About a year and a half ago, I announced:
I got the house!
as part of the series of articles I wrote about my house hunting experience in Silicon Valley.
I recently noticed that 3 units are up for sale in my townhouse neighborhood. One is the single story end unit that's at the south end of my building. On my way back from the mailbox this morning, I grabbed the sell sheet from the sign in the lawn and ran the numbers.
Desirable single story end unit in Lincoln Village close to shopping, schools, and commute. Very open floorplan with generous use of windows and high ceilings. Enjoy the benefits of the newer furnace and air conditioning! The washer, dryer, and refrigerator will remain. Oversize two car garage with room for workshop!
The townhouse is a single story, two bedroom unit of roughly 1,250 square feet. Mine is 36% larger than that. They're asking $585,000. That's about 20% more than the bank paid for my place. To put this on level ground, here are the numbers as dollars per square foot:
- My place: $285.30/sq foot
- The one for sale: $468.00/sq foot
If my math is right, that's about a 60% price difference from a square footage point of view.
Have prices really gone up that much in the last 1.5 years? It's hard to say until it sells. If there's an open house, I'll likely walk thru to see what condition it's in. If mine is similar, that means it has been appreciating at a rate just higher than 3% per month (60% over 18 months).
Perhaps Dan's repeated warnings about the housing bubble are more justified than I had previously thought?
Update: They were having an open house, so I dropped by to see the place and chat with the agents. It seems that the kitchen is quite similar to mine, meaning that it's all original (30 years old) equipment with no upgrades. Similar newish paint, carpet, and other stuff elsewhere. They say that if I sold mine, I could expect something in the $650,000 ballpark. That's just nuts.
Posted by jzawodn at August 06, 2005 03:18 PM
Wow. There are sooo many other places in the country where you could live in a relative palace for that amount. What ever happened to telecommuting?
PMI thinks better than even money now that there's a price decline in your future.
It's a good thing I didn't buy this place with pofit in mind then, huh?
According to my mortgage biz friend (who I regard as smarter than the average bear), historically there has never been a 'bubble' pop on any more than a local level. Instead, the markets will simply go flat as a correction to previous raging upward trends.
The current raging increases in housing costs is a nationwide situation (with some localized exceptions). I think California's very high-end neighborhoods have the greatest prospect of encountering a bubble pop. But that means they will flee to more reasonably priced digs in softer markets elsewhere which will sustain those markets.
I'd love to see a dynamic model for this on a regional or national level. Any takers?
I read an article somewhere (can't recall where unfortunately) that there was a recent massive increase in SJ housing prices. Some real estate people are buying up any property they can get their hands on, under the premise that a large group of Google employees are about to become fully vested and will want to sink their huge piles of money into a house nearby. So prices have just gone insane.
Sadly, it's got a premium because it's an "end unit". Now, while you and I might argue that the premium isn't quite that high, I'm betting that some sucker, err, investor probably isn't.
For now, bask in the warmth of increased property values that precedes your next property tax assessment.
Damn, those things hurt.
i like the phrase
" ...... more than the bank paid for my place."
This isn't crazy! You don't know crazy. Where I live, prices doubled in eight months of our buying a home!
I think it won't be long until stories like this are being reported in Silicon Valley:
Double-wide `mobile villas' fetching seven figures in California
http://www.kansascity.com/mld/kansascity/news/nation/12301445.htm
I always love the million-dollar-trailer in Malibu stories. It always makes me think about the old show The Rockford Files, and the story lines about how Jim Rockford managed to keep ahold of his lease so he could park his trailer on a prime piece of real estate right on the beach. And in fact, that's almost exactly the spot where the million-dollar trailers overlook the beach today.
The same place (1076 Roy) sold at the end of Dec. 2003 for $415,000, so it's a 40% rise over 19 months or so.
It's not just Silicon Valley. I live way out in the extreme suburbs of DC and we are seeing similar appreciation.
Do you know what kind of house I could by for $650,000 here in TN? That's just absolutely insane the cost of real estate where you live.
Are you sure the square footage is correct? Sometimes the square footage is more of an estimate than the true measure. In any case, real estate in any major metro area is insane. Bubble 2.0 !
Wow. Sweet. I'm going to have to buy a house. I've been in San Francisco for 7 years now and its probably a good idea to bite that bullet.
It's not just silly-con valley. The housing prices in CT are absolutely insane.. median house price is around $300K.. I think the bubble is close to bursting though.. the house down the street from me has been up for sale for over a month now.. not that long ago it would have sold in a week.
Joe's (Friend) is right - there's really never a pop or burst in real estate markets, unless perhaps in a single company (or gov't agency) town where it closes down. Prices will go flat, or maybe even trend down a bit.
I'm so jealous.
You could sell up your sunny semi in SV and come and live in a two bedroom flat with no garden and on-street parking next to us in Fulham for that much cash.
It was your blogging of the home buying process which encouraged me to eventually buy a condo in a complex directly behind eBay on Hamilton Ave lat year. Even though the $489,000 price still seems insane, my floor plan goes for twice that now. My greedy self wishes I could have afforded another one.
Frying pan -> fire. Leave your current locale and do what? Buy someone else's overpriced house? Rent? I guess if you are single, its probably the right thing to do. Assuming you would rather pay more to finance a house later when interest rates go up. To rent you have to believe there is 20++% pure froth and you will be ahead post-bust even after rates rise...which I believe to be true.
The winners will be those who are liquid. Those who have cash in the bank and can move to buy properties in cash once things have imploded. There are more of these people than you think, many of them are big real estate players who end up becoming landlords because they play the contrarian and know the tides very well.
Big issue is what you think will happen in the valley long term. Prices here will never be Kansas prices while people believe it is the innovation capital of the world. Y! is hiring (N>2) Bangalore devs for each Sunnyvale dev hired from what I can tell (no offense to the Bangalore guys, they seem to do great work), so maybe that will help polish your crystal ball. Silicon Valley abhors commodity industries.
Some more real estate fun facts:
- 80% of mortgages have a ARM or interest-only component...meaning they are sensitive to rate hikes. Most of these people have no idea how these loans can turn on them.
- In the 90s Japan's post-bubble deflation flattened its real estate market for a decade, and this is in a place with zero room to build (thus negating bogus supply/demand args).
- National savings rate now measured at zero wrt disposable income.
- Home equity (what *you* own) at all time lows.
- Household debt at all time highs. Thirty year mortgages. Six year loans on cars. Credit card for everything else.
- "Real" interest rate still near zero - Fed *still* blowing bubble ("accomodative" by their own admission) at 3.5% overnight rate, far below historical average, and this apparently in a "goldilocks" economy....This is why Volcker still rants....
- Population growth spurring home building? False. Immigration growth is in low-wage earning Latinos who are not in market for $500k houses.
- YOU ARE INVOLVED! Your bank is the one making these subprime loans with *your* money, chasing lower quality borrowers to try to make some profit in this no-interest era. Credit unions lend to people even these "no standard" banks won't loan to. Bank failure has been a reality in the American economy for some time (Depression, S&L scandal), you better believe bad debts impact you. Do yourself a favor, check you bank's safety rating (meaning chance loans will be paid back to them), they all have one.
- Simply put, anyone buying a home now is mental. By 2010 many properties (Manhattan, Bay Area), will be selling for 50% of the current values. Think about it! Can you ride out a mortgage that is more expensive than your house's value for five-ten years? In the depression they left the keys in the doorknob and walked. It will happen again. That house will sell for a dime on the dollar to the market mechanic who doesn't buy into manias.
> By 2010 many properties (Manhattan, Bay Area), will be selling for 50% of the current values.
No f'ing way. Great info otherwise - where'd you get it?
"Even though the $489,000 price still seems insane, my floor plan goes for twice that now."
I meant to write the floor plan sells for $100,000 above what the bank paid.
>> By 2010 many properties (Manhattan, Bay Area),
>> will be selling for 50% of the current values.
> No f'ing way.
but this is exactly what happened in japan in the 90s - a 50% drop in real estate values. and this in a prosperous nation with high savings.
i will leave the exact fluctuation here for posterity, but note that homes have risen 20% per year for the last three years. most of that is financing and interest rate accrual, not real creation of equity. so expect much of that to be given back. also you seem to think 50% rise is preposterous, yet in the last decade many of these properties have doubled in value so a 50% drop would only be a reversion to the mean, which often happens in any commodity market. the bay area and manhattan (as well as san diego) are quite vulnerable to these moves. the illiquidity of the market has so far worked for sellers but it can just as easily work for buyers. hey if a stock goes south i can sell it in 4 seconds. not so with real estate, in my zip there is a 5 million dollar house that has been on sale for years. you better believe the seller is starting to wonder if it will ever go. many more in the 2+ million range that have been sitting around forever. most Gen Xers (age range reading this blog) have not really witnessed a protracted deflation (Greenspan prevented one by creating an asset bubble to replace the stock bubble), so many find it hard to believe these things can happen. look along the hudson river in NY...used to be filled with megamansions from another era...many of which were simply abandoned when the market cratered in the 30s. look at Japan in the 90s....VALUES FELL 50%. and this is in a nation with NO LAND and LOTS OF SAVINGS. repeat - VALUES FELL 50%. oh but this can't happen here?
> Great info otherwise - where'd you get it?
read financially conservative aggregators like safehaven.com and you will see these stats trotted out again and again and again. listen to richard russell, the #1 all-time market timer. listen to warren buffett. do you think these people watch cnbc? yes, for a laugh now and then to see the types of dopes they fleece on a yearly basis.
people buying real estate now are the same people buying net stocks in January 2000. note i say January specifically, since for most of Feb and March 2000 these people were sitting pretty and felt smart. in housing it will be the same way, your decision to buy now may look smart at the end of 2005 and even early 2006, but by 2008 it will doubtlessly look retarded. markets are already stalling out in california for high-end homes (your DEW line for the rest of the markets), so beware.
Well, we'll see. Comparing to 90's Japan and 30's US is rather extreme. Rising interest rates (as the direction appears to be) will definitely have a cooling effect. And a house you live in is quite a bit different than stocks - you can still live in it (as long as you can still afford payments, taxes, upkeep, etc.) and its value will almost never go completely south to penny stock status - it'll probably hold most of its value in the short term and almost definitely continue to appreciate in the long term.
>> and its value will almost never go completely
>> south to penny stock status -
>> it'll probably hold
>> most of its value in the short term
what is the short term? the bay area already saw a 20% drop in 2001-2002 in many areas. 20% drop now would shave off two years bubble appreciation. and bubbles never stop imploding at "fair value"...fair value is some number a price passes in the middle of the night as it oscillates between over and undervaluation. with a stock you have a much better chance of hitting this timing, the housing market is illiquid. when buyers assert total control in the real estate market (happening already), it is going to get ugly. once the PERCEPTION of a bubble takes hold, the bubble popping becomes REALITY - think about it - ALL PRICE IS PERCEPTION. ALL. your house has ZERO ***inherent*** value. only what people INFER. if people infer your house if 50% overvalued, and they stick to this line of reasoning, IT IS.
>> and almost
>> definitely continue to appreciate in the long
>> term.
what is the long term? shareholders in 1929 had to wait until the 50s to break even. and don't tell me "stocks are different" - the housing market dwarfs the stock market by many times in value, and 20% of all homes bought last year were second or speculative homes. so yes, people are "playing" this market, it has become totally speculative. lots of people say "i'm in it for the long haul" but don't have the nerve to stick it out, its just a euphamism for "i f**cked up". most of the shareholders who trotted out this claim in 2000, 2001, were actually out of the shares probably within two months. no one has the brass to watch their savings evaporate long term. this is how manias work.
Japan housing prices drop for a decade.
LA and NYC have seen decade long real estate drops in the 90s and 80s repsectively.
Florida's real estate bust in the 20s was famous ("i've got some swamp land in florida to sell you").
Look up the 100 year history of pricing in major metro areas...you might get a surprise.
Now does all this work out in the "long run"? Maybe, but you have to ask if you can stomach a multi-decade loss waiting for the gold at the end of the rainbow. Unless you are LIQUID (meaning no debt, you buy everything, even homes, with 100% cash), I'm willing to bet you won't be able to ride it out. Those who are LIQUID (market mechanics, the super rich) can just sit back and watch interest rates and oversupply work in their favor. and they will. stocks, bonds, real estate have all risen in UNISON (should never happen in rational market) since greenspan began pumping the credit. they will all fall in UNISON when the punch bowl is removed. the winners: those holding CASH and NO DEBT.
> Look up the 100 year history of pricing in major metro areas...you might get a surprise.
Is there a URL with that data?
I was reading about Florida's condo boom the other day - 25% of buyers are speculators, a lot of them foreign:
http://news.yahoo.com/news?tmpl=story&u=/ap/20050807/ap_on_bi_ge/condominium_boom_1
>> Look up the 100 year history of pricing in major
>> metro areas...you might get a surprise.
> Is there a URL with that data?
probably have to hit microfiche at the library for the full enchilada, or maybe it is online by now. i only know for sure florida, nyc, and LA.
surf some of the articles at safehaven.com, financialsense.com etc, they always are dropping these stats.
as for the florida condo flippers - wow some people are going to get burned there. these are the henry blodgets and frank quattrone types in real estate...they are selling ("flipping") PRE CONSTRUCTION condo rights on condoflip.com...i mean really, this is just insane. they don't even have four walls to point to, just the "rights".
problem is, OUR banks are the ones funding this mess. so WE are funding it. and the wind can blow through the house of cards - look at argentina, which followed US liberalization plans to the letter in the 90s - they had to shut off the ATMs for a week. roosevelt closed all US banks for two weeks during the depression. the only way for banks to make money these days is to chase iffy borrowers. no happy endings here unless you are a market mechanic and can capitalize on misery.
Don't want to be too gloom and doom - this scenario will unfold profitably for those who understand the scenario and build liquidity. for the market mechanics it will be the buying scenario of a lifetime. personally i am holding out for T-Notes at 10%.
no i don't have a blog (too busy with kids) but in any case all i am doing is regurgitating what those who are vastly more intelligent have stated. safehaven.com is a decent aggregator of some of these types.
often this is referred to as "bearish" commentary. to be fair bears have called 10 of the last 3 recessions (nyuk nyuk). you have to take them like anyone with a grain of salt. they range from the hedge managers (don't care which way things move as long as they move) to the world-is-ending gold bugs who do not trust printed money. i personally like warren buffett and richard russell, both legendary money managers, neither of whom work on wall st.!!
i say just NEVER listen to (or at least massively filter) anyone who stands to make money from you doing something (buying, selling, etc). they are never looking out for you, they are looking out for themselves. this includes bankers, brokers, real estate types etc. especially real estate agents....they are the true vampires.
good luck.
It's getting just as bad in the Wash.,DC area. We just sold with a 61.6% return on investment in 3 years. Next week, I begin telecommuting from the "Crossroads of America."
It's getting worse and worse in San Diego. Especially by the beach where I live (Pacific Beach). Run down properties going for skyhigh prices. Location location location is being taken to a new reality. I love it here, but it makes you wonder what it's all worth.
Hi Jeremy,
I recently did a google search and came upon your very interesting blog on your home purchase experience here in the Valley. You are a very good blogger.
The reason for my interest is that I too am trying to start a blog called "Brokers in Your Corner" to give a Silicon Valley Real Estate and Mortgage perspective to the blogosphere.
After your initial blog on the housing project, there were several responses and comments. Excuse me for the stupid question, but besides writing good, attention grabbing content, what other methods are you using to generate traffic to your blog?
Any advice would be much appreciated. I'll let you know once my blog is up and running.
Best regards and keep blogging!
Alex Wang
Great article. I was looking for this. I'm going to bookmark this one. Thanks for taking your time to put this together.
Hi Jeremy, I posted a comment on this blog on September 3, 2005. Can I have my name and comment removed from this blog? Your website is a very good website and to to be honest, I sound like a 'noob'.
Anything you can do would be much appreciated to remove my comment from the site.
Thanks Jeremy.
The information on this site site is the the great source for all who are hunting for a house of their dream for years.
