[First published on SocketSite over two years ago, for obvious reasons it’s time to revist the concept (From ‘Sticky’ To ‘Slippery’: A Fundamental Change In The Housing Market?)]
Technical traders and analysts often talk about support levels or a floor price. In the housing market, real estate agents talk about “stickiness.”
Previous downturns in the housing market have left homeowners owing more that their homes were worth (i.e. “underwater”) and unable, or unwilling, to sell or move. Those who were forced to sell (think job transfer, an unexpected medical expense, or perhaps a new baby in a one bedroom condo) did so at a loss. But the vast majority of owners just stayed put and waited it out – three, five, or even ten years until the market turned around.
And while the housing market might take a turn for the worse, it rarely plummeted. Homeowners sitting on the sidelines made sure of that. These owners kept the market from being flooded with inventory, provided natural resistance to depreciating housing prices, and kept the market out of an associated “crash.”
As Celia Chen writes for the Dismal Scientist, “There is an inherent downward stickiness in home prices, as many homeowners can simply take their product off the market rather than sell at a price lower than they desire.” Or according to Kelly Zito of the Chronicle, “even in a slackening market, sellers often resist losing money on a property or simply not making as much as the Joneses next door. Sometimes that can mean sales volumes will decline, but prices will stay resilient . . . . ”
Historically, the vast majority of homeowners could afford to wait as long-term fixed-rate mortgages kept expenses in line with budgets. Month after month, or year after year, homeowners would simply continue to make their mortgage payments and wait patiently for the market, and their equity, to return.
Unlike the Internet’s “new economy,” however, this time it really might be different. While short-term adjustable, interest-only, and negative amortization mortgages have quite literally opened the doors to a whole host of new homeowners, combined with cash flow negative “investment” properties, and highly leveraged buyers without sufficient reserves, they have also created a more volatile housing market.
Instead of not being able to sell in a downturn, many new homeowners might find that they can’t afford to hold (or wait). Mortgage payments will increase faster than incomes, rental income won’t offset an investment property’s carrying costs, and a high loan to value mortgage will constrain an owner’s ability to tap into equity to help weather any storm.
And for the first time in history, might we find that the “stickiness” that has traditionally kept the housing market from being flooded with inventory in a downturn, and prices from plummeting, has actually turned quite “slippery?”
From ‘Sticky’ To ‘Slippery’: A Fundamental Change In The Housing Market? [SocketSite]

Comments from Plugged-In Readers

  1. Posted by asiagoSF

    The argument of stickiness is predicated on thehomeowners’ prerogative to exercise a choice (the choice of not selling). The transition to slipperiness is caused by fewer and fewer homeowners being able to exercise that same choice because of financial untenability. The argument is flawless directionally, but whether the slippery dynamics are enough to open up the bottom floor of the market is a matter of numbers: what % of would-be sellers have historically exercised that choice, thereby keeping the downmarket sticky, and -of those- what portion can no longer do so today? If only a small portion, then the slippery camp has no legs. I am not saying it necessarily does, but we can’t just buy into the full-consequence of an arguments just because it’s directionally correct.

  2. Posted by diemos

    Denial ain’t just a river in egypt.

  3. Posted by San FronziScheme

    Sure there’s stickiness. Ask the Japanese how long it look for their home prices to go down 60% (hint: they called it the “lost decade”).

  4. Posted by diemos

    The japanese are an honorable people who consider walking away from an obligation an incredible loss of face. We’re a bunch of hucksters who will blow town as soon as it’s obvious the current con isn’t working out.

  5. Posted by dede

    You could look at the long period of relatively flat prices in San Francisco in the early 90s as a potential model for downward stickiness. But I agree that it will be interesting this time around based on the type of loan people used and the potential need for refinancing as a push to sell because refi’s are not available or too expensive.

  6. Posted by ex SF-er

    It is near impossible to tell the future of housing prices because of impending and continued governmental intervention. A very small number of people (just a handful) control the fate of housing in NOMINAL terms. (they can do little about real housing prices)
    For instance: what if tomorrow all our govt leaders decide to put $2T DIRECTLY into buying delinquent/defaulted mortgages and allowing the “homeowners” to live in those homes at reduced subsidized cost? if so, then the above mentioned slippery argument is altered. and many people are calling for the govt to do exactly that.
    we really are at historic times. Much of the western world is nationalizing their respective banking industries. The govts priorities are political and not necessarily economic.
    the US govt may come up with a plan to alter nominal house declines. it will come at a massive cost that may or may not be foreseeable. so beware.
    just as the bulls neglected to understand macroeconomic principles and thus were “surprised” by the downturn, some bears may be “surprised” be if we get an emergency federal intervention.
    note: I am not saying that the govt should support housing prices, nor that it will work. only that they may try it.
    good luck to all, and as I’ve said before remember that there are more important things than money.

  7. Posted by San FronziScheme

    Yes, but the Japanese zombified their banking system and our own “rescue” package might do just that.
    Let gravity take over and let American entrepreneurs do their job at rebuilding from the rubble.

  8. Posted by FSBO

    Well said diemos – it’s unfortunate, but so true. I’ve been enjoying watching Dick Fuld getting roasted by Waxman’s committee on Bloomberg. CNBC had to cut away – too much negativity for them to handle.

  9. Posted by diemos

    So how’s our boy Fuld doing? Does he have his blank look of stupefication, shoulder shrug and “Hoocoudanood?” down pat?

  10. Posted by ex SF-er

    Let gravity take over and let American entrepreneurs do their job at rebuilding from the rubble.
    there is a very real possibility that our system cannot live through gravity taking over. I am as against the bailout as anyone, but I have the capacity to see that we are dealing with Donald Rumsfeld’s infamous “unknown unknowables”.
    not to beat a dead horse, but nobody (including me) knows what would happen if we let chips fall where they may. I do know enough about this situation however to know that nobody else knows either. Austrian economic theory does not predict if we could survive this “treatment”.
    a total collapse could in theory cause massive social instability. massive social instability can be the root cause of world wars. not to mention tribalism, sexism, racism and a whole bunch of other unpleasant “isms”.
    I’m not sure how my American Bretheren would react if suddenly nearly all of them lost their entire retirement savings and all of their assets, or how they would feel if we were instantly relegated to “third world” status.
    this is not to say that any govt intervention will work. on the contrary it has the possibility to worsen things.
    there is of course the argument that our system should not survive. in that case a very different system could possibly rise from the ashes. (my preference: metal based currency with abolition of Federal Reserve banks and abolition of fractional reserve lending).
    lastly: I am not saying that Armageddon is what will happen. But it IS a possibility. That must be considered as we analyze what ‘should’ be done.

  11. Posted by Dude

    I think the national mortgage market is somewhere around $20 to $22 trillion (somebody correct me if I’m off). Assume a 20% decline in home prices nationally from peak to trough – this accounts for places like Sacramento or Florida, where declines will be/already are in excess of 40%. Also accounts for stronger regions like SF and NYC where prices may only fall 10-15%. In any case, 20% of $20 trillion is a $4 trillion dollar wipeout. I think it’d be impossible for the government to try and eat that loss, although I agree that they may try.
    Here’s a more important question for the brains out there: now that Paulson and his bailout czars have carte blanche to start buying bad loans from the banks, what will they do with them? I realize they plan to hold the performing ones until values recover or they pay off, but what about the non-performing stuff?
    If Joe Cultcab stops paying on his luxury condo, and the government holds the note, are they going to foreclose him? Can anyone imagine a situation where the Fed/Treasury will actually foreclose on all the people who “just wanted a home to live in?” I doubt it.
    So will the notes be forgiven/forgotten? Free homes for everyone? Or principal adjusted for current market value? I’m really curious to hear people’s theories on how this will play out. It’s infuriating, but that’s where I see this going.

  12. Posted by San FronziScheme

    ex SF-er, the work is not gonna end with a crash. The doomsday sayers are just trying to make us swallow the NEXT bailout. And making our 401(k) collapse is just what we need to accept to get BOHICA-ed again.

  13. Posted by John

    Once a family owns, rarely would it sell to become a renter. Normally, they sell the existing home to buy a new home. That’s a sideway move.
    Who would move right now? Yes, it is cheaper to buy a new home, but the existing home also fetch less. In addition, if you sell/buy, you give up your low mortgage rate for a higher one (assuming you still can get it).
    That’s why it is sticky and will remain sticky for a while.
    Dude, to answer your question about Treasury – I don’t believe they buy loans. They buy security for the loans. A loan is divided into many fractions into many different securities. I believe the borrower still deal with the lender, although the fractions of the loan may be owned by many parties. It is very unlikely that Treasury would end up owning 100% of any particular loan, so they cannot just forgive the loan that easily unless they get agreement from the rest of loan owners.

  14. Posted by San FronziScheme

    Good point about sideway moves. Homeowners are stuck between a rock and a hard place with negative equity:
    1 – Walk away and get a major ding on their credit, with no other choice than rent (good luck on getting a new mortgage today with negative history).
    2 – Stay and overpay on a place that you do not own. Worse than paying rent: pay more than rent, but also pay taxes and maintain the place. You will not go back to positive equity before a long long time and your expenses are preventing you from saving (your savings was supposed to be your mortgage, remember?).

  15. Posted by diemos

    It’s generally a useful rule-of-thumb to expect the future to be pretty much like the recent past. But that algorithm GUARANTEES that you are going to miss all of the inflection points.

  16. Posted by Dude

    I don’t know, guys. Wouldn’t surprise me if, in a few months, we find out the government is the owner (but not the servicer, obviously) on billions in mortgage notes. Many of them underwater and non-performing. Then what? A new definition of instant equity, courtesy of all us taxpayers.

  17. Posted by Brahma

    I’ll say first off that I am one of the countless silent “pissed off renters” who was waiting for the bubble to pop; for prices to go from ‘sticky’ to ‘slippery’ to where they should be: ‘falling rapidly’ based on the absurd overvaluations of at least the last five years.
    I am sickened by what’s happening in the Real Estate market now. People who out-and-out lied to get a mortgage are being helped out of their Alt-A loans, their option ARMs etc. and into 30-year fixed loans and the normal economic process of price discovery is being hindered. From the article:

    An estimated 125,000 Californians who are struggling with risky mortgages from Countrywide Financial Corp. may get their loans modified and payments reduced under a program to be announced today.
    In a pact that could save mortgage holders billions of dollars, Countrywide owner Bank of America Corp. has agreed to the nation’s largest loan-modification program to settle charges of lending abuse brought by California and other states.

    Why are these people who took out loans they couldn’t afford being rewarded?

    A new federal loan workout program called Hope for Homeowners begins this month, targeting those unable to pay their mortgages. It is for homeowners who bought their homes before 2008 and now have monthly payments exceeding 31% of their income.
    Under the program, banks would in many cases write down mortgages to 90% of a home’s current value. Such a provision would be important in California, where many recent home buyers have mortgages that now greatly exceed their property values.

    …these people knew that values couldn’t keep rising forever and they went in knowing that they would end up with payments over 31% of their income. And now my hard-earned salarey is being taxed to keep them in their homes!
    I now know why people in some places in the world get so frustrated they feel they have no choice but to strap explosives to their chest and detonate it in a public place!

  18. Posted by Mark

    Regarding sideways moves: people might be tempted to sell now at a loss if they plan to migrate to a cheaper area. Some of the sting of selling at a loss might be removed if there is the promise of a nicer home somewhere in flyover country. Perhaps the housing bust will be the catalyst for a shift in migration patterns?

  19. Posted by FSBO

    Your comment that you linked above from way back on Feb 1 was well worth re-reading – as was Satchel’s following post.

  20. Posted by San FronziScheme

    I believe your patience will be rewarded. All these interventions into the free markets are just slowing down what was poised to happen: the correction of a huge asset bubble. Either you get angry, or you decide to re-focus your anger at scooping up cheap property/stocks.
    Moreover, this action to help Countrywide home-owers (typo intended) is actually helping prove the fact that prices have fallen and are not coming back anytime soon. This is price-to-market, 18-months late.

  21. Posted by ester

    Do i dare to say the following on this board? I guess I do, so here it comes:
    the worst wave of foreclosures is behind us. Further big price drop due to foreclosures is unlikely. If employment situation does not deteriorate badly, here is the bottom of this RE corection. But the unemployment threat is getting more and more real now .
    Now, it is up to all of you to curse.

  22. Posted by Ghost of JBR

    Dear ester,
    Its nice of you to share your opinion. But you clearly don’t understand finance, nor do you understand the real estate cycle. You do not acknowledge the link between employment and real estate prices. Your prediction does not anticipate the effect of Option-ARM recasts which have barely started and yet already brought two major banks (Wachovia and WaMu) to their knees.
    Round two is coming.
    Your TIC equity will be fine, though. Don’t worry about it.

  23. Posted by diemos

    Sorry ester,
    Subprime resets are behind us, Alt-A is ahead of us.

  24. Posted by PDT

    I agree Brahma, though I own in SF, and the place will probably will retain most of it’s value, I’m pissed that folks just walked away from their obligations and we all have to bail them out. The banks have done a bad thing, but a lot of the blame has to be put on the liars who bought over their head, then took overinflated equity out to buy crap.

  25. Posted by rr

    My jaded self would like to say that acting honorably and rationally in a capitalist society is only going to lead to frustration with the system. Those who come out ahead are those who know how to game it the best. Be frustrated, but only in the short term. Your energy is better spent figuring out how play better in the next round.

  26. Posted by tipster

    The pact to which Brahma (the bull?) refers is a private deal with the holders of the mortgages. The public won’t be paying anything for these.
    But what exactly are they doing? They are doing exactly what Satchel said they would: they are simply trying to get the existing homeowners to keep paying on something that isn’t worth as much as they will pay for it.
    Most people with adjustable loans will have their interest rate reduced for a few years, only to have it ratchet up again. Translation: we can’t handle the foreclosures in the pipeline, so for SOME of you, please keep paying and we’ll foreclose next year. Who does that help? The banks. It guarantees that foreclosures will continue uninterrupted for years (can you say Japan?) and lets the banks keep the loans current so they don’t have to write them down. Everyone else gets nixed.
    The option arm holders will only get forgiveness if they agree to keep paying on fixed loans, but who the hell is going to qualify? Someone who had been paying $1200 per month on a minimum payment is now going to pay $4000 per month on a fixed rate loan? Who is going to even qualify, let alone agree to do that?
    Now you have to ask yourself, why would the bank forgive the negative amortization? Here’s the reason. Because it won’t be a purchase money loan, it will be a refinance, and now the bank converts a bunch of loans from which the owners can walk away without recourse and for which the banks would not be able to get that negative amortization back anyway, into loans for which the buyer is on the hook for any downside. Buyers can walk from purchase money loans, but the banks can go after people who refinance if the banks lose money on a foreclosure. They will only agree to the modification if the buyer has sufficient assets they can go after.
    So any solvent buyer will basically be transferring the risk of further declines from the bank to the buyer! The bank sees what’s coming, so it’s worth it for the bank to unload that risk to the handful of solvent buyers. Everyone else gets hung out to dry and the states wash their hands of the whole situation.
    The bank makes the best of a bad situation and the buyers get screwed. This is the banks agreeing to modify, and they can and will go after the buyers once it’s all over. Buyers who don’t have sufficient assets are going to get turned out post haste. This is just a way to cheat the buyers with assets. And it isn’t going to help that many people, not nearly enough to make much of a difference.

  27. Posted by wanker

    Surely this can’t be related to the San Francisco market.
    My property is up (fill in percentage)% since I bought it.
    Show me some properties in district (fill in district) that are going down.
    And if the market does go down, I don’t care because I can afford to wait for (number) years.

  28. Posted by John

    ex SF-er,
    Totally agree wth you. I have said multiple times if GD2 hits, everyone loses and there will be a WW3.
    So, the best action may be taking out all your net worth out of stock market, buy a little lot in the forest somewhere (make sure there is water source and there are enough animals around to hunt). Buy a Jeep but customize it to battery powered, and enough solar panel to run your little house and Jeep.
    Sounds like fun

  29. Posted by ester

    Alt-a is a different animal from Subprime, lets be clear about that.
    If my rates go from 0.0000001% to 6%, no, I won’t be able to afford it. if it goes from 5% to 6%, I won’t be happy, but I can still afford it, easily.

  30. Posted by tony

    Haven’t seen dub dub today, but sir, as we discussed a week or so ago, today was RIF day for 1000 at eBay. Obviously that’s the tip of the iceberg with Yahoo rumored to be considering 20% cuts and a hiring freeze @ GOOG for all but the most important positions in the not-too-distant future. Of course, these guys are small fries compared to the MSFT, CSCO, HP etcs of the world, and as I’m betting you’ll agree will not be immune as IT spending slows (and as the true source of much of their “profits” — the dollar’s weakness — flips against them). Dunno how bad it’ll be, but the change in attitude amongst techy friends has been palpable the last couple of weeks.
    Where is Satchel btw? Would love an update on his perspective on all of this, and if he still thinks we’re in for more deleveraging (and how much) before the Fed flips and tries inflating. Noticed that M0 ( ) was up 6.7% YoY last month… only 1/6th of the way to the inflationary stance he said to watch for, but interesting nonetheless.

  31. Posted by EBGuy

    Because it won’t be a purchase money loan, it will be a refinance, and now the bank converts a bunch of loans from which the owners can walk away without recourse and for which the banks would not be able to get that negative amortization back anyway, into loans for which the buyer is on the hook for any downside.
    When’s the last time you heard of a lender going through judicial foreclosure proceedings to obtain a deficiency judgement. Not saying that it couldn’t happen in the future… but anyone, anyone?

  32. Posted by Salarywoman

    “(my preference: metal based currency with abolition of Federal Reserve banks and abolition of fractional reserve lending).”
    My preference: cowrie shells

  33. Posted by diemos

    “Alt-a is a different animal from Subprime, lets be clear about that.”
    alt-A: high fico score, teaser period anywhere from 3-10 years, used by high paid cubicle drones to buy property in SF at 10-12x income.
    subprime: low fico score, teaser period from 2-3 years, used by low paid cubicle drones to buy property in manteca at 10-12x income.

  34. Posted by Trip

    Ester, you’re talking about prime ARM loans, not Alt-A loans. It it true that a rate adjustment from 5% to 6% probably wouldn’t knock too many out(although even these are defaulting at an alarming rate). But the Alt-A impact will be from the thousands who have been paying only interest and will now have to start paying principle, and at an accelerated rate since it has not been paid for 2-5 years. And thousands are also going to see their “teaser” rate adjust from around 2-3% to 7-8% at the same time. Take those two together and it is a very significant increase in the monthly payment. And they won’t be able to refinance out of the problem because they put little or nothing down and they cannot now come up with the 20-25% they would need to refi. As others noted, this is a much bigger part of the SF real estate reality than subprime was, and it is just getting started.

  35. Posted by Joe

    The concept of stickiness strikes me as half myth. Traditionally, prices have seldom fallen in nominal terms. They HAVE fallen in real terms.

  36. Posted by ester

    thanks for the clarification. I was previously mixing them up.
    Your email made a lot of sense THEORETICALLY.
    In realty, I don’t personally know of anyone using those Alt-a loans. Actually, there is one. but she is using it, not because she can’t afford it, but because the loan agent is her relative, and she is doing refi every 3 months to bring him commission.

  37. Posted by San FronziScheme

    Trip, you are correct. Alt-A could be a problem.
    Not only you have the reset scenario and the cash needed to do a refi, but property values went down. Do banks consider decreasing property value when refinancing?
    Say you purchased a property in 2005 with 100% financing I/O for 900K
    In 2008 you still owe 900K but the property is valued at 800K.
    Will the bank take the 900K or the 800K value before doing the refi?
    If the bank finances only 75% of the 800K, you’ll have to pony up 300K for your refi. Ouch!
    During the boom, properties were re-assessed to the increased valuation when a refi was done. Does it work on the way down as well?

  38. Posted by bobTrouser

    this older (and related) socketsite thread makes interesting reading now.
    from one of the comments:
    “So you’re saying that Wells Fargo, B of A, Chase, et. al. are all going out of business and/or the mortgage backed securities market for high income home buyers will evaporate?”

  39. Posted by spencer

    “Alt-a is a different animal from Subprime, lets be clear about that.
    If my rates go from 0.0000001% to 6%, no, I won’t be able to afford it. if it goes from 5% to 6%, I won’t be happy, but I can still afford it, easily.”
    there are at least 3x as many foreclosures predicted from alt-A, jumbo and prime loans over the next 2 yrs than from subprime loans. Subpprime was only the appetizer. we haven’t gotten the main course yet.
    While your exapmle of going from 6 to 7% may be affordable for you, it will put many people over the tipping point as many are already overextended.
    let’s take the average?? SF mortgage ($650K mortgage)
    6% = $3897/month
    7% = $4324/ month
    8% = $4769/ month
    a lot of people don’t have an extra 500-1000/month for their mortgage, especially when a lot of these buyers bring home only $6K-$8k/ month

  40. Posted by dub dub

    @tony — I had already apologized to you for my earlier valleywag slur 😉
    I’ve always said that google’s stock price is a lazy proxy for “the real SF”, and it’s doing as well as “more complex” spreadsheet modeling.
    Almost every tech company in the bay area (esp. google) could lose 15% of their employees without seriously impacting operations. And I’m sure a few of those are paying half a 6500/month mortgage in noe valley 🙂
    Incidentally, business credit (even short term lines) is completely frozen. I can not believe it. This is a real short-term ticking time bomb.
    If you want to close Noe Bagel down even faster, this is how to do it 🙂
    I don’t see how any of the intervention so far “forces” the credit markets to loosen, but maybe someone else can enlighten me.

  41. Posted by Trip

    Dub dub’s point is important. The recent slide has taken place despite a very healthy economy, particularly in Northern California. Housing price declines in a strong economy are nearly unheard of. Well, we are now heading into a huge economic downturn. Even if one disregards ARM-resets, etc. altogether, a $6000 30-year fixed mortgage that was barely affordable on two $100k incomes in the house becomes impossible at one $100k income. That is going to be the reality in more than a negligible number of SF households. I’ve related before how I saw many friends take big financial hits on their homes in the early-90s recession, and the recent bubble run-up puts all others to shame.

  42. Posted by PresidioHtsRenter

    ester (the landlord who lives in a TIC) says:
    > Alt-a is a different animal from
    > Subprime, lets be clear about that.
    The loans are not much different, it is the borrowers that are different.
    > If my rates go from 0.0000001% to 6%,
    > no, I won’t be able to afford it.
    You can get 0% financing for a while on a big screen TV but I never heard of anyone getting it on real estate.
    > if it goes from 5% to 6%, I won’t be happy,
    > but I can still afford it, easily.
    A 5% IO loan on a $1 million has a monthly payment of $4,167, if the loan goes to 6% and a 27 year am (after a 3 year IO period) the payment will be $6,240. A $2,000+ increase is “easy” for a wealthy landlord who bought a TIC for about 50% of what similar places were selling for a few years back but it is a big increase for most people.
    My sister has a lot of single (pushing 40 female) friends who bought in the past few years putting down as little as possible (since they spend all their cash on shoes and handbags) and getting the lowest payment possible (since most women even with MBAs from top 5 schools don’t make a ton of money since they like relaxing jobs with normal hours). I have not seen a lot of $1mm Russian Hill 1 br condos selling this year and know a lot of women that will not be happy when the 3.5% IO periods ends and they can’t make the payment that goes from around $3,500 a month (incl. HOA) to aboot $7,000 a month (incl. HOA)…
    It is way different than the early 90’s this time (when I had a tough time getting a fixed rate loan for 2.5x my income after making a 25% down payment)…

  43. Posted by RenterAgain

    “Even if one disregards ARM-resets, etc. altogether, a $6000 30-year fixed mortgage that was barely affordable on two $100k incomes in the house becomes impossible at one $100k income. That is going to be the reality in more than a negligible number of SF households.”
    This is real. We put an offer on a house earlier this year, and shortly after finding our bid was the lowest of many, my spouse was laid off. Not in high tech, btw. Our rent is manageable on my income, but a mortgage would not be. He’s found another job, but in the meantime we’ve resolved not to buy until Fall 2009.
    PresidioHtsRenter, I hope you are being facetious! I think your argument could apply to men as well–– the shoes/handbag comment was not needed…

  44. Posted by tony

    @dub dub
    doh! sorry my friend, i should have provided more context. my comment wasn’t meant as a dig nor as an i told you so (and thx for the sorry, though not necessary, as i understand where it was coming from). rather, there are a lot of people on this blog that know a heck of a lot more about economics and RE than i do (though i’d like to think i’m a quick study & thx to satchel and others, i’m down ~1-2% for the year… not ideal, but better than most).
    on the other hand, i’d wager than i know more about tech businesses and the tech ‘scene’ than 99% of this blog’s readers. and, i suspect you and a couple of others make up the rest of the 1%. so my comments were more “well, the first domino fell, here’s who’s next, and here’s where it’s likely to go. do you concur, and if not, how are you seeing the world?”
    i ask, as i debate my next move career wise. i’m tempted to grab some funding quickly and getting something going as more high quality ppl come free. otoh, it may make more sense to move to a bigCo and ride things out with a fat salary (but no material upside). your thoughts welcomed (and apologies again).

  45. Posted by FSBO

    Joe at 3:44PM – if real estate prices decline in real terms during a non-inflationary (or deflationary) period, then nominal prices will indeed decline.

  46. Posted by Mole Man

    Much of the buying was at inflated prices. Rewriting the loans with lower prices makes sense for the borrowers and the lenders and helps keep a lid on the chaos. If you actually look at the numbers people still end up paying a huge premium to get in at the top, and prices still correct. All the bloodthirstiness is understandable, but totally counterproductive. If you want just and reasonable markets then you need eternal vigilance, not years and years of deregulation, near zero interest rates, and calls to ARMs.

  47. Posted by diemos

    “Rewriting the loans with lower prices makes sense for the borrowers and the lenders and helps keep a lid on the chaos.”
    Actually, rewriting the loans is something perfectly reasonable. You could write it as a 30-year fixed with a reasonable payment and interest rate and a balloon payment for the balance at the end of 30 years. That would give inflation time to bail people out and “keep people in their homes” in the near term. But when loans are securitized there’s no one on the lender’s side with the authority to make such a deal.

  48. Posted by eddy

    Late to post but didn’t have the time to give this a read until now. The broad issue here is as serious as anything anyone here (under 50) has ever seen. Unprecedented.
    The market and the real economy is just now feeling the reality of subprime defaults after being front page news for 12-18 months. The impact is worldwide and is scary. AltA’s are failing now and the second wave is coming and will be worse. Prime are quietly happening and will increase steadily and all hell will break lose. We haven’t seen anything and the government interventions will only delay the inevitable collapse. Job losses and total economic slowdown are certain and will be significant.
    My only wish is that these freaking bailout plans should have a provision to give a credit to people who don’t own a home and should include massive breaks for truly first time home buyers. These are the people that are really getting it from all sides.
    Prices will slide in SF. It will start in the poorer areas and has already started to happen. It will work itself up through the 400-600k ranks, 600-800k (already happening). Eventually the $1-$2M will start to slide as well. The $2M+ homes will remain largely unaffected as the wealthy continue to do extraordinarily well.
    Bottom line is that if you make 300k and are waiting to get your SFH in PacHeights it probably aint going to happen anytime soon, but if you’re looking for a nice condo or SFH in some other parts of the city — just hang around till 2010 and you will have lots of options.

  49. Posted by DavidQ

    re: where’s Satchel
    He posted a few days ago that he’s taking a break again. Hope he comes back at some point.

  50. Posted by Brahma

    diemos wrote:

    You could write it as a 30-year fixed with a reasonable payment and interest rate and a balloon payment for the balance at the end of 30 years.

    For the sake of argument, let’s suppose that most lenders did this. The overall effect would be to both reward people who took out “liar loans” and to inhibit price discovery.
    You’d be rewarding people who lied on their mortgage applications because they’d still be living in the house, still taking the mortgage interest deduction, avoiding the FICO hit of a foreclosure (thus not paying the opportunity cost of having substantially impaired credit for seven years) etc.
    If these people can’t make their payments, then they need to get foreclosed on, or perhaps sell short with a tax hit for the short amount. Anything other than that creates a moral hazard situation.
    You’d be inhibiting price discovery, because someone living in the house would simply not sell until they could recover at least the amount of the balloon payment, and therefore prices won’t fall, in real and nominal terms, like any asset should after a bubble has burst. Why should they move? They aren’t going to get a deal like the one they have any time soon, so the incentive would be just to ride out the downturn. Which goes to the point of the original post.
    This punishes the people who worked hard, saved and still couldn’t get into a home because the market was being artificially inflated, partially by people taking out Alt-A mortgages and the like to purchase homes they couldn’t afford.

  51. Posted by diemos

    “This punishes the people who worked hard, saved and still couldn’t get into a home because the market was being artificially inflated”
    Yes, I know. That would be me.
    Unfortunately, the only good way to solve this situation is never to allow it to occur in the first place. Once the system has reached this state there’s no good way to unwind it without a great deal of collateral damage to the real economy. The disappearance of credit-money will suppress real economic activity below it’s natural equilibrium leading to mass joblessness and suffering that’s not really necessary. (Although some contraction can’t be avoided as we stop borrowing and start living within our means.)
    To fight this the government needs to get money back into the economy, it can do that by:
    1. Encouraging private parties to lend and borrow, but we’ve run out of creditworthy borrowers and solvent lenders.
    2. Become the borrower of last resort, running up the national debt to fund bailouts and welfare/job programs. Which they can do as long as foreigners show up to the debt auctions, but has the same long-term dead-end as trying to create economic activity through private borrowing.
    3. Fire up the printing presses and start flooding the system with fiat currency to fund those programs which crashes the dollar exchange rate and punishes the prudent savers in favor of the foolish borrowers.
    It’s tempting to want to see justice done with the prudent rewarded and the foolished punished but to let the system take it’s course would dish out severe punishment on the just and the unjust alike. Unfortunately, to minimize the suffering of the just the unjust must be helped at the same time.

  52. Posted by waiting2nest

    I echo your sentiments. My husband and I live in a small (less than 1000 sq ft) apartment with our Toddler son and share a 10 yr. old Honda. We make top 1% income, but we’ve been living below our means for several years in order to save up for the substantial down payment we now have(plus signifant amount of extra cash stowed away in case one of us looses our job, gets sick, etc.). I am very angry and frustrated that the USG thinks nothing of modifying loans for people who either lied on their mortgage apps or were too stupid to realize that they really cannot afford to pay over 10x their salaries.

  53. Posted by sfrisa

    I am surprised that people earning top income (although now-a-days those percentages also became relative to say the least) still living in under 1,000 sq. ft, raising kids and saving money for a downpayment. That is what me and my husband were doing for the past 7 years! Knowing that the market had no other course but to correct itself, we were planning to invest a lot of cash, taking a neglectable mortgage to free ourselves from a necessity to earn the “top” income you were referring to. And, voila, the unexpected has happened, the market is being prevented from self-correcting, and I am still chained to my computer to produce more taxes for future bailouts. My only guess now (I wouln’t dare to say “hope”) that those modifications would not be sufficient to stop the tsunami. But, again, I was apparently wrong for sooo many years, that I cannot trust my judgment anymore…

  54. Posted by salarywoman

    Unfortunately there’s a lot more that’s rotten at the heart of the American financial system than just bad mortgages. Check out the most recent episode of This American Life, “365: Another Frightening Show About the Economy” (10.03.2008). Learn about credit default swaps and weep.
    (Also recommended “355: The Giant Pool of Money” (05.09.2008)
    One reason why it may be better to “own” than to rent these days is that you may have some control over whether you default on your mortgage but you have no control over whether your landlord does.

  55. Posted by Chersonese

    sfrisa, waiting2nest,
    I’m in the same boat. I can’t even count the number of friends and relatives (including my own wife) who pressured me to buy a house. I have resisted thus far, have saved up a lot of cash, have lived in a crappy apartment all this time, and now am extremely angry at the attempts to keep people in homes they should not have bought. Most Americans can “get by” with WAY less than what they have. If your past decisions mean you have to sell one of your BMWs and drive a Honda and downgrade from a 3 bedroom two 2, and put 2 kids in the same bedroom…. well, that sucks for you, but you’ll survive.
    Many of the friends who were pressuring me to buy had lower household income than us and a couple of them are now headed toward big financial trouble. One Googlite may end up needing to sell his fancy new $1.8mm place because his old $1.1mm house is sitting on the market and he can’t afford both. In my opinion he was a bit greedy, took a huge risk by moving into one place before the other sold, and, if he were to meet financial ruin as a result, it would not be cosmically unjust. Another friend has already lost $100K in the value of their Daly City home and is basically stuck there until they realize how much money they are wasting each month and that it’s worth more than 7 years bad credit and walk away.
    I was at a BBQ this weekend where someone speculated that personal credit regulations would change as a result of mass foreclosures. He thought that the 7 years bad credit would be reduced to 3 because of the huge number of people being foreclosed on. Well, I don’t see that happening for a variety of reasons, but can you imagine! That would really be the last straw…

  56. Posted by PresidioHtsRenter

    The biggest change “this time” is the huge disconnect between rents and mortgage payments. My parents have owned Bay Area rental homes since the 60’s and every home they bought had a mortgage payment less than the rent the day escrow closed. In the past very few people “walked away” since it would cost more to rent a similar home.
    In the early 90’s I lived in the Oak Creek Apartments in Palo Alto for a few months. When I bought (my fixer upper Eichler) in below Middlefield my mortgage payment was less than I was paying in rent at an apartment. When I started business school I was able to cover my entire mortgage by renting out two rooms in the house to classmates.
    When I bought a home in Burlingame west of El Camino in 1996 my mortgage payment was actually lower than it would cost to rent a similar home in the area. In 2006 a home on my old street in Burlingame sold for $1.6mm (I sold for $1.2mm in 2003 since I thought that the bubble was about to pop). If that guy who paid $1.6mm put no money down with an 80/20 structure his monthly nut (PITI) will be about $12K a month (when he can rent for about $3-$4K a month).
    When you can save $8K a month after living rent free for about a year there will be a lot of people walking away (but then again we may be at the bottom as ester says and prices will be up by year end). I bet we will see more companies like the two firms below start up in 2009.
    P.S. To RenterAgain the “shoes and handbags” comment was a little facetious but I can’t tell you how many women I know that bought at the top of the market so (as their Realtor ® told them) they “wouldn’t be priced out forever”… Like most guys I knew that no one would ever pay my bills so I worked long hours and lived like a college student with roommates through my 30’s saving and investing every bonus. A large number of women that I have known since I was a kid didn’t save a penny since they thought a guy would sweep them off their feet and pay their bills (just like Dad did for their Mom). Since they watched the home their Dad bought in Hillsborough or Atherton go from $100K in the 60’s to $5mm in 2005 they figured that the one bedroom condos they bought in Russian Hill. Pacific Heights or the Marina in 2005 will be worth at least $50mm in 2045…

  57. Posted by HappyRenter

    sfrisa, waiting2nest & Chersonese,
    We have also been living in a 900 SqFt apartment (no kids though) for the past 3 years waiting for prices to return to normal.
    On the bright side not having mortgage stress and being relatively young (32) has enabled us to work very hard (80hrs is normal) and we should have two commas in our combined W2 income this year.
    Having low expenses has also enabled us to save a substantial sum for a down payment along with saving for retirement and having 2 international vacations a year.
    I’m happy renting, but would really like to get a place in Presidio Heights when prices there fall from their current peak levels (I may be waiting some time).

  58. Posted by Dude

    My partner and I are in the exact same boat as the rest of you. We were hoping that prudence, hard work, and delayed gratification would eventually be rewarded. But I think this has now gone beyond “reward and punishment.” It’s no longer about encouraging planning and reprimanding bad decisions – it’s now a threat to the whole machine, as diemos points out. It’s also a political game.
    I honestly believe our worst predictions may yet come true: bad credit erased, bad loans forgiven or written down, etc. All with no recourse to the fools who bought stuff they couldn’t afford. And all at the cost of the taxpayers. Let’s see what happens in the next 6-12 months, but I think it’s on the horizon.
    I only wish they still had 0% down loans. This would be a great time to buy as expensive a place as possible, and then not make a single payment. Not even one. By the time they got around to foreclosing on you (at least a year), your loan would be owned by the Treasury and would be written down by 20-25%. Effectively, you’d get to buy at 2010 prices today after living free for a year.

  59. Posted by jordan park

    We’ve also been staying in a rental situation despite our high incomes and toddler (with another on the way) and gotten unbelievable hassle from friends and colleagues about not buying. We did move to a nicer apartment a couple of years back when our son was about a year old, though, and although it is more expensive than we wanted to pay, I’ll admit that it is gratifying to live someplace that’s larger and nicer than most of our friends’ condos at half the monthly cost.
    We used to work long hours in pursuit of higher income and bonuses but have no interest in living that way now that we can hang out with our son. My husband took a 50% pay cut to go from 80 hours/week to 40 earlier this year, which was totally worth it, and we are insanely privileged that that income change meant only saving somewhat less money each month (it helped that I got a big raise at the same time). In exchange, he now works 9-5:30 and will be able to stay home for two months when our daughter is born, on top of the four months I will take.
    We try to focus on the positives in our lives instead of getting upset by a bailout we can’t control–great kid, awesome preschool, nice apartment, 15-minute commutes, no debt, safe jobs, plenty of savings to ride out the economic storm–and not pay attention to other people’s living situations. Owning would be nice but not at any cost. I do appreciate not having to hear everyone talk about their real estate brilliance anymore and how we have to get on the California real estate escalator before we’re priced out forever, blah blah blah. I expect we’ll buy someday if we return to a universe where we can find a place that’s nicer than our apartment for 3-4x our incomes. But if that doesn’t happen it’s not like we live in misery and squalor.

  60. Posted by RenterAgain

    “On the bright side not having mortgage stress and being relatively young (32) has enabled us to work very hard (80hrs is normal) and we should have two commas in our combined W2 income this year.”
    Sheesh, now I’m kinda depressed. I’ve got a few years on you, and we’re nowhere close to having two commas in our combined income. Only inflation will change that. I just hope others in your financial situation are also going to be looking in Presidio Heights or other neighborhoods far out of my reach 🙂

  61. Posted by NoeValleyJim

    there are at least 3x as many foreclosures predicted from alt-A, jumbo and prime loans over the next 2 yrs than from subprime loans. Subpprime was only the appetizer. we haven’t gotten the main course yet.
    Spencer, who is predicting this? I thought the number of borrowers was approximately the same, and the sub-prime borrowers had worse credit. What default rates are you using in your analysis for each credit category?

  62. Posted by anon

    If you work 80 hours a week for $1,000,000, could you work 40 hours a week for $500,000? Seems like life would be a lot more fun and your standard of living would not need to change one bit (unless you roll around in a Ferrari Enzo).

  63. Posted by waiting2nest

    It’s strangely comforting to know that many of you are also in the same situation (renting and saving instead of falling victim to the RE mantra of “buy or you’ll get priced out” and “real estate only goes up” in a grossly inflated market). Thanks to all for sharing. I’m still angry about the bailout, but thank you jordan park for putting things in perspective.

  64. Posted by waiting2nest

    “I am surprised that people earning top income (although now-a-days those percentages also became relative to say the least) still living in under 1,000 sq. ft, raising kids and saving money for a downpayment.”
    We are on the bottom end of that 1% – – just under $400K. That’s just middle class by SF standards (or it sure seems like it anyway).

  65. Posted by Trip

    NVJ, I don’t know where the numbers or predictions for Alt-A defaults come from. But Calculated Risk did a very good bit a couple months ago explaining the whole concept of Alt-A loans and why they present at least as great, and possibly greater, risk than subprime loans. Hence the default rates should be at least as high, although they are coming later due to the initial 2-5 year teaser period in most such loans.
    By the way, did everyone see that the Fed is now buying commercial paper! Didn’t take long at all to beef up that old bailout package.

  66. Posted by dub dub

    @Trip — they are going to have to do a lot more than that! Small businesses do not use paper, and as far as I can tell, small business credit lines frozen or nonexistent.
    Nobody has explained how what has been done will free up small business lines, unless you believe in some sort of “trickle down” credit theory.
    Half the economy is now operating with a plastic bag over its head! The good news (!) is this can’t go on much longer — pardon me, I feel sleepy 🙂
    Oh, and talking about RE prices in this environment is a little like complaining about the smell of the plastic bag 🙂

  67. Posted by spencer

    “We are on the bottom end of that 1% – – just under $400K. That’s just middle class by SF standards (or it sure seems like it anyway). ”
    I’m right there with you, except single and a $200K earner. I pay 14% of my gross income on rent and have plenty of money to save, invest and have a nice life.
    I can’t imagine paying >40% (or even 30% for that matter) of my gross on housing. there are much more important things in life than owning a home (like retiring early). Once I can buy a large (>1200sq ft) 2bd 2ba in pac hts for $650K, i will jump in.

  68. Posted by spencer

    “Spencer, who is predicting this? I thought the number of borrowers was approximately the same, and the sub-prime borrowers had worse credit. What default rates are you using in your analysis for each credit category?”
    Credit suisse: numbers of ARMs resetting is much much higher for Alt-A and Prime.

  69. Posted by gmh

    Wow, if these comments are true, SS attracts a really skewed sample of individuals. Claiming that $400K is “just middle class” by SF standards (or the standards of any major city) is going to get you tagged as out-of-touch even faster than John “I can’t remember how many houses I own” McCain! It’s also unclear to me why, at that salary, you wouldn’t pay what would amount to less than 5% of after tax income to upgrade to a larger place, but maybe that’s just me. Certainly it seems to go against the permanent income hypothesis/life cycle model (which postulates that you should smooth consumption over your life).
    [Editor’s Note: We’re detecting a bit of hyperbole, but as a matter of fact we do (see The Average SocketSite Reader (Is Anything But). That being said, only 10% of our readers reported having household incomes of over $400,000 a year (with the average over $200,000).]

  70. Posted by ester

    The two of us have expressed very different opinions on RE here on this board.
    But your comment of “Once I can buy a large (>1200sq ft) 2bd 2ba in pac hts for $650K, i will jump in.” made me laugh so so so hard.
    So, we are the same in the end. I did just that, back in 2005/2006.

  71. Posted by spencer

    “So, we are the same in the end. I did just that, back in 2005/2006”
    I am not interested in a TIC though. I would like a large top floor condo

  72. Posted by spencer

    what i am looking for currently seems to be priced in the $900K to $1.1M range.
    with a 25% drop, those will be in the range i would like to pay

  73. Posted by waiting2nest

    “It’s also unclear to me why, at that salary, you wouldn’t pay what would amount to less than 5% of after tax income to upgrade to a larger place”
    We can, and may move to a larger place some day when our small apartment really starts to drives me crazy. In the meantime, we’re staying put because:
    1) Despite the small space (and by no means luxurious), we have an incredible view of the Bay, Bay Bridge & Ferry Bldg from the large picture window in our living room, and a view of Alcatraz and Coit Tower out of our corner bedroom window.
    2) It’s a convenient location. Husband can walk to work downtown, and I can walk to the BART station for my daily commute to the East Bay.
    3) But most importantly, we’re saving a lot of $$$ by living in our small apartment. By living below our means, we now have a substantial down payment (for when we’re ready to buy), we max out our retirement accounts every year, our son has money for college, and we’re able to splurge on one or two nice vacations /yr and make frequent trips to NYC to visit my mother-in-law. We’re also debt-free.
    For all these reasons, I’m willing to tolerate our current living situation.
    And, unlike McCain, I do not own a home – – not even one. I owned a studio condo in Cow Hollow once when I was single, but sold it in 2002 when I got engaged.

  74. Posted by ester

    Spencer, yes, it was a TIC when I bought it. In another 12 month, it will be in lottery. If we get super lucky, we will convert. Otherwise, we have to wait from 1-6 yrs.
    For me, I would rather take the calculated risk in exchange for rewards, than sit there and day dream.
    For a 25% drop in Pac Height, you need to be very very very patient. For an area that is pretty much immune to the correction so far, what make you think that 25% is in the near future??

  75. Posted by icallbs

    My wife and I have also chosen not to participate in the recent (past 4 years or so) madness despite our high income and savings. We’ve dealt with plenty of “why don’t you buy a place” comments from friends and family. The funny thing is, the more we save, the more critical we become in terms of evaluating anything involving the dispensation of our cash. Our rent is about 1/3 of what a mortgage on a similar place would be (yes, we benefit from rent control). It’s as if the less you have, the more willing you’d be willing to pay for something. The last decade has been fueled by other people’s money. If everyone along the whole chain (from borrower to buyers of MBS) had been making decisions as if it was their own money they were gambling with, we wouldn’t be in this fine mess.
    The stickiness of real estate prices if frustrating, but give the sellers a year to hang in the wind of the current economic environment, and prices may well come unstuck before too long. With the credit contraction, the demand has vanished relative to the supply. Sellers will eventually realize this.

  76. Posted by Foolio

    The Chronicle “Home Sold” archives don’t show anything selling for $623k (a number you supplied in a previous post) from Jan-Mar 06, much less a 1300 sf 2/2 in Pac Heights w/ parking.
    What gives?

  77. Posted by ester

    Sorry I can’t give you the exact address because that will me very comfortable. You can choose to believe or not believe what I said.
    That being said, I can guanrantee you that if you go into MLS agent version, the transaction is right there.

  78. Posted by ester

    I just realized that i did not read my own typing a 2nd time before hitting that post button.
    Anyway, I am sure someone on this board has access to the agent version, and will pull that up. So, this is my last posting in that regard. Will not respond to any guess.

  79. Posted by San FronziScheme

    For a 25% drop in Pac Height, you need to be very very very patient
    Deflation is the word du jour and nobody’s immune anymore, imho.
    Everything is possible. Heck, prices could double too. Look at Wall Street: nobody know where we’re going. this is uncharted territory for RE, banks, stocks.

  80. Posted by Trip

    Six months ago, I would have been reluctant to predict a 25% drop in Pac Heights ever (maybe 15-20% max). But I would now bet on it within the next 18 months. Spencer will find plenty of very nice, large Pac Heights condos in the $900k-$1.1M range, and for less than that. One thing I’ve learned in the last year is that it is almost impossible to paint too bleak a picture on the direction of housing prices. We’re returning to fundamentals. There will be some support from the $625k conforming loan limits but that is the only support.

  81. Posted by diemos

    Everything in the city 50% off from peak and Case-Schiller below 110 by 2011. As I’ve been saying for a year and a half.

  82. Posted by ester

    Well, whether Pac height is going to drop 25% is something that only time can tell.
    I have to say that some people here say more from their emotion than from facts.
    In the mean time, I am busy shopping for two friends (who is a top loan agent in Wells Fargo, the other a FSA engineer with nvda)in SF. One is looking for a 1/1 in north beach (1000 north point to be specific), the other 2/1 anywhere in 7&8.
    Good luck waiting

  83. Posted by Jake

    Not to be inflammatory, but who are you people making so much money and are griping about prices and ability to buy a place? The median income in SF is WELL under 100k and by pretty much any measure, you guys are rich, period. My partner and I make under 200k and live very comfortably in a very nice Pac Heights building and unit of 1200 square feet that we bought one year ago with 20% down (and no we don’t have an AltA or any other kind of freaky mortgage). We knew that we were buying when prices were high, but frankly didn’t care as we bought the place we ultimately wanted and could afford and knew we would be staying in a long time. We have no regrets as a result and are happy paying our place off in 20 years rather than 30 at a nice fixed rate. I just don’t see how, if you are making that kind of money, buying is an issue for you IF YOU WANT TO BUY! A house should not be an “investment” but just that, a home. Your investments and savings should be elsewhere. Point is, if you want to buy a place, stop whining and go buy it. Now is a good time, especially if you’re loaded with double comma incomes.

  84. Posted by ester

    Yeap, I had a good laugh too. I don’t believe all these people making m$$ and renting, because that is just not what i see in real life.
    Every one of my friends, coworker etc, with a household income of $200K have bought already. No exceptions.
    I am a budgeting director for a high tech firm with 9000 employees, i am making $170K. Husband is a sales director, making $130K. I wonder what all these people do making $200+K.
    If you did not buy last year, I bet your $$$ is 30% less now assuming they are invested in stocks.

  85. Posted by ester

    And because of what I do, I see everyone’s salary in every company that I have worked for.
    For $200+K, you need to be a general manager of a product line or a site VP, or a VP of some sort of corporate functions (like HR, legal, Finance).
    But people at those level don’t work 80 hours a week, they do 40-45 hours a week.

  86. Posted by al


    30% less in stocks is better than 0 or negative equity on your house due to price declines.

  87. Posted by waiting2nest

    “…who are you people making so much money and are griping about prices and ability to buy a place?”
    Can’t speak for others, but for me and my husband: We are not griping about the ABILITY to buy because we can certainly buy a house today if we wanted to. In fact, we are a realtor’s dream buyer (high FICO, substantial down payment, verifyable salaries, and renters – – i.e.: eliminates the need to sell our current residence in order to buy another in this abysmal market).
    However, we CHOOSE NOT TO BUY today because we don’t believe it’s fiscally savvy to buy a depreciating asset in a declining market.
    “A house should not be an investment but just that, a home. Your investments and savings should be elsewhere”
    I respectfully disagree. Even for “rich” people like my husband and me, the house we’ll eventually buy will still be a MAJOR purchase for us — one that will eat up the hundreds of thousands of dollars in down payment that we worked really hard for many years to save. And while we, too, PLAN to stay in that house forever, you never know when unexpected life circumstances (like job loss – esp. in this fragile economy, job transfer, major illness, tragic accident, etc.) will force us to sell our beloved home while house prices are still falling. And if that happens, we could potentially loose that down payment and more. Even for “rich” folks like us, several hundred thousand dollars is NOT chump change. And for THAT kind of money, a house is not “just a home” for us. It is also a major investment, along with our stock portfolio and other assets.

  88. Posted by waiting2nest

    BTW @Jake and ester:
    Who are we? and what do we do to make so much money? I am a senior marketing manager in the medical industry, I only make low 6 figures plus bonus. My husband is a principle at an options trading firm. He’s the breadwinner in our family, making nearly $300K/yr (which really isn’t even considered a lot of money in his industry).
    “Every one of my friends, coworker etc, with a household income of $200K have bought already. No exceptions.”
    Now I find THAT hard to believe. How many of your friends and coworkers who bought in the last 4 years can you honestly say are not in a financially vulnerable position?

  89. Posted by jordan park

    Well, ester, I’m not going to attach pdfs of our paystubs to prove our income is in the top 1-2% nationally (even after taking a six-figure pay cut this year). Given that you won’t disclose your address I’m sure you can relate. But my husband is in venture capital and I’m in medicine. So you wouldn’t have run across information about our income in the swath you’ve cut through corporate America; we’ve never worked anywhere like “a high tech firm.”
    As mentioned, we’re fine with renting. Renting means we could easily swallow a pay cut that allows us to stop at the park every day and play with our son as we walk him home from preschool. If we’d bought, we’d still be working long hours to pay the mortgage just so we could say we owned a place. Our liquid savings are in Treasuries, and our investments are pretty conservative given that our assets are high enough that we don’t need to take on much risk, so we haven’t suffered 30% losses, thanks. Whereas all home equity is conceptual until you sell.
    The only thing I dislike about our life is being called a liar by people who can’t conceive that I’m not just DYING of envy because we haven’t bought a place even though we could, because no one who rents could possibly be happy and no one who makes serious money could possibly rent. It’s like when we lived in France a few years back and people couldn’t get over the fact that we were both thin and American, because no American could possibly be less than 50 lbs overweight. The experience gets old quickly.
    Maybe we’ll move back to Paris, where people eventually believed the evidence of their eyes (Mince! Or in my case now, enceinte) but no one ever felt the need to brag about owning a home. I’m proud of my work, of having a good marriage, of my kid’s good behavior; but being proud of a pile of sticks and stucco makes no sense to me.

  90. Posted by sfrisa

    As we approached a “dangerous territory” of personal income levels – the temperature has risen! I have to confess – our family income is far from two commas on W-2s. We are the average SS statistical reader: hanging somewhere around 200k. We both took considerable pay-cuts to spend more time with our kids. I rarely work more than 15 hours per week (from my home office!)and my husband is home before 5pm. Yes, we are able to buy, and saved a lot of money when we were working 80-hour weeks. But it is getting nearly impossible (from a purely psychological point of view) to “catch the falling knife” by stepping into the market in the midst of this historic downslide (especially after missing sooooo many opportunities to buy years and years before this downfall). However, everything could happen – the prices may start to rise (although I do not see how), can just stay flat, or fall for a percentage or two…
    Thank you Jordan Park for trying to refocus our attention to what is more important in our lives, but, you are appealing to the SS readers! Let’s face it: happy, satisfied, envy-free people, with gratifying careers, who do not give a damn about home-ownership (hey, that suppose to be me!) do not spend their nights browsing this site!
    There is certainly much more to it! And I apologize for any unintended generalizations

  91. Posted by Foolio

    I certainly understand that you’re concerned about your privacy. I’m sure you’ll understand that I’m concerned about your credibility.
    Perhaps you really did buy what, where, when and for what price you said you did.
    Too bad no documented evidence (that I can find) exists of that. While imperfect, I have found SF Chron sales listings to be fairly reliable. The fact that your “sale” didn’t appear there during the timeframe you indicated gives me great pause.

  92. Posted by jordan park

    I suppose you’re right. I come here to get reassurance that I’m not crazy after yet another evening of grief from my mother-in-law about how we are irresponsible for continuing to rent with another baby on the way. I should laugh it off like my husband does, but lately it’s been frustrating.
    In her defense, if I’d bought a 4/3 view home in the Berkeley Hills for ~$200k in the 1980s I imagine I’d be pretty high on homeownership too. “We thought it was the top of the market then, too! But Bay Area real estate only goes up!”

  93. Posted by sparky-the-bear

    I’m rich too. I could buy if I wanted to, too. I have lots of time with my kids, too.

  94. Posted by ester

    I am not familiar with the Chron data that you were refering to here, I have accesst to MLS agent version, and it is right there everytime I looked.
    Be careful that you don’t look for the exact $623,000, because that is a rough number that I remembered without going back to the papaerwork. On top of that, i got agent discount (bake commission into sales price etc).
    That is all i can share with here. Other than that, i can only say it is on MLS, it is on property shark.
    Back to personal income debate, I am not saying everyone that claims $400+K and non owner is a liar, I am saying a good % of those are exaggerating their income.

  95. Posted by EBGuy

    In Ester’s defense, fractional TIC loans were just coming online during the time frame that she bought. It’s this “financial innovation” that allowed TICs to really take off and nearly reach parity with condos.
    As a side note, always good to see many who earn six figure multiples in jobs that add liquidity to the market and help with price discovery. I hope your services will continue to be needed in the future.

  96. Posted by waiting2nest

    “I am not saying everyone that claims $400+K and non owner is a liar, I am saying a good % of those are exaggerating their income.”
    Based on what? Based on the fact that ALL of your friends and co-workers who make $200K+ bought houses, no exceptions???? Therefore, all posters on this board who rent and claim high income MUST be exaggerating since no one who makes $400K could possibly rent????
    Like I said before, our incomes are verifyable with W2s and tax return forms.

  97. Posted by al

    My household is earning 200K+ and we are renting by choice.
    I wonder how many of ester’s friends & co-workers who have bought will be forced to rent soon?

  98. Posted by ester

    I am honestly not understanding your question here:
    “Now I find THAT hard to believe. How many of your friends and coworkers who bought in the last 4 years can you honestly say are not in a financially vulnerable position?”
    I have to say non of them, at least to my knowledge. why do you think they should be in some sort of financial difficulty??
    With $200K, your take-home would be roughly $12K. If you have to spend 3-4K on your home, why would you be in “financially vulnerable position?
    what i don’t understand is that people seem to think that if you buy, you would be under huge financial stress and pressure. But that is not the case. If you run some simple math, it is not that hard to see that.
    We bought in 2004 for $775K. 10% down at closing, another 10% payoff after 6 months when the low rates expires. the rest 80% is at 30 yr fixed at 5.25%. monthly mortage (in+principle) is $3500. (995 in equity paydown, rest in interest).

  99. Posted by ester

    A couple of you folks are getting really emotional here, and I personally don’t understand that.
    Foolio kept questioning my claim to have bought a 2/2 in Pac Height for $600+K, and I don’t feel offended at all. It is up to him to believe or not, and it does not make a difference to me either way. So, I am not understanding where is this anger coming from when I was only making a blanket statement.
    And what is my basis for making that statement? On all kinds of stats out there. $200+K is not a low income family. People with that income should not be in “financial vulnerable situation” unless they went out to buy a $3M home. If it is something upto $1M, it should be ok.
    On the flip side, I never said that certain people “MUST” be lying. I only said that I don’t believe that there is a huge population with $400+K and don’t buy. Could there be 1 or 2, sure.

  100. Posted by Foolio

    @ester: Don’t worry, no anger here.
    I’m a little surprised to now hear you back off your $623k number. Your previous post was pretty specific on price, and I would think something like the purchase price would stick in your head. Although I’ve never successfully bid for a place here, I can tell you the exact amount for all of my (losing) offers, and some are much farther back in time than early 2006. But hey, everyone’s different. You do remember that the place still has 2 bathrooms, right? 😉
    I’m also a little surprised to hear you mention (for the first time, I think) that you are a licensed real estate agent, but I guess that’s neither here nor there.
    Out of curiousity, just how many properties do you own?

  101. Posted by spencer

    “Every one of my friends, coworker etc, with a household income of $200K have bought already. No exceptions.”
    Most of my friends are in this income area and less than half own.
    As for me, I am head of Project Mgmt at a biotech firm and barely squeak out the $200K number
    I would never consider paying more than 3.5x my income for a home, so at current pay, $700K is my limit. Again, housing is a depreciating asset at this point in time. I think you would need to stay in a home for 10+ years to not lose money in this market. I don’t think i could commit to more than 5-7, so would more than likely less a sginificant chunk of my $150K downpayment.
    Also, renting is so cheap relative to owning. and while this reamins the case, i don’t see the impetus to own.

  102. Posted by ester

    more than 1 or 2, on our joint income of $300K. Another reason why I don’t understand all these concerns about “financially vulnerable positions” comment.
    And yes, everyone is different. One time my mother asked me how much I spent on our main house, because I have quoted her multiple numbers ranging from $750K to $800K.
    And yes, I am a licensed broker, got my license when i was laid off one time during my maternity. Since I could not be looking for a job at 50+ pounds more than I normally am, I studied thru California License School (or something of that nature) and got my license. Never practised it, other than to buy for ourselves.
    Spencer, you gave yourself a limit of $700K. We gave us a buget of $350K back in 2004. We gave 7 offers, ranging from $350K to $825K.

  103. Posted by Foolio

    @ester: So, you pay for MLS access despite never being a praticing agent?
    How much does that cost?

  104. Posted by ester

    that is correct, it is between $400-$500 a year, Don’t remember the exact number. Give me access to a lot of fun information. Worth it in my judgement.

  105. Posted by Foolio

    @ester: Thanks for the info. I’ve been considering getting a license for some time, so the info is helpful.
    But I gotta say, 3 properties @ approx. $2M, on a $300k joint income with a kid! Wow, you guys are really living large! Mrs. Foolio and I don’t make $300k, but we’re not far from that, and feel uncomfortable at anything over $1.4M, and we don’t even have the kid expenses to worry about…

  106. Posted by ester

    2 of our rental investments are completely cash neutral, one is very close to breaking even, we are probably sinking $300 a month into #3. #4 is my famous TIC, sinking $1000 a month on it. Then, there is our main house of $3500. All in all, we spend $5000 a month on all house.
    then there is $2000 a month on nanny, $1000 on our 3 yr old’s preschool. 2 yr old is ready to go to school next yr. 8 yr old is in public school.
    I cook every night, and that is why I almost never stay past 6:30PM.
    I spend very little on bag/shoes, etc. Do not want to have to make decision (on which shoe goes with which bag) every morning. Have maybe 5 pairs of shoes (for all year), and one bag, that is it. But I am very happy with this simple life. Husband claims to like simple life, but he has maybe 10 GPS, 10 blue tooth phones etc.
    We still manager to have close to $300K in stock market, of couse, that is nothing to envy these days. You probably feel sorry for me now.

  107. Posted by ester
    check this one out. That is what I used. You can buy study materials on line, study yourself, take the online test, and then go sit in the real test.
    It took me 6 months to finish all these, and got a broker license directly. That way, I don’t have to hang under any body. But I was on maternity back the. If you work, apparently, you can’t study full time.

  108. Posted by Dude

    Wow, ester. I don’t even know where to start. So your “investments” are losing a cumulative $1,500/month? Ever consider that the coming recession may cause both home prices and rents to drop, which would make the bleeding worse? And it could last years.
    As a budgeting director, you should be able to build a simple cash flow model and calculate an IRR. The only way you generate a positive one is to sell at a price that exceeds your purchase + monthly lost cash + transaction fees + maintenance expenses, all while taking the time value of money into account. Plus it sounds like you put a lot of money down on these places, making your cash-on-cash return even worse. All I can say is….wow. Better hope for massive inflation.

  109. Posted by ester

    that is your over simplified ways of looking at things.

  110. Posted by waiting2nest

    “2 of our rental investments are completely cash neutral, one is very close to breaking even, we are probably sinking $300 a month into #3. #4 is my famous TIC, sinking $1000 a month on it.”
    Which means that none of your real estate “investments” are profitable.
    “Then, there is our main house of $3500. All in all, we spend $5000 a month on all house. then there is $2000 a month on nanny, $1000 on our 3 yr old’s preschool. 2 yr old is ready to go to school next yr.”
    Ester, I find it incredulous that you, as a Budgeting Director, can’t seem to comprehend that even you yourself are in “a financially vulnerable position”. You are either in complete denial of your precarious situation, or you are just plain naive. I hope that neither you, your husband, nor any of your tentants loose your jobs in these times of economic uncertainty to further add to your debt burden. Good luck — and I really do mean that sincerely.

  111. Posted by incredirent

    chicken money always loses.
    go ester go.

  112. Posted by paco

    no wonder you are still waiting to nest.
    despite your analysis you still miss the benefits of owning and building equity on the rental places using pre tax dollars to do so. money lost on rental properties offsets other taxable income.

  113. Posted by Dude

    “that is your over simplified ways of looking at things.”
    Well then, please enlighten me. I really want to understand how you plan to make money on investments that lose $1,500/month? Volume?
    “chicken money always loses”
    Great point. I heard there were also contrarians on the Titanic. When the chicken money was running for the life boats, they were laughing at the dumb mob that was panicking for no reason. Wonder how they fared?

  114. Posted by Tax Expert

    “money lost on rental properties offsets other taxable income.”
    Sounds like someone doesn’t understand the passive loss rules of the tax code. At $300K household income these passive losses can’t be used to offset active income.

  115. Posted by west side story

    Waiting2nest & Jordan Park – Just have to put in a good word for you both, and your sticking to your guns. I have a friend (married with child) who is often insecure aout the fact that they rent. She once told me that other friends give them a hard time about not owning. My response is that unless those people want to pay your mortgage for you, it’s none of their business and they certainly shouldn’t be giving you grief about it!
    That being said, sfrisa made me chuckle (and made me think about why exactly I come to SS) : “Let’s face it: happy, satisfied, envy-free people, with gratifying careers, who do not give a damn about home-ownership (hey, that suppose to be me!) do not spend their nights browsing this site!”
    Personally, I come for a couple of reasons:
    1. As a homeowner I do like to keep an eye on the market, even though we are in our life-long (barring unforseen/unplanned changes) home. At some point I could see buying a smallish apartment building, and/or buying a small place for my parents.
    2. Some of the more recent economic analysis has been VERY informative – I miss Satchel for that (other great perspectives are still here, but Satchel’s willingness to post with both quantity as well as quality inspired great discussions!)
    3. Mostly, I am fascinated with personal finance psychology. What motivates people to live (and spend) the way they do? Besides the purely voyeuristic aspect, recent events have clearly shown that the decisions of others have real impact on all of us!
    So I find someone like Ester to be fascinating. I could never live like that – way too much real estate debt for my comfort level. But clearly she seems ok with it, so I do wish them the best. I just hope that they made their decisions wiith facts and analysis (combined with their own sense of personal risk) and not just a blind faith that “real estate always goes up”, or that everyone with a certain income automatically buys.
    To those who have chosen a more conservative path, I say good for you too. That is definitely my family profile and it has served us well. We have been blessed with high income, and also had the benefit of buying our first house 11 years ago. But all along we have been very conservative on how much debt we would take on. And during the dot-com boom, when we really would have liked a bigger house, we took ourselves out of the market because we just weren’t comfortable doing the crazy things that were happening in the market. We waited for years till things settled down (they always do) and swooped in to buy our “keeper” house. And in the last few years when our income shot up, we have stayed put with a mortgage that we have never lost a moment’s sleep over (and still don’t worry about, even with all the financial craziness going on). I guess that is the piece of the buy equation that is frequently left out in many of these discussions – your own personal “sleep well” number! Value it and respect it, and you won’t go wrong.
    I have to put in a plug for a book that came out a couple years ago – “The Two-Income Trap” by Elizabeth Warren. One of the arguments she makes is that the rise of two income families (vs. typically one male income in the 50’s/60’s) has contributed to a cycle of higher housing prices, which then necessitate two incomes to afford a house. Don’t worry, she doesn’t advocate women not working, but rather shows how reliance on two incomes just to meet fixed expenses like housing actually increases financial insecurity for families.
    One of her observations is that the opposite of the “latte effect” (or the bags & shoes of this thread) is a more fianancially prudent way to budget. In other words, better to build a family budget that allows for luxuries (lattes, shoes & bags, etc.) and therefore has fixed expenses (mortgage) lower – then if there is a financial downturn (layoff, illness, etc.) you quickly cut back on the luxuries without needing to make drastic changes to your housing situation. Obviously this is not an easy thing for many to do in such a high cost of living area like SF. But it’s a worthwhile concept to think about.
    Sorry for the windy post….

  116. Posted by PresidioHtsRenter

    It was only a few days ago that ester responded to one of my posts saying that she was not a realtor. I have been a licensed agent since I took a part time job managing crappy apartments in the East Bay as an undergrad in 1982. I became a broker after I got my undergrad degree and I’ve kept the license current all these years. A few years back I looked in to getting MLS access and it was a ton of money (not something that anyone not selling real estate full time would pay).
    While it is true that $300K is a lot of money it is easy to feel poor when you make that much when the people you hang out with make a lot more. Most of my friends from business school went up the hill to VC firms when we graduated in ’85 and things have gone very well for all of them. My wife graduated from business school on the east coast 12 years after I did and when we were back in Cambridge last year for her 10 year reunion her friends that went to Wall Street are also doing very well (we did just hear that two friends when were at Lehman are now out of work but since one of them has a house in Southampton that he paid $3.5mm cash for with a bonus a few years back I’m sure he will be fine)…

  117. Posted by Foolio

    @WSS: Please don’t apologize for your lengthy post, I found it (particular the “latte effect” thing) very interesting. 🙂
    @ester: I’m sorry, but I have to agree with others. Your family’s financial situation does not sound like something the missus and I would even *remotely* be comfortable with. It’s great that you don’t spend money on what you consider frivolous things (although there’s certainly some fat on all of our bones!), but I think others are right when they express concern about the cash flow on your investment properties.

  118. Posted by San FronziScheme

    The renter business requires a very low entry point to be cash neutral or even profitable. And very very rarely will you get 5%+ when everything is accounted for. For the amount of work and serious risk involved, this is not for the faint of heart.
    I sold 7 out of 9 rentals I had because the appreciation made the net income/net equity ration go under 2%. All the places were paid for. No debt (good) but also no leverage left (bad).
    If you’re into the rental business and are cash-flow negative in a down market, I’d advise to sell ASAP. You’re in the wrong business. Any incident will bring you down.

  119. Posted by ester

    good god, I almost missed all these posts because this is now on a different page, and also I have been so busy with the 3 yrs “strategic planning”.
    Anyway, I don’t see myself as a realtor because i don’t practise it. But I am a licensed broker. So, to my own defense a little bit here. Someone was asking.
    Then, where my peace of mind is coming from: when I made decision to buy, the short term appreciation (5 yr) is NEVER a consideration. We plan to pass these onto our kids. Our main consideration is can we hold these for long term (5+yrs) in the case of no appreciation for short term at all? The answer is clearly a YES.
    At $1500 a month, it is a small piece of our joint income. Most people at our income level probably spent $1000 on eating out / wine /shoe/ handbag etc.
    Within this $1500, there is a significant amount of principle paydown (Our main house is 30yr fixed, one rental is 30 yrs fixed, the other 3 are 10 yr fixed). If you cut in from a pure profit/loss perspective, it is probably close to breaking even. $1500 is a cash base analysis.
    Over the years of holding these, 4 out of the 5 has good equity on them ($100K +), with our main house carrrying $500Kish equity on it, with a current loan amount of $520Kish.
    If we sell today, yes, we can realize what has been a paper profit so far, and to avoid losing that if the market slides further. But, we don’t care if it goes down and paper profit vanish. Maybe some 20 or 30 year later, the kids can make that decision.
    We would sell, however, if I see the remotest danger of not being able to make the payments. With $300K (now down to $200K) in stock market, and another $300K in 401K, I can afford not to have a job/tenant for a while.
    As a matter of fact, I asked one tenant (this property is NOT in SF) to move in Aug, simply because they picked a place that they can’t afford and have been late for more than 50% in the last 2 years. They were upset in the begining, but very happy now that they found a place smaller and cheaper, and have more financial flexsibility.
    Apparently, I have a very different view on leverage and a different comfort zone than some of the folks here. Thank you all for your best wishes, but I am still very fundamental comfortable here.

  120. Posted by ester

    what would really enlighten me, wake me up from my denial, is if some one can put together a senerio, dollar by dollar, why I am now in a “financial vulnerable position” which equals to default/foreclosure etc in my understanding?

  121. Posted by diemos

    You seem to be solidly placed in your investments to deal with everything except a downturn in rents. Just to be clear, when you say 3, 10-year fixed mortgages are they I/O in the fixed period or fully amortizing from the beginning?

  122. Posted by chuckie

    ester wrote: “With $300K (now down to $200K) in stock market, and another $300K in 401K, I can afford not to have a job/tenant for a while.”
    diemos, with the cash/equity cushion, it seems to me that ester is covering all her bases well and that she is positioned to ride this out. If it gets to where she can’t, good luck to us all!

  123. Posted by diemos


  124. Posted by ester

    Sorry, I kept posting here since it is lunch time.
    I guess I assess risk very differently from some of your folks here.
    I base our business decision on “what is likely to happen”. Sure, if all of the renter, my husband, and myself lose our jobs, and stay unemployed for a prolong period (3 yr), sure, we would be in default. But how likely is that??
    On the other hand, we have a much long time horizon than some folks here. We bascially don’t care if we are losing money today, or for the next 3-5 yrs. These will become a stead cash flow in 25 yr when we are ready to retire.

  125. Posted by BankerBoy

    “We bascially don’t care if we are losing money today, or for the next 3-5 yrs. These will become a stead cash flow in 25 yr when we are ready to retire.”
    That’s one approach. I would rather avoid losing money for 3-5 years, buy at a lower cost basis and get a better return. I thought that’s what “investing” is all about.
    I would be willing to bet that if you liquidated the properties and invested the proceeds in relatively safe investments today your cash flow from earnings/interest would be greater in 25 years than the cash flow from the properties.

  126. Posted by ester

    We would never the result of your bet.
    I do admit that I just liquidate 90% of our what used to be $300K investment, primarily in DIA. Sold them all just now.
    And also a good portion of our rollover. Game over for me with stocks.

  127. Posted by San FronziScheme

    ester, I hadn’t read the part with your other assets. Sure you can ride it out.
    Just be aware that sometimes stock markets can go down while tenants stop paying. It can happen at the same time as RE deflation. That’s a triple-whammy and it can happen (heck, we’ve already got 2 out of 3 there nationally). Diversification is the key there.
    I bought distressed rentals in the mid-90s at a 50% discount from the previous top and was 95% RE in my assets at some point. Way way too close for comfort, but I don’t regret any of it since I sold before this current crash. In retrospect I would have diversified like you did, it’s safer.

  128. Posted by diemos

    “primarily in DIA. Sold them all just now.”
    A-ha! So YOU’RE behind that sharp drop in the Dow 15 minutes ago. 😉

  129. Posted by ester

    Of cousre, everyone hopes to enter at the bottom, but how many managed to do that? Of course, you wanted to buy at 95% discount, but how likely is that going to happen in Pac Height and RH??
    I guess what I am trying to say is that we entered with full assessment of risk.
    For areas like 7&8, we managed to get in and get a $100K equity and be a close to breakeven on cash basis, all within a 3-4 yrs. To tell the truth, I am quite happey with the results so far.
    True, what if Pac drop 25% from here, but who knows?
    I am not trying to say that whose who rent made a mistake. Market needs balance, there have to be renters to have landlords.
    I admit I am on the aggressive side, but I don’t see too much risk/danger in our approach.
    I am not in denial or being naive.
    Do I dare say that I am a budgeting director for a reason? I guess I do. (joking here)

  130. Posted by ester

    I only do full amortization. Is that what you are asking?

  131. Posted by ester

    I could very well be wrong here, but I am guess we are getting close to having a one-day drop of 15% and hit the bottom

  132. Posted by diemos

    “I only do full amortization. Is that what you are asking?”
    Yes. Compared to a lot of people out there you’re a paragon of foresight and planning.
    “but I am guess we are getting close to having a one-day drop of 15% and hit the bottom”
    my guess is that we may see a dead cat bounce in the near term but that the real bottom will come when stock dividends are paying 5%. Somewhere around DOW 4000. In a decade people will look back and be stunned at how the credit bubble inflated asset prices.

  133. Posted by sparky-the-bear

    What I don’t understand is why Paulson doesn’t just expand districts 5 and 7 to include the whole Midwest. Wouldn’t that take care of these problems immediately.

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