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January 23, 2005


Kirk House

"The Japanese real estate boom collapsed in 1991; in 2003 a house in Tokyo cost less than half of what it did in 1991. A tanking real estate sector and a slowing economy saddled Japanese banks with bad loans. Excess capacity, especially high for Japanese automakers, discouraged new investment and ensured that the slowdown would persist."

Wouldn't be unprecedented. Here in San Diego median home prices are around .5 Million. "only 5% of San Diego residents can actually afford the median-priced home. That's troubling." I work for a Fortune 500 company and make a pretty good living for a 26 year old but I can't even imagine buying a home here in San Diego. That said, it was 80 degrees the other day...


As someone in Bay Area tech who bought a house recently... two points:
1. Northern CA has one of the best climates in the USA. People WANT to live there. That will alleviate any tendency to major housing bust.
2. Bay Area tech industry is (IMHO) goin', and will largely disappear. For equipment segment, the design can be done more competitively elsewhere (other states or abroad). For the semiconductor manufacturers, the best place for the business management to be will be where the customers are - Korea/Taiwan/Japan now - add China very soon.

I'm betting that 1. slows the effect of 2.

Matthew Halpin

I am at the moment in the process of buying my first home. Here in Australia it has become such a struggle for first home owners that the federal government introduced a scheme to pay first home owners a $7000 grant. The grant was largely introduced to offset the introduction of a Goods and Serviecs Tax, but 5 years after the introduction the gst has very little impact on the price of a home compared to 5 years ago.

Prices have boomed over here in the 3 years, there was a huge property boom and friends of mine who purchesed in moderate suburbs of Brisbane have seen the value of their properties more than double.

Right now we are purchaseing a brand new town house in a small complex containing only 11 units. Its in a suburb about 10km's from the city centre (considered the burbs here) and we are paying very close to $350,000. No if we were in Sydney or Melbourne we would probably be paying closer to 500,000 for the same place.

Luckily for us the boom has slowed and prices are not increasing every weekend like they were. From the conversations I have had with Real Estate Agents and from general reading about real estate is that places are now taking 3 times as long to sell as they once were.

Interest rates also have a profound impact on property sales. With the current interest rates in America very low housing affordability is probably fairly reasonable (I am propably wrong as I dont have all the facts here). When interest rates rise I am going to feel sorry for all those people who were suckered into loans by the banks looking for new business only to find themselves stuck with a loan that they cannot afford to pay back when the interest rates start to rise.

The story of Japan was a bit of a shcok to me as I thought that property was a pretty stable investment, as long as you were prepared to wait a few years you never lost money. Just goes to show, although I have heard stories of multi generation loans in Japan, with the pricing of housing over there.

I might start blogging about my house purchasing experience.

Charlie Prael

Y'know, I'd be more concerned if this wasn't the (third? fourth?) time that the Collapse of the Great California Housing Bubble had been predicted. Remember the late 70s? Price CAN'T go any higher. They did. 1988? Nope, nobody will pay THOSE prices. 1999? Samesame.

Here's some cold, hard reality to ponder.

First, California housing prices have gone up an average of 7.5% per year since 1973. That's across 3 significant recessions (1980-81, 1990-92, 2001-2003). Including at least two period of housing price _de_creases.

Second, California is expected to absord 20 million new residents over the next 20-odd years. Now, given that real estate is one of those "it's only made once" items, in a growing market, one would pretty much expect housing prices to increase simply due to increased demand.

Now, why am I cynical about this? Because the imminent collapse of housing prices in California has been predicted routinely for the last three years - always right around the corner, within the next six months. And it hasn't happened. Nor will it, for the structural reasons above.

That being said, some deflation _is_ a pretty reasonable thing to be expecting. But what's that deflation going to look like? ~3% of any growth is going to be simple inflationary pressures, not even counting population growth pressure. Another 2% comes from population pressure growth - that fitting in those 20 million new mouths to feed over the next 20 years. So now we're looking at a base price apprecation rate of 5%/year over the long tem. Does take much to get from there to 7.5%, now does it?

Kirk House

I just read a great article by the Center for Economic and Policy Research about this that also sees similarities between Japan and our current situation:
"There has been an extraordinary run-up in home sales prices in the years since 1995, with the rate of increase in home prices exceeding the overall rate of inflation by more than 30 percentage points over this period. There is no obvious explanation for this unprecedented run-up in housing prices, except that the wealth created by the stock market bubble spilled over into a real estate bubble, as happened in Japan in the eighties.

Lots of fancy charts and graphs too, check it out here.

the head lemur

Oh yeah... that's a great solution Cash out and move to arizona!
The bubble is not limited to California.

Joe I.

Well all I can say is I am in my early 30's and bought my first home at 23 in Seattle. The market in California went up faster but Seattle has held its own in appreciation. I sold the home for a nice profit 5 years later and paid off my business loan (startup for my business) as well as my student loans (MBA). Still had some left for down payment on my current home.

All my friends that didn't buy when they had the chance (or couldn't because of bad debt and spending decisions) are now in their late 20's and early 30's and will probably never be able to buy a home at the current prices and future ones. It is sad really because building a financial foundation early allows one to not struggle later in life. Many immigrants from Asia and Canada in this area know the value of owning a home and not renting and making someone else rich.

Rik Gary

Before we start building the RE pyramid scheme too high, let's keep at least one foot on the ground:

Charlie-- interesting you mentioned 1988 in your post. Prices _did_ indeed fall after that runup, for over six years, from 1989-1995. The naysayers get it right sometimes, it seems?

Something else to chew on would be the charts showing how rents have gone absolutely nowhere (have declined in fact) the past four years while housing has exploded. If all those millions of newcomers were in fact flooding in, wouldn't rents be going up too? And in the previous booms of the 70s and 80s, rents did indeed track home prices. But not now.

Funny too, that four years ago if anyone suggested that rents were going to decline the same arguments ("unlimited demand", "population explosion", "great weather") could be and were used against them. Not too many making those claims now.

Joe I.: Do you really think your friends "will...never be able to buy a home at the current prices and future ones"?

What would you do if that were the case, if you were in their boat? Probably push for new housing construction, NIMBYs be damned.

And what about high-schoolers today; by your argument they have zero chance to buy anything and always did. If housing becomes as unaffordable as you suggest, no one can buy, and prices will fall. The notion that someone who bought a house < 10 years ago made a surreal investment and left their friends in the dust, never to recover, is simply wrong.

Charlie Prael


I'm trying to think of where in CA housing prices fell from 1989-95. I owned a house in Silicon Valley then - bought in 1987. It appreciated until 1990, dropped a small bit in value in 91 and 92, and was appreciating in 93. And note, even with that _plus_ the depreciation of the early 80s, you've still got that average growth rate of 7.5%.

On rents - population has been stable (more or less, within ~ 1 million) since 2001. Notice - economy changes, population starts to grow again.

Rik Gary

I don't question your 7.5% growth rate, Charlie. The trouble is the 15-20% rates we've seen the past five years, alongside low inflation. In the 1970s you'll recall inflation was in double-digits some years, which explains a good part of the eye-popping numbers from that time.

So, assuming we return to the 7.5% historical rate, that implies several years of very tepid numbers to say the least.

If you're having trouble remembering where CA housing fell from 1989-95, just ask around Los Angeles or Orange county. You'll have no shortage of testimonials. Also, the Bay Area numbers weren't good in 1993, so I'm not sure your neighbors' homes appreciated at the same time yours did.

Population has indeed been stable since 2001, which helps explain rents dropping. On the other side, does it explain the housing prices the past few years? And wouldn't record house price/income ratios nudge business to expand elsewhere, where the cost of living isn't as bad? Costs matter, and by that yardstick we're far and away the least attractive state for new business.

Charlie Prael

The 15-20% rates are, agreed, troubling. It's why I said that expecting some deflation is a pretty reasonable thing to expect. 30-50% drops, like that seen in Tokyo, and proclaimed by various economists? No, that's pretty _un_ reasonable to expect.

I used a 25 year baseline for that growth rate for a reason. It includes good, bad, and ugly. Inc. the high inflation periods, the low-inflation, deflationary periods (remember the early 1980s? Inflation, 15% mortgages, and you STILL got price appreciation).

I'm not surprised that LA/OC housing was down during the 1991-95 period, given the aerospace exodus that occured then. That was a local spike, note, due to a relatively unique set of circumstances (the mass removal of an underlying industry, in a VERY short period of time).

The housing prices actually make a fair amount of sense. There was a lot of pent-up demand during the 90s for housing, as people moved in. With rates where they are now, a lot of folks who had to live further out are relocating to cut commute times/etc, and you're seeing a bit of a cascade effect as a result. Which is also why rental rates have remained low, and are taking it in the shorts.

I don't disagree that we're unattractive to new business - in some ways. But with 30 million people here, we're still a pretty damned attractive market. It's the "developing new products" stuff that I'm more concerned about. CA is becoming a place to sell _to_, rather than a place to buy _from_.

Side note: I do real estate (a mix of rehab and new construction), so I stay fairly plugged-in to both the economist-type reports and to what's actually happening on the ground. As an illustration of the previous paragraph, it's now significantly cheaper for me to have a top-quality home built in another state and brought here for final assembly, than to just build it here. $50-100K/house cheaper.


Real estate preserved a lot of my capital during the bubble of the late 90s. I took some of my big gains in tech and bought a nice condo (age 26 at the time). It didn't perform incredibly but nicely and if it had been with Copper Mountain, AOL, and a host of other tech stocks it would have disappeared.

ALSO -- RISK has been dramatically reduced over the last 20 years by mortgage backed securities, standardized credit scores, and other efficiencies in the financial services industry. This has democratized lending greatly in America and is one of the reasons (beyond super low rates) that has increased home ownership to record levels.

Sociologically speaking -- greater home ownership = stronger neighborhoods and communities.

Frankke Potential

Dan, please STOP advocating a real estate crash here in Northern California. It's not befitting someone of your position in the journalistic community to be arguing in favor of depression and despair.


We bought our first home in 2002 (july) in San Francisco. It was a probate sale for $486,000. In the past few months we decided to sell the house. If things stay as they are for a few more weeks, we would be looking at $325,000 bottom line back in our bank account. That means our house would sell for about 725-750k.

We are going to rent the empty (for 2 years) house next door and look in San Francisco and Alameda for a bargain.
While I feel that a fixer-upper/probate property may come up in that time period, I am really looking to get out of the real estate market as SOON AS POSSIBLE and hold cash.

I believe there are many individual factors that have led people to predict a "housing crash". Each of these factors has gotten worse, not better, over the last years... at an accelerated pace. Now, as several factors come together the momentum is much greater than say 2 years ago.

If there is a big "drop" this year, say 10%-20%. Whomever buys our house for $740 will see similar properties selling for $595 to $665. If we didn't sell we would say "ohh well, it's worth more than we paid for it", but if we just bought it for $740 we would rethink the probability of selling for a gain in 2-5 years. Then, if interest rates rise over the next 12-18 months, and the buyer tried to keep costs down on
the $740k purchase price by getting an adjustable mortgage, they may find the $3500 month mortgage to be too high.

Next year we'll see defaults and bank sales, which will set the low end (-20%) of the range, and the following year and for many years after that the average price will rise at a nice rate. If $740 falls 20% in one year and then rises 10% a year, it will take 5 years to get to 850,000

What about if it rises at 7.5% (the "average")
6 years

How about 5%?
8.5 years

That's a long time to be waiting for a 14% increase in the purchase price of one's home.

Two or three years ago EVERYONE was saying the bubble was going to burst, now EVERYONE is saying it won't.


There is no question about there being a bubble in California and the Northeast (New York, Washington). Robert Shiller make the very interesting suggestion that the bubble is not just about get-rich-quick mentality, but is also based on people's desire to somehow participate in the mystique of places considered glamourous by living there. Los Angeles, the Bay Area, Washington, DC, NYC are currently considered glamourous, Dallas and Austin Texas are not.

But this notion of glamour can dissipate very rapidly, and what is left is the reality that we are living, for the most part, in a virtual world where intellectual content and telecommunications are king and bricks-and-mortar is passe. NYC, Washington and SF became cheap back in the 70's, due to suburban sprawl, but that before modern telecommunications. It is only this glamour mystique that became associated with big cities in the 80's that allowed these big cities to become pricey again. If that mystique crumbles, don't be surprised for prices in these cities to fall BELOW the prices for comparable houses in Dallas or Austin. That is, don't be surprised to see houses in San Francisco that sell for $750,000 now selling for $150,000 at some point.

BTW I lived in San Francisco for 9 years (including three years on the top of Nob Hill with a stunning view of the bay) so I know something about the place. And I lived in DC (dupont circle area) for 6 years. I lived in Dallas and Houston and Phoenix before that and now I'm retired and live in Austin. And I can tell you, that where I lived didn't make that big a difference in my personal life, other than the cost and associated hassles of living, which were a lot greater in DC and SF than elsewhere.

Nor am I some sort of oddball. The beauty of SF is exciting to everyone for the first month or so, and then everyone start to forget about it and spend most of their time indoors, watching the tube or working on your computer, and when you're indoor, it doesn't matter where you live.

Jill Smith

House prices rise and fall. Search for Los Angeles or Boston at Real Estate Blog.

Dave Johnson

I bought a house in Santa Cruz in 97 for $200K. Now 6 1/2 years later neighboring houses are selling for about $650-700K. The trouble is, my wife won't let me sell it.

I feel like I felt when my company stock was worth about $2 million and we were in our "blackout period" so I couldn't sell it. Everyone was saying that stocks always go up. Now it's not worth anything at all.

Sam Vince

I have worked on an equity trading floor for since early 2002--I study stocks incessantly, and do you know what this discussion reminds me of? Think back to 2000 when investing moguls on CNBC had been pounding the table saying, "These stock valuations are TOO HIGH--this is ridiculous!" No one listened. "Oh, the 'experts' have been saying that for two years," the investors would say. Well, eventually everyone realized it WAS out-of-whack, and the crash ensued. There is a famous saying, "When everyone is making money, sell everything you have." The fact that housing prices have soared in California, while rents have stagnated, shows that speculation has become rampant.

The only responses many of the homeowners on this thread have are:

"You've been saying there is a bubble for years."
"It's a great place to live."
"California homes have appreciated by an AVERAGE rate of 7.5% over the past 30 years."

My question is, over the past five years, haven't we all learned to avoid conclusions predicated solely on emotion or going with the herd? To pay attention to rational data? Every solitary statistic I see says a bubble has formed in California.

- Housing prices soar; rents stagnate.
- Only 19% of CA residents can now afford a median-priced home.
- The CA P/E ratio of 8.3 (px/ has reached the stratosphere (hmmm....high P/E's--sounds similar to another famous crash).
- Imminent interest rate hikes will force many families into foreclosure--this WILL happen.
- California immigration is flat.
- U-haul now charges $600 if you are LEAVING CA, and only $150 if you are coming INTO CA--they say too many people are exiting, and they are having difficulty getting their trucks back into the state.
- Banks know they can hand-off any mortgage to Fannie Mae or Freddie Mac, with essentially no risk.

The list goes on and on. And do you know what? Despite this, my wife and I are getting ready to move to California. We've always planned on doing so ONLY because our families are out there. We will build a home--there is no way on God's green earth I would buy a home out there right now. We were browsing some homes the last time we were there (three months ago) and we were literally laughing at the prices. $400,000 for some 1970's dump in a bad neighborhood.

In my mind, in my opinion, the signs couldn't be clearer.


There HAVE been previous housing bubbles in CA. In 1990 the CA housing market was red hot and prices were high (median was $225,000 in Orange County) In the end of 1991 prices were falling and I bought a great house in Fullerton for $185,000 which would have sold for the median $225,000 in 1990 (thought I got a deal). By 1993 this same house was going for $157,000!!!
I sold it six months ago for $472.000 and moved to Oregon, bought a bigger new house for CASH and have a nice nest egg in the bank besides. I didnt want to ride the market back down and was sick of all the hype SoCal is famous for.
It took seven years of stagnation before the house value started climbing and really didnt start to take off until 2000.


I also bought a home in 1988 - remember the Loma Prieta earthquake? - paid 195K and ten years later sold for 179K Granted this was in Hollister, 35 miles of the Bay Area, but again bought in Hollister at 250K sold two years ago for 465K and moved out of state. I don't miss the gangs, traffic, horrible schools or the earthquakes. I do miss the equity increase :-) but I worry about people refinancing and getting into financial trouble... but just wanted to say that it can happen and it did in 88-96 ...


I am 28 years old, and scared shitless to buy a house at these prices I'm am seeing. Complete dumps for 545,000. I can't even get a place in ghetto East Palo Alto for a decent price. What the heck is going on with these prices. Also, what's up with everyone and there mothers getting their real estate license. The local 7-ll owners are trying to sell me a house... I did go and check them out... same story, it's a dump.


Looks like there is an effort underway to check the expanding bubble.

WSJ 2/18/05 article 'Greenspan urges Fannie, Freddie limits' makes good reading. Greenspan suggested that the two shouldn't hold mortgage portfolios totaling more than $100 billion to $200 billion apiece. Fannie's current portfolio is about $905 billion, while Freddie's is $654 billion.

Both companies' financials have been questioned and there have been changes in leadership.


Well it official! We have confirmation from the FED.

Fed chief sees home price bubble
By Patrice Hill
Published February 18, 2005
Federal Reserve Chairman Alan Greenspan yesterday said he sees a housing price bubble in "certain areas" and suspects prices are vulnerable to declines, but they will not collapse in any way that threatens the economy.
"I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told the House Financial Services Committee. "I don't expect that we will run into anything resembling a collapsing bubble. I do believe that it is conceivable we will get some reduction in overall prices, as we've had in the past, but that is not a particular problem."
Mr. Greenspan was responding to a question from Rep. Scott Garrett, a New Jersey Republican who said he is buying a house in Washington, one of several dozen urban areas on the East and West coasts that economists suspect may be experiencing housing bubbles.
Washington home prices surged on average by 27 percent last year, twice the national rate. In Northern Virginia and many other parts of the region, home values have doubled since 2000 " a boon to homeowners and housing investors but a bane to those trying to buy into the market.
"The bubble is about to burst as soon as I buy my house down here," Mr. Garrett complained to the Fed chairman.
Mr. Greenspan said homeowners have accumulated considerable wealth because of the rapid run-up in the value of their homes in recent years, and many have been tapping into that wealth through home sales, cash-out refinancings and home-equity loans.
The Fed estimates that home values have doubled from $8 trillion to $16 trillion since 1996, outpacing the rapid growth of mortgage debt, which also has doubled from $3.5 trillion to $7 trillion in that time.
"Remember that there's a very significant buffer in home equities at this stage," he said, referring to the $9 trillion difference between home values and outstanding mortgage debt.
Since most homebuyers have put down deposits of 20 percent, they have that much of a cushion against a potential drop in their home values, he said. Even when homebuyers have obtained loans of as much as 100 percent of a house's cost, he said, the rapid gains in value in many cases has provided them with a buffer against decline.
But the Fed chairman conceded that any drop in home values " which could affect as much as one-fifth of the population, according to private estimates " could put a damper on consumer spending and economic growth. Consumer spending since 2000 has been fed by the "wealth effect" created by rising home values.
"Some reversal in that [wealth] is not out of the question. If that were to occur, households would probably perceive the need to save more out of current income; the personal saving rate would accordingly rise, and consumer spending would slow."
Mr. Greenspan indicated that the Fed would like to see consumer spending out of household wealth slow some, since it has been a major factor driving down the personal savings rate to a meager 1 percent last year from a historic average around 7 percent. The Fed's campaign to raise interest rates in the last year thus has been aimed in part at cooling the overheated housing market.
However, home sales have continued at record levels. Mr. Greenspan said the Fed's intentions have been thwarted by an unusual decline in long-term interest rates, in defiance of the Fed's steps to raise short-term rates by 1.5 percentage points.
"Other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields," he said. Yet "30-year fixed-rate mortgage rates have dropped to a level only a little higher than the record lows touched in 2003."
Many analysts attribute this "conundrum" to heavy buying of U.S. Treasury bonds and mortgage-backed securities by foreign central banks and overseas investors, he said, but the explanations have not been convincing. The unexplained drop in mortgage rates "may be a short-term aberration."
Mr. Greenspan also told Congress to slow the growth of mortgage lenders Fannie Mae and Freddie Mac, which have a combined $1.55 trillion loan portfolio.
"Going forward, enabling these institutions to increase in size, we are placing the total financial system of the future at substantial risk," he said.
Most of the House questioners yesterday, like their counterparts on the Senate Banking, Housing and Urban Affairs Committee on Wednesday, focused on the heated topic of Social Security reform.
Mr. Greenspan repeated his support for creating a new system of private accounts to fully fund Social Security's obligations to retirees in the years ahead.
He said such a system would have an advantage over the current one because it would ensure that money supposedly set aside for retirement is actually saved for that purpose. Today, payroll taxes that the government doesn't use to pay retirement benefits are immediately spent on other items. About $1.5 trillion in Social Security funds have been spent that way.
Another reason Mr. Greenspan said the private accounts would be desirable is they would enable many low-income workers to enjoy the benefits of building wealth for the first time.
They "will create ... a sense of increased wealth on the part of the middle- and lower-income classes of this society who ... struggle with very little capital," he said. "For the last 25 years we have had ... an ever-increasing concentration of income and wealth in this country ... that is not conducive to the democratic process. ... It's crucial to our stability that people all have a stake in this system."

Martin Goys

For the people who think there's no California bubble, here's my take:

I'm a degreed engineering professional, 34 yro, no kids, not big spender. Make $75K a year, have been saving for 5 years, have nearly $100K in the bank.

Even with interest rates the lowest they've been been in a loooooong time, I can't afford even crappy 30 year old condos in my town (which go for about $575K). There may be some incredibly risky ARM loan I could take to swing this, but I'd be a fool IMHO.

I would consider myself a shining example of the middle class. When it's time to have kids (approaching rapidly), I will not stay here (i.e. California).

Say what you will, but this situation is not healthy - the lifeblood of a community consists of types like me - not greying retirees with grown kids.

Personally, I'd love to see the bubble burst, as I don't see how things could get any worse for the people who simply want a modest home to provide shelter for their family. Speculators/realtors/lenders be damned.


I thinks it funny how when I hear people talk about real estate. The last post by Martin Goys seems to be very accurite. My wife and I both have prodessional jobs and had a combined income of 95K last year with no debt. We have what would be considered a good down payment in a normal market, it means nothing in this market. My question to all the people who do not believe there is a housing bubble and think they will continue to see 15 - 20% gains every year. Who will be buying these houses ? How long will it take college grads to save up for a down payment ? Despite what people think, the majority of wage earners in california do not make that much money to be able to afford these unrealistic prices. Houses with bars on the windows in crappy parts of long beach and santa ana going for more than 500,000 and a lot of them need about 100,000 more in upgrade work. This state has not see a massive increase in wages or economic growth to accomodate these price increases. Doubling and tripling of home prices with little or no wage growth, and sometimes negative wage growth does not make sense.

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