That House Is Worth HOW Much?!?
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.
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I'll take it! It's only fiat anyway.
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.
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.
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 (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)
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.
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.
I have to post this again…
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!
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 . Where did common sense go…