Bubble Bubble Toil Trouble
The Bubble bloggers are now addressing the multiple offer and "return to frenzy" stories reverberating within "Fortress Silicon Valley", an amusing descriptive term coined, I think, by Randy at Capitalism 2.0. As a self professed "non-doomster" bubble watcher, Randy provides a sane, well written interpretation on the spring upturn in his SF Bay Area Housing Bubble Battle article. In essence, the fundamentals don't favor an upturn, and the news of souring subprime loan companies point to continuing crises. There are also economy doomsters that imply the impending weaker economy will also crash the fragile housing markets.
An attribute of the bubble blogs is their rabid readership... Bay Area-based Patrick.net's article Just who are the Willing Buyers? receives 191+ responses that exemplify the "wisdom of crowds" concept (his other articles get just as prolific feedback). After reading through many of the responses, I've formulated a few reasonable, some obvious, explanations on the spring upturn:
- Pent up buyer demand after waiting on the
sidelines for over a year to make sure there wasn't a crash landing.
This spring upturn, which seemed to start January 2, signaled a bottom
of sorts... most buyers can't trust their intuition on whether this is
a dead cat bounce or a real bottom, they've been waiting so long and
finally, their patience wore thin and they proclaimed "what the hell".
- The "bubble" may be psychological, Bay Area residents live in their own little world and high prices are ingrained in their belief system as inevitable.
- The hot tech economy that drives other parts of the Bay Area economy and reinforces the "bubble world" psychology that the Bay Area is a chosen land.
- The Bay Area IS the chosen land. The economy is dynamic, the opportunities are here (just like New York City has been, is and will be the city where you make it), the weather is nice and the business climate is based on merit and networking, not blood and hierarchy. Finally it's tops in attracting overseas money and immigrants from an ever richer Asia. High demand places to live obey the laws of supply and demand, and the Bay Area housing supply is limited (hence the reason why the Phoenix metro population is now bigger than SF metro according to my son's new atlas).
I think there is a ground zero line running from Marin through SF to Palo Alto (dribbling into Cupertino/Saratoga at the very southern end) parallel the San Andreas fault. This region is bound in by the Coast Ranges and housing supply is limited - and the price support reasons listed above lose credibililty with greater distance from that line (Capitalism 2.0 sees this line too). When prices began upturning again late last year on the ground zero line, it took several months for its effects to reverberate inland in places like San Ramon.
Palo Alto
Marin
San Ramon ~ 25 miles from the San Andreas fault
Livermore ~ 35 miles from the San Andreas faultCharts c/o Altos Research
I'm bubble-neutral - I think the frenzy of 2005 dying down was easy to predict, and I expected this spring's bounce solely on pentup buyer demand. I now see both sides of the bubble story and can't quantify the impact of foreclosures and the potential of a worsening economy against the reasons listed above that support the Bay Area market. The "fundamentals" - the Bay Area's high percentage of interest-only loans, etc. - that would potentially propel a foreclosure based crash is an Armageddon scenario that requires a lot of bad things happening concurrently, i.e., a global economic crash, a big bomb. That's why the doomsters don't seem credible in their pessimism, but I guess the credo here may be never underestimate Murphy's law... so I sit on the fence and watch.
Related articles:
Altos Research, March 8 - Measuring the Transition to a Hot Market
Technorati Tags: housing bubble, san francisco bay area, san francisco, marin, housing crash, subprime loans
Pat, I tell my clients that we live in a world-class destination area. Prices are equally high in London, Tokyo, Paris, or any major world class city. The Peninsula, going only down to Mountain View, has not had any appreciable new building for some years. San Mateo County has about 65% of its land unused but it's in control of government, agriculture or with terrain to steep to build or with no water rights. So, if you want to live here, and work here, you pay a steep price. It's not fair but it is what it is and has always been so. At least since the 1970's (so maybe not always is totally fair but poetic license is allowable?). This week we saw a nice rise in listings during our broker tour in San Mateo County. I haven't seen this in and around Palo Alto, though. I don't know why people aren't selling or moving, but they're not. My theory is that too many of these people have 4 & 5% mortgages and don't want to give them up. Would you? So bubble smubble toil and trouble, prices aren't going down. If you were waiting, you waited too long because they dropped 4th quarter 2006 and have jumped back up with a vengeance.
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Without digging into data, I suspect you'd find the Hayward fault is roughly similar. Buyer interest picked up in late January (the weekend after the NFL Divisional Play-offs), and, for some properties, has gotten HOT! Finding the common pattern hasn't been easy, as some properties sit, while other move in 1-2 weeks with multiple, over-list offers. AS with Lenore, part of my explanatio is, "There's no dirt." Unlike the midwest, or even the eastern half of Alameda/Contra Costa County, in Berkeley, Oakland, Albany, El Cerrito, there's no new development except some in-fill and multi-unit build-up on or near commericial corridors. The ABAG population and employment forecasts has all muncipalities scratching their head, wondering where the projected growth is going to live.
That said, there are folks in ARMs who didn't really understand what they got, or shouldn't have taken them (ie, people on fixed incomes). Similarly, I don't know who those individual cases will add up. I suspect a steady or growing regional economy will make it difficult to see statistically, but the anecdotal stories will be there.
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Lenore and Kevin, your comments mirror everything I'm hearing... I've always been bullish on Bay Area real estate, it is a singular market. I'm quite interested in seeing whether the impending "foreclosure" bubble that is being whispered these days will dent the market. I think housing demand will be too strong for it to have an effect... as you say Kevin, the individual stories will get press play, but in the aggregate, they likely won't have much an effect. The sellers will move to Modesto and the people who want to live in the Bay Area will replace them.
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Hi Pat,
I saw you paid my Manhattan Beach blog a visit.. and yes we are seeing the same changes in our market in Los Angeles county.. inventory is down about 50% from November 2006. I also attribute it the fact that buyers waited a year for the market to crash and as that didn't happen they are willing to step back into the market again as they feel more secure..
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Pat,
Nice article, and a very reasonable interpretation of my Capitalism 2.0 article on the subject.
I would add, in response to the above comments, prices within "the Fortress" did indeed go down in real terms. I think if you'll check the data you'll find that Marin, San Francisco and the Peninsula all posted nominal gains *below* adjusted consumer inflation. This means that even though the price tags went up, the homes cost less to buyers.
So buyers who waited did not wait too long at all. And those still waiting are not necessarily getting behind either. Not until either inflation goes down or nominal prices start going up year-on-year faster than inflation.
Anecdotally, I've been tracking specific homes in South Marin for about 2 years. Like-on-like comparisons have definitely come way down from their peak. I'm seeing houses that easily would have listed for $2.1m in places like Corte Madera summer of 05 now listing for $1.7-$1.8m. By any measure, that is a very significant price drop, even if it doesn't show up in the aggregate statistics (for which there are myriad reasons, not the least of which being the fact sales figures are lagging data while listing figures are leading data that are not 1:1 reflective of closing figures).
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Pat,
Nice work on the Carnival, and this article. I hope you're keeping an eye on the newest blog on sf real estate. The market is taking off!
alex
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