That House Is Worth HOW Much?!?

Adam Taggart
By Adam Taggart on Thu, Jan 29, 2015 - 4:06pm

I have a hard time remaining impartial when looking at the housing market. 

First off, it depresses me how quickly the Fed's ZIRP and QE policies have re-blown price bubbles in many US housing markets. Is our collective national memory that short? How could we unlearn the lessons of the 2007 housing bust so quickly?

Second, I live in the San Francisco Bay Area, where housing prices can only be described as "stupid". There are a number of factors behind this: high demand, limited area for new development, high employment & incomes, high household net worth, and most recently, lots of all-cash foreign buyers. Prices out here are now well above the previous unaffordability records set in 2007.

But I find it much easier to demonstrate the level of stupidity out here with pictures. Here's a house that just hit the market for nearly $2 million in my old neighborhood in Palo Alto. It's sure a beaut, isn't it?

In case you're thinking that perhaps a lot of land comes with this property listing, think again. The entire lot size is 5,600 square feet.

Now, I know this house well. It's just a few blocks from where I used to rent before I finally high-tailed it out of Silicon Valley for (relatively) saner climes. I passed it every day on my morning run. Believe it or not, it looks even crappier than these pictures when you're standing in front of it.

I'm not surprised though at the jaw-dropping price it's been put on the market for. Some insanely rich person -- likely a Chinese or Indian national -- will likely end up buying it for cash, way above the asking price after a frenetic bidding war. They'll tear it down and drop another $3-5 million on whatever they build atop the ashes.

That's what's been going on in much of Silicon Valley and the larger SF Bay Area for the past half-decade. And it's completely nuts.

Prices are so far divorced from traditional valuation indicators like median incomes, etc that there's no way to justify buying a home unless a) you are already quite rich, and/or b) you are betting the party will continue through the time you eventually want to sell.

While there are indeed a lot of folks in the Bay Area who fall into the first category, they're still a minority. But housing is priced at the margin, so it forces everyone else to fall into the second category.

From my personal perspective, today's homebuyers in markets like SF are playing with fire. Unless you have the scratch to buy all or most of your house with cash, you are taking on a monster mortgage, only "affordable" due to today's historically-low interest rates. As soon as those rates start rising (and for the first time in a long time, the Fed is actually murmuring about raising them), home prices must come down. That's not a prediction, it's a mathematical fact (as mortgages become more expensive, real estate prices must come down, all else being equal).

And that's not considering the impact a market downturn and/or economic slowdown could have on prices. Areas like SF are heavily supported by the bonuses and equity gains financial and tech workers receive. When those evaporate as they did in 2008, and may be compounded by widespread layoffs, home prices can fall fast.

Imagine taking on a $1.6 million mortgage to buy a (crummy) $2 million home, and then seeing mortgage rates rise up over the next 5 years to their historical average (~8%). Your $2 million home is now worth $1 million, and you are $1 million underwater. Add in another 2008-style correction and the home could well be worth a lot less. And look at those pictures again. How much annual maintenance and repair is a home like that going to require each year?

So, this all should give you a good sense of why I remain on the sidelines, renting, waiting for saner market prices.

Someday, those rich Asian buyers are going to vanish as their countries impose capital controls. Someday, the stock market is going to have its long-overdue correction. Someday, these over-hyped tech firms (Facebook, twitter, etc) are going to lose their appeal to investors tired of not seeing true profit growth (or any profits, for many of these companies). Someday, people are going to realize it's not worth betting their future prosperity on an overpriced, depreciating, decrepit wooden box.

And prices will come back down to where they should be, as measured by what local incomes can sustainably afford.

And that's when I'll buy.

Note: If you're reading this and are not yet a member of Peak Prosperity's Frugal Living Group, please consider joining it now. It's where our frugality-minded community creatively finds ways to get our needs met while using available resources as sparingly as possible. Simply go here and click the "Join Today" button.

16 Comments

Thetallestmanonearth's picture
Thetallestmanonearth
Status: Gold Member (Offline)
Joined: Feb 28 2013
Posts: 324
I'll take it!  It's only fiat

I'll take it!  It's only fiat anyway.

locksmithuk's picture
locksmithuk
Status: Silver Member (Offline)
Joined: Dec 19 2011
Posts: 127
Caring homeowners

You know that a pukka estate agent (or 'realtor' if you're speaking American) has done a fine job advising his/her client on marketing strategy when there are no empty dishes piling up in the kitchen sink on photoshoot day.

 

It's the little things.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
I am living on my teeny tiny

I am living on my teeny tiny boat. What happened in my neck of the woods is that the real estate market is very volatile (goes up and down a lot). I was renting a company house (Remember those?).

However because we have been through a boom time houses have been sold in $millions. Now a lot of them are on the market and everyone is holding their breath.   .   .  and holding their breath.

So shadowy figures have moved and sent in the fashion police. Apparently the company house does not meet their approval so it has to be bulldozed, thus decreasing the supply of housing. The plan was to force me to move into one of their rentals. I anticipate that a lot of anxious talk is happening behind the curtains. "What happens if the population catches on that the law of the land does not apply to the sea? We cannot set the wrong example, you know."

The other nifty trick is to increase the demand for housing by increasing the number of immigrants. (Homeless people? What homeless people?)

And another is to pass laws facilitating the break-up of families. Where one house was home to a whole family, now we need two houses. Brilliant!

I hear that taxpayer built housing is being bulldozed if the tenants are untidy. (Not that that matters, they were only clapboard anyway. But they did keep the rain off ones head.)

There are a lot of not so obvious, interconnected factors at play. One of the most powerful is the imperative to ensure that the population are debt slaves. (Are you enjoying paying your mortgage, slave?)

I am astounded that we allow the banks to hand out this illusionary debt and thereby ensure our slavery.

The best slaves are the ones who believe that they are free.

 

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1227
Long time no sea...

Glad to see that I am not the only one renting these days. It sucks not being able to fix the place up the way I want but I do not miss my mortgage. Watching and waiting for my time to settle back in somewhere where employment and family interests intersect.

Arthur, I've spent plenty of time living on ships but sorry to say I can't follow your lead. We are about as far as a body can get from an ocean. The last time the sea visited this area was 66 million years ago...

Map of distance to the nearest coastline[1] (including oceanic islands, but not lakes) with red spots marking the poles of inaccessibility of main landmasses, Great Britain, and the Iberian Peninsula. Thin isolines are 250 km (160 mi) apart; thick lines 1,000 km (620 mi). Mollweide projection. (link)

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
Meanwhile, in Flushing

About 12 years ago I inherited some  money, and thought I would look for a modest fixer-upper on the fringe edge of NYC since I worked there at the time. I thought I had found it in the above  property. Behold the new and improved 49-25 Little Neck Parkway, Flushing Queens NYC!  It looked worse then. They wanted $500,000 for it, firm.  It's on a 1,674 sq ft lot, with one bedroom, one bath.

I decided that we were in an RE bubble back then. and used my inheritance to pay off all debt, and rented.

p.s. - It's estimated to be worth almost $600K now.

kevinoman0221's picture
kevinoman0221
Status: Silver Member (Offline)
Joined: Sep 25 2008
Posts: 144
Thanks for the update,

Thanks for the update, Adam.

I am right there with you, but I sure do wish I had a place to start growing my food forests.

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
Joined: Jan 14 2012
Posts: 403
Crack Shack or Mansion?

I have to post this again...

http://www.crackshackormansion.com/

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2247
I got 6 out of 16 WT...

I got 6 out of 16 WT... obviously, I am not qualified to tell the difference between a mansion and a crack house!  I did appreciate the one "gimme"; the one with the police busting through the front door!

Afridev's picture
Afridev
Status: Silver Member (Offline)
Joined: Oct 11 2013
Posts: 144
WT; 5 out of 16...

Abysmal score; luckily I work in technical/ organisational issues and capacity building. Would be as useless a real estate broker as I would be an administrator devil. Where did common sense go...

Afridev's picture
Afridev
Status: Silver Member (Offline)
Joined: Oct 11 2013
Posts: 144
Example house prices in Sweden

Here the link to the type of houses you can find in Sweden in our region:

http://www.maklarringen.se/Kopa/Objektsida/Objektgalleri/?objectid=OBJ30...

Price: a bit over 180,000 USD

Surface of house itself: 111 m2 ('livable' space, there are an additional 22 m2, storage etc.)

It comes with several extra buildings (amongst others one with a pretty large area where guests can stay independently, garage/ workshop, large shed)

Quite close to a lake

Area included: a bit under 6 ha (a bit over 14 acres), most of it wood; part of it is separated from the terrain of the house.

But, not many opportunities for local employment (quite far from city). There are surely other issues, but it gives an impression of house prices over here.

In the Netherlands (where I originally come from), you probably get a larger shed for this price.

 

 

Thetallestmanonearth's picture
Thetallestmanonearth
Status: Gold Member (Offline)
Joined: Feb 28 2013
Posts: 324
I got 15 out of 16

I got 15 out of 16 right.....do I win a crack house?

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
Joined: Jan 14 2012
Posts: 403
Crack houses for everyone!

Crack houses for everyone! Courtesy of PeakProsperity.com

Caveman Joe's picture
Caveman Joe
Status: Member (Offline)
Joined: Mar 2 2015
Posts: 3
House prices

Hi, I'm also from the Netherlands originally and prices there and the rest of Europe are also going up sharply , I managed to buy a small farmhouse on 2,5 acre in Romania where it was still very cheap to buy before they joined EU and I could sell them for double the amount I payed for it.?  I now live on a tropical Island in the Philippines where prices are really cheap.  I now have a 12,5 Ha mountain property and started organic farming and live with my family in a Cave Home apartment inside the mountain witch we dug out ourselves?  Its real frugal living, electricity from a generator and fresh spring water all year around, nice warm temperatures all year and beautifull nature, so this is now my retirement Bug-Out ?  But we have all the comfort we need and are happy to be away from the big city?  We also rent a small house in town so the kids can go to school easy?   Joe

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
Report: San Francisco To Shut Doors Over Rising Rent

Report: San Francisco To Shut Doors Over Rising Rent

Popular Bay Area City Seeking New Location

SAN FRANCISCO (The Onion)—Saying that staying in its current location was no longer feasible, sources across San Francisco confirmed Thursday that the popular Northern California city would be shutting its doors at the end of the month due to rising rent.

Residents and business owners of the iconic West Coast metropolis, which has occupied the same peninsula for generations, told reporters that spiraling costs had reached such a level that remaining in its 47-square-mile waterfront space was simply beyond its means.

“The city’s in such a great area, but ultimately we just couldn’t find a way to make ends meet each month,” said San Francisco resident Jaime Gonzalez, speaking on behalf of the city’s 850,000 citizens, all of whom recently gave notice that they would be vacating the premises by July 1. “We’ve been here for so long, it’s hard to imagine this city anywhere else. But the reality is that we just aren’t making enough to justify what we pay to be here" . . .

 

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 854
Lines of constant distance to the nearest coastline

Isojoy? Or Isolax? We need to come up with an appropriate name for this map.

How about

Isogone (you can't even imagine)?

Location, location, location.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Flatlands.

My birthplace Zimbabwe I see is 1000 kms from the sea. All travel outside Africa was forbidden. Travel outside Zimbabwe was discouraged. 

Now travel out of Zimbabwe is encouraged,  travel back is forbidden.  (Unless you have a black skin. Even then only on sufferance.)

The point is don't rely on prevailing conditions.  

What I like about the sea is that it is a two dimensional surface. There are more degrees of freedom than on the long thin black strips that landlubbers bet on. What I find pretty irksome is my inability to inhabit the third dimension. 

Flatland studies show the degrees of freedom are vastly improved with every extra dimension added. (Dr.  Who's freedom is out of this world. )

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments