A guide to the different parts of the Bay Area
Thanks to Stevo for finding this. For those who are unfamiliar with our fine fine home of Silicon Valley, this should help you learn the basics of what’s what.
expensive - Saratoga, Los Gatos, Los Altos, Los Altos Hills, Palo Alto, Menlo Park & Atherton
moderately expensive - Almaden Valley, Cupertino, Sunnyvale and Mt View
moderate - Santa Teresa, Evergreen, Berryessa, Milpitas, Santa Clara, Willow Glen, Blossom Valley, Cambrian and Campbell
affordable - Central, South and East San Jose
South County - Morgan Hill, Gilroy and San Martin
townhouse/condo - is for the moderate priced areas listed above.
Alright! With that part over, let’s take a look at the numbers that go with those designations:
I like how the numbers are only called out for expensive. Well, that makes sense - look at how cheap the yellow one is for mod: just $625k by my judging.
So… do you feel insulted based on these classifications?
May 10th, 2008 at 10:44 am
This is correct, Saratoga, Los Gatos, Los Altos are the only places worth living in. The rest are all ghettos. Even Palo Alto and Atherton are forgettable places. They are expensive only because VC types and rich CEOs live there.
May 10th, 2008 at 11:15 am
> Even Palo Alto and Atherton are forgettable places.
This is absolutely untrue for Atherton. Atherton (coupled with Hillsborough) probably has the most expensive and beautiful houses in the bay area.
Palo alto comes nowhere close to Atherton. They should not be clubbed together in the first place.
May 10th, 2008 at 2:52 pm
RBAers, welcome to your future… care of Diana Olick:
Existing home sales in Greenwich are down 37.5 percent in March from a year ago and prices are down 13.7 percent. Compare that last one to the nationwide price drop of 7.7 percent in March. What’s even more disturbing, given the median income of the typical Greenwich homeowner (I don’t know what it is, but it’s a LOT), the number of Greenwich foreclosures in March was twice what it was a year ago.
For those of you that live outside the Manhattan beltway (the tri-state area), Greenwich is where Wall Street money-movers aspire to park their Maybachs. It is chock full of stone mansions, endless lawns and big, big gates. So when I see stats such as these, I have to wonder.
Yes, jumbo loans are now far pricier than conforming and banks are requiring much bigger down payments on those loans. But I always think of Greenwich as the kind of place where most buyers don’t need something as prosaic as a mortgage; they just pay cash. It’s the kind of place where listings don’t include the price, because if you have to ask…
If Greenwich is falling, perhaps the super-rich are not so immune to this housing crash as we’ve been saying all along.
May 10th, 2008 at 3:15 pm
I keep joking that the Real Bay Area will eventually be just a block in Palo Alto, but this proves it to be true soon enough. I grew up in NYC metro and what Lionel says about Greenwich is absolutely correct. And San Mateo Homesellers in Trouble did have a mention of an Eleven million dollar foreclosure.
The real estate industry would have us believe that prices never, ever, ever go down. But the graph above shows prices going down now in all but the most expensive sector, and from 2000-2002, there was a huge correction. At some point the kool-aid will wear off.
Until then, someone is going to pay $1.1 million for a light and bright garden shack.
May 10th, 2008 at 3:22 pm
Bah, Greenwich. It’s not a surprise. Those guys were always full of funny money and the people there aren’t smart. How are they adding value to the world, like Facebook and VMWare are?
I suspect Greenwich is going to go the way of Detroit and be just more flyover country. I bet the sushi there is terrible too.
May 10th, 2008 at 5:23 pm
Hmm… Well the Prime and Option arms will reset next year and then the top end of the market will pop. How do you think anybody affords those million dollar homes except with negatively amortizing loans?
May 10th, 2008 at 5:25 pm
Hey kids, what time is it? It’s DataQuick Mercury News sales update time!
Once again, here’s the zips with price increases from the same week last year. Suprises are in bold, with comments why.
City ….. Zip … Median …. %chg $/sf .. #sls %chg
Cupertino 95014 $915,500 3.4% $599 42 -40.0% The surprise is how little it’s up, and check out that median. That’s way down from last month.
Los Altos 94024 $1,875,000 19.0% $871 17 -45.2%
Los Gatos 95030 $1,800,000 12.9% $675 11 -57.7%
Los Gatos 95032 $1,105,000 6.8% $552 20 -64.9%
Mountain View 94041 $1,080,000 33.7% $582 10 0.0%2nd week in a row where 94040 is MIA and 94041 takes its place
Palo Alto 94301 $1,177,000 32.2% $866 11 -52.2% but 94306 is down -25%
San Jose 95118 $670,000 0.4% $440 30 -23.1%85/Branham area
San Jose 95125 $858,750 15.1% $481 51 -23.9% Willow Glen
San Jose 95129 $895,000 9.3% $550 23 -43.9% West side/Cupertino SD. Median is down from last month.
San Jose 95131 $576,500 9.8% $396 21 -36.4%North SJ mostly bet. 880-680, Trade Zone & 101
San Jose 95138 $1,225,000 33.2% $405 13 -50.0% East of SJ 101/85 interchange
Sunnyvale 94087 $961,250 3.9% $620 39 -13.3% 94087 is clearly slowing down from last month.
Sunnyvale 94089 $714,000 3.1% $440 14 -46.2% The surprise is that 94089, which is industrial north, is increasing almost as fast as 94087, which is the best part.
And now, the zips with increasing sales volume:
San Jose 95121 $495,500 -18.8% $325 30 30.4% East SJ - 101/Capitol
Yup, that’s it. 2 more zips are flat (94041 & 95119, west of 95138) and everything else is down, mostly down more than 30%. NOTHING is down by single digits.
May 10th, 2008 at 6:36 pm
downside,
You’re right. Alt-A and option ARMs are/were more prevalent in the Bay area than subprime, mostly because of relatively higher median income.
And some mortgage brokers are still attempting to dump “stated income” loans (euphemism for liar loans) on some borrowers, with a relatively higher interest rate. I know this because, some people forward this kinda Ads in our internal company mailing lists.
Nothing much has happened here in terms of resets, yet.
Neither there is any big job loss in the tech sector.
But the home price/sales are still dropping in most areas. And that tells you something.
May 10th, 2008 at 10:12 pm
Richard’s graph is pointing out that luxury areas have not suffered depreciation. It’s the old saw about location, location, location. We see the same sentiment on the bubble blogs when posters argue about how the more desirable parts of Temecula have held their value.
What kills me is opening the San Jose Mercury and seeing full page ads from builders touting stated income, no money down, and neg-am financing as they attempt to shift the glut of overpriced new homes built on postage stamp lots. Obviously no lessons have been learned about shoddy financing practices.
May 10th, 2008 at 11:20 pm
The chart shows the same thing I’ve brought up before: Buy the management class neighborhoods. Be where the money is, and don’t argue with money!
May 10th, 2008 at 11:46 pm
Burbed (and others waiting for a housing price “correction”),
I have a question for you:
The primary premise I have seen for why folks expect housing prices to correct is that people don’t have sufficient income to service their mortgage debt at the current home valuations.
However, anecdotally I know of many people in the Bay Area who have received several hundred thousands of dollars in stock option grants in the last decade. They use substantial portions of it as a down payment that leaves them with a serviceable mortgage given their incomes.
The question then is this:
Is it possible that these folks represent a large enough fraction that they can support current prices or let them drop only 10-20% (as opposed to the 60-70% some here seem to expect)?
Is it truly different now from the period upto a decade ago. Perhaps till then lay employees didn’t get the large option grants - with the companies’ profits going to the investors, whereas now more goes to the employees?
Does anyone have data of asset (not income) distributions for Bay Area towns?
May 10th, 2008 at 11:47 pm
This graph is a story of four guys. In 2006, the “mod-exp” guy laughed at “mod” and “affordable” and called them losers. In 2007-2008 “expensive” laughed at “mod-exp” and called him loser.
And we laugh at all four guys, because “expensive” is on other three guys way too.
There are some interesting points to note from this graph.
1. If you read older summary pages from Creekside Realty (from 2005, 2006, 2007), they never categorized bay area like this before. I think it is an effort to show that not everything in bay area is all that bad. Some areas are doing pretty good. Hence no reason to be disappointed. He he!
2. Due to this categorization, this graph also revealed another interesting thing. Till March 2000, the appreciation in expensive area was much faster than mod-exp, mod and affordable areas. Drop was also much fast and hard in next 18 months, till Sept 2001 (from $1.425mil to $973K).
3. What this graph does not tell is that the drop in the volume of sales. These graphs shows March year-to-year change in four cities in “expensive” areas. Adding up the numbers from all four cities and comparing between 2007 and 2008: inventory increase from 174 to 201 and sale volume drop from 126 to 71. Due to this nearly 50% sale volume drop, the median price of expensive area could well be skewed - just like it was for moderate and affordable areas for a while in past.
May 10th, 2008 at 11:57 pm
<i.However, anecdotally I know of many people in the Bay Area who have received several hundred thousands of dollars in stock option grants in the last decade.
————
Name,
Are they already homeowners after using their stock options for buying McMansions? Or are they still looking for homes and keeping the housing market in bay area floating?
May 11th, 2008 at 12:51 am
Pralay, if you read Richard’s summaries, you will see that he has been noting the disturbingly low number of transactions every month for more than a year. He’s not looking for a silver lining, he’s simply presenting the facts. Since the subprime meltdown, the “affordable” sector has been hit hard while the luxury market has remained relatively steady. It’s a new phenomenon, hence Richard is presenting data in new ways. You can see volume right here, no spin:
http://www.creeksiderealty.com/bay_area_real_estate/statistics_graphs/houses.htm
Name, the number of folks cashing in hundreds of thousands of dollars worth of options is negligible over the entire county. It’s just not significant, especially since it pales in comparison to the number of homeowners who took advantage of the bubble to pull out hundreds of thousands in paper equity which has now left them with no equity or upside down.
May 11th, 2008 at 1:04 am
I think it’s reasonable to think that a great many white-collar workers have stock options, but it’s unlikely that more than a very small minority had a volume that took them into down payment territory.
It’s also possible that income numbers are skewed low: they all seem to be at least several years old.
May 11th, 2008 at 1:17 am
Income is in the crapper. I know several guys 40-60 who have been unable to replace their old 6-figure jobs. Behind all the “encouraging” statistics on job creation lurks the awful truth that service sector jobs don’t pay nearly as well as all the professional jobs that left town when the factories left town. It isn’t just the line workers, high paying management and engineering jobs leave, too. The effect of this outflow would have been obvious a lot sooner except that many of these professionals took advantage of paper gains during the housing bubble to make up what they thought were temporary gaps in their income. Now reality is starting to set it and it’s scary.
May 11th, 2008 at 5:41 am
Pralay and Frank Jewett,
My social circle includes ~100 people in my age group which is mid-30’s. A fraction (~3/4) live in homes they own. I know about 1/4 well enough to know about the finances. In virtually every case, they bought with small down payments.
With both spouses being white collar and working throughout their 20’s and early 30’s (or until they had their first child), almost all of them have managed to pay off their 2nd mortgage (which typically had a high floating interest rate). Some used stock option money, some had higher incomes, some just scrimped and saved.
Over the years, they have continued to get increasingly large grants of stock options as they have climbed corporate ladders, some at the same company they joined during the dotcom boom, others by switching companies or even fields. However, a large fraction have options that they have sold or still hold worth multiple hundreds of thousands. Although this group may represent a small fraction of the country, they may represent a large fraction of homeowners/buyers in the nicer Bay Area towns - I don’t know, which is why I’m asking here about asset distribution *data*.
Those who have sold have down a variety of things with their money - some paid down the mortgage further, some saved in Treasuries for when they plan to move to larger homes, some invested in real estate in non-bubble markets that continue to hold up fine, a few invested in the market and lost their shirts.
Regardless, the point is that these folks have (i) paid down a large part (20-100%) of their mortgage over the last 5-10 years (since they bought at different points in time), (ii) continue to have large sums, (iii) have significant equity growth in their current homes, (iv) are interested in moving up to better neighborhoods and bigger homes, and (v) make up a large fraction of my social circle despite the fact that few of them come from particularly privileged backgrounds.
I’m hypothesizing that the assets that the line worker in tech over the last decade may have gone up substantially (as opposed to the pattern in other industries where the gains mostly went to the financiers and investors). How do the folks here know this isn’t true? All my experience with homeowners in the Bay Area points to it. If you think my social circle is particularly lucky, I’d like to hear demographics of yours.
May 11th, 2008 at 8:27 am
Several of my Willow Glen neighbors have paid off their houses completely. They never had any options to cash. One bought 20 years ago. Another bought a duplex 10 years ago and used the additional rent income to pay down the mortgage.
Pre-bubble, there were lots of ways to make it work. Now people talk about “going public” because it’s the only route left, but not enough people are “going public” to support the entire county. Someone with $200,000 in stocks isn’t going to reinflate North Valley or Cambrian, they are going to add to the inflation in Mountain View and Cupertino. That’s why we’re seeing a gap between highly desirable areas toward the peninsula and the rest of the county.
Even those who do have $200,000 worth of stocks could be in trouble if they purchased in the $800,000 to $1M range because their carrying costs are huge. The Arcadia blog does a nice job of breaking out not only the down payment required but also the total monthly payment and the salary needed to support that. As an example, here is a $748K property. The down payment is about $150K, but the required income is $187K.
http://www.arcadiahousingblog.com/2008/05/02/under-750k-in-peacock-village/
May 11th, 2008 at 10:36 am
In my circle I don’t know any people who have bought in the 2000 –2006 period, except one family, who are extremely concerned about the fallout of their neighborhood choice on the kids’ schooling.
They’re all either tech or healthcare, >150k joint income, but fairly recent CA transplants, no one before 1995.
One family did buy in Central Valley recently, but that doesn’t count… in any case their income is >300k & it wasn’t a stretch for them.
I’ve had stock option grants at every company I’ve worked for, as has my husband, & I would assume that this is normal.
May 11th, 2008 at 10:44 am
I should say, the tech people I know were active during the dot com boom & probably did cash out significantly… but among the few I’ve talked to in this detail, they don’t want to tie themselves down to a house in this market.
May 11th, 2008 at 10:44 am
I should say, the tech people I know were active during the dot com boom & probably did cash out significantly… but among the few I’ve talked to in this detail, they don’t want to tie themselves down to a house in this market. We’re all from elsewhere and need to stay fairly mobile.
May 11th, 2008 at 11:36 am
Most of my friends entered the Tech job market in 1999-2002. %75 of them own condos, a few own houses.
With big student loan debts, a family, I feel priced out forever.
May 11th, 2008 at 6:13 pm
That’s the basic problem with set of people in their late 30s, to which “Name” is referring.
Most of them entered the tech market during or before the bubble time. They made tons of money during with options before 2001.
Many people do have a few options now. But with the bubble money gone, they will never make as much money as their predecessors did with options. Salary is their biggest support.
But people in “Name”s group don’t care to understand that.
It’s absolutely presumptuous to think every software engineer is making 100,000 every year just with options.
May 11th, 2008 at 8:05 pm
There’s another question, which is: we’ve heard the 200k in assets number before… is that 200k is truly liquid, or is it in 401k & 529? If it’s the latter… it doesn’t seem the same to me as cash in CDs or a money market fund.
May 11th, 2008 at 8:47 pm
I personally don’t know of anyone who makes less than 100.000 a year.
May 11th, 2008 at 9:21 pm
I personally don’t know of anyone who makes less than 100.000 a year.
Oh, now this is interesting. Any software engineer, or anyone, period?
When I was interviewing for my current job, the HR rep told me how much she made as a contractor. It was way up there.
May 11th, 2008 at 9:40 pm
Renter4,
You mentioned that you and your husband get stock options. Please could you estimate the worth of the average annual grant that you get?
How much did the HR rep. make as a contractor?
There seems to be a huge (say 25% of the population) number of people who make six figure salaries in the Bay Area. A couple clearing $200K in salary and having another $200-300K saved from stock options can easily buy homes better than the Bay Area median.
So what’s going to change the status quo? Is there an expectation that salaries will drop dramatically?
Thanks.
May 11th, 2008 at 10:16 pm
>I personally don’t know of anyone who makes less than 100.000 a year.
I know more than 10 people, who are senior software engineers in a big company in the Bay area. They all make around 90-95K. And they did not lie.
May 11th, 2008 at 10:19 pm
Most of my friends are in software. They all make at least 100.000 for 5-10 years of experience.
I know some friends who work for Santa Clara County. I do not think they even think about owning a home here so they are not in my consideration.
May 11th, 2008 at 10:21 pm
Name,
Funny that I was just talking with coworkers a few days ago.
If they have stock options and are well to do, why they want to buy a house in the Bay area? For the Sushi? Just look at the rent to price ratio, so what if they have 200k in options, blow it up living in a house for 2 years?
All of my friends who did make money from stock options have already bought, my coworker’s friends have actually sold and gone back to India.
May 11th, 2008 at 11:00 pm
My social circle includes ~100 people in my age group which is mid-30’s. A fraction (~3/4) live in homes they own.
———-
Name,
The reason I asked the question in post #13 is that people who have substantial gain from their stock options are either bought their home already or they have some reason not be homeowners (temporarily or permanently).
Couple of thing to remember. As many pointed out already, the 2003-2006 home price in bay area appreciation is much higher than the previous years. If stock options is the primary driving factor for bay area home price, does that mean that people did not have much gain from stock options before 2003 and suddenly in 2003-2006 period people started realizing their gain from stock options?
Basically in the end, it boils down to same issue - 2002-2005 was the period of cheap money. Once cheap money is gone, even stock options cannot sustain the current housing market. It did not before 2002 and I don’t think it will now. The gradual drop of sale volume points to exactly that problem which I described in the last section of post #12.
May 11th, 2008 at 11:10 pm
So what’s going to change the status quo? Is there an expectation that salaries will drop dramatically?
————-
I don’t know about salary drop, but I can see enough drop in housing market in most parts of the bay area. So, there got be to something else other than “status quo”, which is causing this drop.
May 11th, 2008 at 11:47 pm
Name, I actually don’t track the worth of my stock options anymore. I’ve only ever joined well-established public companies & gotten a very minimal grant. Similarly, I only got the options when I was being hired, not yearly. I think my current options are actually underwater by about $0.25, although the company is doing okay. My greatest stock option-derived “net worth,” at the time of the dot com boom, would’ve been about $18k (and as I recall, I don’t think all of them were even vested at the time, so probably less).
Now, “going public” is a different kettle of fish… but if you go for that ride, then the stock options are the compensation for the salary deficiency.
The HR rep said that she had been making 160k/yr.
A couple clearing $200K in salary and having another $200-300K saved from stock options can easily buy homes better than the Bay Area median.
See, I don’t think so. That is a SHITLOAD of money, and it still only gets you the million-dollar starter house. “Better than median” is up over 1.5 million. My best guess is that, if this price range is sustainable at all, it’s because it’s the realm of the lawyers & the physicians, individuals who are pulling down 200k & up.
May 11th, 2008 at 11:57 pm
If they have stock options and are well to do, why they want to buy a house in the Bay area?
Everyone I know who has been on the ground floor of a successful company has turned around immediately & joined/founded another. This is one of the few places that you can do that.
But then those people don’t care so much about houses either. Maybe I only know workaholics; I don’t know one person that I think would sell their stock so they could buy a house…
May 12th, 2008 at 12:17 am
Any good startups hiring?
How do I join the next VMWare?
May 12th, 2008 at 12:25 am
Look for the person at Starbucks w/ circles under his eyes and a general air of having been chased there by the hounds of hell. Ask him/her if he wants a coder. If he weeps on your shoulder in gratitude, you’ve probably located the startup founder. This is only based on my observation of VC/buyout people, though. Googillionaires are outside my experience.
May 12th, 2008 at 8:47 am
Renter4, 200k isn’t much if a company does well or goes public. If you joined a medium size company around 02 and survived the price could multiply easily.
Of course nowadays the hope to join a startup and make a killing when it goes IPO has diminished a whole lot. Name can go check how many SV companies go IPO in the last 5 years. A lot of those ones have a unimpressive business plan and will never be able to go public, even being bought is a slim chance.
May 12th, 2008 at 8:49 am
So how do people get rich around here these days? There are plenty of people who are… what’s the secret?
May 12th, 2008 at 9:49 am
Pralay,
I understood your point that people with large option grants have already bought or have a reason not to buy. The fact that people have already bought does not preclude them from buying again. I know a substantial number of people who have lived in their homes for about 5 years and are ready to move to bigger homes or better school districts. They can do so because they have continued to get large amounts from option grants.
As far as everything being about the easy money of the last few years, that easy money was available elsewhere too. In most of those areas the prices did not run up to the same extent. Where it did without a fundamental basis, such as San Diego, Las Vegas and Phoenix, the drops have already been dramatic.
I’m hypothesizing that the difference between the Bay Area and those regions is that a large fraction of people here may actually have much more income from stock options. Part of that hypothesis is that before the dotcom boom, most corporate profits went to investors and the financial middle men, whereas now a substantial amount does get distributed via options in technology companies making the rank and file workers’ income/assets substantially higher.
I can find statistics about income - from the California Census for example (that may only reflect salaries, not option income). Without data about people’s assets, I don’t see how one can conclude anything about whether they have the ability to service their mortgage (regardless of income). I’ve made this point above and you’ve ignored it, but I think it’s critical.
The drop of sales volume may simply be due to fear of losses. Until the prices actually drop dramatically, you can’t assert that the inventory buildup (which is large in relative terms but small in absolute terms) will have the effect that you predict.
Reversion to the mean only works to the extent that the fundamentals support it. For example, noone expects Atherton to revert to the same price as Gilroy, even though they were similarly priced a couple of hundred years ago. If the population of a town have enough assets, they may have small enough mortgages that they can service them with incomes that are substantially smaller than you expect, in which case there will be no selling pressure and price drops.
May 12th, 2008 at 10:17 am
Name,
Regarding your moving-up point in first paragraph, we had similar discussion in past. Check comment #25 (the very last para) and #26 here. However, as you said your friends bought more than 5 years back, it very likely they have pretty good equity on their homes. But a market cannot sustain itself with only existing homeowners. It has to add new homebuyers in the market to sustain itself. This is how home price appreciated in past. Do you think new home buyers are entering into market in the same rate (like past decade)?
Secondly, about equity. I understand people who bought home in 2003 or before have enough equity in 2008 (provided they can sell their current home). But do you think the guy who bought in 2005 is going to have same amount of equity in 2010? I don’t think so. If they don’t have enough equity in 2010, they cannot move-up into better school districts in 2010. If they cannot move-up in better school districts, those better-school district markets cannot maintain same rate of appreciation.
May 12th, 2008 at 10:17 am
Renter4,
Thank you for the datum about the HR rep. It’s about double of what I’d have guessed.
My impression of lawyers and doctors I personally know well enough is that their finances are nowhere near as glamorous as they are often portrayed.
A substantial number of lawyers work at second-rate law firms and get paid salaries very much in the five-figure range.
Doctors who have specialized do get good salaries but they have huge opportunity costs (from minimal salary during the better part of a decade in residency and fellowship after medical school), large medical school loans and continued high malpractice insurance premiums.
Rick, Crossroads,
I never claimed anything about IPOs - someone else in the thread did. In fact, only one person I know got rich in an IPO. The rest got it by getting options in post-IPO companies that have been doing well.
Over the years their grants have increased in size from hundreds (of options) to thousands each year. Over 5-10 years, that adds up to 10,000s of options and if the company’s shares rise a few dollars a year, over 5-10 years that translates to several hundred thousands.
$200K is about the median among those whose worth I know about. At the top end there are some who have made close to a million in option income. The one person who joined pre-IPO that went well has made several million.
May 12th, 2008 at 10:25 am
As far as everything being about the easy money of the last few years, that easy money was available elsewhere too. In most of those areas the prices did not run up to the same extent. Where it did without a fundamental basis, such as San Diego, Las Vegas and Phoenix, the drops have already been dramatic.
———–
Check the above graph again. If we go back to early 2007 using a time-machine and erase all the memory of 2007 and 2008 from our head, you could make the same argument about mod-exp, moderate and affordable areas in bay area.
May 12th, 2008 at 10:32 am
I can find statistics about income - from the California Census for example (that may only reflect salaries, not option income). Without data about people’s assets, I don’t see how one can conclude anything about whether they have the ability to service their mortgage (regardless of income). I’ve made this point above and you’ve ignored it, but I think it’s critical.
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Name,
I did not ignore this point. But wealth does not explain the home price run-up for 2003-2005 period. If there are wealth, it should be there always and it will have impact on housing market all the time more or less in similar fashion. But that’s not the case.
May 12th, 2008 at 10:46 am
<i.The drop of sales volume may simply be due to fear of losses. Until the prices actually drop dramatically, you can’t assert that the inventory buildup (which is large in relative terms but small in absolute terms) will have the effect that you predict.
———–
Name,
Inventory ALWAYS has impact on price. That’s the basic of ANY supply-demand market.
I think more appropriate question would be if the inventory built-up is temporary or seasonal in nature and hence it will disappear over time and little impact on price. But it is increasing from 2006 (from 2007 in better areas). And cannot think of any factor which will help those inventory go away. Can you think of anything? Job growth? Low interest rate? Large number of companies are going to IPO in next few years?
May 12th, 2008 at 12:07 pm
Prlay,
>>But a market cannot sustain itself with only existing homeowners. It has to add new homebuyers in the market to sustain itself.
In a supply contrained market like the Bay Area, demand has a greater chance of outstripping supply than the other way around, given the constant influx of people to the area.
>>But do you think the guy who bought in 2005 is going to have same amount of equity in 2010? I don’t think so.
If not 2010, it will be a few years later. You can’t accurately time the market, but the trend should not be in doubt. Don’t be short-sighted.
>>Inventory ALWAYS has impact on price.
It has already been shown that inventory fluctuations does not affected the price in the Real Bay Area. Ever since last December you’ve been echoing the media’s chat about inventory drop, but so far you’ve not had an opportunity to announce a price drop. I asked you multiple times to locate one bargain priced house in the area, and you cannot find one. The logic is very simple (even though it needs explaining to you): Sellers know that there is no more land here, and the supply cannot be increased indefinitely. Therefore, if there’s any kind of inventory build-up, they know that it’s bound to be temporary. Buyers understand that as well. Thus, price level does not get affected. The major difference is that buyers have more choices when inventory level is higher.
May 12th, 2008 at 1:27 pm
Fortune Magazine reported that Warren Buffett has a FICO score of 718 (2008, March 31, The Oracle’s Credit Crisis).
May 12th, 2008 at 2:05 pm
> Fortune Magazine reported that Warren Buffett has a FICO score of 718 (2008, March 31, The Oracle’s Credit Crisis).
Yes, because Buffett hardly ever needed a loan.
May 12th, 2008 at 2:27 pm
Fortune Magazine reported that Warren Buffett has a FICO score of 718
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And I am guessing the major chunk of this score comes from the credit history of his early life.
May 12th, 2008 at 2:47 pm
The drop of sales volume may simply be due to fear of losses.
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Name,
I forgot to address this part earlier. Fear and speculation always play their roles in market - sometime more, sometimes less.
Why do you think that bidding war for a doghouse in 2004 is perfectly normal behavior of market but people not buying homes in 2008 due to fear it not?
May 12th, 2008 at 3:16 pm
>>Check the above graph again.
When I initially introduced the Creekside Realty website to Burbed readers weeks ago, Pralay immediately dismissed it as realtor crap. Now he’s asking people to refer to the graph?
May 12th, 2008 at 6:20 pm
Enjoy this interesting story .
May 12th, 2008 at 6:30 pm
The guy works for ebay.
May 12th, 2008 at 6:34 pm
Enjoy this interesting story .
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Sg,
Be ready to hear the familiar tone - “Oh, that’s just other part of America like Palm Spring, Vegas or Phoenix. Bay area is special! They are not making anymore land in bay area. Supply is limited.”
May 12th, 2008 at 6:35 pm
The guy works for ebay.
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Hmmmm. Hitech guy. And smart.
May 12th, 2008 at 7:43 pm
Pralay,
I have a central hypothesis and it keeps getting lost in alot of other points in our discussion, so I’m going to ignore everything that I consider secondary so I can focus on what I’m most keen to understand:
If options have truly given the technology worker a large amount of wealth over the last decade, then any statistics from the pre-dotcom period are irrelevant as far as the size of mortgage that can be sustainably be serviced by a large fraction of the local population.
Now I don’t know how much most tech workers get in option income. I also don’t know what they have received in the past and are sitting on in the form of liquid assets. However, I do know that without this data, it is not possible to draw any conclusions about whether a large fraction of people will be able to continue to pay their mortgage (or start to do so for those getting options and buying houses in the future).
One argument against this is that prices get set at the margin, so if half the population can’t sustain their payments and must sell or being foreclosed on, then the selling pressure will cause prices to drop.
The counter to the above argument is that this is the reason that the bottom four curves in that graph are dropping, the second is holding steady and the top one is rising. Perhaps the top 10-15% who are getting the large option grants can continue to pay (or have paid down) their mortgages just fine, leaving the high end homes in as much demand as ever while the rest who bought with unsustainable financing are being impacted.
May 12th, 2008 at 8:17 pm
However, I do know that without this data, it is not possible to draw any conclusions about whether a large fraction of people will be able to continue to pay their mortgage (or start to do so for those getting options and buying houses in the future).
I think that this is reasonable.
Another useful thing to know, would be how many of those “high-end” homes were obtained as speculation/investment purchases. I suspect the 11 mil house that was foreclosed on was one of the latter.
Perhaps the top 10-15% who are getting the large option grants can continue to pay (or have paid down) their mortgages just fine, leaving the high end homes in as much demand as ever while the rest who bought with unsustainable financing are being impacted.
If you assume that the 10 –15% will generate enough demand among them to cover the entire high-end supply. I’m not saying they can’t; like you, I think there’s too much data missing.
May 12th, 2008 at 8:55 pm
Name,
Fair argument. Let me try to address two main issues I came across in your posting.
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One argument against this is that prices get set at the margin, so if half the population can’t sustain their payments and must sell or being foreclosed on, then the selling pressure will cause prices to drop.
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It’s not even issue whether existing homeowners can sustain their payments. Even if they can make their payments, the market is still in trouble to keep the same rate of appreciation if there is not enough new buyers in the market to consume the inventory in the market. Yes, failure to pay mortgage and foreclosure will exacerbate the problem, but it is a problem even WITHOUT it. Take the example of subprime crisis. Foreclosures made the situation worse. But why there is foreclosure problem in first place? Because people could not refinance their mortgage. How so? Because they don’t have enough equity. Why there is not enough equity? Because there is no demand in market (no new buyers). So, basically, the root cause of the problem is not foreclosure. The root cause is again supply-demand market - where there are more supply, but demand was diminishing.
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The counter to the above argument is that this is the reason that the bottom four curves in that graph are dropping, the second is holding steady and the top one is rising. Perhaps the top 10-15% who are getting the large option grants can continue to pay (or have paid down) their mortgages just fine, leaving the high end homes in as much demand as ever while the rest who bought with unsustainable financing are being impacted.
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Pick up any area/city where current housing market is currently not in good shape. East San Jose? Morgan Hills? Now go back one or two years - may be around late 2006 or early 2007. You would notice that median price was still rising rapidly in those area while sale volume was dropping. That’s because higher end homes were selling as usual, but mid or lower end homes weren’t. This is how median price was skewed for a while and was giving an false impression of a healthy market when it already started showing signs of weakness. Eventually after sometime, median price started dropping in those area. Therefore, unless you take inventory and volume of sale into account, the median price may not give exact picture of market.
Even if we consider that top 10-50% people are getting large options and they are using it for buying homes, the sale volume tells me that their number is shrinking everyday. Can the market sustain itself with continuous shrinking demand? I don’t think so.
Now, the million dollar question: can the top curve (”expensive”) keep going up? Probably it can, as long as the sale volume keeps dropping (only higher end homes are selling). In the end you will see that median price of “expensive” area is 100 million dollar. That’s because there is only ONE home sold and that one is Larry Ellisson’s 100 million dollar home. Just kidding!
May 12th, 2008 at 9:09 pm
Pralay,
Buffet must be close to 80 by now, I doubt that FICO exist back in the old days.
He probably doesn’t qualify for a jumbo loan in RBA now that we are in a “credit crunch”.
May 12th, 2008 at 9:15 pm
I have a vague idea that credit history goes back as old as in 1960s and FICO score started sometime in 1980s.
May 13th, 2008 at 11:17 am
There are two take-aways from this discussion:
1. Higher end market and lower end market are different markets. Price drops on one end of the spectrum does not necessarily affect the other, because someone who lives in Palo Alto isn’t going to move to Central San Jose, regardless of how cheap Central San Jose gets. As a matter of fact, the cheaper an area gets, the less likely it’ll attract rich people.
2. The Bay Area is supply constrained, not demand constrained. Buyers may be holding back in certain segments, but they still want to buy at some point. In other words, there’s demand, and then there’s pent-up demand. Don’t estimate the amount of pent-up demand.
May 13th, 2008 at 11:19 am
correction:
Don’t under-estimate the amount of pent-up demand.
May 13th, 2008 at 12:47 pm
If you assume that the 10 –15% will generate enough demand among them to cover the entire high-end supply. I’m not saying they can’t; like you, I think there’s too much data missing.
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Renter4,
Even if we consider there is 10-15% wealthy, but it is very likely most of them are already homeowners in wealthy neighborhoods. Hence, it makes them out of equation in housing market. The real question is that if the bay area economy is making those people wealthy at same rate as it did in last decade. I don’t think so.
Secondly, just having stock option or wealth might not be enough for housing market, if those option holder people don’t think that investing all the options/wealth in real estate is a good idea. Just because Warren Buffet is billionaire that does not mean he is going to invest all his investments on his home (e.g. like this one: Man Builds Himself a Billion Dollar Home).
The whole mentality is changing. Two or three years back most of the people used to consider real estate as good investment. But many of them might not look at home or real estate same way as they did in past.
May 13th, 2008 at 1:41 pm
I know a LOT of people who were millionaires in 2000 and weren’t in 2001. They held onto their stock at Cisco and the like, and then in October, their options were worthless, and stayed worthless thereafter. Until then, they laughed at anyone who cashed out for any reason. They aren’t laughing now.
And I know many people who started jobs in the last five years whose options stayed under water the entire time. Yes people get options, but if you want them to be on the level of a house down payment, you either have to hit a new company pretty early, or just be pretty flippin’ lucky. I’ve worked at places that had great products but if the market doesn’t value the stock price, it doesn’t matter.
How could you possibly figure out who is still sitting on options that could be worth something? That’s not even an asset. That’s a bet. Income stats include the value of cashed in options, not just salary.
May 13th, 2008 at 4:57 pm
Yup, that is really the worst thing that can happen to a stock option scheme. If you bought Cisco options at 50 and held the day you sell it you will owe all the taxes between the price you are granted and 50 as INCOME, even if you sell it at 20!
That might just be the reason the high end tank at 2001, if you believe the high end has anything to do with stock options.
I have some coworker and friend held stocks once were 100 and now 0 or less than 10. When the market first tanked in 2000, their CEO comes out every quarter and spins about how one might regret selling their shares, while he is laying off people left and right, the stock keeps tanking, and he keeps selling!
May 14th, 2008 at 5:13 am
[...] stock options save the Bay Area? A guide to the different parts of the Bay Area [Burbed.com] Name Says: May 10th, 2008 at 11:46 [...]