July 27, 2009
Apples To Apples To Apples Over The Past Five Years (1578 Noe)
Purchased for $1,005,000 in May of 2004 on a namesake street, 1578 Noe returned to the market a little over two years later and sold for $1,300,000 in November of 2006. It’s back on the market today and listed for $1,075,000.
A sale at asking would represent average annual depreciation of roughly 6.8% per year (a 17.3% drop) from 2006 to 2009 versus average annual appreciation of 11.0% (a 29.4% gain) from 2004 to 2006 for this single-family (albeit both currently and historically only one and one-half bath) Noe Valley home.
∙ Listing: 1578 Noe (2/1.5) - $1,075,000 [MLS]
First Published: July 27, 2009 9:30 AM
Comments from "Plugged In" Readers
I wonder what is says about the real estate market that a single property is being sold for the third time in just five years. Maybe we'll find more stability when people buy homes to live in rather than just to flip for a speculative buck.
Posted by: missiondweller at July 27, 2009 9:45 AM
I bet they wished they'd put in another bathroom or two. That would've saved them. Number of bathrooms should always exceed number of bedrooms.
Posted by: Jimmy (No Longer Bitter) at July 27, 2009 9:55 AM
you can't live in a home for more then a few years when you have a 2,3, or 5 year 80/20 IO, or similar, mortgage that you could barely afford from day and is due to recast.
Which, unfortunately, most buyer's in SF and the rest of the Bay Area were stuck using due to the bubble in home prices.
Posted by: badlydrawnbear at July 27, 2009 9:57 AM
If it sells at asking, that will pretty much fit the bell shaped curve some of us are seeing...
Posted by: San FronziScheme at July 27, 2009 10:10 AM
It seems nice enough (but low-ceiling parts might be included in the sq footage?).
The last seven pictures "of the house" should tell you the kind of person who will pay the solvency tax on this one.
Posted by: dub dub at July 27, 2009 10:15 AM
From propertyshark, this looks like it was an investment property (owned by an LLC out of Texas). A dumb investment, suitably punished.
I agree with SFS about the curve. If it goes for asking, that's a 2004 price. People who do this for a living tell us on SS that late 2003/early 2004 represents the first backward length and we haven't lapped that yet. Or something like that.
Posted by: LMRiM at July 27, 2009 10:29 AM
The house is very cute and seems to be a place one could live in, bathrooms and all.
it has the requisite poor work triangle in the kitchen due to the poorly placed island, but everything else is quite liveable.
I never can tell if something is "real" Noe or not... but this is a solid location nonetheless
I wonder what is says about the real estate market that a single property is being sold for the third time in just five years.
I remember that I used to comment on this a lot a few years ago. It does seem like properties come up again and again and again. Much of this might be recall bias and not true fact, but it sure seems prevalent
Posted by: ex SF-er at July 27, 2009 10:30 AM
that is the strangest looking roofline. Looks like someone came along, lifted the roof, and turned it 90 degrees.
Posted by: curmudgeon at July 27, 2009 10:31 AM
People who do this for a living tell us on SS that late 2003/early 2004 represents the first backward length and we haven't lapped that yet. Or something like that.
I'm pretty sure the interpretation depends on what stroke you are doing. If think you're doing backstroke, then probably you can pick up this place at asking. But if you think you're doing butterfly, then for sure this place is going to go for way over asking. I know it's all very confusing, but if you were a real estate professional you would understand.
Posted by: anonm at July 27, 2009 10:47 AM
2006: I want what I paid, plus what I added, plus all expected appreciation for the next 5 years.
2007: I want what I paid, plus what I added, plus a year or two of expected appreciation.
2008: I want what I paid. You can have what I added.
2009: Can I please have my loan balance? I'll walk away from my downpayment, and what I added.
It's amazing to see SF real estate continue to just sink, though what would one expect with the jobs situation being what it is. Oh well, whoever buys this place is a complete fool (you don't buy real estate with 10% unemployment), and will regret that decision at the time of the next sale.
Posted by: tipster at July 27, 2009 11:03 AM
2010: Mr Bankster, keys are on the roof, probably fell in the gutter. Your mess. You sort out the paperwork.
Posted by: San FronziScheme at July 27, 2009 11:47 AM
A 2004 price plus 25K, sure. Not too sure why this site is so obsessed with slapping percentages on individual properties as if they are big data sets. But y'all seem to like it, so different strokes ...
Posted by: anonn at July 27, 2009 12:45 PM
Pescheria (the restaurant in the last 3-4 photos) has been closed for more than a year now...
Posted by: Former_noe at July 27, 2009 2:17 PM
Will someone please tell the Realtor that Joey and Eddie's closed about a year ago. If you're going to market the neighborhood, at least be informed about it.
Posted by: NoeNative at July 27, 2009 2:21 PM
Yawn. 25K potential commission is not enough to take a 1/2 hour break to go grab a coffee 3 blocks away and snap a few pics as you walk.
Seriously, go to Cafe XO and get a slice of their deserts. 3-layer chocolate cake (white, milk, dark) is my favorite with a double-espresso. I don't know where they get them from, but they're worth the money!
Posted by: San FronziScheme at July 27, 2009 3:00 PM
SFS, now I'm craving that cake you described!
I like this house. If the square footage is real, then it's a very good-sized 2/1.5, which works fine for me. Last summer the going price for a nice 2/1 or 2/1.5 seemed to be about $1M to 1.1M, but that was for smaller places.
I think someone (not me) will buy it at this price.
I've also noticed the number of listings that have been sold several times in a relatively short time span. I worry that it's a sign of the house having a non-obvious fatal flaw–- like the upstairs rooms are too hot, or the next door neighbor plays the bagpipes, or some such thing.
Posted by: RenterAgain at July 27, 2009 11:06 PM
So what happened to those other six apples I posted, four of which sold at 2006 prices. All of them actually sold in the last three months.
Posted by: NoeValleyJim at July 28, 2009 12:58 AM
So what happened to those other six apples I posted, four of which sold at 2006 prices.
There's no need to wonder, as we originally responded six days ago to your "only the one who dropped the most was featured on SocketSite" comment:
[Editor’s Note: Come on NVJ, at least do your homework and try to be factually accurate. Of your six apples, we actually profiled three: 3976 25th Street, 714 Duncan, and 1507 Dolores. And we wrote about all three well before they closed escrow (i.e., we weren’t "cherry picking" their outcomes).
Unfortunately the City’s online permit history site is currently down so we can’t do any basic due diligence on your other three (we tend not to settle for "probably" when it comes to apples).
We will note, however, that while 435 Alvarado recently sold for 0.5% under its purchase price in August of 2006, you might have noticed that it also just sold for 0.5% under its sale price in May of 2000.]
Posted by: SocketSite at July 28, 2009 7:29 AM
$1M+ and a lovely view of the apartment building across the street. Some people just don't need views.
Posted by: NoeLocal at July 28, 2009 3:52 PM
Sorry, didn't see your reply. I guess we will have to wait and see when the online permitting process is back up.
Posted by: NoeValleyJim at July 28, 2009 4:47 PM
1578 Noe is in escrow. That was fast! 6 DOM? I hope they still have an open house this weekend, I wanted to take a look.
Posted by: RenterAgain at July 30, 2009 10:32 AM
Posted again here, in case the other one is too old for anyone to notice:
he database is back up.
435 Alvarado shows no work since a bathroom remodel in 2004. So that is:
May 12, 2009 Sold $2,140,000
Aug 15, 2006 Sold $2,150,000
For 3976 35th St:
Jun 05, 2009 Sold $2,800,000
Nov 28, 2006 Sold $2,900,000
For 16 28th St, there is a permit for four new windows, valued at $4k, this is minor enough I am going to ignore it though not quite a perfect apple:
May 19, 2009 Sold $1,003,000
Nov 10, 2005 Sold $1,000,000
1424 Sanchez shows no work since a deck added in 2004:
Jul 08, 2009 Sold $1,285,000
Nov 20, 2006 Sold $1,335,000
Adding the other two:
Jun 23, 2009 Sold $1,095,000
Jan 25, 2008 Sold $1,413,000
Jun 26, 2009 Sold $1,040,000
Feb 01, 2006 Sold $1,310,000
So those apples are from 10/05, 2/06, 8/06, 11/06, 11/06 and 1/08 with a change in value of
0%, -21%, 0%, -4%, -3% and -23% respectively.
The mean of those values is -9 and the median -4.
Now this is not a perfect data set and there are some that believe that late 2006 was not the peak of values, in spite of Case-Shiller and other evidence, but there is enough to tentatively state that prices are about 5% down from 2006 values. I believe that prices went up a tiny bit, perhaps 5%, the next summer and then matched that value in spring 2008, but I haven't done enough data analysis to prove it to anyone, including myself.
The price/sq ft graph on redfin looks similar, with some pronounced humps each summer:
Prices today are $728/sq ft, which is 4% down from the $759 in July 2007, which reinforces the other analysis.
Posted by: NoeValleyJim at August 1, 2009 3:27 PM
Hmm, the variance in the start dates is greater than the variance in the hold dates. It includes houses in the 2 million range, and also in the 1 million range. The calculation of means and medians is incorrect, since it doesn't account for different holding periods. It's a sample size of 6. Etc.
It is really difficult to measure the "price" of housing in a neighborhood. To convince yourself of this, just ask whether those who sold for a 23% loss were fools to do so, if the "price" only fell by 4%. The obvious answer is no, because each house has a different price, and a different change in price. In that case, by what reason can you average the changes together?
At the same time, look at the volumes, and all the properties that failed to sell. Could it be, that only those who can afford to absorb the loss are selling, and that this is skewing the data?
In any case, to really try to measure prices, the current state of the art is to assume brownian motion, but around some trend. You want to measure the underlying trend. But, in order to detect this trend -- let alone estimate it with some precision, you need to compare a large number of properties that sold at around the same time, and that were bought at around the same time. It's hard to do, and impossible for a small hood like Noe. That's why Case-Schiller looks only at the SF MSA. It's because they are unable to get enough data for SF alone. Same thing with OFHEO. They can shrink the area a bit, but only at the expense of using re-financing data as well. With purchase only data, they can't estimate SF either.
Besides, I'm not sure why you would want to -- if you want to sell, put your house on the market and see what is offered. If you don't want to sell, then don't worry about what your neighbor sells for. Long term, the price will reflect the owner equivalent rent, carrying costs, and financing costs. Short term, it's a lot of noise.
Posted by: Robert at August 1, 2009 4:46 PM
Another Noe property just closed to add into NVJ's apple cart, 826 Duncan:
Sold for $1.2M, 9.4% below its 5/2005 price, and exactly equal to its 9/2004 sales price.
Too bad they didn't realize that prices are only down 4% on average in NV. I'm sure had they known this, they wouldn't have eaten the roughly $200K loss (after transaction costs) on a slightly more than 4-year hold. I'm sure that's no big deal to them - after all, SFers always expect to lose a lot of money on a 4-year hold; that's why they agree to pay carrying costs well in excess of what it would have cost to rent a much nicer place :)
BTW, stats discussions are always interesting, and Robert's discussion about trying to infer a trend from very limited data points randomly distributed around the central tendency is well taken. In addition, though, it's always useful to keep in mind that over short and even medium time horizons, what data we do get is highly affected by selection bias. Because average people are loss averse, downside outliers around the central trend are less likely to show up in the data than upside surprises. Just going by the bookmarks on my machine, there looks to be at least a dozen NV properties featured or mentioned on SS that were pulled because the owners could not face the losses. Trapped, in other words, and data from those potential sales cannot be examined.
Posted by: LMRiM at August 1, 2009 6:12 PM
"Prices today are $728/sq ft, which is 4% down from the $759 in July 2007, which reinforces the other analysis."
For Noe Valley homes sold in July 2007 the listing $/sqft was 805 and selling 940. The numbers for July 2009 currently stand at 714 listing and 710 selling.
The standard measures, $/sqft and median selling price, seem to be down about 15-20 percent for 2009 compared to the peek. (Depending on if you define the peek as all of 2007 or, say, Apr-Sep 2007.)
Year $/sqft Median price
1999: 437 637,500
2000: 580 854,500
2001: 517 750,000
2002: 553 826,000
2003: 549 872,000
2004: 695 1,050,000
2005: 763 1,229,000
2006: 749 1,275,000
2007: 826 1,402,000
2008: 815 1,380,500
2009 so far: 703 1,177,000
From these numbers, one could argue that Noe is back to about 2004. Especially when considering that houses sold in 2009 have been larger than those sold in 2004. (The median square footage is up about 9 percent.) So one would expect that the median price would be up for that reason alone even if the market had been completely flat.
Posted by: anonanon at August 1, 2009 6:50 PM
The cranky renters are coming out of the woodwork!
You are absolutely right about that, LMRiM, and that is why the Case-Schiller data shows such large declines -- larger than I believe are in SF at the moment -- because they are being swamped by transactions in more liquid counties (CC), whereas SF remains frozen. I still maintain that we should wait until about 1 year after the bulk of the IO loans recast in order to see what is happening in SF. 70% of the loans were IO, after-all.
Posted by: Robert at August 1, 2009 7:00 PM
For Noe Valley homes sold in July 2007 the listing $/sqft was 805 and selling 940. The numbers for July 2009 currently stand at 714 listing and 710 selling.
What is your source for this data? I showed you mine, and it does not correspond to the data you just published. Is this MRLS data? What is included, SFH, condos, multi-unit, what?
In any case, you have 2006 at $749/sq ft and this year at $703, for a 6% drop. Which matches up pretty closely with my estimate of 4%.
In any case, many of the bears told us ad nauseam how home prices were virtually certain to drop to 1997 prices by 2010. Some said inflation adjusted and some said nominal values. Which is what, a 60% drop from peak? Since the economy is starting to recover, it seems to hard to imagine that we will see a 50% drop in the next year or so, but I guess we will have to just wait and see.
Posted by: NoeValleyJim at August 1, 2009 9:34 PM
In any case, many of the bears told us ad nauseam how home prices were virtually certain to drop to 1997 prices by 2010.
Huh? What are your sources? I don't remember reading anyone saying this, let alone multiple people at multiple times -- it would be a silly thing to say.
I will go on the record to say that multiples (price to income) will revert to the 3-4 range from the 6-7 range at the peak. They may shoot even more downward, but that's hard to predict. I will also go on record that per capita income growth will be stagnant -- not more than 1% above inflation -- over the next few decades. Also, I don't believe inflation will be high (>3%) in the next decade. Maybe not in the next 2 decades. I would be surprised at sustained inflation above 2% over the next 20 years. Not unless a real political shift happens towards more equal income distributions -- an FDR type shift.
I don't make any predictions about whether Cole Valley will outperform Noe Valley, or any such nonsense.
From that you can infer where I believe prices are headed. Now, how this adjustment will occur, fast and quick, or slow and steady -- it's a different question. I think there is a good chance for more capitulation after most of the loans recast. But, the "bottom" will most likely not be in for a long long time.
Posted by: Robert at August 1, 2009 10:44 PM
Case-Sciller below 110 and 50% off peak prices by 2011.
I see no reason to change my prediction now.
Posted by: diemos at August 1, 2009 11:14 PM
Robert, if you're talking SF only, multiples at peak have been much higher than 6-7, and have rarely been below. Not saying we won't revert to 3-4, but it seems very unlikely that we will see median prices in SF go down to 300K at this point, which would represent multiples of 3-4.
Year Wage Median Price Multiple
1976 12,000 52,000 4.33
1980 16,000 110,000 6.88
1985 24,000 140,000 5.83
1990 30,000 288,000 9.60
1995 36,000 255,000 7.08
1997 41,000 270,000 6.59
2000 54,000 400,000 7.41
2005 62,000 670,000 10.81
Posted by: BernalDweller at August 2, 2009 12:00 AM
Ahh, are you the culprit, Demos? Did you predict that Noe Valley would drop by half by 2010? Did you predict SF would reach 1997 pricing by 2010? And repeat this ad nauseam? Posing as multiple bears? Reminds me of a Radio Yetevan Joke:
Caller into Radio Yerevan asks "Is it true that Comrade Ivanovitch received a car as a gift?" The announcer replies: "it's true, with modifications. First, it wasn't Ivanovich, but Stepanovich. Second, it wasn't a car, but a bicycle. Third, it wasn't a gift, but was stolen from him!"
Posted by: Robert at August 2, 2009 12:01 AM
Looking at the SF market for a while now, I'm going with a 40% decline on average from peak prices, with some areas more than 60-70% down. I think we will see 1998-type pricing all over the city, with the largest declines happening starting
in Q3 2009 and continuing for about a year. I don't think the market will bottom absolutely until after 2012, but the lion's share of declines should be done by end 2010. Just a guesstimate forecast on my part - hope you're prepared.
Will we go back to 1996 pricing? As sure as I'm sitting here.
The odds look overwhelming that we will go back to pre-2000 price levels, and I'd bet we go back even further to 1997 or 1998.
I believe that they will fall at least 60%. Hope you're covered when it happens
Here's a prediction, comparable houses in the neighborhood lower $700's mid next year, it was only $600k 8 years ago at the beginning of the bubble.
This was on a house that was priced at $1.49M in March of this year and sold for $1.550 in 2007.
Posted by: NoeValleyJim at August 2, 2009 12:04 AM
Damn the lack of an editing feature. My apologies for the double post.
Posted by: BernalDweller at August 2, 2009 12:05 AM
Oh, I found few more, but that should do for now.
Posted by: NoeValleyJim at August 2, 2009 12:09 AM
You do realize, NVJ, that none of those examples said that Noe Valley would fall by 50% in 2010, or that San Francisco would reach 1997 pricing by 2010, right?
For example, for LMRiM, if he is predicting 40% declines, with the "largest declines" happening by Q3 2010, then that means a decline of more than 20% by Q3 2010 would satisfy the prediction, right? How does that get transformed by you into a prediction of 50% declines by 2010? I mean, this is basic stuff, right?
I guess if you are amalgamating different things that different posters said, and it all gets mixed up in your head, then I can see how you would think that someone said these things. Person A claims 1997 pricing -- but doesn't say by 2010. Person B claims large Case-Schiller declines for 2011. Person C makes a comment about a specific house, etc.
But, if you are going to attack these points, you have to attack what was claimed, not your personal strawman amalgamation.
So please give multiple examples of different bears repeating either these two predictions:
Noe Valley dropping 50% by 2010, or SF dropping to 1997 prices by 2010.
If you can't find examples of these statements, then please stop putting them into bears' mouths, and respond to arguments that were actually made, rather than strawmen.
Posted by: Robert at August 2, 2009 2:59 AM
Yeah, of course, NVJ is setting up multiple strawmen.
I stick by my prediction of 40% on average across SF by sometime (shortly) "after 2012" as I wrote.
Originally, prior to the macro policies that were adopted by Bush/Obama after summer 2008, I thought 30% down as a base case, and I provided my methodology for calculating that number (it's not a trivial exercise when trying to estimate actual declines). For those who are interested, see here:
http://www.socketsite.com/archives/2008/02/san_francisco_sales_activity_in_january_down_again_271.html (see post at February 15, 2008 10:10 AM)
If you read it, you'll see it's a bit nuanced - not an unthinking one-size-fits-all forecast at all. As I said, due to the macro policies being implemented, I revised my range down a bit.
Also, in another post, I mentioned that a fair examination of price changes should account for upgrades by adjusting selling prices downward by the market value (not necessarily cost) of remodels, extensions, etc. at the time of sale. To use a favorite example, if someone buys a house for $500K, bolts in a solid gold washbasin, and then sells it for $550K two years later, did "the house" appreciate 10% or depreciate 50%+?
I do think that I may turn out to be a bit early in my forecast for when the lion's share of declines for The Real SF™, but I'll still stick with it for now. (I might not have been as clear as I could have been, but I think most people would recognize that I was talking about The Real SF™ declining in 2H2009 until end2010 - places like Oceanview have already been crushed.) We've still got 18 months to go, and NVJ and others are already rying to call the game! I know that NVJ thinks the economy is going to improve from here on out, but if you search the archives, you'll find some horrendously inaccurate econ forecasts from NVJ. (My favorite was his idea that "The Great Moderation" was going to be permanent - expressed in summer 2008 almost immediately before all hell broke loose!)
About 60-70% off for some nabes, well, we've already seen a number of parts of SF where apples are showing 40%+ declines, and we're only just starting 3Q2009.
I have also said somewhere that I thought NV would fare about average in peak to trough declines (meaning 40%), and so - although it's early - recent apples showing greater than 20% declines from peak (for instance, 714 Duncan) are very encouraging at this stage of the unwind.
Posted by: LMRiM at August 2, 2009 6:43 AM
I believe that May 2007 was my debut as SocketSite's "Mad Prophet of Doom".
I added the Case-Schiller number in Feb 2008 when the index was still above 200. Back when anyone would tell ya that SF was immune because everyone paid cash and rich foreigners were going to swoop in and save the day.
Posted by: diemos at August 2, 2009 8:46 AM
I also stand by my prediction, which NVJ mischaracterizes. I never said anything was going back to 1997 or 1998 levels "by 2010." I do think 2010 will see continuing steep declines, followed by lessening declines for several years beyond that. So we may have another 4-5 years to get to those late '90s levels, but we'll get there. The rent/buy and income/price ratios are still way, way out of whack even with the ~20% declines in Real SF. I'll add ex SF-er's standard caveat that govt efforts to blow another bubble or spawn serious inflation could always change things radically -- but I don't see any of the current efforts doing anything but drawing the downturn out, which I think is the objective.
Posted by: Trip at August 2, 2009 9:46 AM
A "lion's share" is certainly more than half, though we can argue endlessly about what percentage that exactly means.
And yes, LMRiM, I certainly blew my prediction that there was a good chance that the Great Moderation was permanent, but I have made a few pretty good calls as well, such as the prediction that China, Brazil and India were mostly decoupled from the US economy, which was made to the massive noise of the Bronx cheer from many.
I remember LMRiM telling us in April that the bear market was not over and that we were soon headed for the 600's again in the S&P 500. That hasn't happened, at least not yet. But I will give you a pass on it, since stock markets are so hard to predict. You have made some very astute bond calls.
Deflationjunkies prediction that a 3/2 in NV comparable to the one on sale would be worth less than half in a year definitely fits the claim, as does Diemos' and LMRiM, though it looks like the latter two are saying 2011. I am pretty sure I saw LMRiM predict that SF home prices would return to 1997 nominal prices, but most since of his claims are 1997 real (inflation adjusted) so maybe I am misremembering that one. In any case, I cannot find it, given the large corpus of his work on this site. Maybe you can help me out here.
LMRiM, do you believe that SF home prices are headed for 1997 prices still? Do you mean real or nominal 1997 prices, e.g. inflation adjusted prices or not?
But it is not fair to point out others' misses without making a guess of my own: another year of moderate declines (5-15%) for a total peak to trough drop in nominal home prices of ~25%, followed by a decade or so of below trend price gains, most likely about 0% nominal and negative 3-6% real -- as that is what I expect the inflation rate to be. This is for SFHs in San Francisco proper, no RealSF(tm) adjustment required.
Why do I think this is what will happen? Because something similar is how it has played our in every post-WWII recession. I still don't think that "It Is Different This Time" as so many posters seem to. Our post-recession recovery will probably be weaker than usual though, since we are mostly a post-industrial economy, which won't get a big goose from inventory effects.
Posted by: NoeValleyJim at August 2, 2009 10:54 AM
I remember LMRiM telling us in April that the bear market was not over and that we were soon headed for the 600's again in the S&P 500.
Very doubtful, NVJ. I was long from March 9 - in pretty large size through options - and maintained a healthy long stock market exposure until about a month ago (even now, I'm on balance net long). You might also recall that I advocated "scaling into" long Asian equity indices at the end of 2008 as well as junk bonds at that time. For the record, now, I think the US equity rally off the recent lows is very long in the tooth, and would be looking for ways to reduce risk exposure. I've cut a lot of my exposure and am engaging in options stategies to (legally) shift gains recognition into later tax years because this year is already shaping up as another year of involuntary contributions to the charlatans running the gooberment.
I do stick by my original predictions (made numerous times on SS in 2007 and also to friends and colleagues in 2000 and 2001) that US equities are likely to return approximately 0% CAGR nominally (and negative in real terms) from 2000 until 2020-25, and so far that has held up wonderfully. I really think that the period from 2000 until now has been about the easiest period I've seen to "read" stock markets from an intellectual point of view, even though for many it has been emotionally difficult to take advantage of these really extraordinary mispricings (NASDAQ in 2000, US Treasury bonds throughout the decade, US equities in mid-2002, etc.).
About where I think SF property prices are going, I've said many times that some of the bump to SF prices over the period 1997-2000 (the "dotcom" bump) will prove to be durable, and that there would be a good deal of variation by neighborhood and property type. I think a range of 1998-99 prices is a reasonable guess for most properties in SF, adjusted of course for significant remodels in the case of any particular property. We are already seeing at least a few trophy pac heights properties trading below 2000 prices, and that's terrific news.
I do think we'll see those 1998-99 prices in nominal terms. I'm not forecasting much inflation for the next year or two, just as I forecast no inflation (or mild deflation) from December 2007 when I forst posted on SS (another forecast of course that was spot on). Price inflation will of course pick up at some point in the future (the Fed is basically an inflation machine under most economic conditions), but the rise in equilibrium nominal rates in that case will moderate any tendency of real estate to "keep pace" with inflation. So, ultimately, in real (inflation-adjusted) terms, I do think SF property prices will fall below 1997 prices on average.
About the "lion's share" comment I thought I was pretty clear that that refers to the bulk of the declines that I was forecasting. That is, significantly more than half of the 30-40% average nominal declines will be in by end 2010. As I said, I might turn out to be a little early in the timing, but so far I'm sticking with it. We've still got 17 months even to the end of that time period, so the jury is still out.
Posted by: LMRiM at August 2, 2009 11:26 AM
LMRiM, search for your post dated April 16, 2009, which contains the phrase "Bear markets don't end that way"
And I don't point these out to make fun of any one individual or to attack anyone, but I think it is interesting that Groupthink is just as prevalent and perhaps even more dangerous on the way down as it is on the way up. As LMRiM points out though, it is still only halftime and too early to call the game.
I do enjoy discussions with people who have different points of view though, and when they have an intellectual framework and know how to discuss rationally, it is particularly edifying.
But I am tired of sitting in the fog, so I will go find someplace sunnier for a while, away from the computer.
Posted by: NoeValleyJim at August 2, 2009 11:55 AM
One thing to keep in mind is that you can't have inflation of X%, productivity gains of Y%, without having "average" wages grow at least X+Y%. Not long term, anyways, and not for an economy the size of ours, which is basically closed.
Actually, more than that is required (hence the "at least"). Because you also need 1) the social choice to divert the surplus purchasing power into consumption rather than investment, and 2) the inability to bring excess capacity online to absorb the new consumption.
Only then can consumer prices rise.
This is why income distribution is also key, as wealth concentration means that per-capita wage gains are pushed disproportionally into investment. This leads to asset bubbles, which makes the rich even richer, until asset deflation wipes those excess wage gains out. By "excess", I mean those wage gains that were funneled into production and not appropriately matched by wage gains funneled into consumption, deflated via productivity.
By definition, such gains must see a diminishing return on investment, although it may take time for this to be understood.
Now, if this deflation process results in some sort of political shift leading to wage compression -- i.e. future wage gains are more evenly captured by the majority of the population, then you can set the stage for more future price inflation, once the credit overshoots. Indeed, we had this in the 50s-70s.
I think some of that will happen, but I just don't see how we can have sustained inflation going forward. Wake me up when we are all unionized again and the upper bracket tax rates are very high. Then we can talk about 3-6% inflation rates over the next decade.
Posted by: Robert at August 2, 2009 12:15 PM
Currency "accident", Robert, is the only way you get to sustained price inflation in an environment of contrained wage growth (and, as Indonesia circa 1999 showed, it isn't "sustained" for too long). Of course, you get an instant smash to leveraged asset prices - not too many people lending when forward nominal rates lurch higher - especially as cash markets (like food and other commodities) sop up as much of the value that's left in the depreciating currency being exchanged by the population.
NVJ, I can't seem to find that "Bear markets don't end that way" post - I think I can recall it off the top of my head (it was a response to chuckie's question about whether one should be getting back into US equities, I think?). Anyway, I'd stand by that too. Volatility was way too high in March/April to convince me that we've made any sort of durable bottom. Generally, I try to calibrate any comments on market on SS to the average buy and hold investor - not trader types - and they are almost always in response to specific questions posed to me.
If you could post the link to the comment, maybe I could revisit it, but I don't see how you go from that approach (as I remember it) to the idea that I was saying we'd be at 500-600 soon on the S&P. In fact, I recall posting on SS that I'd be a huge buyer of the S&P if we got down as low as 500-600 in the near term. As it turned out, I was a moderately big buyer of calls when it was trading 680ish in early March.
Take a look at the Japanese stock market over the period 1989 until today. There were so many times in the 90s when experienced strategists called the bottom..... Buy and hold is a bad idea in US stocks for the next decade at these levels imo. If you've been successful timing equity exposure over the past decade, then you'll have plenty of opportunity to demonstrate trading prowess over the next - that's my prediction!
Posted by: LMRiM at August 2, 2009 12:46 PM
I agree that the inflationary effects of a currency accident would be brief. Also, neither the u.s. government nor american businesses have a lot of foreign denominated debt, and don't really need any foreign investment -- but of course they will take it if it is subsidized and available. A political accident is more of a threat to the status quo.
U.S. consumption is way too high; the productive portions of the world need to learn to pay their employees instead of relying on the american consumer. It's absolutely ludicrous to have a problem of overcapacity in a third world-country like China. It's the equivalent of an obesity epidemic in Somalia. There are so many distortions caused by this arrangement in terms of the currency markets, "fake" productivity, and instability.
But there is a strong political consensus on the part of american and foreign firms to suppress the standard of living of domestic populations in order to benefit asset prices. Either via wage arbitrage, or via suppressing consumption by means of currency pegs. A true change away from this system will be painful, but would lead to an increased standard of living across the board.
Posted by: Robert at August 2, 2009 2:32 PM
"It's absolutely ludicrous to have a problem of overcapacity in a third world-country like China."
Amen. Preach on brother Robert. There is no such thing as "too much capacity", there is only "not enough money". In a fiat money system that situation can be easily cured by printing money and distributing it to the hoi polloi. Not that our masters ever will.
"but would lead to an increased standard of living across the board."
except for us. The realignment would require our resource consumption to fall while others rose.
Posted by: diemos at August 2, 2009 2:40 PM
Thanks, Diemos, but I do think it would increase living standards across the board, although the transition would be a little painful -- actually not too painful.
In terms of resources, I don't believe that "we", in terms of the median household -- have been benefitting from that. It's true we got cheaper stuff -- only somewhat cheaper. In most cases, cost savings were not passed on to the consumer. But at the same time, we got lower wages, so it's not clear that middle class consumption would have been materially lower had China developed a healthy domestic market.
I don't see evidence of an increase in standard of living in the u.s. that can be attributed to our trade with china, although I do see evidence of increased asset prices.
Then again, maybe we would have consumed less, but obtained a shorter work week -- who knows?
One thing to keep in mind is the cost of the current situation. The consequences of mis-priced labor rates, currency rates, and interest rates:
The factories in china are not more efficient. Nor is their workforce more productive -- in terms of labor or resource inputs. So, the net result is that our economy is incentivized to do things less efficiently. And this fake productivity is sending a lot of bad price signals, with far-reaching effects.
Think of all the thought and effort that went to outsourcing, and what would have been the result if we expended that effort by doing things in a more efficient manner. All the effort building byzantine (and fragile) supply chains that stretch around the globe -- and only because of political distortions. All the effort wasted at shipping goods back and forth across the globe -- because of currency manipulation. It's hard to argue that the general population is really able to consume more under such a system.
Posted by: Robert at August 2, 2009 4:00 PM
"The factories in china are not more efficient. Nor is their workforce more productive"
There is some truth to that.
But it doesn't matter how inefficient they are when they're selling it to you on credit that you are never going to pay back.
Posted by: diemos at August 2, 2009 6:05 PM
But it doesn't matter how inefficient they are when they're selling it to you on credit that you are never going to pay back.
I know this is a common view, but I think its completely insane. China has accumulated a lot of treasuries. As far as I can tell, the dollar is legal tender here in the U.S. We make no guarantees that it is legal tender elsewhere. And if China were to decide to spend those dollars and buy our goods, we would be more than happy to sell them stuff. We would jump for joy. Tons of jobs would be created. Local incomes would soar. No U.S. business would turn away a large chinese order for manufactured goods, or commodities. Hell, they would probably throw in free shipping.
So if the Chinese insist on accumulating dollars, but refuse to buy U.S. output with them -- well, I'm not sure how they could possibly be repaid. It would be a strange form of repayment.
Maybe instead of confiscating dollars, they could make it legal to hold dollars in china, and let those dollars float. Then, chinese nationals would be able to buy more goods than they otherwise would, and their standard of living would rise. We would see the wage arbitrage lessened, and our standard of living would rise, too.
As it is, here in the U.S., people must still pay for goods out of incomes. Even imported goods. And our incomes have been disciplined with wage arbitrage. As a result, standard of living has fallen -- real median incomes, peak-to-peak, fell from 2000 to 2007. Perhaps the first such time in U.S. history that real incomes fell across an entire business cycle. But of course business profits were very high. Neither population has benefitted from this policy.
Posted by: Robert at August 2, 2009 7:04 PM
Sorry, I cannot find it LMRiM, though I did keep a copy of it. I have been tracking your recommendations to see if 1) you were any good at it and 2) if I could perhaps profit from your recommendations. I am not sure where it went, perhaps some posts got lost during the upgrade when the site was up and down for a few days.
So here it is in its entirity:
BTW, I am getting a little bearish stocks again. Bear markets don't end that way - believe me. I can't say for sure we'll go much lower than the roughly 680 the S&Ps were trading when I put on that rare long position, but I can almost guarantee another trip down to near those levels at some point in the (relatively) near future ;)
About buying in Islington - I was only there for a year. My final pay that (first full) year of traing was roughly about what you sold your condo in NV for, in mid-90s dollars, so don't feel too bad for me ;) Damn those taxes though!
Posted by: LMRiM at April 16, 2009 7:07 PM
Full disclosure, I decided soon after this that you were an awesome bond market timer and a perhaps not quite as good stock market timer, so when you recommended Treasuries long at 4.5%, I bought some TLT. It almost immediately went up 5%, but I did not take any profits and it is back to a 3.5% gain now. But I am much happier getting the 4.12% interest than the 0.1% my bank was paying me. Plus its presence reduces overall portfolio volatility, which is nice.
Posted by: NoeValleyJim at August 2, 2009 10:22 PM
Well, NVJ, I remember that exchange with 45YOH. I sort of remember the S&P500 trading almost 900 when I wrote that, so I would have guessed that that was later than April 16, but I guess it could have been (index traded around 870 April 16-17 before falling a bit to the 850s the following week or so).
I don't think that was a super bearish recommendation - I only said said "near" those levels (680 - so, high 600s/low 700s ) and even left open the possibility that that the 660-680 levels would turn out to be the lows for the cycle. I need to be more careful with my time qualifiers - by "relatively soon" I usually mean within 12 months. I still think that US equities are going to revisit those levels, but the current rally has been impressive in its ferocity (but not in volume, and I really wouldn't be surprised if at some point in the distant future we find out that the USG has manipulated the entire move :).
If that date is right, I was probably just giddy with the April 17 options expiry the following day (and raging mad over writing a check to the IRS the day prior). That period March 9/10-April 17 made the entire year for me! I'm glad that you made some cash on long treasuries. I haven't taken any profits either on those treasuries (I typically buy the actual bonds in cash accounts, but use TLT in retirement accounts). I'm going to stick with them and add periodically at these levels. Like I said, this equity rally is getting very long in the tooth imo, and the real yields being offered now at the far end of the treasury curve are still pretty compelling on a medium term view. (BTW, medium term for me usually means 2-4 years.)
Posted by: LMRiM at August 3, 2009 6:40 AM
If I read the charts correctly TFT was at 102.8 on April 16, 2009 and is now trading at 92.10. I read this as a 10.4% loss at this point (not counting dividends). Am I missing something?
LMRiM: Are you still in favor of being long treasuries at these levels?
Posted by: West Portal at August 4, 2009 9:18 AM
West Portal - yes, I do still like long treasuries here, but I don't have a full position on. Only about 25% of the position size I had on early in 2008. The long end of the curve has held up remarkable well imo given the huge equity rally over the past few months - you'd expect some negative correlation between these two asset classes in the current environment, but it's been remarkable muted. I'll add to the position on significant weakness (although we haven't seen any yet), and a small amount mechanically at set intervals.
About the symbol - I think you're looking at the wrong ETF. It's "TLT" - an index tracker that seeks to mimic the 20-30 yr part of the curve. I generally use that only for retirement type accounts - I'd rather buy the bonds direct (or on the secondary market) in marginable cash accounts. You probably know this, but cash dividends on all treasuries are going to be CA-tax exempt, but capital gains aren't.
Posted by: LMRiM at August 4, 2009 9:40 AM
LMRiM: Thanks. I typed the ticker symbol wrong in Socketsite, but the values quoted above are for TLT iShares Barclays 20+ Year Treasury Bond Fund(down 10.4% since April 16).
Posted by: West Portal at August 4, 2009 10:46 AM
WP - That makes more sense. You're right about the prices (but you do need to adjust for dividends, which are about $0.30 per month for that etf). But I don't think I was talking about buying treasuries on April 16 - it was a later comment that NVJ was referencing when I mentioned that I was getting back into treasuries. Checking my accounts, they show puchases the week of June 8 (with a little TLT purchased around $90), so although I can't find the comment that NVJ was referencing but it was probably from right around then.
Up about 2-4% (including coupons) sounds about right for the 20-30 year blend, a little better for the 30y.
It could be tough sledding in terms of volatility (that's why I have a less than full position for me) over the next months, but I think there is almost no chance that the US "recession" doesn't go on for years. Sure, technically there will be periods of "engineered" growth (just like in Japan), but the underlying conditions are just not there for sustained growth and inflation.
Posted by: LMRiM at August 4, 2009 11:03 AM