Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Sunday, August 20, 2006

Party At Marinite's...

Please see Marinite's post for a terrific "How To" article on how to play to win at the overpriced housing game, and topple the pyramid scheme it has become.

Here's a hint:

1. Look up the price 5 years ago
2. Add 25%
3. Adjust for inlfation

That's your offer.

If it was worth $300,000 five years ago
It is worth approximately $364,000 today.

Don't be the greatest fool and pay for another fool's idiotic lifestyle choices.


At 8/20/2006 06:22:00 PM , Blogger Marinite said...

Actually, that +25% IS the adjustment for inflation. Thank's for the plug.

At 8/20/2006 09:48:00 PM , Anonymous trailer trash said...

Regarding the "true value" formula, which allows a 5% per year increase in real estate appreciation:

1. Look up the price 5 years ago
2. Add 25% (plus an optional 2%, for good measure, to the total.)

When applied to a home valued at $300,000 in 2001, the formula is intended to calculate the current value of this home at $375,000, when in fact, this home is probably listing for $600,000 to $700,000. It appears that most Bay Area real estate prices went up 100% to 125% between January 2001 and January 2006. This runaway inflation is currently proving to be unsustainable.

One thing that the 25% formula does not account for is the compounding of the annual 5% increase. If this additional 5% is factored into the equation, the results look like this:

2001 = $300,000
2002 = $315,000
2003 = $331,000
2004 = $347,000
2005 = $365,000
2006 = $383,000

Therefore, the quick way to factor in the compounded 5% per year increase over 5 years would be to add 28%. Either way, the margin for error in this type of calculation is much greater than this $8000 difference.

The frightening thing is that this formula is based on traditional, normal real estate appreciation. If this formula is reasonably accurate -- and I think it is -- a tremendous crash in real estate prices is coming to the Bay Area. Nearly every property here is selling for at least twice what it is actually worth. Take away the gimmicky, no-document, no-down payment, negative-amortization loans, and there is nowhere to go but down.

At 8/20/2006 09:48:00 PM , Anonymous Anonymous said...

Ha! As long as prices are not rising, there is no benefit down the road to be had from owning a house! Therefore, don't pay more than you would to rent a similar dwelling.

At 8/20/2006 09:54:00 PM , Blogger Athena said...

TT- I like it... either way, there needs to be a return to sanity. Houses just don't become 100% more valuable. I mean if godzilla shows up eating entire neighborhoods I suppose godzilla proof houses would become really valuable real quick... but Sonoma suddenly being proclaimed the new Sausalito just isn't nearly as compelling. I think the buyer should be as conservative as possible as the population of F'd Borrowers gets re-educated on the fundamentals here in the real world.

Anon... good advice.

At 8/20/2006 10:07:00 PM , Blogger Athena said...

and before you even think about buying a condo in Sonoma... Sing this song to yourself:

(stolen from Santa Monica Landlord at Ben's place)

Comment by sm_landlord

On a dark desert highway
Cool wind in my hair
Warm smell of construction
Rising up through the air
Up ahead in the distance
I saw a billboard sign
My greed grew heavy, and my mind grew dim
I had to stop for a time
There she stood in the doorway
I missed the tolling bell
But I was thinking to myself
This could be Heaven or this could be Hell
Then she lit up the entrance
And she showed me the way
There were voices down the corridor
I thought I heard them say

Welcome to the Condo California
Such a lovely place
Such a lovely place (background)
Such a lovely face
Plenty of room at the Condo California
Any time of year
Any time of year (background)
You can find it here
You can find it here

My mind is Tiffany twisted
I’ve got the Mercedes bends
I’ve got lots of mortgage broker types
That I call friends
How they dance in their adverts
‘Bout the deals you can get
None dance to remember
All dance to forget
So I called up the brokers
Please get me my line
They said
We haven’t had this interest rate since 1969
And still those voices are calling from far away
Wake you up in the middle of the night
Just to hear them say

Welcome to the Condo California
Such a lovely Place
Such a lovely Place (background)
Such a lovely face
I’m livin’ it up at the Condo California
What a nice surprise
What a nice surprise (background)
I have closed my eyes…

Roaches on the ceiling
Ripple wine on ice
And I said
We are all just prisoners here
Of our own device
And in the blogger’s chambers
They gathered for the feast
They stab it with their steely knives
But they just can’t kill the beast
Last thing I remember
I was running for the door
I had to get a refi back to the place I was before
Relax said the banker
We are programed to recieve
You can cash out any time you like
But you can never leave

At 8/20/2006 10:11:00 PM , Blogger Athena said...

...another verse from Max:

Comment by Max

Down a desolate highway
Blowing dust in my hair
Warm smell of diesel fuel
Blowing around in the air

Up ahead in the distance
I saw an amazing sight
The desert filling with a million new homes
Springing up overnight

To a young couple in the show model doorway
I heard the Realtor tell
If you can’t pay in a year or two
You could always sell

Then she lit up a smile
And she showed them the way
How to sign on the dotted line
Now they can really say

Now at last we finally get to own one
In this desert place
In this really hot place (background)
In this scorching place
At least we finally get to own one
But my well paying job
But my well paying job (background)
Is 100 miles from here

They got their ARM loan twisted
By their mortgage guy
Now that they’ve found that they’re upside-down
It’s impossible to refi

Now they sit in their backyard
Soaking in their sweat
Their electric bill is way too high
And they’re too far in debt.

So they called up their agent
Please put up your sign
She said
We haven’t had this much inventory since 1989.

And every month those bills push them closer to judgment day
Toss and turn in the middle of the night
But they just can’t pay

Commuting two hours just so we could own one.
Such a faraway place
Such a lonely place (background)
Such a scorching place
Working two jobs just to be able to afford one.
What a long drive
What a terrible drive(background)
So much gas to buy

Since their ARM has no ceiling
Called Mom and Dad on the phone
And they said
We need to borrow another twenty grand
Just another small loan.

And in his manager’s office
He checked the balance sheet
The numbers no longer added up
So layoffs begin next week

Last thing I remember
I pushed them out the door
I told them they should go back to renting just like they were before

Relax said the Agent
We are programmed to deceive
You take out a loan any time you like
But you’ll never be free

At 8/20/2006 11:07:00 PM , Blogger marin_explorer said...

5% per annum or 28%/5yr. Either way, that's still generous appreciation, per Shiller's historical findings.

Btw, I spent the weekend in Sonoma doing various wine functions, with one of the industry bankers there. The wife was reciting the usual "there's never a bad time to buy, invest, etc." in RE. Hearing her out, then taking my turn to respond, the banker quietly listened and agreed to what people are saying here.

At 8/21/2006 09:51:00 AM , Anonymous trailer trash said...

Regarding: marin_explorer said... 5% per annum or 28%/5yr. Either way, that's still generous appreciation, per Shiller's historical findings.

Yes it is, and you had the generous 5% per year, compounding appreciation covered with the bonus 2%. After giving the matter some additional thought, I think that the Bay Area is in for an average real estate price drop of around 40% over the next 2 years. Many analysts feel that real estate prices are somewhat slow to unwind, so a 2 to 3 year decline might very well encompass the actual time frame.

Even though Bay Area real estate prices are currently averaging twice what the properties are actually worth, Schiller's formula would still allow for another 2 years of appreciation at the historic rate of around 5% when calculating 2008 values:

2001 = $300,000
2002 = $315,000
2003 = $331,000
2004 = $347,000
2005 = $365,000
2006 = $383,000
2007 = $402,000
2008 = $422,000

If prices take 2 to 3 years to fall back into the realm of Robert Schiller's appreciation formula, today's typical $670,000 house will indeed be selling in the low $400,000 range by 2009.

At 8/21/2006 10:22:00 AM , Blogger Marinite said...

Therefore, the quick way to factor in the compounded 5% per year increase over 5 years would be to add 28%

You are quite right. But math is hard for most people so just going with a quarter is easier. And that's also why I added the "add 2% for good measure" clause. I guess it should have been 3%. Oh well.

The point, however, is clear enough even if the math is not exactly correct.


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