Why Palo Alto Housing Will Fall 30% or More
Green shoots, the recovery is here, houses are bottoming!
Not so fast! Yes many areas may be reaching a bottom but that does not mean that all places have hit bottom.
For example it is believed that housing bubble ground zero locations like Vallejo, California have come close to a bottom. Therefore, hot areas like Palo Alto, must also be similarly close to that bottom eventhough prices there have not fallen (on a percentage basis) nearly as much.
The typical explanation for the differential treatment is that Palo Alto is desireable and therefore immune to a large price decline. I would like to suggest that its not about “absolute” price but “relative” value.
Yes, a house in Palo Alto will ALWAYS be worth more than a house in Vallejo but I argue that the RATIO of house prices should remain close to constant. If Vallejo rises in value then Palo Alto will rise in value but if you divide the value of a house in Palo Alto by the value of a house in Vallejo the resulting number should, over the long term, be relatively the same. So that is what I did.
Using data from Zillow I took the sales price per square foot of houses in Palo Alto over the past 10 years (2000-present) and divided it by the same metric from Vallejo to plot the ratio. For extra credit I also calculated the ratio of Palo Alto to both Hayward and Mountain View.
Why Hayward and Mountain View? Simply put Hayward is a little closer in and a more rational commute (not many people would think you were NUTS to commute to the Silicon Valley/San Francisco job centers from there). I chose Mountain View because that is the, only slighly less desireable, southern neighbor to Palo Alto.
So here is a picture of what I found:
What does this all mean? Well let me state one other assumption and that is let’s assume the year 2000 was a ratonal year and that that ratio represents a normal premium of Palo Alto over the other cities. (older data was not available from Zillow)
Lets divide the chart into 3 segments:
- 2000-2001 – The “normal” period in which the ratios represent the typical balance.
- 2002-2006 – The “bubble” in which all hell broke loose.
- 2007-2009 – The “deflation” of the bubble. (NOTE most people agree that the bubble started deflating in 2006-2007 across the US.)
So in the “normal” period we see the ratios between Palo Alto and its neighbors staying relatively confined (maybe a 5-10% swing at most). This is what you would expect.
Now if we look at the “bubble” period we see a relatively dramatic drop in the ratio which means that Vallejo and Hayward were gaining on Palo Alto. Did they actually become more desirable? Well traffic would go up (more people were moving there driving up those prices) so I would say “no”. What it really means is that the bubble valuations hit Vallejo first.
Now if we look at the “deflation” period we see the ratio turning DRAMATICALLY in the other direction and well above the historical norm. This means that either (or both) that deflation hit Vallejo first and the bubble hit Palo Alto second.
One might argue that this means Palo Alto is safe EXCEPT for the fact that the ratio has so dramatically outpaced where it was in the “normal” period in 2000-2001. If it had returned to the levels of the normal period in 2000 then there would be nothing noteworthy here. In fact Vallejo returned to almost the exact same price per square foot in 2009 that it was in 2000 where as Palo Alto was still almost double where it was in 2000 as shown here.
So what would it take for this ratio to fall back into line (and deflation to hit Palo Alto second)? Simply put, compared to Vallejo, Palo Alto prices would have to fall 39%. Compared to Hayward they would have to fall 26%. This of course assumes that Vallejo and Hayward have truly bottomed out which is probably not the case. Assuming they have even the most conservative estimate pegs Palo Alto at a 26% fall.
Heck even compared to it’s neighbor Mountain View it would have to fall 11% to come into line with the historical ratio.
In short Palo Alto has some falling to do. It just was late to both parties.
November 14, 2009 at 3:04 pm
The claims I see here about Palo Alto housing not going down, etc are the same ridiculous claims I used to hear in Orange County over and over again. Guess what? Those houses are down 30-50%. The same will happen in Palo Alto over time.
Secondly, I’d love to see the over time square foot comparison for a place like Irvine, CA. Any ideas where I could find it?
November 14, 2009 at 7:07 pm
when real estate prices seemed to go up like forever, back in 06/07, every city experienced the same rise in house prices. There is no other region in USA that can compare to the cities I mentioned about: palo alto for example. You cannot compare OC with palo alto. Around palo alto, there are many venture capital firms on sand hill road, there is stanford, and there all these net 2.0 companies, and there is google, facebook, twitter headquarters, a lot of innovation in silicon valley, you cannot find this kind of telented and well paid pool of individuals in OC.
that is the difference. OC rose in prices because the overall prices went up. OC could not sustain, so they fell.
November 14, 2009 at 9:32 pm
Like you said “every city experienced the same rise in house prices”. So Palo Alto experienced the same rise as others. More specifically it went up for the same reasons (loose financing, housng mania) and will fall for the same reasons ABOVE its normal historical appreciation.
Think of it this way. Housing prices over the past 10 years went up for two reasons. One reason was the normal run-rate appreciation. The other was the “bubble mania”. The bubble mania has popped so that component of the housing price surge in Palo Alto will disappear.
Another way to think of it is that Palo Alto (prior to 2000) appreciated about 6-8% a year. After 2000 it was appreciating 10-20% per year. The difference between those two numbers is the bubble mania component. Before 2000 Palo Alto still had VCs and Stanford, smart people and something even better than net 2.0 companies – we had net 1.0 companies where millionaires were being minted MUCH faster than today (remember pets.com?). Why in that period (1996-2000), when everyone was wealthy and everyone was moving here did prices only appreciate 6-8% per year? When that bubble collapsed and people lost millions (and many VCs closed) and started to leave (after 2000) housing prices started appreciating FASTER than the last peoriod. That was the housing bubble again. Clearly the area wasn’t BETTER than it was in the previous period.
So, in short, housing prices have to hold or drop such that the long run appreciation in Palo Alto maintains the historical norm of 6-8%.
November 17, 2009 at 2:05 pm
here again, in my lunch time, I am going to reply to you. I checked your reference to zillow chart on palo alto prices. 6.6% down. It fell, but it will not fall 30%, not even 20%. Even it falls 10%, it is still out of reach. In mlslistings, there are only 7 houses for less than 1 million. If it drops 30% as you said, that will be nice. Maybe 2012 like movie, the prices will drop like 30% at least. But at that time, who is buying?
November 15, 2009 at 10:28 pm
Amazing. How foolish can one be? You know, those are the exact same BS arguments I get about why home prices won’t go down in Irvine and other areas of the OC. Everybody thinks that their area is different. It’s not. Wake up. OOH, venture capital firms and so forth. Irvine has over 200 major worldwide corporate headquarters located in Irvine alone. There’s no other are like Irvine in the whole US. Yeah, sure, you cannot find this kind of talented (correct spelling) and well paid pool of people…blah blah blah. Have you ever even lived in the OC? I’ve lived in both places. You are far too closed minded. Open your eyes.
November 14, 2009 at 8:00 pm
Thanks for your comments.
Regarding Irvine (BTW I grew up in “The Colony” so I know Irvine well) you can get all sorts of data from Zillow. Here is a link directly to “sales per square foot” for Irvine for the past 10 years (Zillow doesn’t go back any further than that). If you poke around you’ll see a ton of other metrics on the left.
Happy hunting!
http://www.zillow.com/local-info/CA-Irvine-home-value/r_52650/#metric=mt%3D36%26dt%3D1%26tp%3D6%26rt%3D8%26r%3D52650%2C276119%2C276486%2C274371
November 11, 2009 at 12:34 pm
I am not bias , I do not live in any of the areas you mentioned, but live in san jose. I too would want to live in palo alto, but i think your case point is ridiculous.. Palo alto house prices willl never go down!!! I already accept that. Most likely your assumptions is all wrong. They do not apply to these affluent cities, such saratoga, los gatos, los altos, menlo park, san mateo, burlingame, etc. You mys be so angry that you made a big mistake in your life, that you write these ridiculous blogs so you can feel better . Please do something more useful with your time.
November 11, 2009 at 1:21 pm
Well actually my assumptions are based on facts. Will it fall 30%, maybe not, but it will fall.
You said, and I quote, “Palo Alto house prices will never go down”. You might want to look at this chart from Zillow
In this chart you will see these facts:
– In the past 10 years Palo Alto home prices (in all of the zip codes) have fallen from a local peak 4 times.
– In the last year Palo Alto has fallen 6.6%
Also we all know that foreclosures lead to falling home values and those are increasing at an alarming rate in all the neighborhoods you mentioned according to this article from the San Francisco Chronicle:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/11/08/MNMC1ABRBC.DTL
So you may get your chance at Palo Alto. Please just be nicer if you become my neighbor.
August 3, 2009 at 2:20 pm
[...] ReallyFuckedHomeowner.com Regretting the American Dream « Why Palo Alto Housing Will Fall 30% or More [...]
July 5, 2009 at 11:35 pm
Regarding the earlier point about foreclosures affecting Vallejo more adversely than Palo Alto, and thus being and inappropriate comparison, the data was stated to be derived from Zillow which does not include foreclosure sales (hilariously enough) as they do not believe those sales to be part of the “market”
Case Shiller does include foreclosures in it’s data.
For reference http://www.zillow.com/blog/case-shiller-is-it-really-that-bad/2009/04/02/
July 6, 2009 at 6:28 am
Yeah, its like Zillow forgot about “comps”. Typically I believe that it doesn’t matter how the house cratered it will still get factored into a buyers “comps”. Thanks for backing up my point because if Zillow doesn’t include foreclosures then it does in fact further show that this data is consistent. Obviously the market had factored in those foreclosures when pricing the non-foreclosed properties.
July 4, 2009 at 12:01 am
Well, either Palo Alto values drop, or Vallejo values rise.
Could be that the outskirts overcorrected, right?
July 4, 2009 at 1:02 am
Mathematically speaking that could happen but note that Vallejo moved back to the almost exact level it was in 2000 so I doubt it overcorrected as most people agree everything after 2000 was a fiction created by loose financing and that loose financing is now gone.
July 3, 2009 at 4:47 pm
How would you explain the Fall in the ratio of PA/vallejo from 2001-2006?
The point you tried to make is that since prices in vallejo have fallen, the prices in PA should fall at the same rate, but from the graph, that is not true when the prices were climbing from 2001-2006. As much as I want to agree with your assumption that the ratio should be constant, I am not convinced that it should indeed be constant given the irrational behavior of people.
July 3, 2009 at 5:46 pm
Actually I did explain that apparent “conundrum” in the post. Here is what I said about that period:
July 2, 2009 at 9:20 pm
[...] and be forewarned about the next major drop in real estate on the San Francisco Peninsula. Here is an article that shows why prices are due for another 30% drop. Possibly related posts: (automatically [...]
June 30, 2009 at 10:41 am
Voodoo math and magic! It seems interesting and logical but not sure if this is correct.
Firstly, what is happening to the mortgage and Real Estate market has never happened before so a lot of the historic data and trends don’t apply – like the ratios.
Secondly, assuming that it does, what is missing from this picture is the foreclosure rates between different cities. Do we have the same foreclosure ratios? One of the major parameters in driving down the prices are foreclosures; communities with much higher foreclosures have ended up much lower in prices. So a ratio between Palo Alto, a community with significantly lower foreclosure rate vs. one with higher foreclosure rate won’t show proper results. Simply the down trend won’t materialize as much.
Thirdly, Palo Alto’s median home prices are over 1.5M (actually down from a year ago). Many of these houses have significant equity in them and therefore chance of an owner foreclosing is significantly less. I have seen many home owners in Palo Alto, who have not got the prices they have asked for and are renting their houses – I can think of at least five such cases in Old Palo Alto and they can wait.
I actually think it is a great time to buy into the Palo Alto market now while there are a few choices out there.
June 30, 2009 at 8:59 pm
Thanks for the comment but let me address your points one-by-one:
Regarding this never happening before. That’s not exactly true in that there have been housing bubbles before (never as severe as this). Evenso let’s assume you are correct that this is “new”. Doesn’t matter because that just means that you have normal behavior followed by the “irrational new thing” followed by a return to the normal behavior. My theory is that we will return to the “normal” behavior and that is where the ratios return to where they were.
Regarding foreclosure rates. I do not have those but again differing foreclosure rates may lead to a temporary effect but once they work themselves through the system the normal behavior (as stated above) returns. Also remember foreclosures in one community affect another by lowering prices providing “substitutes”. As I said in my piece lower prices in Vallejo lead to lower prices in Castro Valley lead to lower prices in Hayward then Fremont, then Mountain View then Palo Alto. It will take time, no doubt, but it will happen. Afterall why did prices go up in the outlying areas. Well it became too expensive to buy in Palo Alto so you went to Mountain View then that became too expensive so you went to Fremont, then Hayward, then Castro Valley then Vallejo. Same behavior just working itself backwards (what goes out must come in).
Third regarding equity. Hey people die, retire, get divorced, etc… In short people need to move regardless of the best time to move. Also those with significant equity are more likely to be older and thus more ripe for the kinds of activities in the last sentence. Regardless its the comps that determine your price. You just need 3 homes to foreclose in a neighborhood (or sell out cheap and if you have significant equity you are more likely to be able to sell out cheap, because you accept the loss and don’t have to pay back the bank) to set the price for your house even if you never sell it. Also rents are a great point. If you look at the rental rates they justify houses much cheaper than the prices people want to sell them for (And that is, in the end, the ratio that determines the price of a house and the fundamental the market must return to). There was one house in old Palo Alto renting for an equivalent of $750,000 in purchase price. It had been listed, prior to rental, for $2,495,000. Therein lies the rub.
Finally if you feel its a great time to buy in Palo Alto then good luck and God Bless but I respectfually disagree. Check out 830 Arroyo Ct history both in it recent attempt to sell, lower by 9% and then pull it off the market and its historical price (it was half the price in 1999 when it was built as a NEW house). Also compare it to 810 Arroyo Ct. 810 was built at the same time but is smaller (a few hundred square feet) yet it sold for much more than the final listing price on the larger 830 property only 2 years ago.
July 1, 2009 at 11:29 am
No question that values have adjusted and will adjust. The question is whether they will free fall by 30% or more.
In May, 15% of houses sold in Palo Alto were overbid offers. This does not seem like a desperate market which is about to plunge into the abyss. The list/sell price ratio is over 96%.
From an investment pov, historical low interest rates, great prices, great inventory and the FUD (fear, uncertainty and doubt) rampant in the market and specially the real estate market supports an amazing time to lay great investment foundation for the next 5-10 years.
Will the values drop in PA another few points, they might, who knows – certainly more houses in the market than a year ago. Will it drop by 30%, I highly doubt given the over bidding and list/price ratios, significantly lower foreclosure rations and the fact the PA remains one of the most desired places to live by even the richest of the rich, like Larry Page and Steve Jobs.
July 1, 2009 at 1:37 pm
It is a desireable area but it hasn’t gotten more desireable and in fact has gotten less desireable. The weather hasn’t gotten better and the schools haven’t gotten better, the jobs haven’t gotten better (in fact employment is down in the valley, startups are light), other wealth creation is down (VCs are not making the money they used to, layoffs are coming, less startups being funded, IPOs still practically non-existent), people are moving out of the state. Oh and there are cheaper homes elsewhere (not to beat a dead horse). So why should it have a price justified a level higher than 1999 when life was getting better in Palo Alto (everyone was wealthy and everyone was moving here) and now its getting worse (people are poorer and people are moving out).
Why are people overbidding? Because you have a lot of people that agree with you (congrats!) but remember that was what happened in the rest of the economy (“mob mentality”) and eventually the “its a new world economy” logic broke and it all collapsed even while people still believed. If a trend can’t continue it won’t.
Also you assume that most homes in Palo Alto were bought for cash. Not so fast, many stretched to live the PA lifestyle with funny financing and that is what will take the comps down. Ironically the market to be hit first in Palo Alto was the $2 Million and above “high-end” market so for some reason the “rich” (or those that pretend to be “rich”) were the first to cave. That part of the market is practically dead at the moment.
And about interest rates. Prices go up when interest rates go down and prices go down when interest rates go up. So historically low interest rates mean they can only go up so when they do expect another decline in house prices. Combine that with the banks withholding their foreclosure inventory. Eventually that damn breaks and inventory gets a LOT better meaning another downward shock to housing prices.
July 1, 2009 at 11:33 pm
So here is an interesting article from the San Francisco Chronicle from March that shows that inventories for houses in the Bay Area above $1,000,000 (the bulk of Palo Alto) have moved, over the last year, up from 6 to 14 months. Over the same period inventories for houses in the less than $500,000 range have fallen from 12.1 months to 2.6 months (there is NONE of that in Palo Alto). Smack in the middle (between $500K and $1 million) inventories have fallen from 7.8 to 5.6 months) and you may find some small amount of that in Palo Alto.
So looks like inventories are actually increasing for areas like Palo Alto. This means “substitutes” for high-end homes are increasing which can only lead to downward pricing pressure.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/17/MNKV17K2OV.DTL
July 2, 2009 at 8:21 am
Thanks for posting the article. Makes good sense and as it points out, there are really interesting opportunities to go shopping if one is interested in the PA real estate market ( > $1 million).
I was just looking at the June data and it is clear that there is downward pressure, but at the same time, there are overbids for houses more than $1 and $2 million.
Unless one believes that the center of innovation is done and that Silicon Valley and Palo Alto are dead in the water and there is an exodus going on, I believe this is a historical opportunity to buy into PA market which has been traditionally very difficult to get into. You children and grand children will thank you!
July 2, 2009 at 9:15 pm
THANKS and thanks for the solid debate. Fun to knock stuff around. Hey, BTW, always looking for data so please send me links to where you found the overbids and all the other data you cited. My email is reallyf_ckedhomeowner@yahoo.com. Please send on the links.
July 3, 2009 at 12:11 pm
Here is a link that shows the monthly activities in different areas in the Bay Area. This doesn’t have all the transactions, but it’s fairly good. This is posted by the real estate agent who owns the site.
http://www.julianalee.com/real-estate-sales.htm
Best,
July 3, 2009 at 12:17 pm
Here is another link from the San Jose Merc. It is an OK tool for doing searches on various rates, foreclosures, etc.
http://www.mercurynews.com/realestatenews
Best,
June 25, 2009 at 6:25 pm
when the higher end homes finally drop in value , down another 20-40% it will push the even cheaper homes now that people are claiming to have reached the bottom even lower! its a no brainer ! in the inland empire several homes 16-1900sq ft are going for prices anywhere from $150-$220,000 . some areas for $80-$150,000 . but what happens when the higher end homes flood the market and you can purchase a 2500sq ft home for $150-$220,000 . which house would you buy?its already happening in hemet and the high desert areas like victorville . that why i believe that even the cheaper sector of homes now claiming to have reached a bottom will continue to fall even lower ! it did in the 90s recession so why not now ,considering this recession is far worse and will last much longer period of time ! unemployement at an all time high , credit card collapse, comercial collapse . alt-a resets, option arm resets , on and on ! we are just getting started !
June 25, 2009 at 4:57 pm
Your analysis is dead on. The higher end is lagging, but will fall another 30-50%. The Bay Area is rampant with Option ARMs. Two quick examples: relatives bought in San Carlos near peak, using a 10-year Interest Only loan. They are down about 13-15% currently and have no idea or any concern. They could not afford a conventional mortgage in October 2006, how are they going to in October of 2016? (amoritizing over 20 years, not 30!!). Answer: they aren’t. They’ll lose the house, but pay out the yingy ‘renting from the bank’ until then.
Another example: relatives bought pre bubble in San Ramon and took $250k out with HELOC and bought much larger home in San Ramon ($1.07M near peak in 2006). They are now about $300k down, and have an ARM. If they are even able to keep this house, it will suck them dry (in terms of net worth) for another 26 years. Neither of these two familiies will be buying homes again soon…possibly never. But it’ll take time for these and other similar examples to play out in the Bay Area.
June 25, 2009 at 10:39 am
On what basis is it “believed” that Vallejo, Stockton and other CA cities mentioned have bottomed? Have RE prices in those cities risen? No? Given the steep rise of the CA real estate bubble 1996 – 2006, why isn’t it entirely reasonable to expect that a bottom would bring houses back to 1995 levels?.. especially given the CA unemployment levels which show no signs of improvement. The stock market touched 1996 levels not long ago, why not real estate too? “It can’t happen” is not an answer. If RE levels go back to the mid 90’s, there will be a LOT more than a 30% drop in some of these areas.
June 25, 2009 at 9:12 am
Very good synopsis.
I am not sure if you have seen this graph before, but it adds credence to your assertions:
http://www.housingbubblebust.com/OFHEO/Major/NorCal.html
Although Palo Alto is not listed per se in the above graph, it does demonstrate that certain areas have corrected farther than others. Stockton has now essentially corrected while Valejo is close to bottom but not quite.
San Jose and San Francisco are still WELL above trend lines and have quite a bit further to fall. Based on all the calculations I have done, a drop of 30% in the more desirable areas is on the horizon. It will take some time to reach that point though. With government intervention activities like the bailouts and foreclosure moratoriums, that will drag the correction out for some time. I am guessing that we will be bottoming somewhere around 2012-2014 for those more desirable spots of SV.
June 25, 2009 at 8:20 am
Palo Alto is a hard area to judge because of the tax free status of many of the properties. As wikipedia points out, “Since 1900, Stanford has enjoyed the benefit of a constitutional clause shielding Stanford-owned property from taxes as long as it is used for educational purposes.”
http://en.wikipedia.org/wiki/California_Constitution
And you better believe there’s all sorts of trickery used by faculty and staff at Stanford to extend that tax free status to their personal homes.
As a result, most Palo Alto property prices have a “never have to pay California Taxes” premium built into them as faculty and staff purchase property and then use trusts and other corporate shells to bring the property under the tax-free shelter of the University. Apparently all homes owned by faculty and staff of Stanford have an education use that rationalizes dodging paying taxes for life.
Needless to say, many people value the tax free privilege of the property much higher than the actual value of the property itself.
Palo Alto would be better valued as, “How much will people pay to never pay taxes again” with incidental real estate attached.
June 25, 2009 at 7:14 am
Oh I forgot, I think the premium will shrink due to the eventual dissipation of said dotcom money and no more crazy loan programs. That coupled with a continued weak economy should do the trick
June 25, 2009 at 7:16 am
True. Here is an interesting fact but anyone hired at Gooogle in the past 3 or so years is “underwater” and I believe that represents about 60-70% of the company so actually the worst place to get a job in the past 3 years in Silicon Valley (from a stock perspective) was Google.
June 25, 2009 at 6:54 am
Very good work. I too have argued that there will always be a premium but that it is too large. The only thing I would argue is that 2000 was not a “normal” period. There was so much dot com money floating around in this area it was crazy. 1997 would be a better year to check for normality imho.
June 25, 2009 at 6:56 am
I actually agree but regretably the data doesn’t go back that far. If anyone finds that data I will gladly rerun the numbers Ideally I wanted data from 1980 but that level of city granularity doesn’t exist to the best of my knowledge.
June 26, 2009 at 9:34 am
Google reprice all the options at the bottom. Now all the employee’s options are way above water
July 3, 2009 at 1:35 pm
Its a matter of time before bing takes a bite off goog’s stock.
June 25, 2009 at 12:54 am
I think it’s possibly the price ratios may stay constant, but more broadly it’s the economic subclasses of people that stay in the same relative positions. It’s not a caste system, but maybe it’s similar.
For quite a while now, very few people in the Bay Area could afford to buy in their own neighborhoods anymore, be it Palo Alto or Vallejo. You might have a neighborhood of plumbers (well paid blue collar) but recently it was unaffordable for plumbers to buy in their own neighborhood. And a plumber was hardly ever going to be able to make enough, even on the sale of his house in Hayward, to buy into Palo Alto. Palo Alto is always out of reach. Just as Hillsborough always remains beyond the grasp of someone from the Berkeley hills. In spite of the fact that North Berkeley has gotten too expensive for it’s demographic, also.
Very few people increased their standing relative to people above them on the economic scale, even in Palo Alto. Let’s hope our neighborhoods once again become affordable to the people that live in them. Lets hope THIS is what comes back into balance.
June 24, 2009 at 11:49 pm
I am sorry. What you see is just the result of the widening gap between the rich and the poor in recent years. During the period, the income of the blue collar has been mostly flat while that of the high tech professionals have risen much. That explains much of the increasing ratio. I don’t mean to say there is no bubble but it is far from reality to expect the ratio to come down to where it was.
June 24, 2009 at 11:56 pm
So it sounds like you are saying that Palo Alto is “rich white collar” and Vallejo is “poor blue collar”. If that were the case then how did Vallejo (according to my chart) actually gain on Palo Alto during the bubble years such that Palo Alto was demanding a SMALLER premium? Clearly either the blue collar found a way to spend more or something else was going on (like white collar moving out towards Vallejo to get “more for their money”). In short I disagree with your analysis.
June 25, 2009 at 1:26 am
– “Clearly either the blue collar found a way to spend more…”
Of course that’s what happened — you heard about the loose lending, right??? I know about several dirt-poor, blue collar people who took out zero-down, interest-only loans at debt-to-income ratios that would boggle the mind. People with incomes under $75k were buying homes in excess of $600-750k! Now those are on the market in foreclosure for under $200k. Check out Antioch too…
June 25, 2009 at 6:58 am
True but that loose lending applied to “white collar” as well. The peninusula had about 70% of loans over 1-2 years actually be no money down ARM loans. In short everyone participated equally in the loose money culture. BOTH white collar and blue collar bought homes they couldn’t afford but the white collar just bought nominallly more expensive homes. We are now in the phase where that comes to light.
June 25, 2009 at 11:27 am
“BOTH white collar and blue collar bought homes they couldn’t afford but the white collar just bought nominallly more expensive homes.”
The question is will white collar lose homes in equal numbers as blue colloar. I guess, we’ll find out with the next wave of foreclosures.
June 24, 2009 at 11:45 pm
Excellent analysis! The story of home prices for Palo Alto seems to be similar to that of Los Altos. Do you know or even speculate on why home prices in these two areas are not dropping as quickly as they should? I really don’t think that homes in these areas are worth the money as current prices suggested.
June 24, 2009 at 11:50 pm
They aren’t dropping as quickly because what drives them down are “substitutes”. In other words Vallejo is being driven down by people being driven out and that is happening quickly. It will take time for people to move to the cheaper areas. Basically people in, lets say, Pleasanton might move to Vallejo because they can get some much more house for so much less. Then Castro Valley moves to Pleasanton. Fremont moves to Castro Valley, Mountain View moves to Fremont and then Palo Alto moves to Mountain View and the prices drop as everyone moves (because close substitutes are cheaper).
In another comment I ran a price for Berkley vs. Vallejo and sure enough Berkeley exhibited the same behavior as Palo Alto. Not surprising as that is another desireable area so it is also lagging behind.
June 24, 2009 at 11:36 pm
thanks for doing those calculations. I’ve been thinking that that principal ought to hold, but would have found it very difficult to do the numbers.
June 24, 2009 at 11:16 pm
Point well made.
June 24, 2009 at 11:04 pm
Very interesting. Would you be kind enough to do this for Berkeley? You may want to look separately at North Berkeley (94709) as this is where prices have been very sticky — but I’m not buying it. And have not. Appreciate whatever you take on.
June 24, 2009 at 11:28 pm
Sure, here is a graph of Berkeley/Vallejo. For comparison I superimposed the Palo Alto/Vallejo graph and you can see that Berkeley is exhibiting the same kind of behavior as Palo Alto. In this case it would have to fall about 25% for the ratio to come in line with the 2000 “normal” ratio.
http://fuckedhomeowner.wordpress.com/files/2009/06/berkeley-vallejo-comparison.jpg
June 24, 2009 at 9:43 pm
“Yes, a house in Palo Alto will ALWAYS be worth more than a house in Vallejo but I argue that the RATIO of house prices should remain close to constant.”
Yep, I’ve been arguing that point for a while. Nobody has even attempted to dispute it once they gave it some thought. (Except some who say the widening income gap justifies the gap as it exists right now.)
Thanks for crunching some numbers to make the point more real.
The mechanism is clear: No move up buyers, dry up of jumbo mortgage credit, and 5 year exotic mortgage recast fuses in the high end ‘fortress’ markets, vs. 2-3 years in the ’subprime’ markets.
June 24, 2009 at 9:46 pm
Thanks for your comment and welcome back from Argentina!