 200K.

http://tinyurl.com/aj9zu

http://tinyurl.com/76jz4

Median household income in Santa Clara is roughly 75K. Remember G, for every dot.com king of the universe there are 10 people making 30K a year.

Quoting SFGate:

The median household income in Santa Clara County, adjusted for inflation, fell 10.6 percent between 2000 and 2004, from $83,370 to $74,509. In Contra Costa and Alameda counties, median income was steady -- about $47,000 in Contra Costa and $59,000 in Alameda County.

Somehow I saw much higher median household income on realty sites. Can they be lying?

OwnOcp, of course not, you can rely on the Realtors, their trade agencies, and groups to provide you with clear, accurate, truthful, unbiased data, kind of like Fox.

OwnOcp, of course not, you can rely on the Realtors, their trade agencies, and groups to provide you with clear, accurate, truthful, unbiased data, kind of like Fox.

Yes, they will tell you that the typical family makes 400K as a financier and buys a 1.5M home in a Prime(tm) location.

As a result, anyone who makes less scrambles to buy a shitbox for 800K.

You guys are right. I don't know where I got this impression that the household income is doubled-up, I thought we BA residents were a lot richer, lol. Based on the official data, obviously the housing price is set up for a serious correction.

There seems to be a quite common misconception that everyone in the BA makes a ton of money. This just isn't true. I know far more people making 60K than I do making 120K.

There seems to be a quite common misconception that everyone in the BA makes a ton of money. This just isn’t true. I know far more people making 60K than I do making 120K.

Still, P/E ratio is my favorite argument.

Mine too. My adopted Dad, and his suitcase of money toting title company working wife, took their suitcase of money to Albq. NM to buy properties that are + cash flow. Now why would this be?