17 thoughts on “As the real estate bubble builds”

  1. Great links…thanks. Who cares if it is a bubble or not, except for the people who’re speculating and flipping real estate faster than you can say “Capital gains, anyone?” I thought real estate — like investing in stocks — is all about the long term. And, while our house in Palo Alto may have increased by almost 50% in the last 14 months since we bought it, we’d only benefit if we were ready to move inland from one of the bubble East/West Coast cities. Which I don’t think we are… 🙂 That’s where the arbitrage opportunities exist as the Wall Street Journal pointed out last September: http://www.blogit.com/Blogs/Blog.aspx/readyfireaim/182324

  2. well there are more opportunities. i think the bubble is spreading even inwards and you can see the increase in prices of places like north dakota

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  4. Well, it’s not necessary to move away from the Bay Area to hedge, one need only sell and rent. My wife and I sold (although ugh, a year early) and we’re renting a $1.2 million home in San Mateo for $2,500 a month. The guy who is renting it to us left the rent FLAT after the first year and may drop it in six months.

    Residential have dropped every single quarter in most Bay Area cities since 2001. They rose just a tiny bit Q4 2004 and everyone thought that was a turn in the market, but alas, they were down again in Q1 2005.

    There’s a clear reason for this: the Bay Area has lost population, jobs and median income for every single year since 2002. The Bay Area was number one in the United States for population loss from 2002 to 2003 — Detroit was second.

    These statistics are freely available from the US Census and the US Bureau of Labor Statistics websites.

    So, unless there’s some turnaround in the Bay Area job market on the horizon, I see rents staying this low or maybe even moving lower. With interest rates rising, you can even get 3.25% now on a savings account (www.emigrant-direct.com).

    My wife works in IT and I don’t see it generating a lot of jobs in the Bay Area in the next few years — there are always higher paying management jobs or kick ass engineers in certain specialties, but those 1 in 100 or 1 in 50 IT jobs aren’t enough to power a housing or rental market for the Bay Area. All of the new $70K to $100K jobs are being added in Boise, or in Bangalore, Shanghai, or Manila.

    It’s also interesting to note that 70% of all jobs created in California in the last two years were related to real estate — mortgage brokers/agents, real estate agents, construction workers, etc. If housing goes, it’s going to cause some fairly deep structural problems since California’s economy is now powered mostly by this one sector.

    There’s no telling if it’s going to happen this year or two years from now, but when it happens, it’s going to be a real bummer. And because people are so over the top with this fever, I could see prices go up another 40% in the next year or two before there’s a crisis. After all, it wouldn’t have looked too smart to have predicted the NASDAQ bubble in 1997 or 1998 because you would have lost out on 50% gains.

    But the real problem here is that Tech was a big mover in the economy in 2000 when the bubble burst and that should have hurt a lot. Instead the $6 trillion that was erased in that crash (as of today’s figures) was mostly reflated in home prices — so the average joe’s balance sheet was either unchanged or remains ahead.

    Housing is not merely a big mover in California’s economy today, I’d argue that as the source of 70% of all added employment, it is the only real mover. So, if it stops, whether you own a home or not, and whether you work in the real estate industry or not, it’s going to be more than a little noticeable.

    But in short, renting is a way to hedge and not leave the Bay Area. You can take your first $500K of capital gains 100% tax free (provided that you are married and lived in the home you are selling as your primary residence for a minimum of two years). That means at the measly current savings account rate you can get at emigrant-direct, you would be making about $1,400 a month in interest alone and you wouldn’t have mortgage interest payments, property tax payments, etc. And that’s only the first $500K of capital gains — the rest are taxed at a friendly 15% if you held more than a year… and if you have been in Palo Alto for a while, you may walk with more than $500K in capital gains.

    Anyway, it’s just a thought. I remember when everybody I knew would talk about their investments in tech companies — bragging about the big gains and their margin positions. Now everyone I know talks about their home, or their second home and they only mention the purchase price, not the interest-only loan, the 80/20 financing, the two or three year adjustible period even when interest rates are at 40-year-lows, etc. I imagine that at some point between six months and two years from now, it will be as unfashionable to talk about owning a home as it is to talk about owning tech stocks.

  5. I saw the bubble coming and sold my house in the Fall. It was on the market for 45 days and instead of getting overbids of $100K or more, as we expected, we got bits at or below the asking price. I had to negotiate $ back to the seller in the deal, so while the price that went on the record seemed to be “asking price” the actual price was much lower. Many other houses on the street at that time also sold for below asking — with this carefully hidden as a post-escrow deal.

    My next door neighbor’s house was on the market at the same time and it languished for 6 months. They pulled it off the market, reduced the price by $100K and eventually got an offer of $125K below asking.

    This seems to indicate to me that housing prices have actually fallen about $100 to $100,000 in recent months, cleverly hidden by the fact that most houses do not get overbids in the Bay Area anymore and that the practice of negotiating a lower price in escrow is pretty common.

    Has anyone else out there seen this? OR was this just a seasonal dip that happens every year at the end of the summer?


  6. I actually think we’ll see the bubble burst much more based on interest rate increases alone! I’ve recently written an article about this which shows the graph of how interest rates can greatly affect the affordability prices of mortgages.

    For example, if you want to keep a monthly payment of $1000/mth, and if interest rates climb up 2-3% from todays lows of 5% then you are looking at a 20-30% drop in mortgage affordability! In detail, if you have an interest rate of 5% and you can only afford $1000/mth mortgage payments, then you can afford a mortgage of up to $186,281.62. If interest rates climb to 7%, then this number drastically drops to $150,307.57, a $36k difference, or about a 20% drop in price!

    Stephane Grenier

  7. The real estate bubble is getting so much hype right now, especially in the Bay area. I’ve been regularly reading a number of blogs and articles concerning the bubble, and I’ve been finding remarkably conflicting accounts of what is going on. Steve Sjugerrud has a great article on the real estate bubble. He seems to give a really honest and balanced account.

  8. Love your blog…

    If you are looking for a grapic visualisation the the real estate bubble check out:


    The blog publishes long run prices for about 40 US cities. Some of the blog commentary is a little inane, but the pictures of overbloated US real estate prices is shocking.


  9. We have the biggest bubble here in Miami..

    Real estate still stays to be an investment category with more emotional baggage than the rest. It also shows that there is a continuing gap between the way investors may understand their personal real estate holdings and their outlook on the public securities market for real estate.


  10. Real Estate’s Role in the Post-Bubble
    Real estate still stays to be an investment category with more emotional baggage than the rest. It also shows that there is a continuing gap between the way investors may understand their personal real estate holdings and their outlook on the public securities market for real estate.

    Many investors, especially those heading toward retirement, are becoming hungrier for profit and yield. Despite of the volatile times for the cyclical world of real estate, many real estate stocks still continue to allow for solid returns and offer growth capacity among investors.

    Property type variables for local, regional and national property and capital markets conditions, management experience and maturity, and even luck, all have major roles in determining how companies perform. The coming of investment capital into commercial real estate stocks has paralleled the overall growth of real estate development.

    This has caused increasing sophistication to real-estate capital markets and spurred the continuing consolidation of real estate management and brokerage from local to national and even international ownership structures. REIT stock valuations are connected to interest rates. However, the question remains. As interest rates rise, will interest in real estate fall?

    In real estate, more opportunities arise as up or down movements in various property types and markets force owners and operators to maneuver their holdings to take advantage of or defend against trends in office leasing, consumer behavior, travel, logistics and housing.

    The National Association of Real Estate Investment Trusts, an industry trade group, reported that around $1.7 trillion in real estate transactions happen every year. Together with REITs, the grand total includes the institutional and private-equity buyers, single-family homebuilders, real-estate operating companies and land companies.

    To summarize, the real-estate securities world is an active and exciting market that is sure to experience great growth in the coming years. However, there is also a great change that comes with concomitant risks and rewards.

    By M. Sese

  11. For those in denial of the current real estate collapse, check out the following website which charts asset diversification among different categories. Does the Real Estate sector for year 1990,1991,and 1992 look familiar? How many folks forget that history repeats itself. Wake up and smell the coffee…

  12. Hey I’m new and I guess this is as good a place as any to see if anyone knows of a good loss mitigation training course?

    I keep hearing about people making tons of money becoming foreclosure consultants.
    So, If you have any info or you have purchased a good course, please share. I’m retired and looking for a home based business that I can earn a decent income with.


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