Gee,
let's see if I got this right (in no particular order):
- Roughly 40% of houses sold were for speculative reasons.
- November sales fell 22% in the West. Existing home sales fell and the number of existing houses put on the market in November was the highest it has been in the last 21 years.
- "Investors are prepared to buy houses they will rent out at a loss; just because they think prices will keep rising -- the very definition of a financial bubble."
- Housing affordability is abysmally low.
- Housing starts nose dive.
- The housing bubble is bigger than the tech bubble of recent memory.
- Two-fifths of all private-sector jobs are housing related.
- 90% of GDP is accounted for by consumer spending and residential construction.
- Traditional, conservative loans have been replaced by "creative" financing and account for about 40% of today's market.
- New steps will be taken to regulate low-interest, high-risk loans.
- Mortgage applications are now at a three year low.
- Gold prices are very high.
- The yield curve is inverting.
- Marin's real estate is now in "two-sigma" territory.
- And a crappy old PoS-of-a-house in Marin will cost you two-thirds to three-quarters of a million dollars.
Did I miss anything? Feel free to complete the list.
Gee, let's see if I got this right (in no particular order):
27 comments:
You have most things pretty much correct except gold prices. They are rising, but in inflation adjusted terms, not really that high. If you want to see high, wait around 5 years and price it in US dollars at that time.
No doubt that the housing bubble is on its last legs in marin, but I have been saying that since I moved here 10 years ago.
I know, they are not at the adjusted $800 level (yet) but like you say they are rising. I think the fact that they broke above the $500 level is a significant indicator of sentiment.
H*ll no. I'm entitled to 20% yearly price appreciation its the American Dream. LOL!
I want to watch the tube!
hemorrhoid -
Agreed. The "intangibles" of Marin's RE market.
"The way most of us deal with life’s problems we allow things to happen and then we react. We could live on earth for a thousand years and the largest percent of us never get the lesson right – ‘prepare and don’t worry if it doesn’t happen.’ What do the greatest percentage of us do? Not-prepare and then we worry.
Do we go deep into debt, buy anything you see on the shelf, don’t save, and enjoy today -never mind tomorrow? Or, is it to save, pay down debt, get one’s house in order, and decrease your demands."
Above quote is from Financial Sense by Gary Robertson.
Marinite-
I agree with you that I think prices in Marin are overblown and the market is unhealthy.
BUT, in fairness, there are a few factors that run counter to the argument that prices will fall more a few percentage points over the next few years:
Roughly 2800 homes trade hands each year in Marin, representing only 2.8% of the 105,000 dwelling units. The vast majority of the residents here are NOT participating in the bubble.
Let's assume, based on the use of exotic loans, invstor interest and price increases that really only the people who bought in 2004 and 2005 are at some kind of risk. That represents 5% of our housing potentially in the hands of people in over their heads.
Let's also say for arguments sake that those that bought in 2003 (when the median was $735k for a SFH and $429k for a condo) were buying in a market supported by fundamentals (dropping interest rates and low-single digit housing appreciation, making actual ownership costs cheaper that the prior 2 years).
So potentially, we have 5% of the homeowners at some kind of risk based on the price they paid and the exotic loans they used to buy their houses.
This, against a backdrop of much lower unemployment in CA over the past few years (using the handy mapper at http://data.bls.gov/map/servlet/map.servlet.MapToolServlet?survey=la
CA Unemployment:
11/2003: 6.7%
11/2005: 5.2%
Or in the Bay Area:
2003:
SF-Oak MSA: 6.1%
San Jose MSA: 7.8%
Santa Rosa MSA: 5.2%
2005:
SF-Oak MSA:4.6% (1.5 point drop or 25% lower unemployment)
San Jose MSA:5.3% (2.5 point drop or 32% lower unemployment)
Santa Rosa MSA: 4.2% (1 point drop or 20% lower unemployment)
I know from firsthand experience in the tech industry that it is beginning to get difficult to find people to fill jobs again. Multiple job offers for qualified candidates is becoming the norm once again.
The last bubble of 1990-92, we had a period of rising, not falling unemployment in CA and the Bay Area.
I don't think people are going to sell unless they have very little equity AND their job is being threatened. So how many of those 5000 homeowners in Marin who might be in over their heads, have a tenuous job situation when unemployment is in the 4% range? How many are sitting on an equity cushion so small (7-8% of the property value) that they would rather give it back to the bank than sell it?
IMO, a very, very small segment of the market is potentially at risk of selling under duress -- most people can probably hang tight for the next few years.
Will property values go up double digits? No. Low singles or flat? Probably. Is that how you define a bubble?
rejunkie -
I see everything you are saying re: small #'s under duress to sell in Marin. However, I am not a pure disciple of the "Church of the Soft Landing."
Because at the same time, there a lot of people in Marin who are not distressed who are going to want to sell their homes in the next five or 10 years.
They perceive the near present as "their time" for cashing out and they, especially after a couple years of very small or negative gains, are going to be excited to "get out" at 5% or 10% below peak values (those seen today).
Also - what % of the housing in Marin is owned by tech workers versus other communities? Given that it's possible a general economic slowdown is at hand nationally, is Marin more or less exposed to those effects than an area such as San Jose, whose economic activity is effected in great part by the fortunes of the Valley? (I guess I'm saying that if the anecdotes about tech hiring are true, I can also say there are anecdotes about many fewer tech workers existing in Marin than elsewhere around here).
Just some thoughts.
Roughly 2800 homes trade hands each year in Marin, representing only 2.8% of the 105,000 dwelling units. The vast majority of the residents here are NOT participating in the bubble.
Prices are based on comps, not the houses that are not put on the market. So it doesn't matter if 95% of Marin houses don't sell at a discount.
So potentially, we have 5% of the homeowners at some kind of risk based on the price they paid and the exotic loans they used to buy their houses. - Rejunkie
If the potential 5% of the homeowners are forced to sell their houses, they probably will sell them with discounts. This will reduce the comp of that neighborhood. People who bought the houses earlier will be impacted by the reduced comp and sell their houses cheaper. Not to mention a lot home owners have taken on huge equity against their houses. If they are forced to sell their houses cheaper, then we will have some domino effect. Financial disasters are usually triggered by seemingly small events. The market usually over shoot to the upside or downside because emotion is involved. Particularly for housing, so many people have taken on huge loans and it is the debt level that is worrisome.
Much of California will deflate. But not Marin. Everything else will fall apart all around it, but Marin will stand tall. - backstairs
Mentality like this is abundant in Marin. After all, it is the God's County. Prices only go up not down. Let's see whether they are ready for rude awakening when RE crashes.
Holland and others-
Absolutely agree that even if it is a small slice of all homes that are under duress AND they are the only ones selling then yes, prices, being based on comps, will slide.
But this not the same as SoCal in the 90s or Houston in the 80s where the defense/oil industries were tanking sending large numbers of locals into bankruptcy and being forced to unload. We don't have that kind of economic stressor at the moment that causes a panic.
Scoff all you want but Marin prices tend to be more stable than most of the Bay Area. They go up more slowly during the good times and fall less (or not at all) during the bad. In fact the median price has only fallen one year out of the past 40 (1993 I believe). I will try to dig up the link to the historical medians and post it.
Also, if you have a 5-10 year time frame, you should not care one whit what happens in the next 2-3 years. I guarantee your home will be worth at least as much in 5 (and much more in 10) as it is today. Notwithstanding some massive financial collapse (like the Depression) a World War or other highly unlikely events.
I knew several people who cashed out in the early 90s to move to Seattle using the same line of logic (wow! my place is worth $300k! I can get something twice as big for that price in Seattle!) I see posted here and they not only regret the decision because they would prefer to live here but the lower appreciation in Seattle means it would be difficult if not impossible for them to return, not as homeowners anyway.
There are clearly two different schools of thought here: those who think history will somehow NOT repeat itself and we are in for one mother of a correction, or those that look back at the last 40 years, and infer from that that over the long term, prices in Marin will continue to rise.
Had my parents had the attitude prevalent on this blog, and dumped their Marin properties at the slightest hint of a downturn (which has happened 3 times since they started out in 1971) they would not be sitting on $6m in real estate with no mortgages.
Buying and holding Marin real estate has made alot of people very wealthy and will continue to do so. Ignore history at your own financial peril.
rejunkie and fred -
No one is going around here saying that Marin real estate is not a great investment in the long term.
And neither is anyone advocating timing the market in the manner in which you speak.
I think what people have said is that this market is presently distorted and it will take time to sort itself out. Those who decide to wait and rent in the meantime will likely have less financial risk and will be able to save themselves some money.
"Getting in" today just because "Marin is different" will likely have a cost. Just as buyers did in 1990 versus those who did so in 1995. The '95 buyer who rented from '90 to '95 kept a helluva lot more of their money... and didn't buy houses that were appreciably more expensive by 1995.
Today, it appears as if over the next five years one who rents for half the mortgage cost (or likely less) for a comparable place will "do better" financially. You've got to be delusional not to see this. The Marin real estate market is poised to have very slow to negative growth in that time period and not perform nearly as well as it has for the last 10.
That's what people are saying.
That and the fact that Marin is becoming the kind of place that only a few of the wealthy can afford and the changes that brings to a community.
And fred - that's right, we are all just exactly what you surmise.
rejunkie and fredtobik-
I think the RE market has been doing well due to the following variables:
1. baby boomers
2. artificially low interest rates
3. economic expansion
4. favorable tax laws
Any good investor would ask whether these variables stay constant in the future. If not, what will the impacts be to the RE industry including Marin.
If an investor makes his decision based on the past history, he might be making an irrational decision and get burned in the process. Just look at the stock market. Back in the 90's, investors were used to an annual 20% return and see what is happening now.
Also, if one disagrees with your view points, doesn’t mean he or she is bitter. It may just mean there are some cautious people out there and post different opinions. This is Marin Real Estate Bubble blog not Marin RE blog. Bubble in Marin is the common concern of this blog.
I wanted to stay out of this but...
This is Marin Real Estate Bubble blog not Marin RE blog. Bubble in Marin is the common concern of this blog.
If it wasn’t already patently obvious to anyone who has been paying even a little attention, this blog argues (more or less successfully) -
(1) There is a RE bubble (hence posts of a more general scope).
(2) The causes of that bubble are transitory, arguably artificial, and go beyond the normal boom/bust cycle that is commonplace in RE.
(3) Marin is affected by that bubble in a manner very similar if not identical to that of other functioning RE markets and as such will tend to share their fate (hence posts specifically targeted at Marin as well as posts that are not specifically targeted at Marin yet nevertheless generalize to Marin in my estimation).
(4) No claim has ever been made on this blog (nor is likely to ever be made) that the downturn that is likely to follow the “pop”, “bust”, “deflation”, “hiss”, whatever, will be permanent. RE has generally tended to go up in the long term if for no other reason than inflation.
(5) This bubble has many negative aspects to it, on many levels, negatively impacting our community. I care about that. Maybe no one else does, but I do. I guess I am not so wealthy that I can afford not to care.
1. I grabbed my little slice of God's country, too bad for you if you can't afford it.
2. Marin RE prices will never fall because there are lots of people like me who will pay absurd sums to grab their little slice too.
3. You Marin natives who can't afford to live here should blame your parents – they should have foreseen the absurd RE prices and put aside a trust fund for you.
If you try to time any market you will lose, and should! - fredtobik
The same type of mentality burned investors badly during the burst of tech bubble. Buying RE properties now is like buying tech stocks when NASDAQ hit 5000.
Timing is everything. It makes a huge difference between buying tech stocks at NASDAQ 5000 and 1100. You either lose 90% of your holdings or double your investment. Buy low and sell high is the only formula for successful investment not the other way around.
It sounds like rejunkie is a REALTOR(tm) who has practice telling people that "it is always a good time to buy".
Sure Marin is a nice place to live and there is a good reason that a nice home in Ross went up in value from $2K to $400K from 1924 to 1994. It is a BUBBLE that pushed the price from $400K to $3.4mm over the past 10 years.
rejunkie mentions that last time prices dropped in Marin unemployment was going up, but forgets to mention that interest rates were going down (making homes more affordable).
The reason that the bubble is so out of control this time is that "Lenders" are not actually lending money (so they don't care if people pay it back). As soon as defaults start to increase things like the "liar's loan" (often called the "no doc loan") will go away when the bond buyers stop buying them.
rejunkie then says: "Roughly 2800 homes trade hands each year in Marin, representing only 2.8% of the 105,000 dwelling units. The vast majority of the residents here are NOT participating in the bubble." Every house in Marin has gone up in value and since most people in Marin did not grow up here a drop in prices may lead a lot of people to cash in and move back to where they came from (paying all cash for a nicer new home).
FEAR will cause all people to think about selling. My Uncle lived in Inglewood in Southern California after the war and when I was a little kid almost every home in the neighborhood sold (and prices dropped like rocks) since there was a FEAR that black families moving in would lower property values.
As soon as the cocktail party stories change from people making $500K owning a home for 18 months to people trying to figure out how to pay the extra $6K a month after their IO/Neg Am loan converts to a 27 year am loan we will see prices start to go the other way...
If you buy the right investments you should NEVER SELL!
Then what is the point of the investment?
NO! Buy low sell high is almost the definition of market timing.
That is exactly my point. Timing is everything. Knowing when to sell is tough but knowing when not to buy such as present time is easy. If one uses past experience to assume the future, one is easily being blindsided. Investment 101 - get ride of emotion, attitudes and false belief. Buy a value asset when nobody wants it and sell it when everyone wants it.
BTW, it is easily said than done - following Investment 101. Many people usually jump on the bang wagon the last minute and get burnt. There are only few wise ones can make it.
"Could it be argued that communities are doing it to themselves? Nobody makes someone sell their house."
Sir, you are living in an alternate universe that I simply do not recognize.
Scoff all you want but Marin prices tend to be more stable than most of the Bay Area. They go up more slowly during the good times and fall less (or not at all) during the bad. In fact the median price has only fallen one year out of the past 40 (1993 I believe). I will try to dig up the link to the historical medians and post it.
While that may be true historically, price runups since about '98 are precedented (even for Marin), so extrapolating "stability" from past scenarios may not apply. Has anyone proven the stability of this market? Numerous analyses suggest otherwise. There are a host of reasons, elaborated in detail on this blog, that give me pause and caution to buy a new home in this current market. We're certainly not going to happily delude ourselves into financial risk for some feel-good, unproven "stability" of Marin's RE market--not to mention the whole Bay Area.
...my parents...sitting on $6m in real estate with no mortgages.
Advice:
Don’t count your chickens before they hatch.
Wow, what a difference a day makes! I take off for a ride in our spectacular locale (despite investordude's assertions that Marin is nothing special) and I guess I (and fred) sparked some discussion.
First of all, I am not a realtor. I know you will have to trust me on this one and I would prefer to remain as anonymous as I can but in the interests of somewhat full disclosure, I work for a software company, I have lived in Marin for all but a few years of my life ( the other years spent in the UK and in Australia) and I own 2 condos and one SFH here. Since 1998, when I first started buying I have profited to the tune of about $650k on these 3 places. Nothing major, plenty of people have done better but RE has been kind to me. I am the child of real estate investors (who again, were in no way affiliated with the industry and came to this country with almost nothing) so it is in my blood. I share this not to boast but to admit that I do indeed have alot of skin (and most of my net worth) in this game. I am also very passionate about it and I feel like I have found something i understand that engrosses me (unlike the stock market) -- if I could ditch my day job for something real estate-related that could sustain me I would; but again, the timing right now is not the best. I also love Marin -- it is almost a spiritual thing for me. I think you could do alot worse than live here.
I agree that this is a bad time to buy (and this is not the first time I have stated this) for many reasons outlined by the bloggers here. If you are renting and buying would kill you financially, you should stay put. Conversely, I think trying to time the market can be a dicey proposition as well.
FWIW, my advice to anyone who is suitably open-minded is based on decades of direct and indirect experience: If you own something in Marin, good for you -- it is no small achievement and you should do your best to hang on to it for it will make you a tidy little nest egg. Think long and hard before cashing out because it may be a one-way door.
If you want to buy as an investment, I think there are better places for your money right now. I got a little carried away and bought my third in Fall 2004 and I got lucky as it has jumped 20% since then but the fundamentals were just not there. However, I am committed to seeing my RE investing strategy through and will hold it for as long as I can. Stock pickers are familiar with "dollar-cost averaging" -- that is pretty much what I do. Scrounge up the money when I can and pick something up every 3-4 years.
If you want to be an owner-occupier and you have a long-term desire to stay here, I just don't know -- instinctively, I would think affordability should improve over the coming years and you would be better off renting in the interim. OTOH, you should really only base purchases on the facts today, not what may or may not happen down the road. The point about buying in 1990 versus 1995 is totally valid, but capitalizing on a recurrence of that period requires a degree of foresight that none of us have. Besides, by picking up that house at the top of the market in 1990, you would still be up about 200% in 15 years (about 8% CAGR, without factoring in leverage), as opposed to 10 years (nearly 12%). I don't think you would find too many people who bought in 1990 licking their wounds over their decision.
Alot of indicators point to a slowdown/correction/bursting bubble, whatever you want to call it. However, they are just indicators, not proof. Alan Greenspan famously declared the stock market irrationally exuberant in 1996, 5 years before the market finally imploded and at no point did the Dow Jones sink to 1996 levels in the ensuing 4 years. In hindsight, you would have been foolish to infer from his remarks that 1996 was a good time to sell. However, there are alot of differences between RE and stocks -- to name but a few:
1. RE is not liquid - it takes a lot of time and effort to buy and sell. You can pitchs stocks as quickly as you can click a mouse.
2. RE is a neccessity in some form or fashion -- whether you rent or own, you have to live somewhere. Nobody is forced to buy stocks.
3. RE purchases are governed as much by emotion as they are by anything resembling financial sense. I don't think anyone buys Apple just because they love their iPod (although I am sure some do).
4. RE is highly transparent. You are the master of your own destiny when you invest in RE. You know the balance sheets, the cash flow, the repair costs, the taxes, the rent: everything. YOu rely on nobody else but yourself when evaluating the performance of your properties. When you invest in stocks you are trusting that the executives are being truthful as to the health of their business. As Enron et al have taught us: that is asking for a whole lotta trust.
By betting against the RE market, it is a bit like shorting the DJI: it might work well in the short-term, but in the end, the money is with the longs.
I also want to give a shout out to Marinite for providing this forum. I don't always agree with everything posted, but I certainly have learned alot and the facts and details provided by everyone are fascinating to me. You learn absolutely nothing from people who agree with everything you say.
And on that note, my wife quite rightly tells me I spend WAY too much time on this blog. And I still have to find those median stats going back to 1965....
...price runups since about '98 are precedented...
Actually, I meant unprecedented
To me, this is the most telling indicator that the market is overvalued:
The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,921 in November. That was up from $2,815 in October and $2,350 for November last year. Adjusted for inflation current payments are 16.5 percent higher than at the peak of the last real estate cycle in the spring of 1990.
http://www.dqnews.com/RRBay1205.shtm
Prices, on their own, are not as much of a determining factor as the monthly nut.
I also want to give a shout out to Marinite for providing this forum. I don't always agree with everything posted, but I certainly have learned alot and the facts and details provided by everyone are fascinating to me. You learn absolutely nothing from people who agree with everything you say.
Thanks for that. And thanks for keeping your cool -- this thread could have easily gone out of control and it didn't because you chose not to let it. I've learned a lot from this blog too and if you think you spend a lot of time on this blog, well buddy, I've got some news for you. But seriously, I am at the point where I've said most of what needs to be said and I find myself now repeating myself (just like this sentence it seems). Oh well, press onward. Maybe after the dust settles I'll rename this blog to "Marin Real Estate"...wouldn't that be nice.
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