“Make the splurge, you won’t regret it now, you won’t regret it later.”
Wow… commenter Steve really stirred up some discussion. Here’s what Steve had to say yesterday:
Real Estate is Saved! Thanks stimulus package! [Burbed.com]
well, I’m ecstatic. I bought in October 2005 on the Peninsula (the good part), my house has appreciated $200K while everyone said it would never happen, and now I can refinance out of my jumbo loan to save $$$ every month.
Can’t wait for my 15% appreciation in the Spring! I love Bush!
The pessimism for the market carte blanche is misplaced.. just need to pick carefully. Los Altos, Palo Alto, Mountain View resale homes above $1M all have appreciated just fine during a flight to quality schools, quality employers, and most importantly areas with no new housing development. There’s zero inventory, LP remains above 100%, high-tech is weathering the storm just fine, etc, etc. My advice - jump in to these areas now… the water’s fine!
Pralay - (I’m not a RE agent) I agree with you on sales, but by pulling listings in this area, demand = supply for these areas where there are no investors, good schools, solid job prospects, and most folks lovin’ their low prop 13 tax base. My sources:
Inventory, 12-month avg source: rereport.com/scc/ (click on relevant cities), Zillow, Trulia
MV=25 homes in inventory, 12-month avg. up ~ $200K (Zillow MV non-condo=$100K gain)
LA=20 homes, 12-month avg. up ~ $150K (Zillow LA = $200K gain)
PA=20 homes, 12-month avg. up ~ $300K (Zillow PA = $200K gain)Current snapshot of mlslistings: 46 homes for sale in MV, 27 in LA, and 31 in PA… very low, and it’s been that way for 6 months…
Trulia has MV & LA up for non-condo (3&4 bed) units. Kinda tough to tell on Palo Alto 3&4 bed.
And, my favorite, Creekside Realty: top 10% of homes in SCC increased median from $1.37M to $1.70M in one year. Check it out: http://www.creeksiderealty.com/bay_area_real_estate/2008/santa_clara_county/1jan.htm Yeah, I know there are more high $$ selling than low, but look at the historical trend back to 2000…
I’m just proving the premise of this site - There is The Real Bay Area (>$1M houses in NW SCC county) and there’s everything else… Make the splurge, you won’t regret it now, you won’t regret it later.
Well… what do you think? Do you share Steve’s sentiments? Is now the right time to buy in The Real Bay Area?
January 26th, 2008 at 10:05 am
Sure! buy buy buy! RE only goes up! The gov’t will always bail you out!
For the rest of us who will never own a house, the Paladin Press has some fine, fine, Molotov Cocktail recipes.
January 26th, 2008 at 10:22 am
Steve must be a realtor.
January 26th, 2008 at 10:42 am
Steve should do what he said , buy one more house in the real bay area. Interest rate is lower.
January 26th, 2008 at 10:44 am
Here is what a realtor’s blog said:
Silicon Valley companies are doing very well as is evident in premier communities like Palo Alto. Here’s an interesting scenario for both the home buyer and the investor. A coworker just bought a home in midtown for $1,425,000 - not huge at all - 3 bedrooms, 1 bath and maybe 1,300 square feet on a normal lot. One day’s rental listing on Craigslist.com generated 4 applicants all willing to pay her $4,800 asking rent! Does this make “investment sense”? Not if you consider cash flow as the only aspect of return on investment. Investment return also involves appreciation, debt reduction, tax benefits, depreciation deductions and holding period. Will my coworker make money on this deal - in my opinion - absolutely yes - does it take guts and risk - yes also - but markets like Palo Alto will forever be in demand - so the risk is quite mitigated.
January 26th, 2008 at 10:59 am
Buy, buy, buy … this is why bay area prices will never go down:
Fine Print in a Fact Sheet sent by a “A” “P”rominent “R”ealtor: All reports presented are based on data supplied by Contra Costa, Bay East, Santa Clara County, San Mateo County, Santa Cruz, Stanislaus County and San Joaquin County Association of Realtors or their MLSs. Neither the Associations nor their MLSs guarantee or are in anyway responsible for their accuracy. Data maintained by the Associations or their MLSs may not reflect all real estate activities in the market. Information deemed reliable but not guaranteed
Have others seen things like this? Maybe I should post the whole discussion…. or better we should have a special thread about realtors and their factual (ahem, bullshit) insights.
January 26th, 2008 at 11:21 am
hey, Burbed, thanks for the platform!
I’ll repeat, I’m not a RE agent, just a homeowner in the valley workin’ like the rest of us in the tech biz.
Half the reason I posted yesterday is that I personally think the bubble talk has become, well, pretty darn boring. Yup, if you look at the AVERAGE real estate return in the Bay Area and if you look at the AVERAGE inventory levels around here, it all stinks to high heaven.
But, I don’t care about the average - I care about my specific, individual home investment. I care about whether my school district has API scores above 900, I care about how Google is doing down the street as I, in effect, own equity in that company despite not working there or not owning any of its stock. And I care about the level of investment the City is making in University Ave, Castro Street, Main Street, and investments others around me are making in their homes.
And, what’s the alternative now? Renting and putting the rest in the stock market? Check out the whoppin’ return on the S&P over the past couple years. Oh, that’s the average too - instead, pickup great companies that have been pounded on, like Disney, Boeing, GE, etc…
Anyhow, I digress - either sit on the sidelines and wait for… what? Or take some risk and invest in either an undervalued asset or an asset whose increase in value you can always bank on…
January 26th, 2008 at 11:23 am
Wait… Steve’s source (rerenter.com/scc/)has a similar disclaimer. Aha, I get it … posting statistics and claiming NO responsibility for accuracy is the in trend nowadays.
January 26th, 2008 at 12:22 pm
Steve,
“MV=25 homes in inventory, 12-month avg. up ~ $200K (Zillow MV non-condo=$100K gain)
LA=20 homes, 12-month avg. up ~ $150K (Zillow LA = $200K gain)
PA=20 homes, 12-month avg. up ~ $300K (Zillow PA = $200K gain)”
You are showing December numbers. December is normally low inventory month. Look at October inventory in MV. From October the inventory started going downward. Is it because homes are selling hot? No, number of sales are not going up. That’s because homeowners are simply pulling out their homes from market. That’s the secret of so-called “low-inventory”.
Now look are the “Annual Trends” section in the rereport.com. Both inventory and number of sales are going down since 2004. It indicates that market is showing down from the peak of 2004. It is not slowing down not as fast as other areas, but it is slowing. It’s a matter of time the price will become flat or start falling in MV and PA too. Because once the home prices become cheaper and affordable in surrounding areas, it won’t make sense to buy overpriced homes in PA or MV (even if they are attractive). When the RE market was good, the price growth happened outward. This is how home became overvalued in Gilroy or Morgan Hills or Central Valley. Now in bad RE market it’s just opposite - the slowdown is creeping inward. 2008 and 2009 will be fun years.
January 26th, 2008 at 12:46 pm
“Anyhow, I digress - either sit on the sidelines and wait for… what? Or take some risk and invest in either an undervalued asset or an asset whose increase in value you can always bank on…”
Steve,
I will rather rely on the advises given by many economists:
If you want to buy home TODAY, think of it as an asset which can either appreciate or depreciate in future. Take risk accordingly. Don’t take it granted that it will appreciate. If you are not in hurry to buy a home, watch the market for a few years, because it started slowing down.
Now, tell me Steve, in what way your advise is better than the above one? Your assumption is based on only ONE home and that is your home. It certainly does not cover the broad spectrum of RE market. And guess what, your assumption is based on some zestimate (or something else) which is unrealistic at the best in present day RE market. So, let’s put your assumption into test:
1. You put your home (which is appreciated $200K) into market and let us know the MLS number. Let’s us know what kind of offer it gets.
Or
2. Find a similar to your home in your neighborhood which is listed currently. Let’s us know the MLS#. We will watch how it sells eventually.
January 26th, 2008 at 12:51 pm
“Steve should do what he said , buy one more house in the real bay area. Interest rate is lower.”
I too encourage him to do exactly that:) Take the equity from current home and buy another home in MV/PA/LA.
January 26th, 2008 at 12:51 pm
I think I agree with Steve, and with Pralay both. It’s true that in the rich meaning upper class areas of the bay area values I think will hold pretty much steady, and at worst may see a small decline. However in the more ‘middle’ class areas of the bay area the prices will continue to decline because the fact that people just don’t have the salary power to keep values high.
January 26th, 2008 at 2:18 pm
Renter -
3/1 houses in midtown PA may sell for $1.4 million, but they certainly don’t rent for $4800 a month - more like $3000 a month. I own a shack in midtown and track this stuff.
Steve - I bought in 2003 and generally side with you that its probably still a good time to buy a house to live in if its in a prime Bay Area location (which really isn’t that large of an area) especially since mortgage rates are almost back to where they were in 2003 to early 2004. But as the monthly rent / purchase price numbers in the paragraph above indicate, unless you are prepared to lose 2-4 thousand a month, its insane to buy a house as an investment to rent out.
Given the complete failure of single family homes as income generating property for investors does anyone have any ideas on where to buy rental properties that will actually be cash flow positive in the first year??
January 26th, 2008 at 4:23 pm
So, I think it’s important to distinguish between a property that you own for your residence vs. a property you buy solely as an investment.
Right now, I think it’s still prudent to buy in the former case (in these areas) for three main reasons: 1) you are comparing vs. rent on the marginal difference between renting vs. buying, which you don’t do with a second property; 2) your time horizon is probably longer; 3) intangibles (the neighborhood, better living environment, you have a yard, your commute whatever)
PA Homeowner, I think you pose an interesting question on investing for its own sake in today’s environment, but a one-year cash-flow positive return is going to be pretty risky. Maybe 3 years min, but 5 years to be safe. For cash on cash return over a 3-5 year period, you’d have to look at someplace outside the Bay Area where prices have been pummeled, but where fundamentals (job growth, schools, etc) are sound.
Pralay - for the above reasons, my time horizon is 5+ years, so I’m too early to cash (and, heck, gotta live somewhere… not to mention transaction fees for getting in/out). As for option #2, I look at sales vs. LP every month and 90% of all properties are selling for $50-$100K over LP. Again, I agree with you that sales are tanking AND I agree that people are pulling houses from the market. My point is that this ‘hunkering down’ is preserving prices and unique in this area vs. other areas where people can’t/aren’t taking their properties off the market… and where the resulting inventory drives prices declines.
I’d bet you on what the price changes will be this Spring… but it sounds like we’ve both made our bets!
January 26th, 2008 at 4:24 pm
So, I think it’s important to distinguish between a property that you own for your residence vs. a property you buy solely as an investment.
Right now, I think it’s still prudent to buy in the former case (in these areas) for three main reasons: 1) you are comparing vs. rent on the marginal difference between renting vs. buying, which you don’t do with a second property; 2) your time horizon is probably longer; 3) intangibles (the neighborhood, better living environment, you have a yard, your commute whatever)
PA Homeowner, I think you pose an interesting question on investing for its own sake in today’s environment, but a one-year cash-flow positive return is going to be pretty risky. Maybe 3 years min, but 5 years to be safe. For cash on cash return over a 3-5 year period, you’d have to look at someplace outside the Bay Area where prices have been pummeled, but where fundamentals (job growth, schools, etc) are sound.
Pralay - for the above reasons, my time horizon is 5+ years, so I’m too early to cash out (and, heck, gotta live somewhere… not to mention transaction fees for getting in/out). As for option #2, I look at sales vs. LP every month and 90% of all properties are selling for $50-$100K over LP. Again, I agree with you that sales are tanking AND I agree that people are pulling houses from the market. My point is that this ‘hunkering down’ is preserving prices and unique in this area vs. other areas where people can’t/aren’t taking their properties off the market… and where the resulting inventory drives prices declines.
I’d bet you on what the price changes will be this Spring… but it sounds like we’ve both made our bets!
January 26th, 2008 at 4:38 pm
Hello all:
I think Stevo makes a good point.
It *is* true that Palo Alto, Mountain View, Los Altos, Los Altos Hills, Cupertino, Atherton, Menlo Park (aka the real bay area) have shown dramatic, and continuing price appreciation. They are *not* crumbling like marginal areas on the East Bay, or closer to San Jose, or further north.
Will this continue? It’s hard to say.
If you are a renter now, interested in buying, the question is should you buy *now* (so you can enjoy appreciation) or should you rent for a few more years, pocket the sizable difference between renting and buying, and then get the same house for 2007 prices in 2009 (or whenever).
It all depends on whether you think prices in the Real Bay Area are going to keep going up or not, and if they are going up, how fast. If appreciation is about the same as inflation, you can sit tight and it makes no difference. If there are more years of 15% y-o-y upside, you should jump in now.
-zanon
January 26th, 2008 at 6:26 pm
more like get a house at 2001 prices in 2009. Yeah. Rent.
January 26th, 2008 at 7:02 pm
What can I say? Priced out forever.
It is always easy to “imagine” what your home is worth, until you sell.
The law of economics is the same. The weak assets crushed first in a downturn, then the strong ones. Those people holding Apple and Google stocks are sure thinking that their stocks are special, cause they are taking over the world and such. After all, how low can they go right? Pretty much like Cisco, Sun, EMC, blah blah.
I am not planning to buy a $1m home so what do I care about how Palo Alto is selling. If homes remain expansive then people just don’t buy, simple as that.
January 26th, 2008 at 9:40 pm
I am happy that your house appreciated by $200K. If you can refinance, do it sooner than later.
From what I here from realtors and friends looking to buy, the $1 million dollar housing “Real Bay Area” market is still strong. High traffic at open houses. Multiple bids. Etc. Etc. However, the sales numbers since August clearly show that the “Real Bay Area” market was much stronger in 06, 05 and earlier. Right now, the “Real Bay Area” is strong compared to “everything else”. The strength is trending weaker and weaker each year.
I do not buy the “flight to quality” argument. “Everything else” had been very strong for many years, and now it is broken. The price reductions that burbed has been posting. $50K. $100K. $200K. Truly amazing. The reason behind the strength was the easy money over the last 8 years. Anyone, ANYONE, could get a home loan. No job. No money down. No credit. No problem. The banks have tightened lending standards, washing out demand in “everything else”. The demand being speculators, “investors” and people who could not otherwise afford to buy.
With that said, I believe the same thing will come to the “Real Bay Area” in time. The banks have tightened lending standards, but it is still “easy” for borrowers with good credit and good income to acquire interest only, ARM, Option ARM and other creative financing. When these loans go away, where will the money come from?. And, these loans will go away, but they need to start blowing up first. The wave of loan resets coming in 2009 - 2011 will impact interest only loans, ARMs, etc of borrowers with good credit (non sub prime).
I work in the tech industry, and on the surface, the job market is excellent and there is no reason to worry. However, there are legitimate recession concerns on Wall Street right now. If we see unemployment go up or see real signs of a tapped out consumer, this will be catastrophic for the tech industry. The VC money that has been pouring into the valley the past few years has been going to Web 2.0. Web 2.0 is all about advertising. Web advertising is (again) expensive compared to its effectiveness. The competition for the consumer’s dollar has been fierce, and advertisers have been willing to pay the premium for web ads. Without a spend silly consumer, Web 2.0 ad money will dry up fast. The flight from online advertising was seen during the .com bust. This will mean job losses in the tech industry. (Assuming the consumer is dead…)
[Interestingly, one of the top web advertisers over the past few years was Countrywide Financial. When CFC is bought by BAC this year (Q3), CFC's ad spending spree will be over.]
I believe there are just as many finance jobs as tech jobs in the Bay Area. In the past few months, CitiBank and other financial institutions have announced huge layoffs. If you have been following Wall Street and seen the balance sheets of many leading financial institutions, you have to believe that more write downs and job cuts are coming.
When these job losses happen and borrowers with 800+ FICO scores cannot afford an ARM reset, we will see where the “Real Bay Area” truly is.
January 26th, 2008 at 10:36 pm
Can’t imagine tech taking a hit during a recession. Nope, not possible. GOOG will never trade below 550, no chance. W will save Silicon Valley just like he saved Iraq and New Orleans. Holy crap, people, the Bay Area is going to get leveled during this deflating bubble. Only an imbecile would buy now.
January 26th, 2008 at 10:57 pm
“I do not buy the “flight to quality” argument. “Everything else” had been very strong for many years, and now it is broken.”
Dan,
You explained it 1000 times better than me. I am monitoring the RE market (and economy in general) quite a while. Here the nature of local RE forecasts from RE industry in nutshell:
In 2005 and early 2006 (when things were as good it as can be): “California is special. Here weather is so great, the price will never go down here.”
In late 2006 and early 2007 (CA RE market showing signs of slowdown): “Bay Area is special. So many guys are earning above 100K here. The price will never go down here.”
Now, in late 2007 and early 2008 (even bay area is not immune): “PA, LA, MV are special. Google is here. The price will never go down here.”
It’s apparent that “special” area is shrinking quite fast. So let’s keep the following space for RE industry for farther forecast:
In late 2008 and 2009: _______________________________
Here my wild guess: “Google campus is special. The price will never go down here.”
January 26th, 2008 at 11:39 pm
Pralay: Amen to that!
Or maybe “The Real Bay Area” will end up being a couple of blocks in Atherton?
January 27th, 2008 at 12:09 am
You’re right, the problem with buying in “The Real Bay Area” is that it keeps shrinking. A couple of blocks in Atherton may be right, or maybe the “Real Bay Area” will shrink to a Platonic Ideal, existing in the mind like a perfect triangle and nowhere else.
January 27th, 2008 at 12:14 am
“My point is that this ‘hunkering down’ is preserving prices and unique in this area vs. other areas where people can’t/aren’t taking their properties off the market… and where the resulting inventory drives prices declines.”
Steve,
There is nothing unique about this phenomenon.
I already mentioned earlier. It’s called market freeze. And it happened in earlier RE market slowdowns (e.g. 1990). People don’t try to sell homes because they know that they are not going to get the price they want. People don’t buy homes because either they cannot afford or they don’t get within the price they want. Basically supply is zero and demand is zero.
But, the values of homes in certain area are not decided by the homes that did not sell. It’s decided by the homes sold in recent past. Eventually someone has to sell for some reason (losing job/moving out/old parents died and their children are selling it). When there was demands, this how home price appreciated rapidly in 2003/2004, isn’t it? One guy sold his house for 500K. Next month the next door neighbor put up his house in market for 550K. Then next month another guy in neighborhood put his house in market for 600K. The price goes down similar way. When there is no demand and one house is sold for 500K, nobody will be willing to pay next house for 700K even if the owner wants it.
It reminds me a story about Japan’s real estate bubble in late 1980s. I read it somewhere. One Japanese woman was saying “You know what, the value of my home is multi-million. Every homeowner in Japan is a multi-millionaire, because of his/her home.”. Then she adds “But you know what, there is no multi-millionaire left in this country who could buy our homes”.
January 27th, 2008 at 12:39 am
“They are *not* crumbling like marginal areas on the East Bay, or closer to San Jose, or further north.”
zanon,
In normal RE market the *crumbling* is very unusual. It almost does not exist in the dictionary of RE market. In general RE market settle down slowly and it takes years for that. Past slowdowns took many years to settle down. It’s not like stock market where people sell off quick when things start heading down.
However, the current RE bubble is very unusual too. Too many people got into this market who could not afford their homes in conventional mortgages. They got into market too fast and now they are getting kicked out too fast. The result - *crumbling fast*.
January 27th, 2008 at 12:46 am
“I’d bet you on what the price changes will be this Spring… but it sounds like we’ve both made our bets!”
Steve,
Spring is not far. I will be eagerly waiting for your post in Spring.
burbed,
Please revive this topic in Spring
January 27th, 2008 at 6:50 am
Pralay - I’ll bet on continuing strength in jobs, schools, and business/government/residential investment in the area any day. See ‘ya in the Spring!
January 27th, 2008 at 7:19 am
Probably a $30K Millionaire posting from Scottsdale, or a stock option king-for-a-day. Gee, never seen that before, or a trolling realwhore lie.
I’m glad you are so positive. You should offer your prescient wisdom to the White House. They could you use your BIG brains.
January 27th, 2008 at 9:34 am
> “Pralay - I’ll bet on continuing strength in jobs, schools, and business/government/residential investment in the area any day. See ‘ya in the Spring!”
Steve,
I am yet to see ONE SINGLE article that indicates the magnitude of optimism you are describing. But your last comment tells me that you are not keeping yourself up-to-date with local news. Just keep your ears and eyes open for all the press releases from your local city offices. Here some brief summary from all the news I came across so far.
- Home price tanking –> less property tax –> less new development project, less maintenance and improvements of streets and street lights, less law enforcements, less recreational activities offered city offices.
Now you know why many city offices are not liking the fact that home prices are going down. Don’t be surprised if you see too many potholes in your local streets and they are not getting repaired.
Have you seen the latest news of retail sales? That means less sales tax. Go figure what that means.
January 27th, 2008 at 11:07 am
Pralay -
Round and round we go. Since home prices haven’t tanked in the areas that I’m interested in, I’m not interested in the decrease in those area’s tax receipts. And on retail sales? http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/21/BUB8U25FO.DTL
Here’s my view - jobs, schools, investment:
VC spending: up 11% YOY and highest since 2001
http://www.mercurynews.com/vc/ci_8018519
NON-residential investment project investment approved: $191.4 million. This is 2 times the amount in 2006.
Employment: 922,100, highest since 2001. Unemployment remains low @ 5%
Hardcopy report, but scan available here: http://www.homei.us/home-values/economic-indicators-november-2007.html
API scores: all schools in area maintaining pristine scores. http://api.cde.ca.gov/AcntRpt2007/2007GrthAPICo.aspx?cYear=2004-05&cSelect=43,SANTA,CLARA
Conforming loan amounts increase, interest rates drop - get ready for the Spring bounce!
January 27th, 2008 at 11:58 am
I put my time in, in Silly-Con Valley for about 4 years, mid 03 to mid 07, and the trend I saw from my vantage point dealing in electronic surplus, was that tech is dying. Right now, stuff that used to be worth real money, test equipment, parts, etc is worth only its scrap value. The no. of places to obtain surplus is a quarter what there was say 5 years ago (a bunch of surplus dealers went out of biz just before I arrived) and now the few remaining surplus places are laying off people and closing up shops - their owners working out of their houses.
It will take a while but Silly-Con Valley will eventually go back to being a fruit growing area.
January 27th, 2008 at 12:27 pm
Oh no wonder - that’s hardware. Yeah hardware is definitely gone. It’s all about Web 2.0 baby!
January 27th, 2008 at 4:45 pm
Very simply, Steve has cherry picked his data from a relatively small segment of the market and takes one single data point (his own) and guesses it has appreciated.
While he may be right about his particular circumstance, his argument does not hold for the aggregate. Just look at the S&P/Case-Shiller Home price Index……
January 27th, 2008 at 10:07 pm
Steve,
If you’re placing all your hope of home appreciation on Google, I would look somewhere else.
I worked at Google recently and I have to tell you- I haven’t seen such wanton waste of money since the dot bomb days!
Employees get free breakfast, lunch, dinner and 3pm ‘snacks’. The food is all done by professional chefs, so it isn’t cheap.
There’s free massages. If you can’t make it to the appointment, you can schedule a desk side massage. You get on-campus dentists and car washes, not to mention fully equipped gyms in every building. To top it off, there’s heated toilet seats.
It’s quite amazing, if you think about it. Sure, they’ve been named the number one company to work for in 2008, but how long will that last when the money runs out?
What companies have been paying Google’s high ad fees lately?
I’ll give you a hint- they usually feature a man or woman dancing for joy after getting a new lower mortgage rate. You guessed it- Countrywide.
When Countrywide doesn’t have the ad money for expensive Google ads, I think we’ll see how many perks will be taken away from all those Googlers.
When Google doesn’t make their earnings target, the stock price will plummet.
Where will your house price be then, Steve? I’ll tell you- in the sewer, along with the rest of the “Real Bay Area”.
January 27th, 2008 at 10:15 pm
It’s total bullshit what Steve says, otherwise houses like this one in Mountain View wouldn’t have been on the market for months upon months:
http://www.mls-2.com/houseDetail.jsp?id=778276
List Date: 2007-09-20
Yeah! What a great real estate market this is.
January 28th, 2008 at 4:58 am
I agree with Steve’s comments. Some of you may need to get out and see some open houses in the real Bay Area before drawing your conclusions. Regardless of whether you can afford this market, go out and take a look at what’s reality.
I went to several open houses in Sunnyvale this weekend. There’s lots of traffic and interest. In one instance, I asked the realtor if there is any significant issue in the inspection report. The realtor said there is no inspection report; the house is being sold as is. Quite a contrast to the desparation depicted in the media!
Steve is right that it doesn’t matter what’s happening in Antioch, Central Valley, East San Jose, or anywhere the school API score is under 800. The “real” Bay Area market is where everyone wants to be, including people who keep hoping the market will go down. This is precisely the reason the “real” Bay Area will always keep its value — anytime there’s a dip, there will be tons of people rushing to get in, because they realize the window of opportunity is short.
If you think about it, for what reason should this market go down now? It didn’t go down during the dot com bust. Comparing to those times, the job market is way better now, and mortgage rates are almost as low. If you point to the credit crisis, I will tell you that Real Bay Area home owners don’t have sub-prime loans! They have 30 year fixed, and their mortgage rate never resets.
January 28th, 2008 at 7:08 am
Why are all the realtors coming out of the woodwork all of a sudden?
Could it be because we’re getting mounting supply and record foreclosures? Could it be because prices have dropped 10% YOY and we’re only at the opening innings of a multi-year downturn?
I smell desperation from the realtor community.
They’re even willing to come to blogs like this one to try and convince us to get out there and BUY, BUY, BUY!!! Before it’s too late!!
They aren’t making any more land, you know…
January 28th, 2008 at 8:14 am
If there is a fall it won’t happen until 2010. That’s when all the five-year ARMs written in 2005 will reset, and you’ll see people doing panic sales trying to get rid of their investment properties. Right now they’re still in the introductory period and there’s no reason to sell at a loss; they’re more likely to just take the house off the market.
It seems to me that whatever slowdown we’re seeing is more due to the banks than anything else. More and more places are drinking the “20% down” Kool-Aid, as though sinking 20% into a house is a guarantee of financial stability. Heck, I’d say that doing that leaves people WORSE OFF, because they just went and tied up a huge amount of money, and they can’t get it back without a home-equity loan!
But anyway, since very few people have $200,000 sitting around in their bank accounts, sales have slowed because people can’t get financing.
January 28th, 2008 at 8:30 am
>>But anyway, since very few people have $200,000 sitting around in their bank accounts, sales have slowed because people can’t get financing.
Not sure how you came to this conclusion. There are certainly enough people with that much. Tons of people make $100K+ salaries, lots of people have stock options, and lots more people who currently own a home have >200K in equities, which makes it possible for them to trade up.
January 28th, 2008 at 8:47 am
Steve,
Do you know why VC were getting lots of money in 2007, although it is considered riskier? Because growth in other sectors slowed down significantly in 2006-2007. Due to this reason lots of big institutional investors (especially banks) and retire funds were taking these risks. But it is going to end soon after all the big write downs in subprime market. Keep in mind that all the write downs happened in 3rd quarter of 2007 when significant VC funds were already allocated. It will be interesting to see how it goes in 1st and 2nd quarter of 2008.
Regarding sales tax collection, did you read the article carefully? The trends is downward since 2005, including bay area. Yes, in bay area the growth is still positive, but when the curve in the graph is downward you got to be wondering how long it will stay positive. It simply does not support the kind of optimistic picture you are trying to portray. And look at the industry-wise break up at the end of the article. “Building and construction” dropped -14.3% from 2006. Wow! That’s a quite encouraging number for you, isn’t it?
January 28th, 2008 at 9:00 am
> Steve is right that it doesn’t matter what’s happening in Antioch, Central Valley, East San Jose, or anywhere the school API score is under 800.
RealEstater,
As I mentioned earlier, similar kind of words were being said for WHOLE bay area couple of years back.
Yes, good school districts are still doing better, but I wonder how long it will continue if home price difference between good school district and not-so-good school district is significantly high. I know a guy who bought home in not-so-good school district and sending his kids to private school. His comment “I will rather invest my money on my children, instead of house”.
January 28th, 2008 at 9:08 am
> Tons of people make $100K+ salaries, lots of people have stock options, and lots more people who currently own a home have >200K in equities, which makes it possible for them to trade up.
Trading up? Who is going to refinance when investor like Goldman Sachs thinks that California homes are 30% overvalued.
January 28th, 2008 at 9:29 am
>>I know a guy who bought home in not-so-good school district and sending his kids to private school. His comment “I will rather invest my money on my children, instead of house”.
You should look at the total cost of living. Private school tuition runs around $1500/month/child. Assuming your friend has 2 kids, and a mortgage of $2500/month, then he is paying $5500 a month on housing and education (1500×2 + 2500) each month.
A different choice would be to live in a “Real Bay Area” neighborhood with a mortgage of $5500/month, and send your kids to the neighborhood school with a 900+ API score. That is clearly a better outcome, because:
1. Neighborhood schools are more convenient, and lets your kids know the other kids in the neighborhood.
2. You friend would be building equity faster.
3. The house would maintain its value better during a downturn, and appreciate better during an upturn.
4. Better enjoyment due to better neighborhood, and other associated factors (less crime, etc.).
January 28th, 2008 at 9:45 am
One more comment about schools. California schools mostly suck. That’s not a secret. The only island of good education is in those choice Bay Area neighborhoods with API scores above 900. This is why people pay up for a spot to live there. It’s not just about the house, it’s about your children’s future! When the California budget cuts hit, education in the state will go down the toilet, but you know what happens in the Real Bay Area? The schools there will start some fund raising campaigns, and the CEO/CFO/CTO parents will donate the funds directly to these schools. It does not get funneled through the state, so it’s 100% targeted and highly efficient.
January 28th, 2008 at 10:53 am
I think RealEstater is somewhat right but mostly wrong. I went to a number of open houses with some friends for kicks the past two weekends. There are quite a few folks out there but the ones that I talked to were trying to gauge the drops in pricing. For example, there are a number of Eichlers out there that have dropped their asking price (one from 1.15 down to 900k).
One home on Mary street has increased its price from 850k to 877k. That one is a total joke. Busy street and they’ve been burning incense (probably to cover a mold issue?).
I don’t know if TONS of people make over $100k. What I do know that those of us who make over $100k are sophisticated enough to be wary of buying a home in this market when rentals are lagging way behind purchase (around $2300 versus $4800). Saving $2500 and investing that elsewhere (let’s say the real estate market in Austin TX) is the better idea.
As for schools, there’s a strange mindset here in the Bay Area about the API scores. My friends and I have talked it over. Most of us went to crappy high schools and somehow ended up getting graduate degrees at Ivies. Trust me, it isn’t about the schools, it’s all about the parents.
So obviously, I’m a contrarian and I’m willing to sit it out here in the Bay Area and invest elsewhere in RE.
January 28th, 2008 at 12:09 pm
> 3. The house would maintain its value better during a downturn, and appreciate better during an upturn.
This is a good one “maintain its value better during a downturn”. I thought someone said here good school area will continue appreciate. You just need a Spring in very year
And guess what, every year has a Spring. Home price will sprung with Spring….every year.
It’s defy any logic that somehow good school district will be unaffected when home price will continue to fall in other areas. Yes, probably it won’t fall as badly as other area, but they will be affected slowly.
BTW, it’s sad to see Real Estate Industry gave up on “Bay Area” and is banking only on pockets of “good school districts”.
January 28th, 2008 at 12:12 pm
> Trust me, it isn’t about the schools, it’s all about the parents.
Exactly! One of my friends once said “If you move all the educated families from Cupertino, Saratoga, Palo Alto to a crappy place in desert, the API score of that desert will jump way up”.
January 28th, 2008 at 12:22 pm
> California schools mostly suck. That’s not a secret.
It sucks and it will suck big time in future, given the mismanagement and shortfall in state budget. And that is one of reasons it is a gamble to invest on so-called good school districts. Oh, I forgot, those CEO/CFO will save school districts
I have not seen many CEOs sending their kids to public schools. It’s hard to believe that they will be sympathetic.
January 28th, 2008 at 12:52 pm
> Trust me, it isn’t about the schools, it’s all about the parents.
>Exactly! One of my friends once said “If you move all the educated families from Cupertino, Saratoga, Palo Alto to a crappy place in desert, the API score of that desert will jump way up”.
I think we’re all saying the same thing. It’s about the extended educational environment. In the neighborhoods above, it’s more likely you’ll find educated parents who place high value on education, thus your kids will go to school with other kids who come from such families, as opposed to kids who do drugs, join gangs or hang out at the local arcade.
January 28th, 2008 at 12:56 pm
Wow - 47 posts and this thread is still going strong.
Ultimately, as some are now posting, this boils down to investing in X (The Real Bay Area) vs. Y (Other RE like Austin as one poster put it, the stock market, under a mattress, ???). It’s an ROI equation. So, folks like RealEstater and I have been putting forth our thesis on why it makes sense to put money in “The Real Bay Area” given the options on the table. At a minimum, I need to clear the mortgage rate hurdle (let’s say 6% for discussion purposes), but more importantly, I need this investment to produce a better return vs. the alternatives out there.
Obviously, we have a lot of votes for Y, but it’s very strange that, aside from one post on investing in Other RE, we haven’t seen ANY constructive arguments in favor of alternative investments. But yet, this assumption is implicit in anyone who favors Y as renting certainly frees up cash to do something… So, what are examples of that ’something’ that you all are investing in and why?
January 28th, 2008 at 1:36 pm
Steve,
Historically real estate barely keeps up with inflation. So, just like stock market, it’s all about buying it at right time in right location and selling it at right time. That’s how many flipper made money who bought homes five years back and able to sell their homes already. And that’s how many flippers are going to lose money who bought 1 or 2 years back and are struggling to sell their homes. Common-sense says it’s not a good time buy home and think it as a “good investment”. There is a good possibility that the price will fall and there is a very thin narrow possibility that it will appreciate. Just look at Case-Shiller Index.
Basically, this is what you said in the initial post:
“….invest in either an undervalued asset or an asset whose increase in value you can always bank on”.
This is simply untrue in present RE market. Why do you think that your argument is correct when most of the economists are saying otherwise?
January 28th, 2008 at 1:48 pm
> Obviously, we have a lot of votes for Y, but it’s very strange that, aside from one post on investing in Other RE, we haven’t seen ANY constructive arguments in favor of alternative investments. But yet, this assumption is implicit in anyone who favors Y as renting certainly frees up cash to do something… So, what are examples of that ’something’ that you all are investing in and why?
It’s not about having alternate investments. I think we were discussing whether RE is a good investment in present market. When Fed chairman and other experts are using “R” words for US economy, probably stock market is not a good investment either. But your logic is: “if A (stock) is a bad investment, then B (real estate) must be a good investment”. In your logic, showing negative aspects of A (stock) somehow translates to positive for B (real estate). This is simply wrong. You failed to show how RE could be a good investment in present market (without pointing finger at stock market). Is it possible that both could be bad investment at this moment?
January 28th, 2008 at 2:20 pm
Steveo:
There are tons of investments other than housing. I personally don’t consider a house to be an investment, but a place to live in providing that it fits into my finances, which it currently does not in the bay area.
As for other places to invest money, that’s hard, since there is whole stock market, bonds, and such to invest in. I’ve got my money invested conservatively, so that it won’t take too much of a hit in the upcoming recession and it’s yielding me about 6% annually. I was earning around 10% when I was invested into riskier index funds and stocks.
So, the question comes down to where you should put your money in a slowing economy with high inflation? My bet is that commodities and energy companies will do well. Commodities and energy track inflation pretty well, and global energy demand is increasing, regardless of economic downturns, so you should see positive ROI even in a slow economy.
January 28th, 2008 at 2:24 pm
Hm,
I’ve checked around open houses around Cupertino in October, and they were no other visitors except us. Except in one 2m+ house, very nice built and does seem to be a bargain, there is a Google employee negotiating. At that time good houses with a lower price than similar homes were still selling.
So I guess Sunnyvale must be more special or like RealEstater/Steve said: just wait for the Spring!
BTW, my old neighbor just closed a 4/2 house in SJ at $625k, the asking price was $750k (in 2005 I think it would have been $800k, probably even now by “Zestimate” :)). He started negotiation in October, and was the only one submitted an offer. Oh never mind, that is not the real BA.
January 28th, 2008 at 9:05 pm
Here are some facts:
1. Nobody ever rented their way to riches.
2. Nobody ever saved their way to riches.
One can keep renting/saving, and developing a false sense of security. The truth is that such a strategy would never get you ahead of the curve. It’s the old rich dad/poor dad sort of story. To get rich you need to own assets. At this moment, I can’t think of a better asset to own than a Bay Area house. It’s way safer than putting your money in the stock market, and certainly more effective than “safe” investments like a CD. With the Fed lowering interest rates, it doesn’t make sense to be in a cash position. One of the best ways to capitalize on the current economic weakness is to get a deal on a mortgage. Yes, now is the right time to buy even an investment property.
January 28th, 2008 at 9:37 pm
All the same desperate pathetic contentions made by the realtors above have been made about Los Angeles. Today, the median asking price in LA has dropped 102K from peak and it’s dropping like a rock. $1,900/week. Yeah, that’s a terrific investment. It’s good that your kids are getting a good education. They’ll need it to dig themselves out from under the debt you’ve saddled them with. Welcome to the future, real bay area.
PS - at my urging, my brother took a long, sober look at the market and sold his SV house this summer. He took the profits and dropped it into GLD, which has gone from about 700 - 900. (Note: You don’t have to invest in the S&P.) When the appraiser came by, my brother asked him where prices were heading, and the appraiser arced his thumb downwards as a Roman Senator might. As Bill Paxton so eloquently put it in Aliens, Game Over!
January 28th, 2008 at 11:54 pm
> To get rich you need to own assets. At this moment, I can’t think of a better asset to own than a Bay Area house.
RealEstater,
It’s a straw man argument. Nobody here said that people should not own assets. But owning it in OVERVALUED price makes no sense. Bay area home price is overvalued.
Here some facts:
1. In most of the places in bay area the price already started falling dramatically. In some areas slowly.
2. Even if the home value is appreciating in some pockets of bay area, the rate of appreciation is slowing down. It’s very clear that soon the value will remain flat for years. Or, it will start falling in those areas too.
3. Prices are still far too high in relation to local rents and incomes.
4. Case-Shiller Index curve? Downward. Other forcasts about RE market? Bad.
And last but not least:
5. In a market that is both overvalued and oversupplied, prices will decline. After all it is supply-demand market.
January 29th, 2008 at 8:23 am
I’m a young professional right out of college. I cannot afford to buy real estate in California, not when a condo just like my apartment is $390,000. Could I get some fly-by-night to take a chance on me and get me a loan? Sure. I almost did that a year ago (with all the rate cuts since then, glad I didn’t!!). But where am I going to come up with $2300 a month for the mortgage, HOA, insurance, and property taxes? Is this what they mean when they say it takes money to make money? I don’t think so. I think that buying would be positively suicidal.
January 29th, 2008 at 10:11 am
When people say that it takes money to make money, they sure don’t mean getting a huge loan, it means wise investing. One of the few things that I agree with RealEstater about is that you won’t make a lot of money putting it into a savings account, but you also will not make money on an overvalued house, and your jumbo loan does not care that your house loses value.
For example, right now I pay $1400/month to rent a house that Zillow values at $1.04M. With an 80/20 loan @5.6%, my monthly interest would cost $3890/month during the first year. So, I’m renting a place for a lot less than the interest on my loan, and pocketing and investing the rest, even though I can afford to buy such a house. Which is the wiser move, RealEstater? At the rate I’m going, I will be able to buy a house outright in a few years, especially if housing prices decrease, and I had a very good ROI on my savings over the last few years, on par with housing appreciation, it’s just that my investments are appreciating slower now due to the slowing economy while housing prices are falling.
January 29th, 2008 at 1:03 pm
Here is also one fact:
A lot of those on their way to real estate riches are in BK now.
If you have not noticed, just check those real estate tycoons, Tom Wu and such. There was a nice piece from Dr HBB or burbed months back.
January 29th, 2008 at 1:47 pm
Who the heck is Tom Wu?
January 29th, 2008 at 1:55 pm
“1. Nobody ever rented their way to riches.
2. Nobody ever saved their way to riches.”
Oh good lord. I think Warren Buffet (WHO LIVES IN OMAHA FFS) would say otherwise. Jesus christ, if I ever wondered what kind of retard buys real estate in the Bay Area, now I know.
January 29th, 2008 at 4:13 pm
“Here are some facts:
1. Nobody ever rented their way to riches.
2. Nobody ever saved their way to riches.”
Read “The Millionaire Next Door” before you make broad based statements that display your idiocy for all to see.
January 29th, 2008 at 10:52 pm
>>I’m a young professional right out of college. I cannot afford to buy real estate in California, not when a condo just like my apartment is $390,000. Could I get some fly-by-night to take a chance on me and get me a loan?
>>But where am I going to come up with $2300 a month for the mortgage, HOA, insurance, and property taxes?
Sonarrat: You’re right, you’re not ready to buy just yet. Coming out of school, you may not even know where you want to live, where you will be working, etc. Buying a place is an investment, as well as a commitment. Since you can’t come up with the money (and I wouldn’t expect you too), you’re not in a position to take on such a large investment. However, you can still follow real estate, keeping yourself abreast of the market, so that you are well prepared when day comes to buy.
January 29th, 2008 at 11:02 pm
Malcolm,
Actually, there are plenty of millionaires “next door” to me, because they are home owners in the Bay Area! While you are toiling away each day, enduring long commutes, trying to out-do your co-workers and impress your boss, all they did to become millionaires is simply by living in their houses.
January 29th, 2008 at 11:31 pm
mtv-renter :
>>One of the few things that I agree with RealEstater about is that you won’t make a lot of money putting it into a savings account, but you also will not make money on an overvalued house, and your jumbo loan does not care that your house loses value.
Just because something is expensive doesn’t mean it’s overvalued. It could be because it’s highly valued. For example, I consider many houses in non-real Bay Area neighborhoods overvalued at $600K. You see those junks on Burbed all the time. However, if you find something in Palo Alto/Los Altos/Menlo Park/Cupertino (”real” Bay Area) in the low $1million range, it can very well be a bargain, and these homes are in fact highly saught after.
>>So, I’m renting a place for a lot less than the interest on my loan, and pocketing and investing the rest, even though I can afford to buy such a house. Which is the wiser move, RealEstater? At the rate I’m going, I will be able to buy a house outright in a few years, especially if housing prices decrease
You should consider renting as your temporary strategy (and I think you do). At the same time, don’t deceive yourself by comparing renting to buying. Every penny you spend on rent is throw away money. You can never recover any of it, let alone getting a return on it. The above argument (that renting is cheaper than owning) held true 10 years ago, and you don’t need me to tell you which way came out ahead. In addition, don’t forget to take taxes into the equation. You can either pay for mortgage, or pay taxes.
Final point: Unless you’re in retirement age, you should never pay for your house outright. You would lose the two major benefits of real estate investing: 1)Tax shelter 2)leverage. Having a mortgage is considered “good debt”. It will even improve your credit score.
January 29th, 2008 at 11:56 pm
> Actually, there are plenty of millionaires “next door” to me, because they are home owners in the Bay Area! While you are toiling away each day, enduring long commutes, trying to out-do your co-workers and impress your boss, all they did to become millionaires is simply by living in their houses.
RealEstater,
Remember that Japanese woman I mentioned in one of the earlier posts?
January 30th, 2008 at 12:08 am
> Just because something is expensive doesn’t mean it’s overvalued. It could be because it’s highly valued.
Well, Larry Ellison’s house could well be considered “highly valued”. But average middle class people should not care about those houses. An average middle class person should not buy a million (or multi-million) dollar house and stretch himself financially when rent is much much lower in comparison. Period.
January 30th, 2008 at 12:14 am
> For example, I consider many houses in non-real Bay Area neighborhoods overvalued at $600K. You see those junks on Burbed all the time.
And who are the people who convinced those poor guys to buy those junks and told them that someday their houses are going to be million dollar too?
Let me try to guess…..
(after a long thought)
Someone who told “Home price always go up”?
Someone who told “They aren’t making any more land”?
Someone who told “Don’t get priced out forever”?
Am I guessing right?
January 30th, 2008 at 12:28 am
> The above argument (that renting is cheaper than owning) held true 10 years ago, and you don’t need me to tell you which way came out ahead.
Not true. In 1997 the median price was about $350K. Rent similar home would be around $1300-$1500.
Now, Median is well above $800K when a single family house can be rented in $2000.
January 30th, 2008 at 12:31 am
> Every penny you spend on rent is throw away money.
And how exactly paying interest is not throwing away money?
January 30th, 2008 at 12:38 am
> 2)leverage. Having a mortgage is considered “good debt”. It will even improve your credit score.
Yes, I agree. That’s the strongest point I found so far in favor of buying a home. I am convinced…at last. I am going to buy an OVERVALUED asset (which will start depreciating soon) and pay for it for next 30 years - just to increase my credit score!
Rich people got to be very dumb, because they always buy assets in cash. No credit score. What a loser!
January 30th, 2008 at 1:43 am
Real Estater Says:
> You should consider renting as your temporary strategy (and I think you do). At the same time, don’t deceive yourself by comparing renting to buying. Every penny you spend on rent is throw away money.
I absolutely disagree with this, which is why I posted numbers. Interest on my loan is money that I throw away as well, I will never see it return. Right now, I’m throwing away far less on rent than I would be on a loan. If you factor that the loan would net me a tax savings of about 35% of the annual interest, I’m still throwing away far less on rent without any sort of deduction (about half as much). In the end, I am saving and investing far more per month than I would be paying principal, so I am building equity faster. I’m also not heavily leveraged. In an 80/20 loan, if the house loses 5% of its value, I actually lose 25% of my down payment, since the loan does not decrease by by 5% (yes, leverage also has upsides in an up market).
While houses in Palo Alto or Los Altos hold their value, that’s fine by me, since, as I said, a house for me is a place to live, not a place to invest. If I was buying right now, of course I would choose one of those areas, but remember this prediction; those prices will come down as well. They are disconnected from fundamentals. The bay area has a lot of wealth, yes, but this wealth also relied on heavy debt to buy these houses and may not be able to cover it.
January 30th, 2008 at 9:43 am
Pralay:
>>But average middle class people should not care about those houses.
It depends on whether one wants to stay as average middle class, or become a millionaire home owner.
>>And how exactly paying interest is not throwing away money?
Interest is your tax shelter. It’s money you would’ve given to the government anyways.
>>I am going to buy an OVERVALUED asset (which will start depreciating soon) and pay for it for next 30 years - just to increase my credit score!
I can just about guarantee you no real estate in the Bay Area will depreciate for the next 30 years. You will only see fluctuations in the short term. Even if you buy an overvalued asset today, you will still make money.
January 30th, 2008 at 9:48 am
mtv-renter:
Don’t be a career renter! Your point about interest on loan is answered in my last post. I’m not saying you won’t make progress by saving money, it’s just way too slow. Where can you invest now that gives you both yield and stability? I hope it’s not the stock market. Did you check the price of VMWare and Google lately?
January 30th, 2008 at 10:52 am
> It depends on whether one wants to stay as average middle class, or become a millionaire home owner.
RealEstater,
People should buy asset (car, house or whatever) within their means. People should buy house FOR THE PURPOSE LIVING. People should NOT buy home to get millionaire. If someone’s home appreciates from $100K to million dollar, of course this is a good investment. But AT THE TIME OF PURCHASE, the buyers should not take it granted that it will appreciate and become a million dollar home.
The whole subprime crisis is result of this - you guys pushed too many people to buy something outside their means showing pipe-dreams that someday THEY ALL ARE GOING TO BE MILLIONAIRES. You know what, when you guys start showing those rosy pictures based on lies (home value never drops, it will appreciate 10% per year, rental is throwing away money etc), they make stupid decisions and buy outside their means. And this exactly what happened. Just look at this two monkeys from Real Estate Industry about 2007 housing market prediction.
http://www.youtube.com/watch?v=yoZV5jt9puc
These Real Estate guys know nothing about economy. They want transactions to go through get 2.5%-3%-6% commission out of it - it is as simple as that. They will do anything do get it - even if showing people pipe-dreams and pushing people to buy assets outside their means.
January 30th, 2008 at 10:53 am
> Interest is your tax shelter. It’s money you would’ve given to the government anyways.
Bullshit! Another poster mtv-renter already showed how your calculations are wrong.
January 30th, 2008 at 10:57 am
> I can just about guarantee you no real estate in the Bay Area will depreciate for the next 30 years. You will only see fluctuations in the short term. Even if you buy an overvalued asset today, you will still make money.
I can guarantee that after the big correction (in next 2-5 years) the real estate in Bay Area will barely keep up with inflation in next 30 years. Just look at the historical data for long term home values.
January 30th, 2008 at 2:33 pm
“Actually, there are plenty of millionaires “next door” to me, because they are home owners in the Bay Area! While you are toiling away each day, enduring long commutes, trying to out-do your co-workers and impress your boss, all they did to become millionaires is simply by living in their houses.”
Asinine comment from a deluded individual.
I rent in Saratoga, Carnac. My commute to Cupertino where I work is about 10 minutes. The people I know who own show up FAR later at work than I do largely in part to their LONG commutes.
Oh, and to the comments made in regards to Los Gatos real estate “not dropping”, I live right next to Los Gatos. Guess what: prices are DROPPING. I see a myriad of “Price Reduced” signs all over the place. The reason that the median price is holding up is due to the fact that only the higher priced homes are selling. Check out the condo and townhouse prices in Los Gatos for a real eye-opener. Better yet, log onto RealtyTrac and check out the foreclosure listings.
One final note: to the poster that indicated that real estate is a “better” long term investment than other asset classes really needs to pick up a book.
Historically, real estate has been the LEAST performing asset class relative to others. You can verify this in just about any book on fundamental economics. And no, I don’t mean books written by David Lereah.
Stocks have historically (over a 100 year period) averaged annualized rate of return of 11%. Bonds historical rate of return is 6% annualized. And real estate? Well, hold onto your hats partners. It registered at a whopping 3.7% annually. And these stats came from someone who went back in records in certain areas for 350 friggen years. So find any NAR stat that long term.
I agree with a poster before me (Pralay). Not only do I think that Bay Area real estate will be a bad investment over the next 2-5 years, I actually think it will be a HORRIBLE investment based on historical data. Anybody that bought in the last two years or is planning on buying in the next three years will likely NEVER break even. Ever.
Remember folks, we only have one frame of reference for a real estate bubble of this magnitude. And that is Japan. Which has been in a spiralling real estate downtrend for over 15 years! And I do love how the NAR and those with vested interest in real estate spin the fact that “the USA is not Japan”. Well, they are right. Japan has no budget deficit and it’s population does not live under a mountain of debt. Two things that are not going to help real estate prices moving forward.
January 30th, 2008 at 3:15 pm
Oh, I forgot to mention something to the deluded realtor: I AM a millionaire. And all I had to do was get copious stock options tossed my way and cash them out. Happened during the dot com era. And like many a moronic stock analyst of those days was saying, stocks can only go up! Well, we all see how that turned out. But hey, real estate is different, right? It’s the “new economy” afterall….
January 30th, 2008 at 3:30 pm
Malcolm:
With 11% annual return in stocks, how many years will it take for you to catch up to the 300% return yielded by Bay Area real estate in the past 10 years?
Your 3.7% figure for real estate includes places like Iowa, Nebraska, North/South Dakota, Montana, etc. We’re not talking about those places. They don’t have Silicon Valley, and they don’t have our weather. If you focus on the Bay Area for a moment, you’ll find that on the average Bay Area properties double in price every 10 years, without exception. It will surely double again, and it doesn’t matter what happens in the next 2-5 years. So far, you have not been able to explain what would be the drivers for lower prices; you’re just making a claim based on your own guess.
One other comment about rents. Over time, rents will increase. However, if you have a fixed rate mortgage, your housing expense will not go up with inflation. Most people I know who bought say 10 years ago, are paying less for mortgage than what it would take to rent the house. In other words, the cost advantage of renting is only short term. Renting is like leasing a car. At the end of the day, you get nothing.
January 30th, 2008 at 3:44 pm
Tom Vu.
Oops.
January 30th, 2008 at 4:14 pm
RealEstater, I think you have gotten caught up in the bubble runup mentality and you’re not objective in predicting future trends, and you are ignoring past history.
First of all, prices have gone down in the Bay Area. San Jose experienced a 38% drop in the early 1990’s, other cities performed similarly. There are places rich people congregate where prices drop less, but those also have an upper bound on growth potential, since at some point, the housing becomes overpriced, even for people who can afford the prices. A house price is based on the value of the land, the value of the house, and the expected gain due to future appreciation. As houses get more expensive, most people (not you) see less upside potential, so they are less willing to consider the house as a speculative investment.
You make the statement “on the average Bay Area properties double in price every 10 years, without exception”. This is flat out false. They have increased tremendously due to cheap credit and speculation post 2001, but the financial conditions which made that possible no longer exist. Credit is harder to get, speculators are in trouble. Consider for a second what you are saying; if houses double in price every ten years without exception, that means that during a 30 year loan, they would double three times; 2*2*2 = 8. Do you honestly think that an $1M house would cost $8M 30 years from now? $32M 50 years from now? No way, man. Where’s this money going to come from? Google and VMWare won’t be around forever, and only their early employees made a pile of cash, and there aren’t very many of those, numbering maybe 5,000 total. Most of the buyers who drove up prices did so with cheap credit and speculation.
Yes, you are right, rents go up over time, loan interest goes down. You can easily express the expected cost of renting and investing versus buying and appreciation, and there are times when it makes more sense to buy, and times when it makes more sense to rent. Right now, the balance is on the renting side in the bay area, other cities are different. I refer you to the fantastic NY times rent vs own calculator. I could go through the math here, but they did it with nice pictures and sliders: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=3&th&emc=th&oref=slogin&oref=slogin&oref=slogin
For your reference, a doubling of price every ten years assumes a 7.1% annual appreciation, which is out of the realm of the possible outside of a bubble environment, which is ending now.
January 30th, 2008 at 4:26 pm
“With 11% annual return in stocks, how many years will it take for you to catch up to the 300% return yielded by Bay Area real estate in the past 10 years?”
Easy. By simply waiting for that 300% increase to erode over the next 5-10 years until it normalizes into a rate of return that matches the historical norms. In 2000, I could have easily used the same logic you are applying by stating that “how can your measily 10% returns in real estate match my grandious 500% return in E-Bay?”. A dumb statement utterred during the dot com era that merely morphed into a similar catch phrase for use by the realtor establishment.
“Your 3.7% figure for real estate includes places like Iowa, Nebraska, North/South Dakota, Montana, etc. We’re not talking about those places. They don’t have Silicon Valley, and they don’t have our weather. If you focus on the Bay Area for a moment, you’ll find that on the average Bay Area properties double in price every 10 years, without exception.”
Oh really?
You may want to check out these charts that burbed linked to a while back:
http://www.burbed.com/2007/02/16/how-the-bay-area-caused-home-prices-to-go-up-nationally/
Seems like those prices over a long period of time were yielding diddly squat, except for the recent, and all to obvious “bubble”.
And incidentally, you are wrong. Prices in the Bay Area have NOT doubled consistly every ten years forever. How do I know? Simple. Because wages did not double every ten years in the Bay Area. Housing in the Bay Area, while more expensive than the rest of the nation, merely reflected the higher rate of wages that this area was paying. And while wages essentially peaked since 2000 and have actually been stagnant, real estate skyrocketed. Why? Simple. Larger and larger mortgages. (Perhaps you’ve been reading the news about that “problem”.)
“One other comment about rents. Over time, rents will increase. However, if you have a fixed rate mortgage, your housing expense will not go up with inflation. Most people I know who bought say 10 years ago, are paying less for mortgage than what it would take to rent the house. In other words, the cost advantage of renting is only short term. Renting is like leasing a car. At the end of the day, you get nothing.”
You really are making this too easy for me. Renting is burning money and so are INTEREST PAYMENTS. Nobody here says that buying a home 10 years ago was a bad idea. They are saying buying a home DURING THE BUBBLE ERA was a bad idea.
I have friends that bought homes as much as five years ago and STILL pay more for mortgages and property tax than most pay in equivalent rent. Rents declined for almost 6 years after the dot com era while housing skyrocketted. As it stands, yearly rents are between 2-3% of the purchase price while even with reduced mortgage interest rates, home ownership is between 7-9% of the purchase price. So it costs almost three times as much to buy a home than to rent.
I know many will ask why I am bothering to converse with a realtor troll looking to assert himself. (Or herself) But it is not for their benefit, it is for the benefit of those who might be reading this page and wondering how to invest their hard earned money. So don’t take either mine or the realtors advice. Just do the math. And if you want an excellent frame of reference, here is an outstanding rent versus buy calculator:
http://www.dinkytown.com/java/MortgageRentvsBuy.html
Give it a try. I am certainly not afraid of the numbers it will produce. I am wondering if the realtor is as confident. Of course, with their spin tactics, the crack house in East Palo Alto is not a decrepid shack, but a great first time home and fixer-upper!
January 30th, 2008 at 4:29 pm
Just as an FYI - some messages are getting stuck in the moderation queue for a few hours, due to number of links posted.
I have no problems with bunches of links being posted - I’m just saying that if you do, expect your post to delay showing up.
Now, back to the thread!
January 30th, 2008 at 4:49 pm
> So far, you have not been able to explain what would be the drivers for lower prices; you’re just making a claim based on your own guess.
Supply-demand. Supply is soaring and demand is going down.
Let me ask you a counter question. What is the basis of your guesswork that home price will double in next 10 years? What kind of inflation adjusted historical data you are taking about?
January 30th, 2008 at 4:57 pm
> Your 3.7% figure for real estate includes places like Iowa, Nebraska, North/South Dakota, Montana, etc. We’re not talking about those places. They don’t have Silicon Valley, and they don’t have our weather.
RealEstater,
If you want to isolate bay area data from rest of USA, what stops you doing same from stocks? Actually some stocks are better than others and return is lot higher than 11%. What if someone bought Google stocks in 2004?
January 30th, 2008 at 5:06 pm
BTW, this is the chart I found for inflation adjusted home price for SF metropolitan area.
http://mysite.verizon.net/vodkajim/housingbubble/san_francisco.html
It’s very clear that RealEstater does not know anything beyond last 10 years.
January 30th, 2008 at 11:11 pm
mtv-renter:
>>if houses double in price every ten years without exception, that means that during a 30 year loan, they would double three times; 2*2*2 = 8. Do you honestly think that an $1M house would cost $8M 30 years from now?
That sounds about right, give or take a million. You don’t believe it? I’ll give you some real life examples.
- My next door neighbor is in their 80’s. They bought their house in 1957 (5 decades ago) for $30K, which was already at the higher end of the market. Let’s do some math here: 30*2*2*2*2*2= 960K. I can tell you their house is worth much more than that.
- My parents bought their house in 1978 (3 decades ago) for $100K. I should note this is in Southern California, nevertheless, the results are similar:
100*2*2*2= 800K. This is just about how much their house is worth.
January 30th, 2008 at 11:22 pm
Pralay:
>>Let me ask you a counter question. What is the basis of your guesswork that home price will double in next 10 years?
Supply and demand. Supply in the Bay Area is limited. This is not a secret. Bay Area is land locked, and fully built out. The only way to build new houses is to tear down an existing one.
Demand, on the other hand, is ever increasing, due to many reasons, such as: growth of Silicon Valley, immigration, attractive weather, etc….actually, just ask yourself why you’re here.
One fundamental concept about real estate is that home appreciation is driven by demographics. In states like California, the population is projected to increase at a higher rate than the housing inventory can accomodate. In places like Iowa, Wyoming, Nebraska etc. there is no such trend, so home prices stay stagnant for long periods of time.
January 30th, 2008 at 11:36 pm
Malcolm:
>>Oh, I forgot to mention something to the deluded realtor: I AM a millionaire. And all I had to do was get copious stock options tossed my way and cash them out. Happened during the dot com era.
Your formula for success is not repeatable. It’s just luck from a one time event. Home ownership does not require such luck. All home owners who bought 10 or more years ago are sitting pretty today. Yes, ALL. Everyone won the prize.
Secondly, your method is inefficient. If you cashed out $1 million in stock options, you end up getting only $500K. If your home appreciated by $500K, you get to keep every penny, because there is no tax on the first $500K for couples.
January 31st, 2008 at 9:04 am
“Your formula for success is not repeatable. It’s just luck from a one time event. Home ownership does not require such luck. All home owners who bought 10 or more years ago are sitting pretty today. Yes, ALL. Everyone won the prize.”
Really? So in other words, there are NO companies in the Bay Area (hint: Google, VMWare, Apple) that are likely to make people handsome returns in the near future? Last time I checked, the true wealth of Silicon Valley is not attributed to real estate, but to the companies that reside here and the profits people have incurred working and investing with them. Or am I wrong and did Steve Jobs, Larry Ellison, and a myriad of others merely make their wealth investing in real estate?
And how about those people who bought homes 5 years ago or less with interest only, negative amortization loans? How are they doing? And clearly the 300% returns you tout over the past 10 years of real estate IS repeatable, right? People that buy now will have homes three times as expensive as they are now in 10 years? Seriously dude, are you just trying to troll or are you actually this ignorant?
“Secondly, your method is inefficient. If you cashed out $1 million in stock options, you end up getting only $500K. If your home appreciated by $500K, you get to keep every penny, because there is no tax on the first $500K for couples.”
Actually, I cashed out $2.3 million in stock options. And I am not sure who does your taxes, but the last time I checked, my capital gains tax rate was not 50%. And in actuality, because a lot of my profits were through exercising and holding ISO stock options, my federal capital gains tax was the standard 20%.
Care to try again there, Sparky?
You know, I had previously been indifferent to the people who made stupid decisions with real estate and are now in dire straights because I felt they should be completely accountable for their actions. But when I read RealEstater words, I have to rethink my view. If he is knowingly spreading this propaganda and false rhetoric to individuals who are counting on him being truthful, than I have to lump realtors into the group of people that need to be held accountable for this debacle. I am sorry, but in any other profession, if an individual outright lies and skews data to fit their agenda, they are usually dealt with rather severely.
January 31st, 2008 at 10:01 am
Something interesting I noticed.
Why is it everytime that myself or some of the other posters on this board make a point, we can site example and link to actual data sets while the realtor can only give us examples of people “he knows”, i.e. friends, family, etc. as justification for his conclusions.
Well hey, if its that easy. Hey realtor! My sister’s cousin’s nephew’s spouse’s former roomate made 500% returns this year on Gold stocks. So clearly, gold stocks are the road to riches!
January 31st, 2008 at 11:07 am
RealEstater says:
> “- My next door neighbor is in their 80’s. They bought their house in 1957 (5 decades ago) for $30K, which was already at the higher end of the market. Let’s do some math here: 30*2*2*2*2*2= 960K. I can tell you their house is worth much more than that.
- My parents bought their house in 1978 (3 decades ago) for $100K. I should note this is in Southern California, nevertheless, the results are similar:
100*2*2*2= 800K. This is just about how much their house is worth.”
RealEstater,
It is intellectual inability or intellectual dishonesty? Why are you not taking inflation into account?
Why don’t you adjust the price with this inflation calculator and let us know the exact number?
http://www.westegg.com/inflation/
There are two happened in bay area in last 10 years. One, housing price appreciation from 1998 to 2001 due to job growth (that’s why nobody label that appreciation as “bubble”).
Two, then from 2003-2005 housing price appreciated due to NINJA loans and irrational speculation.
So, I won’t be surprised if your next door neighbor home comes to 1997 level, if you take the inflation into account.