Preaching To The Plugged-In Choir (We Can Only Hope)

From the article:
“The median price of a single-family home in San Francisco fell 16.6 percent to $702,000 in October, the most recent month for which data are available, according to the real estate information service MDA DataQuick. The October drop compares with $842,000 in October 2007. The median price is now 22 percent below its peak of $900,000 in May 2007.”
Guess it’s not just a SOMA condo problem, after all.

Advice to sellers:
“Prices are still coming down, and good sellers have to chase the prices down.”
If chasing prices down in the mark of a “good” seller, what’s the mark of a “bad” one?
A bad seller prices high; the property sits and sits. If there’s enough bad sellers, inventory builds and builds. If a seller is eventually forced to liquidate, it will be at much lower prices.
And I don’t think there’s any way the housing market recovers in 2009. Did anybody see the 60 Minutes piece about the next wave of disaster yet to hit residential real estate (the Alt A and Option Arm resets)? It will be much bigger than the subprime wave:
http://www.cbsnews.com/video/watch/?id=4668112n

“my friend, i think you need to put the crack pipe down.”
Indeed. It’s going to take AT LEAST two years to reach 50% off peak prices in the real SF. Rome wasn’t burned down in a day, ya know.

Paco, you misread my post. I agree that we’re not likely to see 40-50% declines in the next 6 months. It will take a couple of years to get there. That is why we are nowhere near the bottom yet, and why the guys from Zephyr and Pac Union are dead wrong.

“Indeed. It’s going to take AT LEAST two years to reach 50% off peak prices in the real SF. Rome wasn’t burned down in a day, ya know.”
We’re already 20% off peak while the job situation and local economy were putting up a fighting effort. Now that everything is imploding, it’s not unreasonable to assume a further 30% fall from peak levels in the next 6 months as the weakness turns into dire straits. I wouldn’t bet on it happening, but it’s not unreasonable.

And I don’t think there’s any way the housing market recovers in 2009. Did anybody see the 60 Minutes piece about the next wave of disaster yet to hit residential real estate (the Alt A and Option Arm resets)? It will be much bigger than the subprime wave.
Really? The LIBOR is near 5 years lows. Seems like anyone who bought in the last five years might not see much of an increase in their rate (and perhaps a decrease).

anon, they won’t be able to refi. Even if their property value didn’t drop (unlikely), stricter LTV and higher downpayment requirements will make lower rates unattainable. So they’re stuck in a pay option ARM or alt-A ARM that will reset to higher rates as the teaser period ends. Most of these people could barely afford the teaser rate, how are they suddenly going to pay the real rate?

“He(Moore, McGuire CEO) said he is running his business under the assumption that the down market will continue for at least two more years. His top piece of advice to his agents? Don’t take overpriced listings.”
I’ll admit I’m in a cynical mood but it seems to me the cartel honchos are signalling the start of a new phase to the troops. They have positioned their personal RE portfolios appropriately and now they are ready to drive the market to the ground.
Reading between the lines, “Hey, we know few transactions are going to happen in this next phase of the market, but lets play hardball with the sellers. Lets bring this market down. The sooner we get it done, the sooner we can get back to business as usual.”
Now it’s the sellers turn to get f’d!

I wouldn’t advise to buy a house today. This will take many years to unravel. I think that any purchase done in the next few years will go on losing value until prices go back to fundamentals (and probably overshoot).
But nothing new there. SF is way overpriced at this point as are many other luxury bubble locales and many here have been saying this for quite some time now.
If you think things cannot go much lower, think that the last bottom in the early-mid 90s followed a mild and short recession. Today, the recession is as real and touches to the very core of the market: TRUST.
Investors cannot TRUST banks. Investors cannot TRUST mortgage holders. Investors cannot TRUST any asset class. Investors cannot even TRUST the market itself (incessant Govt meddling). Heck, INVESTORS CANNOT EVEN TRUST THEIR FUND MANAGERS ANYMORE as is proven by the Madoff Ponzi that was going on for – gasp – 20 years.
This market went from “buy and hold” to “take the money and run” after the Reagan years. The Ponzis now defaulted on their debt, ran away with the real cash and left us with the bills.

The press has been sloppy with the terminology. The Alt-A and option-ARM problem is not interest rates re-setting. The problem is the “recast” — when the “teaser” period ends and borrowers have to start paying principle that had been deferred and perhaps also higher rates (2% or 3% teaser rates were common). With a loan recast, a $2500 mortgage can double even if interest rates don’t budge. I use these numbers as an example because it is precisely what my kids’ piano teacher is facing on the $700,000 home they bought in the Exelsior with a neg-am loan that re-casts in about 6 months — the home is now worth about $400,000. This will be SF’s “subprime” problem. Borrowers in significant numbers will be unable to pay the recast payments and they will be unable to refi out of it.

“Really? The LIBOR is near 5 years lows. Seems like anyone who bought in the last five years might not see much of an increase in their rate (and perhaps a decrease).”
How are jumbos affected? Since the jumbo rate is now near 8%, it seems like some mortgage payments for jumbos might double. I am a novice on mortgage rates, so someone please confirm aor adjust my thinking.

Now it’s the sellers turn to get f’d!
I don’t think it’s a question of the sellers getting treated unfairly, it’s a question of making sure sellers are able to sell.
Buyers aren’t buying at yesterday’s prices. Very little has sold since October. So if a seller wants to sell, they need to get realistic and lower prices. And let’s not forget realtors don’t make any more until a house actually sells.

6 months ago we were debating whether prices were coming down. Today, we’re debating how deep. In 1 year we’ll be debating how long this major crash will last.

My predictions FWIW are:
40% off on average from peak for SF prices. (I used to think 30%, but the policy responses have been abysmally poor, and will exacerbate the structural problems with the US economy.) Many neighborhoods will see 60% off peak, and a few greater than 70%.
All in nominal terms.
Nominal prices in SF should fall for 3-6 years more, although the bulk of decline will happen in Q2 2009 to Q3 2010. It should be “safe” to buy a house in mid-2010 so long as interest rates are relatively attractive.
Real prices (not inflation adjusted) should fall for 10 years or more, ultimately wiping out about 60-70% of the real value of SF real estate (from peak).

Paco, what’s your strike date on those hypothetical puts, and are they inflation-adjusted? As I noted above, I would be extremely surprised to see real prices (in “real” SF) down 40-50% in six months. I would not be surprised at all to see this in two or three years — in fact, I’ll be surprised if we don’t see this. The bailouts will get bigger and more widespread, but we’re not going to see them extended to $1 million-plus homes in any material way, so we’re going to continue to see a dearth of buyers here until prices come way down.

“Real prices (not inflation adjusted) should fall for 10 years or more, ultimately wiping out about 60-70% of the real value of SF real estate”
another great example from the peanut gallery…
if 60-70% of real value were to leave sf real estate then i imagine
80-90% of real value of the globe will precede it. iow sf real estate will always hold relative value over other places and assets.
this is not the bronx…and it never will be.

The teaser amount is now larger than the I/O payment so the loan is getting paid down
also: I’m struggling to find a scenario where the teaser rate would be higher than the IO payment
teasers by definition are always lower than the interest rate due, and hence would never pay down the loan balance.
but I’d welcome someone pointing out a scenario where I’m wrong on this because I very well could be.

“Real prices (not inflation adjusted) should fall for 10 years or more, ultimately wiping out about 60-70% of the real value of SF real estate (from peak).”
lol. if you really believe this you (as a former “professional trader”) should be able to tell the board about how to profit from this. we could all get RICH with that kind of move.
so lets hear it

rr
“I’m convinced we are going to inflate our way out of nominal decreases.. ”
let me see if i can clearly see thru your fuzzy logic; worldwide, govts. are printing up cash to battle deflation leading some to worry about inflation. if indeed this inflation shows up (in the usa) housing should benefit, no?

Unrelated, but I hear everyone harping on LIBOR rates. ARM’s are tied to one of four rates. One is the 10-year yield (basically), one is LIBOR, one is this weird rate of rates thing, and the last I forget. It might help to know which one your loan is tied to.
here is a partial list of things that an ARM can be tied to:
-LIBOR
-Constant Maturity Treasury Index (CMT)
-10 year treasury
-MTA (12 month Treasury average also known as 12-Month Moving Average Treasury index (MAT)
-CODI (certificate of Deposit Index)
-COFI index (Cost of Funds Index)
-COSI index (Cost of Savings Index)
-Prime Rate
-Federal Finance Housing Board’s Contract Rate

Oops. Typo.
The inflation/deflation tug-of-war is currently being won by the DEflation side.
The Fed will lower the rates probably close to 0 this week, implicitly admitting the previous rate cuts didn’t do the job. What’s next? Negative rates?
Banks are hoarding the cash generously handed over by the tax payer, and they’re not giving anything back. The hole is humongous and we’ll see if the Fed can prevent us from falling into the traps of the Japan mess.

Banks are hoarding the cash generously handed over by the tax payer, and they’re not giving anything back
this is actually hyperbole. I sparred with NoeValley Jim about this the other week.
The banks ARE hoarding most of the cash they are getting. most likely to fill critical holes (since they’re mostly all insolvent) or to give themselves golden parachutes and record bonueses.
but they ARE lending to creditworthy institutions. this can be seen when you look at overall bank credit.
the problem: there are very few creditworthy people who wish to borrow right now.
however, although the banks are lending a little, they are clearly hoarding. If they weren’t then we would see MASSIVE increase in overall bank credit. with 10% reserve requirements, the banks can lend 10x what the govt gives them.
the banks have gotten around $300B or so from the govt recently, so that could translate into $3T of increased lending.
add in the $1Trillion or more thay got through the Lending Facilities, and they could have lent out another $10 Trillion.
they clearly are NOT doing this. Thus they are hoarding.
so you see, they are hoarding AND they are also still lending.
this is why many of us see problems with future massive inflation. if the banks DO start to lend, it would be up to $13 TRILLION of lending that could be done quickly! Ay Caramba!
(obviously, it would never reach the full $13T, but you get the point).
so the Fed/govt have to pump enough into the banks to
-avoid bankrupting the entire country
-recapitalize the banks
-without overdoing it so that the banks really transmit all that money at once.
difficult (probably impossible) to balance that all out.
so they’ll either underdo it and we’ll continue disinflation (monetary supply)/deflation (credit) or they’ll overshoot and we’ll get massive inflation (monetary/credit) although I still doubt hyperinflation (like Zimbabwe).

if this 40-50% talk were ever to come to fruition, I shudder to think how bad things would be in the rest of the world.
And the subprime areas that already lost 40-60% do not make you shudder?
We are currently in the first feedback loop of last year’s subprime meltdown. Now the crisis will feed on itself until we go back to attractive prices.
But the sky will not fall if SF loses 50%. We are not the center of the world. Now, if NY/London were to lose 50%, that would be a different story…

“Real prices (not inflation adjusted) should fall for 10 years or more”
This is contradictory. Real prices ARE adjusted for inflation. Nominal prices aren’t. So you’re calling for nominal (headline) prices to fall for ten years, If the CPI rises over that time, then real rices will fall more.

ex SF-er, thanks for the list of rate sources. I’d heard that most were tied to only four, but my source (the Economist) could be wrong. Do you know the breakdown of each? I’d imagine that data are hard to come by though.
BTW, I disagree with your inflation prediction, but ultimately it sounds like we have the same strategies and will probably both be right where it matters (with our money). Peter Schiff was shooting his mouth off for a lot of the wrong reasons, but he was right because he made the right bet. I guess you can’t argue with results.

I’m a bear myself, but I’ve got to go against the grain here and say that 40-50% drops in Pac Heights are just unrealistic, IMO. In fact, I’d set an depreciation cap of 20% for the entire 94123 zip code, as well as Russian Hill and other “prime” parts of town. And that’s my upper limit. Down 15% over the next 2 years seems more reasonable at this point in time.
Personally, I’m not interested in living in that area at all. But there are enough doe-eyed yuppies who think that the world ends south of California St. to keep both the rental and purchase market there afloat while the southern and western parts of the city stagnate. Flight to quality. Combine that with a lot of old owners with minimal carrying costs, and a complete wipeout seems unlikely.
I rarely agree with Paco, but if prices in one of the most desirable areas of the nation fell that much, we’d have bigger problems as a country than worrying about buy vs. rent. We’d have another great depression with 25% unemployment. I just don’t think it gets that bad…but we’ll see.

I happen to agree with Paco’s conclusion (though not his tone) about the unlikelihood of 40-50% price reductions in “Real SF.”
IMO, too much “value” has been added to these properties in the last 10 years through renovation, permitting, and conversion to see them fall back to their nominal 1999 prices.

paco – In your scenario the buyer is fine unless s/he wants to sell the house. Then s/he can only sell to people who will be paying 15% interest rates in this high-inflation world. They won’t be able to afford anywhere near the price that the original buyer paid.
The bottom line is that house prices will go down if inflation takes off. If you don’t have to sell in the next decade, then that’s fine…after 10 or 20 years eventually the higher rate of inflation will win out. But in the short run (say 5-7 years or less) there is no question that house prices would fall, making it a very risky investment if you think there’s some chance you may need to sell.

“I’m a bear myself, but I’ve got to go against the grain here and say that 40-50% drops in Pac Heights are just unrealistic, IMO. In fact, I’d set an depreciation cap of 20% for the entire 94123 zip code, as well as Russian Hill and other “prime” parts of town. And that’s my upper limit. Down 15% over the next 2 years seems more reasonable at this point in time.”
I live in Pac Hts and see quite a few properties that are already selling at a 10-15% dicount to their 2005/2006 prices. I’d be willing to be that certain part of Pac Heights will see 30% drops from the peak. there are quite a few 2bdr 2b condos that i can see easily going from $1M + to 700-800K

Great discussion on both sides. My only points to add thus far:
1. Volumes in 94123 and 94115 have tanked. Yes, asking prices have not gone down by much, but few are buying at these asking prices. I’ve seen very few places going IN to contract in the last 45 days. And as for fix ups and expansions, I think people are talking about the price drops for apples.
2220 Sacramento 94115 hasn’t budged and anything close to it would have been at least 10% higher. I was practically laughed at for saying it might last through Dec 1. It’s still available. 1880 Steiner 403 (94115 – lower pac heights) is in contract for an ask of 4% per year gain in 8 years of ownership – on an inflation adjusted basis, that’s less than they paid. I certainly wasn’t expecting that.
2. Rental prices in 94123 and 94115 have declined about 10% since September. 40% per year if annualized, and the job losses are really just starting to hit that area.
3. Lots of people are walking from their homes even BEFORE the recasts and resets. Why? Simple, they qualified for these loans on FUMES and they have been BARELY SURVIVING, throwing everything into their homes. When the home price falls below the loan balance (which was usually 103% of the purchase price), they tend to walk because the mortgage is literally killing them.
The $2M condo I lost out to a secretary is probably in this category. She won’t qualify for anything close to what she has now so she’s not going to sell and get out, even though she should. But when she’s convinced that she’s underwater, and going through that pain is pointless, she’ll walk away.
4. Bubbles popping always surprise people by how long they take to pop, and how far they fall when they do. This one is playing out exactly that way.

Maybe the market will tank by 50% in the next six months …
Fitch: Alt-A Mortgages Deteriorating More Rapidly than Expected

Citing “a rapid deterioration of U.S. Alt-A RMBS performance,” Fitch Ratings again took the hatchet to its previous assumptions for Alt-A mortgages on Monday morning, revising its surveillance methodology and updating loss projections for all U.S. Alt-A RMBS.

Those relying on current LIBOR to blunt the effect of the coming recast/reset wave(s) need to remember that there’s no reason to expect interest rates to stay low.
In fact, there are many reasons to think rates will rise. The US government can borrow for free right now, but will this continue in a world where the oil states can’t balance their own budgets (many rely on oil prices over $50/bbl to pay their gov’t expenditures), China’s GDP is dropping a few percent a quarter, and the states are all crying for Federal funding in order to maintain current service levels (to say nothing of expanding them to provide stimulus).
I’ve heard that many funds have parked their money in treasuries just to ride out 2008 without any more surprises. In 2009, they might start pulling the cash out to invest again. Another way it will be harder for the US to sell bonds.
No one is talking about what we’ll do with interest rates at 5%, but we could easily see that or higher in a few months. Lots of stimulus plans and homeowner bailouts becomes much more expensive in that environment, and might push interest rates up, which end up being counterproductive.
While the government keeps eating up bits of the free market, the parts that remain keep forcing RE prices down. We’re still a long way from a complete socialization of housing (the auto companies can’t even get a couple of months of Iraq spending at this point!), so I don’t see much cause for optimism.
I’ve traced out a very bad case, and I wouldn’t be surprised if the government can keep interest rates down while handing out dollars. However, the scenarios that expect moderate price drops need a series of excellent things to happen in the coming year (layoffs don’t affect the wealthier classes, interest rates stay low, GSEs keep lending and maybe relax standards, etc.), and I think one or more the requirements will fail to develop.
At least Obama seems to be appointing reasonable and smart people to handle this crisis (Summers excepted). Not that I think they will be able to find a way out of our predicament, but at least they won’t confuse markets with contradictory stances like out current administration.
Fun times ahead in 2009. Anyone making large bets that are hard to get out of (like buying a house) are much bolder than I am.

Seems I’m the most optimistic bear on this thread, which is definitely a first!
As I mentioned, I don’t follow that area too closely, so those of you actually living there would know better. But I still find a 40% drop in D7 nominal prices hard to imagine. I guess time will tell.

Oh yeah. A lot of plugged in people on here “knew” that prices were bottoming well before the second quarter of this year. I’d say about 10 very vocal “plugged in” people spoke of bottoming and adjustments all the way back in the summer and fall of 2007. You know, when SF prices were practically at their peak and stuff? Oh what fun we had arguing about that.
The shift happened in San Francisco in September of this year. So please, let’s avoid any and all potential injuries derived from patting yourselves on your collective backs. Many of you were vociferously quite wrong for a very, very long time. Although in an economy where top experts take a year to say, “Yes by golly we really are in a recession,” what should the expectations be for a bunch of anonymous internet posters?

“Many of you were vociferously quite wrong for a very, very long time.”
Not wrong, just early.

Many of you were vociferously quite wrong for a very, very long time.
What a spin! Most bears we saying RE would start falling soon in SF. They were right.
Of course, for the ADHD crowd who look only at instant data (of the type: “hey, a house sold 2 blocks away asking, this is the proof the market is not crashing”), a year is an eternity. But for those who saw it coming a long long time ago, this is simply the market behaving as it should.

The 40 and 50 percent chorus in this thread will never buy property in San Francisco.
Wrong. Many here will buy when prices make sense. Just not at the current insane levels.
And as I said again, bears were neither wrong or early. They have been calling this crash and it is happening. It will take a few years to unravel after so many years of appreciation.

“I don’t know or really care what you mean by “So was your boss,” but I’m pretty sure it was intended to be petty.”
Well, your assistant posted that us bears made some bad calls. You’ve made plenty yourself. I’m too lazy to dig through the archives, but some of the selected gems I do recall:
– There is no bubble in San Francisco.
– OK, maybe there was a bubble in Bayview, but only there.
– San Francisco real estate is undervalued, not overvalued.
– Financing markets don’t matter because the bank of mom and dad has immeasurable liquidity.
….and so forth.
One of the old saws of economics is “Never predict both an event and its timing unless you want to be wrong 50% of the time.” Ties in to the old Keynes quote about markets remaining irrational longer than you can remain liquid. In other words, we bears were right about the bubble, just off on the timing.

I don’t think the bears were even wrong on the timing. Predicting that prices would start falling right at what is now recognized to be the peak of the SF market is pretty much hitting it out of the park. It is true that a very few neighborhoods (e.g. Noe Valley) continued to see prices rise into 2008, but unless one were able to buy in Noe late in ’07 and flip before mid-’08, there really would not have been anything of worth to come out of such a spot-on “micro” prediction. That late 2007 Noe buyer is now seeing a loss.
Any would-be buyers from about 2006 forward who heeded the call of the bears on this site and decided to just wait it out are in far better shape than those who followed the “only goes up” call of the SF bull. There are probably one billion dollars in losses (already) by those who bought in SF just in the past two years (much, but not all, will fall only on the lenders). Any realtor who counseled a client to buy in that time period without advising of this readily apparent risk was in serious dereliction of his fiduciary obligations.

“Early by a year is wrong in my book. And most books. Especially when one considers the very specific localized scope under which I personally spoke. But if I actually believed that many of you really are buyers in waiting, datadude, I would take your point. Why? Just look up. The 40 and 50 percent chorus in this thread will never buy property in San Francisco.”
i don’t think people were early by a year. i now i wasn’t. I and a few others began to say in early 07 (on this board, but earleir elsewhere) that SF was overvalued and would eventually fall. Most of the board posters at that time were saying “prices only go up in sf” or “buy now or be priced out forever”.
By saying an asset class is overvalued and then seeing it precipitously fall 1 – 1.5 yrs later is in my opinion “RIGHT ON THE MONEY”.
You have constantly been wrong on this site and continue to post snide insults. Its notalway “what’s on the ground man” as you say. Macroeconomics always win versus a narrow “what’s on the ground” focus,.
The few people who prdicted a fall have been right. You should at least give them credit. Personally I have over and over (for a long period of time) said i expect to buy in Q2/Q3 2010, and I still expect to do so as i think we may stabilize (at least somewhat) by then. And I am almost sure that PAC hts median will be down by 30% from peak to trough.

No, fluj is right. I was wrong on the timing. Look at this quote from me this past may:
What happens when the Alt-A resets hit SF next year? And if it takes 9 months to hit full stride, well, then we’ve got more than a year before SF gets hit by this wave.
Posted by: tipster at May 27, 2008 12:48 PM
I was forecasting things would hold up in sf til at least next summer.
They’re crashing, not later (as fluj posits), but EARLIER, than I thought!!!
https://socketsite.com/archives/2008/05/march_spcaseshiller_san_francisco_msa_declines_top_tier.html
Here’s another quote where I thought it was a few years away:
In a year or two, people won’t be willing to pay a premium over the rental price for ownership of an asset class they will retrain themselves to think only goes down
Posted by: tipster at April 17, 2008
https://socketsite.com/archives/2008/04/san_francisco_recorded_sales_activity_in_march_down_206.html
It’s getting worse than even *I* thought, and that’s pretty bad!

@ tipster
Don’t be so hard on yourself. I’ve been saying a crash was coming to the Bay Area since at least 1999. And while we deflated a wee bit in 2001, I just can’t believe it took so long for things to finally pop.
Or maybe not “pop,” but slow, long hiss of deflation…

Fluj,
Even the DealMaster, a master of the ridiculous in his own right, has to laugh at your claims. Most posters claimed that the bubble would pop in SF quite a bit after the deflation hit the outlying areas.
Admit you were wrong and move on. Trying to paint the others on this site as being wrong because they didn’t pick the exact time of the implosion doesn’t give your position any more credibility.

Based on the overwhelming majority of bears posting, we must be near the bottom. Massive earthquakes, thousands of dot-com job losses, knocked the City off of its historical appreciation curve temporarily. This bottom will last through 2009 and then the uptick begins in 2010. There will be no 50% correction off of the high in this City. There is no historical basis for such a thing.

Wow….this thread got a lot of activity. I didn’t get through all of it, and I probably won’t until tonight, but I did want to jump in with a few comments. First of all, I have to admit when I’m wrong. My personal prediction was that prices would drop by around 15% in nominal terms for SF as a whole, and I now think the drop could be much worse. In real terms (adjusted for inflation), it could be decades before prices approach where they were during the peak in 2007. This really is pretty nasty.
With that said, I think Trip’s prediction of a 50% price drop for SF as in general is ridiculous. My quick math says that prices have grown around 7% CAGR from the end of ’97 to the end of ’07 — which is significantly higher than inflation. In order to align housing prices with inflation, this would equate to a 32% drop in prices from the peak. While this is severe, it is still much less than 50%. On top of that, housing cycles are slow. Ex-sfer often uses the analogy of waiting for paint to dry, and I think that’s pretty appropriate. This correction isn’t going to happen over night, and if takes another 10 years to correct, that means that prices would drop much less significantly than 50% in nominal terms. Most people won’t see a drop anywhere near even 30% unless they are doing they are doing their own inflation adjustments. And using that math, my 401K has dropped by 25% over the past 10 years, so this is not isolated to real esate.
Finally, I’m going to comment on ARM resets from personal experience. My fully- amortized ARM is currently indexed to the 1 year CMT T-bond rate. That rate is at 1% right now. If my ARM were to reset today, my interest rate would drop by 2.5 points, and my payment would drop very significantly. I think this is the reality for a lot of people who purchased in the last few years, and you DO NOT need to refinance in order to get the lower rate. All you need to do is hit your reset timing, and the rate and payment automatically changes. I also have a friend who has an I/O loan, and surprisingly – his rate would also drop. I was helping him sort through his paperwork for his loan that resets at the end of ’09, and his fully-amortized payment would be LESS than his interest only payment. These are real examples of what rate resets mean. BTW, I realize for the few who have negative amortization loans, there is no index rate low enough to help them. I think those folks are the exception rather than the norm however.

Lance,
Kudos for your position. Your math makes perfect sense for instant prices to go back to a median trend.
Why I think prices could go down more than 32% is 2-fold:
1 – The reality of markets is that they often overshoot on the way up and on the way down. 1992-1998 was underpriced compared to fundamentals and it crossed the trend line in 1999-2000. To go back to the trend line, prices would have to go back to 2002-2003 which few deny could be happening within 1-2 years.
Therefore I think they’ll overshoot simply because we need to “rebuild” the trend.
2 – Until mid-2008 prices were led by a technical correction on a massive overshoot. Now they are controlled by macro economic conditions. There’s no telling where this will go. Heck, maybe inflation will come back. But macro-economics are a big question mark in this market.

Regarding Re-sets etc. and current loan trends. FYI after doing a refi with Wells Fargo in to the increased conforming limit 2008 (up to est 725k) was told I qualified for/offered over the phone better rates with what they called a no cost 3 step refi as interest rates had dropped on the conforming loans recently. I noted I was interested in getting the skinny on it. The agent than took my name and number and told me she was putting me on a call back list as the wait was over an hour and noted I would get a call back in 24-48 hours. I asked for the contact number directly and tried to call on my own, got through immediately and was told this time around that I did not qualify as Wells apparently was now evaluating my increased “conforming” not as conforming but as Jumbo due to the $ amount and limit (being over 417k for CA). I was told trying to refi to the lower interest rate given the increased conforming limit was reduced for 2009 would equate to my having to try and put a balance on an equity if possible to refi and take advantage of the est 625k conf limit int rate or pay down what I had (of course I am not doing this). I am still trying to put calls in to find out what the true story is as it seems everyone I spoke with has a different one (the many Wells reps I spoke to following). I was merely calling in for account info not to refi when this came to light. Does anyone have info on this; had this happen?

duuude,
“Um….what? The local market took longer to fall than we expected, so we’re no longer solvent?”
sorry about my unsuccessful paraphrasing. i was referring to a deal master comment to fluj. my point being that bears on this site have been making comments that have been factually countered by fluj and others for a year-which, in a betting/trading scenario would have rendered these bears insolvent. but b/c these bears are all talk they continue to hold onto their convictions; after all, internet talk is cheap!

oh fronnzzz,
” My steadily increasing capital from the RE I sold in 2006 (in Euro!”
do tell how you steadily increased your capital since ’06.
(i did it with over 10%cap rates on rental property among other things…)

paco, I’ll be glad to share. My banks in Europe currently give me 4.0 to 4.5% on risk free, liquid, guaranteed capital Euro funds. Rates are going down but the product I have are pools of funds which bank on the past 5 years’ rates and make a nice level rate. Bad when rates go up, much better when rates go down like today.
Plus if you account for the 10% appreciation of the Euro from these past 2 1/2 years since I sold, I’m actually up 22%. I did some re-balancing around 1.50/$ in the summer though, therefore I am around 60% Euro on liquidity and I locked in a couple of % in gain. My tax return will hurt a bit…
I am excluding remaining rental income from those gains of course. If you include those, overall that would be around 30%. And my cap rate on the 1999 price is meaningless at this point. Compared to purchase price, that would be north of 10% on one, and 15% the other. Compared to current value that’s more like 5%. But this value is decreasing…

sleepiguy at December 15, 2008 2:48 PM: Will be hard to sell at $3.5m on California St, I agree. But try telling that to the guy who listed 2265 California for $3.25m. It sold for $480k within recent memory, although it has sustained a significant remodeling since.
Just in the immediate vicinity of my house in the 94115 there is 2265 California, a house right across the street from it (next to the temple), a house around the corner on the 1900 block of Webster that fell off the market after being listed for months (it is now listed for rent), the house directly across the street from that which is listed for about $2m, the house at the corner of Webster and Bush which may have sold but I think it fell off the market, and a number of houses on Buchanan between California and Japan Town that are currently listed or recently delisted.
I have never seen this many houses for sale in the 94115 at once before. People who stretched to drive up prices in this neighborhood are obviously distressed and are trying to get out from under their exotic financing before the situation deteriorates further.

I am looking forward to making the buy decision when prices are closer aligned with reality. The last eight years have been insane, and I must confess that I am really enjoying this correction.
I feel fine about flippers who got caught holding a hot potato with no one to throw it to. I don’t like professional middlemen, and I feel a special kind of distain for RE agents, bankers, and appraisers who contributed to the irrational exuberance. I hope they can taste the guilt of the stress of each family they placed in an unaffordable ‘dream home’.
What the hell was everyone thinking? How could checkout cashiers really think they were going to make $1M+ places work? There’s no such thing as a free lunch! How could common sense take such a vacation?
People took loans because they could get them. They ignored their inner voice of reason. They lied, cheated, and stole to pad their egos and one-up the Joneses. Cash-out purchases, HELOCs, nodocs, teaser no-principal deals, what!?!
Yes, institutions made mistakes, and sure, some people were lied to or deceived, but I find the overwhelming lack of personal responsibility incredible.
So I’m renting, waiting it out, building my cash reserves, and watching the fundamentals closely. I don’t know when, but sometime in the future I’m going to buy something great. Something I can afford. It’s going to feel wonderful.

… but since these bears are all talk and no money they persist….iow even a broken clock is correct twice a day.
This statement is not only trite but misses the point: Even if those horrible bears were not able to predict the precise month when things were to go south, such precision is really only of value for hedge fund managers, not those looking to purchase their home. Fact is, anyone with half a brain recognized years ago that housing has been in a bubble and that bubbles will do what bubbles do. Your 2007 2/28 ARM-financed RE purchase is today’s Pets.com. Seriously – who didn’t see that one coming?
Makes me wonder how much YHOO Paco bought at $400.

I guess it’s a matter of how one defines economic disaster IMO. I don’t believe economic GLOBAL disaster was expected to occur in order for SF to finally see falling prices similar to other markets two years after. In fact, I don’t believe many people on Wall street even thought anything of that hedge fund blowing up since the market was driven to its peak 3 months later. We only found out it was important(maybe) 3 months ago ourselves when banks that dabbed in hedge funds were blowing up too.
It’s one thing to blog about economic disaster, but to really see it unfolding at this magnitude is something else. This could be the worse time in many of our lives, beyond what many of us can even begin to comprehend. We’ve gone from a country that saw it’s greatest wealth in history prior to 2001 to a country in a world on the verge of financial collapse unknown to even most of our parents. The price of a two bedroom condo in Sf is going to be the least of our worries if things do not improve overall.
Ex-sfer, I have a hard time believing you believed it would get this bad all the way around. I’ve been reading this site for a long time now. The majority of bears attacked fluj and not about impending disaster but about his facts, which he was always seemed to back up. Rent-vs-buy analysis, in which opportunity costs were even part of the equations and arguments used to call for the “correction”. Income levels/cost of living ratios, etc. Those were the usual suspects. Real estate in SF was constantly compared to other financial instruments using investment formulas, gov’t intervention hedge funds, and still is to this day. But really at this point, a zero return fund/bond is a GOOD investment. That’s quite a reality check at all levels, and not just calls on SF real estate.

yo mikey,
as i recall i was long lots of yhoo early on before one of the splits. i sold half my position each time the stock price doubled.
managed to do that a handful of times before riding the rest down.
still have some yhoo to this day, as well as fond memories of lucking into that bubble.

spencer, you wrote
” Most of the board posters at that time were saying “prices only go up in sf” or “buy now or be priced out forever”.”
i am having a hard time finding any such comments, let alone those of “most posters”.

Wow, you guys just discovered that there is an economic cycle? I am so proud of you!
I will predict the same thing that I predict every time I am asked, which is that this down cycle will be similar to all the other real estate down cycles in California history, which is 10-25% down the first year, followed by at least five years of stagnant nominal (and declining real) prices. So a 25-50% overall peak to trough real decline.
If anything, the economy seems to be holding up better than it did in 71-72 or 82-84 and about the same as 91-92, which is kind of surprising, given all the “worst downturn since the Great Depression” talk. I am guessing most of these reporters (and posters) are too young to remember a recession.
i am having a hard time finding any such comments, let alone those of “most posters”.
Yeah, Paco, this is the favorite Straw Man here.

To be selfish… what do you think of my situation. I put 25% down on a TIC in a very nice building in a nice block of on Liberty Hill in April 2008. My rate is 6.75 for the first 5, then resets to LIBOR annually, cap at 11.75% (individual/fractional TIC loan). Job is secure (as they go) and if I could get another job it would at least currently be same or higher salary. One bedroom, view, parking. Monthly payments are currently just about the max I can afford. I bought looking for a home first, investment secondary. I don’t intend on moving (willfully) in the next 5 years. I bought thinking I would keep the place forever, even if I moved on, but don’t like being over a barrel either.

A blast from the past from the “no one could have seen this coming” file from your resident “Mad prophet of doom”.
https://socketsite.com/archives/2007/11/when_good_comps_go_bad_in_the_marina.html
“The 20’s were a time of great prosperity. Prosperity was high because people had discovered the secret to endless free money. You see, all you had to do was borrow money and buy stock with it. Then, when the stock had gone up you sold it, payed off the loan and kept the excess. It was so easy, and best of all, ANYONE could do it. You could do it with stocks, you could do it with bonds, you could do it with real estate. As long as banks were willing to lend ever increasing amounts of money and borrowers were willing to borrow ever increasing amounts of money asset prices could go on increasing forever.
The era of endless free money, where everyone would be rich forever, had arrived. No one ever need work again. Just keep flipping assets and collecting the profits.
But, as always happens, asset prices finally got so far out of whack that the people woke up. They decided to hold off on buying, so prices stopped going up. As the short term balloon mortgages of the day started coming due the investors had to sell their assets to pay off the loans. This put downward pressure on asset prices. As prices went down loans started going bad so bankers pulled back on their lending, no longer lending any amount of money to anyone who wanted it. Without access to credit fewer buyers could pay the high prices, so prices fell. With prices falling people stopped wanting to invest. The market got into a positive feedback spiral with fewer buyers willing to buy, fewer borrowers willing to borrow, fewer lenders willing to lend.
As the people stopped receiving free money and had to start paying it back they stopped their discretionary spending. Economic activity crashed throwing people out of work. People out of work could no longer pay back their loans leading to even more losses. Eventually the financial system imploded under the burden of unpayable bad debt.
The chairman of the federal reserve, Dr. Bernanke, is said to be an expert on the Great Depression. I think he is going to get a chance to test out his theories on how to prevent one from happening again.”

LOL. I love those who say that no one saw this coming, and the particular nature of the credit deflation that is hitting us (some of us always understood that this was not a housing crisis – it was a crisis of Fed and USG mismanagement come home to roost). It was as obvious as the reality of Santa Claus to a 4-year old.
I’d list numerous cites to posts from the December 2007-March 2008 period calling for exactly a depression-styke adjustment, and numerous posts arguing that Bernanke would fail, etc., but then someone would come on labelling it a “vanity post”.
Well, how about just two, to establish some :
https://socketsite.com/archives/2008/01/bay_area_rents_surge_but_housing_pe_ratios_remain_out_o.html (Posted by: Satchel at January 19, 2008 3:31 PM)
And here:
https://socketsite.com/archives/2008/03/well_just_go_with_the_graphic_and_note_that_6_isnt_high.html (Posted by: Satchel at March 20, 2008 5:40 AM)
There are so many others it’s not even funny.
Anyway, this has been a relatively easy year to make money – so long as one understood that we were facing a credit deflation (very different, NVJ, from 80-82 or 91-92, as you will find out). The equity wipeout in October was a bit of a surprise. 30% declines were of course always to be expected (that’s just slightly above the average loss going into recession in the postwar period), but 50%+ coming so quickly on the heels of the 50% decline 2000-2002 was unprecedented. No big deal – good traders understand the risk of “fat tails” and always trade with stops.
All that is in the past now, though. The real joy is beginning! This is the fun part of the bubble unwind lesson, and the real economy is about to offer a dissertation-quality exegesis on the evils of foolish monetary and fiscal policies for over 20 years. Sit back and enjoy the show….
Although there will of course be many “bad outcomes” for individuals who didn’t see this coming, I hope that evryone can see the overall good:
“The boom…is the time when errors are made…” Rothbard continues. “The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom… Far from being an evil scourge, [the depression] is the necessary and beneficial return of the economy to normal… Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”
http://www.lewrockwell.com/bonner/bonner350.html

@ Curiously in Noe
Here are some thoughts:
Do you want to live in SF forever, or is 5 years your time horizon? If you want SF to be your permanent home, and you are happy living where you are, then you can ride out whatever downturn the SF real estate market will face (assuming you maintain your income and your rate doesn’t go through the roof). I imagine if you get married and/or have kids, you might outgrow your place quickly. Can you rent it out at a rate that covers your mortgage payment? Your place sounds nicer than the average rental, but keep in mind rents are going down.
If your rate resets to 11.75% in 5 years, will you be able to afford payments? If you’re already stretched, probably not. Most people, when they get this type of loan, never believe the rate can actually reset up to the cap. You’re assuming that your job is safe and income will only go up; if we experience high unemployment and/or wage deflation, this is not a good assumption, I’m sorry to say. Do you have 1-2 years mortgage payments saved up?
I personally would never do anything other than a 15 or 30 year fixed, especially if I had long term plans of staying in my residence. I like certainty.
Can you refinance to a fixed rate without paying a pre-payment penalty? If you can get an assumable mortgage, do so, because if you have to sell in a high inflation environment, this loan feature will be attractive to potential buyers. (Since this is a TIC, there might be financing restrictions).
Lastly, and I hate to bring this up, but how will you feel if your market value declines 20, 30, 40 even 50% in the next 3-5 years? Your type of property is more common in SF, and will devalue at a greater percentage than say a SFR. Keep in mind, once you’re underwater, it will be much harder to refinance into a more sensible loan.
I guess it comes down to what would you do if your place were underwater and you couldn’t afford your mortgage? Personally, this would be an intolerable situation to me, therefore, I would never put myself into an arrangement that had this potential. (And while you might think I’m being overly conservative, if other people thought this way, we wouldn’t be in the mess we’re in! To be harsh: I don’t steal from taxpayers or banks; I’m not a parasite.) But other people would be willing to default or even walk.
How comfortable are you with a worst case scenario that would most likely force you in to foreclosure and impact your credit for years?
Renters never face foreclosure, they simply move on to something more affordable, sometimes after being evicted.
If you’re thinking of unwinding this transaction and putting your place up for sale, you’re much better off selling now than a year from now. Or two years from now. Or three, four, five… At least that’s what my crystal ball says.
What do other readers think? (without the sarcasm, folks, this is a sincere solicitation for opinion…)

Hmmm. I’m oddly not too down with the weird analogies and paraphrasing that’s occurring. Drunk 16 year old Farrari drivers, etc. Even my biggest bashers on here know I was never an “up up up” or “buy now or be priced out forever” type. Spencer, come on man. That was never me.
Of course, all of this self-congratulation is skewed. The model is basically 2006 purchasers who have to sell right now, viewed in terms of liquid investment. That’s what’s getting riffed on here. Well, that’s not the big picture.
Those with enough money to put 20 percent or more down — your affected liquidity — can afford their good rates. Most people stay in primary residences for more than two years. In general, selling in a year or two sans improvements is a bad idea. It has always been a bad idea. Actually, folks who bought at peak are going to try to stay. So any potential loss is not a real loss, unlike the stock market.
Cue massive layoff predictions thread turn.

tipster, you wrote
“After everything all of us have been posting, you couldn’t see that coming? Honestly, how could you NOT see it coming?”
i’m not sure who you are addressing but i will say you bears overshot your plunge scenarios. yes, after the bear stearns funds blew up in 7/07 it was a huge wake up call. in fact the blogosphere (mish, cr,etc..) accurately alerted any who cared to listen and indeed by 11/07 it was easy to get flat or short the securities markets.
but as clear as the signals were its not like any on this board were bringing up great trading strategies to BENEFIT from the down draft. ex-sfer and satch took up my challenge a number of times when i asked people what they were doing with all their prescience. but, if you care to read past posts you will see that trading ideas that were actionable to the retail securities customers were NOT apparent.
don’t get me wrong, i sold index funds and bought treasuries but this only saved me from losses rather than made me a pile o cash. (i’m all ears for those who want to claim that they bought treasuries, currencies commodities etc on margin).
so, before this self-congratulatory bear thread ends i want to point out that paper trading the market is quite different than actually putting the $ down on the table…
trading it

wait a minute…you mean using a neg am io loan to buy an apartment that you can barely afford in a re market that has already seen years of outsize gains is a BAD IDEA???
good thing someone is warning us…

paco, of course it’s a bad idea. But putting 20% down to buy a place you can readily afford in the SF market which has seen years of outsize gains was (and is) also a BAD IDEA. From a financial standpoint (lots of non-financial reasons to buy just about anything). That is really the point that I’ve been making for the past 18 months here.
Unfortunately, all those who did what you recognize to have been a bad idea played an outsized role in inflating the bubble here, and all who bought in the last 5 years or so will suffer financially for it.

but, if you care to read past posts you will see that trading ideas that were actionable to the retail securities customers were NOT apparent.
if you recall, back in 2007 people asked me for investment ideas. I purposefully stated at the time that the coming market was NOT a market that one should trade if they don’t know what they’re doing. thus I refused to give them investment advice.
Instead, I did say many times that people should
-decrease their expenditures
-not take on new debt (car,house,etc)
-build as huge an emergency fund as possible
-pay off as much debt as possible
-make sure they have LIQUID cash available
-I recommended they have cash at home
-I also recommended splitting the cash they have around several banks, and making sure they were under the FDIC limit.
etc
these are all actionable by anybody, and would have helped anybody who did it.
===
also, although I purposefully did NOT tell people what to do in terms of the stock market, I DID often highlight my trades. someone could have easily followed what I was doing (although I recommended against it)
All of my trades were all available to the retail sector at all times. Unlike Satchel, I am not a trader. I am typically an investor.
I stated many times I was
-long Treasuries (through treasurydirect.com)
-long gold (through the ETF’s and also physical)
-initially long and then short the stock market (through the short ETFs)
-long oil back last year.
For instance: I wrote:
as others have said… now the “smart” money will simply play the Fed and the volatility. I wish I was more brave and had more time to sit in front of a computer terminal. I wish I was “smart” money!
Ben fooled me once (way back last summer… when he first betrayed us with the 50bps cut). but I learned… This guy will drop as fast as he can as low as he can. And take our life savings with him if we let him.
I will only play a little… Gold like everybody else (for me since 2005). I cashed out all my longs today. Now I’ll ride back and forth shorting then going long. (actually I use index ETFs and ultrashort ETFs instead of really shorting)
ride the market up… sell and go short… ride the market down, sell and go long… ride the market up… sell and go short… ride the market down… rinse, lather, repeat
this isn’t good for the economy at all. but it will bring in bigger bonuses for Wall Street… the desired effect.
Posted by: ex SF-er at January 30, 2008 5:16 PM
(**James later challenged that it would be hard to market time, and so in that same thread I also showed how it was NOT market timing, rather playing volatility in a simplistic way-apologies to Satchel for the simplicity, but I like simple investing and not complex stuff)
My response is on the same thread, at this time. Here I show exactly how I’m going to ride the market up and down:
Posted by: ex SF-er at January 30, 2008 7:21 PM
here is the thread

aside from great investment property income you do not have any good ideas.
ROTFLMAO! You’re putting words in my mouth. I never ever claimed I had good investment ideas for Pete’s sake! I know I’m just small fry and that fortunes are made plucking people with little market-savvy with the lure of sure-fire strategies like tech/oil/emerging markets and whatnot.
I just know bad ideas when I see them: loading up on RE after 2005 was a bad idea, and not selling investment RE in 2006 was sometimes a bad idea too, by the way.

just curious fronnzzz,
“I just know bad ideas when I see them: loading up on RE after 2005 was a bad idea”
have you heard ANYONE on this board EVER suggest that one should have loaded up on re after ’05?
its like spencer saying
“Most of the board posters at that time were saying “prices only go up in sf” or “buy now or be priced out forever”.
even though its hard to find ANYONE EVER saying that…

paco:
I would say that most everybody thought that one should load up on RE in 2005
In fact, I don’t know a single “regular” person who thought otherwise back then. 2003-5 was the height of bubblemania. the height of “buy now or be priced out forever”
Even in 2006 the pressure to buy was high.
for instance: David Lereah’s infamous book “Why the Real Estate Boom Will Not Bust” was written in 2005 and the paperback came out in 2006
There were all sorts of books like this. David Bach’s “The Automatic Millionaire, A lifetime plan to finish rich by Real Estate” was also in 2006.
also, here was money magazine from 2005:
http://money.cnn.com/2005/05/12/real_estate/re2005_100markets_0506/
In 2005 and 2006 we still heard the “there is no RE bubble, only froth” arguments. and “RE is based on sound fundamentals”.
I know this because I sold in May 2005 in a bubble market and people thought I was crazy. (in the past on socketsite I’ve posted the url for the blog posting from 2005 when I sold, and how I was derided as stupid).
====
it wasn’t until very late 2006 and early 2007 that the argument changed to “well, there might have been a bubble, but if it deflates we’ll get a soft landing like a souffle”
even in most of 2007 people believed the problem was “contained” and was “subprime”.
2007 is when David Lereah had the book “all real estate is Local”.
This is when I joined socketsite.
I would guess at that time that most of the posters believed that all real estate is local, and we got a lot of “micromarket” talk etc back in 2007.
It has really only been in 2008 that we had consensus from most people that RE is a bad investment (for now), even in SF.
even just a few months ago many people still thought RE in SF was “immune”.
===
I only bring this up because I was often slammed 1.5-2 years ago when I said the things I said, and told how stupid I was as a person who couldn’t “hack” SF and didn’t know how “special it was”
and now 2 years later all the bulls say “well you never knew it would be that bad anyway, and we all knew that this could happen anyway so you’re not special”
many of us saw SF falling in RE due to major macroeconomic issues, specifically the unwinding of the worldwide credit bubble.

ex-sfer,
i think your record of postings speaks very well for itself.
and as i mentioned, you were one of very few who actually took up my challenge to come up with a better mousetrap, and as i posted above, you did have some good ideas (etfs, yes; commodity trading, no).
but, “it wasn’t until very late 2006 and early 2007 that the argument changed to “well, there might have been a bubble, but if it deflates we’ll get a soft landing like a souffle”.
i still contend that real sf has so far had a soft landing (especially considering how outsize the price gains were).
i still contend that real estate in sf has outperformed the stock markets over any period of time that we’ve been alive.
and i still contend that real sf re will hold its relative strength over most other investment classes or regions.
and i bet you cannot find ANYONE on this board who EVER touted lereah as anything other than a mouthpiece for vested interests…
also, you wrote “and now 2 years later all the bulls say “well you never knew it would be that bad anyway, and we all knew that this could happen anyway so you’re not special”
i know someone called you out but i do not believe you are correct to state “all the bulls say”. who are “all the bulls” on this board anyway?

@ paco
“and i still contend that real sf re will hold its relative strength over most other investment classes or regions.”
We are in what is described as the worst financial crisis since the Great Depression. Since you know so much about real estate, and seem to have a vested interest in prices maintaining their relative strength, I’m curious what your outlook is for housing prices in San Francisco. How far do you think prices will fall, and when will we bottom out?
Also, why are you so passionate about proving the bears wrong? Are you a realtor?
Wouldn’t falling prices be a good thing because eventually buyers step in and complete transactions? In some parts of the Bay Area, prices have dropped about 50% but volume has doubled, so I would assume realtor income has stayed steady, although maybe agents are working a little harder (or not, if buyers are snapping up bargains).
FWIW, I disagree that SF real estate will hold up against cash equivalent assets, at least for a year or two. Even equities, which have taken a beating this year, look more attractive.

i know someone called you out but i do not believe you are correct to state “all the bulls say”. who are “all the bulls” on this board anyway?
fair enough, I retract that quote, it was hyperbole. I’ll change it to “some of the bulls”.
I’m specifically speaking of Viewlover above.
i still contend that real sf has so far had a soft landing (especially considering how outsize the price gains were).
I agree with 2 caveats:
-due to the steep SF valuations, even small % changes can be devastating. for instance a 5% drop on a $1M home is $50k. no small potato(e)s. this deleterious effect is compounded by how overleveraged San Franciscans are IN MY OPINION.
-SF has had a soft landing so far. As I’ve said, I expect this downturn to last another 3 years. we’ve really only had a hard market in SF for a few months now.
i still contend that real estate in sf has outperformed the stock markets over any period of time that we’ve been alive.
I don’t agree or disagree with this.
For instance, I have no doubt that you could get a better return on RE than with equities. I have no doubt that I can do better with equities.
it depends on how you structure your argument. we’ve discussed this before. the problem is that too many people say “I bought this house at X and sold at 3X so I made 2x in just so many years!” but they forget to take into account holding costs, renovations, sweat equity, taxes, opportunity cost, leverage etc etc etc.
it also depends on what years you use.
You can cherry pick the data to make RE “better” or “worse” than RE.
I’m agnostic on the “RE is better/worse than equities” argument.
besides, I think they both suck right now (and have said so for over a year now) so I have no interest in choosing between different types of crap.
and i still contend that real sf re will hold its relative strength over most other investment classes or regions.
possible. depends on what the govt does. in the end, the goal is to lose the least money possible.
and i bet you cannot find ANYONE on this board who EVER touted lereah as anything other than a mouthpiece for vested interests…
probably true. But I used 3 sources. Lereah, David Bach, and Money Magazine. I didn’t even talk about Robert Kiyosaki, or the explosion of REITs back then, and so on.
Money and David Bach are pretty in touch with how mainstream America is thinking IMO.
like I said, I wasn’t on Socketsite in 2005 so I can’t say what people said here. But based on what i saw when I came to SS in late 2006/early 2007 (can’t remember which), the site was decidedly bullish except for a few posters.
That changed in LATE 2007.
and it’s been mainly bearish for the 2nd half of 2008.
—
that said: RE will have its place again. that time may come sooner than “it should” because of govt interference.
I’m awaiting big pension fund blowouts and municipal bond problems and insurance carrier catastrophes. when those happen then we’ll see what our leaders are truly made of. and it’s when I expect to see us try to openly “inflate”. My guesstimate is that it’s 1-2 years out. at that time our $$$ will become toast and then I will buy lots of assets, likely including RE.
but again, as I’ve said for the last few months, no way to make forecasts now IMO, as too few people are moving all the markets.
so instead: I’m just watching and seeing how things develop. I’ve been OUT of the market for about 2 months now with the exception of a small losing bet on Oil (USO) and a little gold.
I’m gonna keep sniffing. but with RE being so slow, there’s no reason to jump in anytime soon. I’ll wait until there is a year of YOY gains in RE and then I’ll know it’s “safe”
my goal is not to make tons of money. it is to lose as little as possible in this very difficult of economic times.

“even though its hard to find ANYONE EVER saying that…”
Nobody ever said these things? The name Prime ring a bell to anyone? I may just play class historian here, and sift through the archives to see what kind of treasures I can find in the ’05 and ’06 vintage bins. Be back soon.

ah satch,
“If one is an ex-macro hedge fund trader, these strategies are second nature. If one is a handyman…”
actually, you never did answer my query re whether you ever had a b/d license. i did, for 13 years. i ran my own fund and was a principal of another fund. we had 14 guys trading in different pits. good times. i finally sold out in august 2000 as it was not as much fun after the .com bubble.
“and now you are desperately trying to “prove the bears wrong”. LOL.”
um, i’d say that i’ve repeatedly corrected erroneous statements
as i speak from actual hands-on experience.
as far as your comment about me sounding like i’m stuck
with something i cannot sell..hmm..i don’t see it. but as long as you’re throwing out theories i’d say you, sir, sound like a fellow who may have worked for a hedge fund (back office? client relations?) rather than traded for one . its curious that you are unemployed during such a great trading period. more curious that you purportedly have so much $ but still want to live in a rented outdated rancher…
well, i guess you can take the boy out of the bronx…

well said fluj

ex-sfer,
“For instance, I have no doubt that you could get a better return on RE than with equities. I have no doubt that I can do better with equities.”
my point is that w/re in real sf you can make (or lose!) money a few ways; buy ‘n hold, buy ‘n fix/flip, buy ‘n convert to condo/tic, extend financing, etc..
w/the stock market you only really make money if you time the market (like re) and buy ‘n sell. long term buy ‘n hold is a fraud that has been exposed yet again.
remember to ask, where are the customer’s yachts?

ebguy,
i’m still looking but there is not much out there. i went after 601 broderick,94117 and lost out. (six 1bds,3studios,extra lot-$1.5m)
you are correct tho, there are headwinds. but i smell opportunity for a coupla reasons; not as much competition (with commercial financing tight), lower prices and, most importantly,
i know lots of family and friends who are looking for a good place to put some money. some want to buy but cannot get a loan, some want the steady income stream afforded by first/second trust deeds, some want capital gains w/low risk.

The cartel honchos? What are you people talking about? I find this site so confusing at times.
It is the end of the year, and I give to you
my christmas poem.
T’was the night before escrow
And all through my chest
My heart won’t stop pounding,
A TIC partner pest.
The appraisers all twinkling
Tapes and levels in tow,
“This house was worth more,
Just two years ago.”
The Adjustable rate mortgage,
Wound tight as a spring,
We’re tied to the Libor,
We’re safe till next spring!
Your home equity line,
All snug in bank,
Is collecting low percentages,
Not out buying planks.
The plan for the attic
Where all the art work could go,
Flew away to never-never land
The contractor, in tow.
The dream of big listings
Have melted like snow,
The haves are not selling,
The poor have to go.
The signs of recession,
Are not fading away,
We’re praying, “Obama!
And hoping “Change, Yay!”

OK, fluj, I’ll give you Prime. But there were plenty of other posters who refused to believe SF prices would ever fall materially, and they were quite prolific about it here. Although I’ve decided against posting links to those old comments now. Most are probably upside down in million dollar starter homes and scared for their lives anyway.

I have found and continue to find that fluj is an excellent agent for his clients. I think he likes to get a rise out of people on here, and it works. What would this site be without fluj and paco. You can injury yourself with to much back patting, as fluj pointed out earlier (only to immediateley have people link to themselves, he was 100% accurate with that).

Anna,
You know what? So broadly reducing another’s viewpoints to “straw man” arguments is in itself a straw man argument. Also, I gotta say that there’s another irony in your quick synopsis. I steadfastly remained very local, micro, and neighborhood. This was while arguing against superimposing broader mix-tainted data on localized. I mean, Bayview bottomed. My data was totally correct at all times. Once or twice I didn’t dig into permitting tho, admitted. One time all my pals had a field day with it. (Five K is still occasiojally getting 900 a foot even now, tho. See the viewless 2oth st sfr.)

LMRIM,
You said”Cash flow potential fom Section 8 rentals are getting very attractive right now out there, not yet in CA from what I can tell. We’ve seen properties in the $80-110K range that, with a little work less than $10K using the same Home Dumpo parking lot “subcontractors” that you do, can reliably generate $1900-2200/mo rents – the county portion, not the portion that you never collect from your “tenants” 🙂 If we can get some scale – e.g., 5-7 properties, we are going to do it).” The Stockton brokers are doing big numbers on REOs up there with investors picking up houses in the 110 to 125 range. I have some Section 8 properties in FL but, am interested about the where and when in CA. Any thoughts?

Sunny Jim,
I have no real insight into CA regarding Section 8 rentals. I have *heard* anecdotally that attractive Section 8 rental possibilities exist in Antioch, but the numbers I heard were house = $200k +/-, rent is $2000 +/-. Another problem I heard is that in CA the imputed payment from the tenant is fairly large, which is not the case on the East Coast (it varies by county). As you know, the likelihood of getting actual $$ from the tenant is low.
I am also interested in FL, and will be there next week (Boca Raton/Coral Springs). What sorts of ratios are you seeing in FL and where/what towns? What is the % expected contribution from the “tenant”?
FYI, the Long Island towns I am talking about are places like Mastic Beach, Middle Island, Shirley, etc. Property taxes generally run around $3-4K on a $100K assessed value house. Imputed contributions from tenants are in the 5-10% range of total scheduled rent, so it’s not too big of a deal that they don’t actually pay it.
Like I said, I’d be very interested to hear your experiences in FL, and West Coast or East Coast?

” As you know, the likelihood of getting actual $$ from the tenant is low.”
having inherited a coupla sec8 tenants i’ve had a fairly long
experience with this. i became familiar w/the complexities of a federal program in a city w/rent control that involved a protected tenant.
as you may know there is a long waiting list for securing a section 8 voucher. once a tenant gets one they can be set for life. there is a great incentive to maintain the terms of your tenancy lest you jeopardize your voucher. ergo, sec8 tenants usually pay their % of rent, obey the house rules etc…

so satch and sunny j,
i wonder what its like sitting around the family table around the holidays..uncles and brothers disclosing to all how they are abusing the system…your forebearers must be soo proud..

“you don’t understand too much about how hedge funds work, if you think a b/d license is a requirement!”
requirement? those are your words, not mine.
so are you saying you worked for a hedge fund that had no b/d?
“This has not been the experience of people out in central long island who have done upwards of 10 of these, though. They cut a side deal with the tenants, invariably.”
hmm, sounds like your m.o.
” his best friend out there is a firefighter (they all hang out at the firehouse together “on the clock”)”
wow. now i understand your worldview. cops and firefighters feeding at the trough, boasting about overtime scams/retirement scams/section8 scams…i got mine mentality…
“I’m exactly who I say I am – no need to wonder so much”
indeed

To Paco and Fluj-who have basicalliy said the same thing below:
actually, it does.
sf re had an unsustainable run-up for far longer than anyone would have predicted. and with the rest of the country and world re markets sharply correcting it was easy to predict that our local market would follow. so most arm chair economists of ss confidently (even vociferously) voiced their opinions. in retrospect these bears were wrong. aggressively and frequently
wrong.
as keynes noted, the market was able to defy their logic for longer than they could stay solvent. but since these bears are all talk and no money they persist….iow even a broken clock is correct twice a day.
——————————————
So last year when I and several other souls were saying RE was going to crash (at the time I think I said at least 25-30%) and putting up with attacks and mocking arrogance that SFO real estate would never go up we were wrong because we didn’t pick the exact month?
The fact is-anyone who bought then because you and fluj were so sanguine lost 100% of their equity by now. Yet that still doesn’t make you wrong?
I suppose you can tell the same to your clients who you put into over valued pieces of real estate as their life savings are wiped out while you pushed this crap on them.
But because last summer I said it was an imminent collapse because some sucker could have gone in for 6 months of appreciation.
Also-some of the posts you specifically made Paco–are personal attacks on Satchel (or whatever is name is now) and its total bs this site doesn’t delete them. Just like when you told me to “go back to texas” and it wasn’t deleted. Even tho I was born right here. silly silly realtors.

and another thing
“I suppose you can tell the same to your clients who you put into over valued pieces of real estate as their life savings are wiped out while you pushed this crap on them.”
i can tell you with 100% certainty that any re i’ve sold in sf
is worth more now than when i sold it.
as for your outrage i think you are looking in the wrong direction. wall street has nearly destroyed the country (and may yet). those guys truly have a fiduciary duty to their customers
and you can see how that is working out in municipalities,pension funds and everywhere else.
please direct your rage at the true culprits. and as i’ve said before i’m not nor ever have been a realtor or broker or tout of any type.

“Section 8 rentals”
Speaking of Section 8 rentals. One of the signs of the apocalypse that I eventually expect to see is a craigslist ad for an ORH rental with “Section 8 ok”

Thanks, cooper.
Funny thing is, if you go back and look at what I think was the very first post paco ever posted (regarding his small time TIC conversion in response to a challenge regarding anyone who has actually made money over the past few years – it netted a pretty small amount of $$ and he said he did it with partners) you’ll see that I was one of the very few posters to congratulate him and acknowledge his specialized skills in the area (can’t find the link, but as you might have guessed my recall is pretty good).
No big deal. Now, paco says he “ran” a fund and “sold out” with 14 guys “in the pits” or something like that. LOL.
If it’s at all true, he’s talking about the demutualization of that irrelevancy, the PSE in 1999 (completed 01 I think). I actually suspect he is talking about the 14 Home Dumpo Parking Lot workers he employed digging out the foundation of one of his crappy flips.
LOL again. Paco has never once (please correct me if I am wrong here) given a trade idea in advance (sure, he “claims” he sold indexes in 11/07 and put it into treasuries), recommended a macro position based on an econ analysis, and spends most of his time fighting with noearch over the cost of pulling down stucco, and he wants us to believe that he was interested enough in markets to have “run” a fund. He didn’t even know the difference between a ratio spread and a butterfly, and it apparently comes as a surprise to him that the big macro funds of the 1990s were almost always CFTC regulated, and typically had no SEC-regulated b/d captive sub.
LOL yet again.
Oh, and paco, I enjoyed the part about how you never sold a piece of real estate in SF that is now worth less than when you sold it. That means that you missed the top and are riding the market down with your existing holdings. Have a smooth ride, and I’ll be thinking especially of you when those DQ and Case Shiller numbers come out 🙂

At this second, it’s probably not true of every building. Maybe if they sell right now there is time to escape that. The end of this process is a 40-50% retracement in SFO RE values. On average it’s a true statement, and when all is said and done, anyone escaping that will be the exception.
like maybe if you discover oil under your property like beverly hillbillies.

LMRiM,
Yer killing me with that last post! A lot of these posters remind me of the old saying,”The dogs bark and the caravan moves on.” Thanks for the Times link. One thing you might research and comment on is Senior Housing leases.

Cooper, wow. You want to talk about absurdo reductum “straw man” b.s! Paco and I advising people from an “up up up” prism? Everybody who heeded our sanguine twin siren calls is 20 fathoms underwater, eh?
We, and Paco is not a realtor nor a client tho I gather we have crossed paths professionally, were saying otherwise. Rare, if ever, did I even call something a good buy. I said over and over “where is the shift? Why the lag time?” Unlocking equity, talking about condos being vulnerable in certain areas, challenging specific examples as indicators, etc. That was my m.o. I left the prognosticating to others. I don’t want to continue this particular dialog. You’re speaking as if I am one of Larry Yun’s evil henchmen. Take the last word or 10 if you like.
And Trip, “It’s all very micro, bro” is precisely why the market is pretty much a standoff right now. Individual properties are still trading hands for near peak sums, everywhere. It gives people pause. Look at the copper clad Clayton condo.

SF Doc – you are right on the money. There are 2002 deals out there in the market now.
High end homes that haven’t been churning on the sales market in the past decade.

I’d say because a BMW 7 series is a lot nicer car than a Corolla.
I see your point but it is invalid — here’s a quote (I’m paraphrasing) from somebody (Warren Buffett?) I remember from the last absurd bubble that popped, the dot-com bubble, regarding tech stocks:
“A Toyota Camry is a good car. In fact it’s a great car. But I would never pay $100,000 for one.”

The tech bubble was caused by “investors” bidding up stock prices based on expectations of future appreciation rather than based on fundamentals.
The housing bubble was caused by “investors” bidding up home prices based on expectations of future appreciation rather than based on fundamentals.
Both were utterly ridiculous and stereotypical bubble behaviors. The 7 series argument isn’t worth a response.

you “fundamental” arguers never take into account other dynamics… like supply and demand… we are a city with 65% rental stock and 35% for-sale stock… where the City keeps rents artificially low, and has no control on the free market sale of homes. You also don’t take into account the kind of person who pays $1 million for 1,000 SqFt condo when they could just rent a nearby apartment for $2,000… who is also the kind of people who buys $80,000 cars when they could just rent a $300 per month car. I don’t need a response from you, and this isn’t an arguement in defense of over priced SOMA condos, but rather one in support of those who argue that Noe Valley and Russian Hill will not be dropping to 2002 levels ever again. If you want to buy based on fundamentals, just head over to Oakland or Antioch, and if you want to find troubling fundamentals look at Bayview and yes, SOMA. But to argue that a home near 24th in Noe, or a water view condo in Russian Hill will ever sell based on “fundamentals” is folly.

Oh, and sfrob, regarding your comment “and certain folks will refuse to buy anywhere but certain neighborhoods, just as they will refuse to buy anything but certain car no matter the ridiculous amount of money they charge.”
True, to a point. But in the end, at it’s most fundamental, people need a roof over their head. Refusing a certain neighborhood/car is a luxury that some will just not be able to afford.
We have friends who are under huge financial pressure (loss of assets, formerly-lucrative career in banking that is vanishing, etc.) . It is painful to watch, and it casts a pall over all of their interactions and relationship with others, including their own children. They are exactly the kind of people who “refuse” to live anywhere except certain neighborhoods (Presidio Heights, Nob Hill, etc.). They would certainly refuse to live in my lovely but non-marquee ‘hood (where I sleep soundly despite bonus plummeting next year). But at some point they may literally not be able to afford such high standards.
I don’t know what these friends will do absent an imminent reversal of fortune. Honestly I suspect they would move to an affluent suburb (and do public school) before they would move to a lesser neighborhood in the city. But regardless, “refusal” only takes you so far when you just don’t have the $$. I guess it’s just those darn fundamentals….

westsiide,
“. Honestly I suspect they would move to an affluent suburb (and do public school) before they would move to a lesser neighborhood in the city.”
me too. i don’t blame them.
mill valley/lamorinda/primo peninsula vs. d5,6,7,8- not so much
mill valley/lamorinda/primo peninsula vs. 1,2,3,4,9,10- hello great public schools!

Actually, viewlover, after 5 years the value of the car will be the same regardless of whether you chose to purchase it or lease it (the residual), and as a lesee you’d have an option to purchase at that time. In reality, there wouldn’t be much difference in either scenario in terms of value because they’re both structured using the same beginning and terminal values of the car. So long story short, my analogy was admittedly imperfect. But despite being a bad analogy, I made it anyway because it was “less bad” than sfrob’s original comparison.
If you REALLY want to split hairs, imagine going to the BMW dealer and seeing 2 deals: lease the car for 5 years assuming a current price of $65,000, or purchase it over 5 years with a current price of $90,000. When you ask the dealer why the purchase price is so much higher than the lease price (given the same residual), the answer is “Pride of ownership!”

Car values are the same regardless of lease or purchase, just a difference in financing and ultimately ownership. When you purchase the car at $90K you agree that the car is worth $90K. How you choose to pay for it whether with cash,financing or least is irrelavant.
To lease the same car you still start out with $90K sale price but subtract the projected residual and you pay the difference with interest, you get your lease payment. You only pay for the depreciation with interest when the lease is up. If you choose to keep the car, then you pay the residual, in which case you may end up paying more than the $90K you started with.
If a dealer told me there were two prices and I believed it, then I would be the same person that would fall for the negative amortization loan pitch and who knows what else, a bridge for sale possibly.
Ultimately, you have to know what you are paying for and make a decision whether it works for you or not.