August 14, 2009
From The Top Of Noe To The Courthouse Steps: 647 Grand View #1
From the agent’s website for 647 Grand View Avenue #1 back in 2007:
With a large, open plan design, unusually high ceilings and the highest quality finishes it is unique to Noe Valley. Encompassing the lower three levels of 647 Grand View, it is very private and quiet with a house-like feel.
Sweeping views of the Valley and Bay are offered from multiple vantage points throughout the home. A total renovation of the entire property was completed in April 2007.
Asking $1,875,000 at the time, or a little over $800 a square foot, 647 Grand View Avenue #1 appears to have
sold been refinanced in October of 2007 for $1,870,000 with nothing down and two variable rate loans, one for $1,500,000 and the other for $370,000.
Unit #3 appears to have been refinanced around the same time as well, but 647 Grand View #2 and #4 appear to have sold in October of 2007 for $1,100 and $764 a square foot respectively.
And a plugged-in and on the foreclosure ball "EBGuy" notes on our update on 601 Grand View down the block, 647 Grand View #1 now has (or perhaps had) a date with the courthouse steps. Seeking an opening bid of $1,500,000.
UPDATE: From a plugged-in reader:
This property originally came on the market in spring of '07 for $2.4 million. I toured it in late July of '07 at which point it had already been on the market for about 4 months. They hadn't received any offers and I was told the price was very negotiable.
UPDATE: It appears as though 647 Grand View Avenue #1 and #3 were actually refinanced without a sale (#1 to the tune of $1,870,000). Our apologies for the early confusion and corrected above.
∙ 2007 Listing: 647 Grand View #1 (3/3) 2,316 sqft - $1,875,000 [647grandview1.com]
∙ Apples To Apples 601 Grand View Is Down After A Five Year Hold [SocketSite]
First Published: August 14, 2009 7:00 AM
Comments from "Plugged In" Readers
Wow. It's really starting to hit here, isn't it?
Right about as predicted, of course.
Should be an interesting year. Or two.
Posted by: tipster at August 14, 2009 7:25 AM
At 1.5M I think it will go back to the bank. More shadow inventory for the future.
Posted by: diemos at August 14, 2009 7:36 AM
Tipster, I was actually about to state the same thing. It's all anecdotal of course but it's certainly become more common to find these upper end foreclosure situations. I agree the next 2 years will be interesting but I think the next 6 months are going to very telling.
We're going to see a flood of homes hitting the markets in the next month or two and I'm predicting that we'll see desperate sellers looking to get out while we can, and I also predict that we will see more 10+ year sellers out there who will be looking to get out. I know 3 or 4 familiar that are seriously considering to move given the market situations. I have to believe there are more out there. One of these groups is price insensitive and the other is highly price sensitive. Should be interesting.
Posted by: eddy at August 14, 2009 7:43 AM
If ever there was a fitting epitaph for the late housing bubble, "zero down" would be it.
Posted by: anon at August 14, 2009 8:11 AM
The design really doesn't come together. Outside it is a grey box. Inside a bunch of high end materials and finishes that don't match are thrown together. The bowl light doesn't work with the down lights. Institutional handrails protrude awkwardly into the stairway. The cherry wood and granite darken a space that really needs to be lightened. Much was spent on this treatment when lower end stuff might have worked out better.
Posted by: Mole Man at August 14, 2009 8:31 AM
Agreed that zero-down (and also stated-income) were the big drivers of the bubble, particularly in SF, which is why record-low interest rates are not stemming the decline at the higher end. Just not that many buyers with 25% to put down.
CR had another piece on the growing trend of foreclosures moving up-market: http://www.calculatedriskblog.com/2009/08/illinois-foreclosures-increasing-again.html
He posits: "But where will the buyers come from in the mid-to-high end areas? First time buyers in affluent areas? I don't think so. Investors looking for cash flow? The numbers don't work. Move-up buyers selling their homes? A large number of sellers at the low-to-mid end are lenders ..."
I think he's right on the first two points, but I think in SF you will find some move-up buyers, but not at anything close to 2007 price levels. And supply will continue to far outstrip demand until prices have fallen much further. As I've said many times, there will be no government bailout at the $1M-plus range, and the bailouts appear to be on the wane even at the lower end.
Posted by: Trip at August 14, 2009 8:39 AM
obviously, people move all the time. but, let's say you had the income to swing a $1.5M house 5 or 10 years ago and are now looking to get out and move somewhere else. what is it, exactly, that you do?
partners in law firms don't change cities that often; neither do doctors with private practices. similarly business owners with client bases find it hard to re-locate. if you are in tech, there are other cities but bay area is pretty strong. do you work for clorox and decide to go to P&G? were you a banker?
just curious, because in my friend set I know of no one thinking of moving.
Posted by: steve at August 14, 2009 8:45 AM
You need to check your facts. I have it on good authority from a REALTOR that the 600 block of Grand View is a uniquely bad street and nothing would ever have sold in 2007 at prices such as those described here. Nobody would ever, ever have paid nearly $2,000,000 for a condo on this street in 2007. And nothing down? Not in San Francisco. I also have it on good authority that buyers here, unlike the rest of the country, all put down significant sums.
Posted by: anon at August 14, 2009 9:01 AM
Go look at what "Grandview" (sic) has ever done. The guys who developed this property hit a few grand slams in an inning. That doesn't often happen in baseball. And, buddy, you didn't address the fact that the property you were blathering/piling on/kibbitzing/ peanut gallery noise making/ seeeing my name in a thread and feeling compelled to say something about being "peak 1.3M 20 % higher" was ~1100 feet big and already at $1000 a foot.
Posted by: anonn at August 14, 2009 9:09 AM
The high-end bail-out is the Fed directly buying God-knows-what mortgage paper, $300B of it.
Posted by: Jeff at August 14, 2009 9:11 AM
What I would like to know is who financed this? It's pretty crazy to finance such an amount with no money down, I really did not think you could get such a loan. The buyer must have had other assests and an 850 credit score, or was the loan agent themselves.
[Editor's Note: A little bank known as JPMorgan Chase.]
Posted by: viewlover at August 14, 2009 9:11 AM
"It's pretty crazy to finance such an amount with no money down, I really did not think you could get such a loan."
Why not? Don't you remember 2007? Back when everything was confined to subprime. Subprime was too small to have any real effect on the financial system. There would be no effect on the real economy and high priced areas were immune? Back when a bank CEO famously said, "As long as the music is playing you have to get up and dance." (or words to that effect) And only mad internet prophets would howl about 2nd Great Depressions right around the corner.
Posted by: diemos at August 14, 2009 9:28 AM
Also, none of these show as "sold" in the MLS, but instead as withdrawn. All of them. Are we certain that they were not refinanced and title transferred into the name of another entity? Odd that all six would have gone the same route, two pairs each on the same day, and all during the same time frame.
Posted by: anonn at August 14, 2009 9:28 AM
Everyone was financing stuff like this. If you could sell the loan off to wall street, why not?
When my wife and I -- freshly minted JDs at the peak of the bubble -- moved here, there was no shortage of banks/brokers offering us 1.5-2 million to buy a house 0 down, based off of our ~350k combined income, 0 savings, and six figure student loans.
Somehow, that didn't strike us as a wise financial move, so we kept renting. If we're both employed in 2 years, perhaps we'll buy a place like this if it hits 1m.
Posted by: dch at August 14, 2009 9:32 AM
diemos is right. The starting bid of 1.5 mil is excessive.
If I really wanted to get rid of a place like this, I would start the bids at 999,995 and advertise it heavily as an "under 1 million "gem" " .... ;)
Posted by: Chad at August 14, 2009 9:41 AM
anon at 9:01 --
Didn't your REALTOR(tm) tell you that this property is not in the "real" SF?
For future reference, the "real" SF is a constantly shifting and increasing small area of tbe city where the residents all bought their homes for cash in early 2006 and no one has sold since.
Posted by: anonymous at August 14, 2009 9:42 AM
Wait a minute. There were only four. But #4 and #1 were ultimately withdrawn on the same day, and #'s 2 and 3 withdrawn within two weeks of one another. What really went down here?
Posted by: anonn at August 14, 2009 9:45 AM
do you work for clorox and decide to go to P&G
A couple of years ago a patent lawyer friend moved to Cincinatti to work for P&G. He bought a place with a resale warranty from P&G. If the resale price is lower than the buy, PG will make up for the difference. I don't know if they'd do it in SF though. Risk exposure is more than double Cincinatti's!
Posted by: San FronziScheme at August 14, 2009 9:45 AM
I dunno, Steve, researchers move all the time in a big circle from North Carolina to Cambridge to Chicago to NY to SF and various points between. :-)
Some of them (but not most of them) can afford this price range.
So, I imagine there's others besides your examples that need to move for business and professional reasons - I'm interested to read responses to your question.
Posted by: kthnxybe at August 14, 2009 9:51 AM
This property originally came on the market in spring of '07 for $2.4 million. I toured it in late July of '07 at which point it had already been on the market for about 4 months. They hadn't received any offers and I was told the price was very negotiable. The day I visited, you had to brace yourself from the wind to get into the building. The agent told me the developer combined several apartments, but I found the apartment to have fairly steep stairs which would result in a lot of up and down living. There was a subsequent change in listing agents and significant price reduction in late summer/fall. I too find it difficult that someone could get 100% financing anytime after July/August of 07. The credit crunch was well under way, bank were already reporting significant losses from MBS and the TED spread was consistently over 200bps. I also find it difficult that anyone would pay almost 1.9 million to live on this part of Grandview, not matter how high end the finishes.
Posted by: TwinPeaks at August 14, 2009 9:54 AM
I meant to say that people need to move for business and *personal* reasons.
(I didn't have my coffee either.)
Posted by: kthnxybe at August 14, 2009 10:04 AM
TwinPeaks, you're right that that crumbling of the SF market really got going in Fall 2007. And that was also when no-down jumbo loans ended (they ended in the subprime space earlier, which is largely why that price range got hit earlier). As diemos notes, CW then was still that this was all just a contained subprime problem. These jumbo loans were still being offered right up until at least early fall 2007, and anyone who locked in then (or earlier) still had it when they closed some time later. So an October 2007 sale date with a no-down jumbo loan is not unusual and likely reflects a lock-in date about 2 months earlier. I'll bet SF had tons of them in this time period.
Posted by: Trip at August 14, 2009 10:04 AM
"It's pretty crazy to finance such an amount with no money down, I really did not think you could get such a loan."
it was common practice through the bubble years IMO. Maybe not in SF where I was assured most people were "all cash" buyers, but the 80/20 loan was extremely popular around the various bubble markets.
mortgage data reflected a fairly rapid drop in down payments and also a precipitous increase in payment-option and interest only loans. the so called "affordability" products.
this is one of many reasons why many market watchers like me knew we were in the mother of all bubbles, despite the idiotic "it's all contained" arguments.
and remember, we still have 2.5 crushing more years of these terrible loans resetting!
Posted by: ex SF-er at August 14, 2009 10:21 AM
Because I had to put 25% down on my loan since it was over 1.5 million through Wells Fargo. I really did not know these products existed on the higher end. Should have used a mortgage broker.
Posted by: viewlover at August 14, 2009 10:21 AM
UPDATE: It's a good catch by "anonn" as it appears 647 Grand View Avenue #1 and #3 were actually refinanced without a sale (#1 to the tune of $1,870,000), but #2 and #4 were recorded as sales in October of 2007 for $1,100 and $764 a square foot respectively.
Our apologies for the confusion. The bit about the auction still stands.
Posted by: SocketSite at August 14, 2009 10:26 AM
It was a lot more common for re-fi cash-outs than new purchases. These Grand View condos do not appear to be arms length transactions. I just glanced at #1. It was a "stand-alone re-fi" + a "revolving credit line."
Posted by: anonn at August 14, 2009 10:27 AM
Yeah. Number one is for auction after the guy cashed out. The other "sales" have new owner's names but they look like they could be partnerships rather than arm's length sales? I'm not sure there but the transaction history shows the developer as a "borrower," same day. I also see that #4 is a 1.7M "sale" of a 2226 sq ft property? Or 763 a foot? OK. So maybe that one's legit.
Regardless, some of you folks need to understand that a blog is not a good platform for jumping off and being critical of others. (Sarcasm) "Oh anonn. I thought it was like this."
Yeah? That's cause it was like that, turkeys.
Posted by: anonn at August 14, 2009 10:42 AM
In '03 we got a 100% mortgage (not 80/20) without PMI from Countrywide. 30 year fixed. I think we paid 3/8% interest premium for this priviledge. All the Broker kept asking was why we weren't buying a more expensive home based on our incomes and credit scores.
Posted by: OneEyedMan at August 14, 2009 10:45 AM
Trip, by summer '07, almost all the IBs had quit buying mortgages. Most Banks were looking for funding to close out the committments in inventory and were closing down the loan window to new customers. These "buyers" or "refinanciers", or whatever happened here, must have just made it before closing time, at supposedly one of the "smarter" banks.
Posted by: TwinPeaks at August 14, 2009 10:47 AM
I avoided using the term fraud yesterday after spending considerable time looking at PropertyShark and Googling the developer, because the property records are so convoluted I can't piece together a complete narrative. I will go on the record, though, about a "whiff of impropriety".
Posted by: EBGuy at August 14, 2009 10:51 AM
TwinPeaks, that's probably right that this was one of those late, late inning deals.
Ex Sf-er wrote "we still have 2.5 crushing more years of these terrible loans resetting"
That's a key point in a thread discussing foreclosures. And it also should be noted that the worst and largest volume of these asinine loans were in 2006 and 2007 -- i.e. the problem is still largely ahead of us and not behind us.
Really scary are the Wachovia products. Lots of stuff illustrating the point, but here is a presentation touting this garbage in Summer 2007, long after the writing was on the wall:
Note in particular slides 6, 9, and 10. A 10-year re-cast schedule, with a 1% rate, and a huge increase in "pick-a-pay" loan volumes through 2007. This is such an unbelievable time-bomb for Wells Fargo. I hope Wells got some clear gov't guarantee when it "won" Wachovia over Citi.
Posted by: Trip at August 14, 2009 11:00 AM
Judging from the tax bills, it appears that #4 is the only one that "changed" hands as a condo and does not have a low Prop 13 basis. I'm guessing #1 got its tax basis when the owner bought into a TIC partnership ($630k). Monopoly Game, LLC indeed!
Posted by: EBGuy at August 14, 2009 11:19 AM
in LA, such properties are called persian palaces (i.e. flipped renovations, unnecessary upgrades and increased sizes, etc) in sf, what is the proper term?
Posted by: t at August 14, 2009 11:46 AM
t says "in LA, such properties are called persian palaces"
I like the sound of that. Persian. Pompous. Like the Shah of Iran :)
Posted by: Chad at August 14, 2009 11:50 AM
I thought "Persian Palaces" were single family homes in Beverly Hills in which older Tudor homes and whatnot were turned into behomeths. This was a condo development deal.
Posted by: anonn at August 14, 2009 11:52 AM
anonn, youre right. but the concept is still there. and that is what I am wondering...what do you call SF properties such as this? credit condo?
Posted by: t at August 14, 2009 11:56 AM
"Grand View Grandiose-trocities" ??
Posted by: anonn at August 14, 2009 12:01 PM
The plot thickens; David Salma and Marion Zaborski are husband and wife. The legal eagles can take a look at existing civil actions here, related to other properties (including 1409-1413 Golden Gate Ave) they are involved with. As part of one lawsuit, it is alleged that "defendants Zaborski and Salma were engaged in or were about to engage in business transactions for which their remaining assets were unreasonably small, and they believed would and intended to incur debts beyond their ability to pay".
Posted by: EBGuy at August 14, 2009 2:00 PM
Should read "they believed they would"
Posted by: EBGuy at August 14, 2009 2:03 PM
LOL. Let's see if a single Socketsite boo bird steps up and is accountable. Doubt it.
Posted by: anonn at August 14, 2009 2:20 PM
Is this place a relevant data point, or simply a disgusting mess? I'm thinking it's the latter.
Posted by: amused at August 14, 2009 2:32 PM
Really? My comment about Anonn's caffenation gets struck, and you leave the Persian Palace comments? What, is murder bad but genocide OK? If I cannot point out that a member of the commentariate is being a bit snarky, then why does may an ethnic group be defamed?
That said, with regards to the owners, perhaps someone should investigate California's fraudulent conveyance law.
Posted by: Mr. E. at August 14, 2009 2:47 PM
On July 17, 2009 their was a NOD filed by World Savings Bank on a property owned by Marion Zaborski (Document #I79183600). The information on the SF Recorders site is limited, so I don't have access to the address (or APN) of the property. I do know that when I searched on the APN of Unit 3 (6501 074), the NOD did not come up; however, Unit 3 (on PropertyShark) shows Marion Zaborski as the owner and World Savings Bank as the mortgagee. Can someone with better access to recorded documents confirm the address on the NOD?
Posted by: EBGuy at August 14, 2009 2:59 PM
Let's see if a single Socketsite boo bird steps up and is accountable
Posted by: eddy at August 14, 2009 3:43 PM
Oh, for seizing upon this one as if it were a gospel indicator of peak Grand View values and attempting to lambaste yours truly. The comments were mostly stricken, although anonymous at 9:42 is one. Can't really blame the cynical peanuts of the Socketsite gallery tho. It wasn't a coincidence this one was presented the way it was, tho I know you mentioned it previously.
Posted by: anonn at August 14, 2009 4:22 PM
#2 sold in October of 2007 for $1,100 per sq foot? Awfully pricey for a condo on a crummy street with lots of problems. I think it's safe to say the market value has fallen considerably since that peak period.
Posted by: anon at August 14, 2009 5:13 PM
Document #I791836 is for Unit 3, though I see it recorded July 8, not 17. World Savings first deed of trust for 800k recorded 10/11/07.
Posted by: whatever at August 14, 2009 5:21 PM
"#2 sold in October of 2007 for $1,100 per sq foot? Awfully pricey for a condo on a crummy street with lots of problems. I think it's safe to say the market value has fallen considerably since that peak period."
Really? according to EBGUY,
"Judging from the tax bills, it appears that #4 is the only one that "changed" hands as a condo and does not have a low Prop 13 basis."
So only #4 sold, and that was at 764 a foot.
Posted by: sparkyb at August 14, 2009 5:38 PM
#2 sold in October of 2007 for $1,100 per sq foot? Awfully pricey for a condo on a crummy street with lots of problems. I think it's safe to say the market value has fallen considerably since that peak period
Why didn't you read the thread?
Posted by: anonn at August 14, 2009 6:57 PM
Wow, I was not too active on this thread and it went the usual way. Someone has found what he thinks is a strand of flesh on that old bone. He's gonna try and gnaw on it as much he can. Always fun to watch.
Let's see if a bubble negationist can tell us why he was wrong in 2007, wrong in 2008 and why we should believe him when he is telling he is now right in 2009. What do I hear? Crickets? Insults? Threats of lawsuits? Or will it be the usual one-liners carefully crafted to divert the attacks and make people fight on your own (shrinking) turf?
That's who is asking others about accountability!
Bush and Cheney would be proud of their legacy: no matter how wrong or misleading you are, if you stay the course and are consistent in your story you'll get more suckers to trust you for round 2 of the great debacle.
Posted by: San FronziScheme at August 15, 2009 1:07 AM
Buddy, rationalize your (usual) wrongness however you feel. If it involves a swipe or two at me after I served you breakfast, lunch, and dinner, feel free. I am done prep cooking for the party tomorrow that my ill gotten r.e. gains is paying for. It's time for bed.
Posted by: anonn at August 15, 2009 1:27 AM
Another good Noe apple sale just posted, 303 30th Street. This is an exceptional apple, because it traded hands three times in the last 6 years (and once in 1999, to boot).
Jul 28, 2009 $1,299,000
Feb 13, 2007 $1,402,000
Jun 06, 2003 $925,000
Jul 21, 1999 $425,000
The extreme bears often claim that Noe did not peak in 2006, but 2007 instead, so if that is correct, this house is down %7 from peak, and still up 40% from 2003 pricing.
I think this would make a good SocketSite front door post, but I won't hold my breath.
Posted by: NoeValleyJim at August 15, 2009 9:53 AM
The listing photos for 303 30th make it appear that the kitchen was relocated to the ground floor, probably around 2004, just after its prior sale. I assume that was added square footage, and they probably took a house with a small kitchen and made it into one with a very large one. A half bath was also added since the last sale and they remodled the remaining bathrooms.
Except for those very minor points, this is clearly an apple that shows prices are only down 7% from the peak. Not!
Posted by: tipster at August 15, 2009 2:10 PM
The story here is no longer about a couple(?) of overpriced comps; it is about the collapse of a mini development empire. If I have some time and energy, I will try to chronicle a basic timeline. @whatever, thanks for cofirming the fate of unit 3 (I had incorrectly transcribed the date).
Posted by: EBGuy at August 15, 2009 3:57 PM
I've also heard it claimed on this site that 2008 was the peak for Noe.
of course, this view only appeared in 2009 following a 2007/2009 apple sale, and not in 2008 itself..
Posted by: REpornaddict at August 15, 2009 4:04 PM
^^^"it is about the collapse of a mini development empire"
Please do write that timeline EBGuy! I am also fascinated by the amount of people who never studying architecture, engineering, construction or even economics had become "professional" builders. Their success was mainly caused by easy money and the ever escalating bubble, not their own skills, and now all of us will be paying off their bills for years due to increased taxation.
What is also interesting also is that their average client (buyer) was as unsophisticated as they were. I found these people more excited by Italian kitchen cabinets and zen spa soak tubs, instead of roof problems and repairs history or structural concerns that may have not been corrected during the flip.
Posted by: anonarchitect at August 15, 2009 4:14 PM
I agree that the mini-empire collapse would be an interesting book project. And in fact, the larger story is even more interesting:
Bondholders buy bank dent, expecting a certain return, and banks loan money to investors expecting a certain return, the investors in turn buy goods and employ local construction workers and also expect a return. The local construction workforce, flush with cash, spends more on goods, causing business to expand capacity in their datacenter, causing Cisco sales to rise, causing some tech guy (and it is a guy) to cash out options and buy a house from the flipper, who is able to repay the bank.
So, everything *seems* to be going well, until you actually add up all the expected returns and count the leakages. It's not that no one was being productive, just that the returns don't measure up to expectations.
Now if, simultaneously. the stock/bondholders would accept 50 cents on the dollar from the banks, and the banks would accept 60 cents on the dollar from their debtors, and employees would accept 90 cents on the dollar from their employers, then the merchants could still sell goods for the same price as yesterday. But barring this, you have very crude measures such as a little bit of price deflation, a lot of asset price deflation, and a healthy dose of layoffs. It's very hard for general deflationary forces to fine tune things so well as to adjust each cohort by the appropriate amount (hint: the wealthier cohorts have farther to fall).
Moreover, if no one would be emotionally troubled by any of this or become pessimistic about future business prospects, then we would be ready to go for another long boom period.
The whole thing could be taken care of in just a couple of business days. We wouldn't need any long winter of digging in -- and we still don't.
Alas, too few people seem to have a sense of humor about these things, and aren't willing to forgive and forget.
Posted by: Robert at August 15, 2009 9:36 PM
whaddya mean, i get plenty of good laughs from socketsite's amateur 'economists.'
Posted by: observer at August 15, 2009 10:50 PM
I served you breakfast, lunch, and dinner
As expected, a wishful thinking one liner and no comment on the meat of the subject. Aren't we predictable...
Why do you keep doing that to yourself? You're fueling next year's "what fluj said last year:" revivals!
Posted by: San FronziScheme at August 15, 2009 11:22 PM
How come none of this mystery remodeling shows up on The City permit database tipster? The last permit was issued in 2002. Even if your imaginary extra square footage was added when you think it was, how did a kitchen remodel in 2004 effect a sale price between 2007 and today?
I think that work was all done in 2002, in fact I am almost certain of it, since I have been in this house a couple of times. What listing photos are you talking about?
Posted by: NoeValleyJim at August 16, 2009 12:35 AM
I think this would make a good SocketSite front door post, but I won't hold my breath.
I'd be interested in this too!
Even if your imaginary extra square footage was added when you think it was, how did a kitchen remodel in 2004 effect a sale price between 2007 and today?
it wouldn't. but it would change how pricing went from 2003 to 2007
That said: I am easily convinced that Noe "peaked" in 2006 or 2007.
Unfortunately, "only" losing 7% turns out to be over $100,000. (not counting transaction fees, the higher holding costs while "owning" vs renting, etc).
But I agree, Socketsite, Please make this an apple.
Posted by: ex SF-er at August 16, 2009 4:23 AM
As a thinkig bear, I'm not bothered in the least by an apple in NV showing "only" a 7% decline since early 2007.
There is always going to be some dispersion around the central tendency (which is down), and selection bias means that at the margins the ones that fall the least are statistically more likely to be sold - at least until you get a market more characterized by foreclosures, which NV most definitely is not. Frankly, I'm surprised that we don't see some apples that are "up" - if the central tendency of declines was only around 5-10% I think you'd see a few of those.
I don't have a good feel for when NV "peaked" and I say that all the time. It could have been 06, but probably was sometime in mid- to late-07 from what I can gather.
The important thing here is that the 2007 buyer of 303 30th Street suffered a capital loss of more than $100K, and then spent another $80K or so on transaction costs unloading the albatross. That's great news - the property was overvalued no doubt about it (you really don't have to be an expert in Noe to seee that) and the buyer paid teh price for the eror of paying above fair value.
Oh, and the 2009 buyer "overpaid" :) Why do people think buyers have suddenly gotten smart? It's a slow process, but visible losses like those suffered by the 2007 purchaser help it along.
Posted by: LMRiM at August 16, 2009 7:07 AM
Frankly, I'm surprised that we don't see some apples that are "up" - if the central tendency of declines was only around 5-10% I think you'd see a few of those.
I disagree with that. Everyone knows prices are down from peak - I can't see anybody who would pay over a 06 or 07 price right now.
And I thought that was your 'apple challenge' - to find apples that sell for more than their previous sale within a specific timeframe (which I forget). So, presumably when you made that challenge you didn;t expect to find any apples that are up.
Posted by: REpornaddict at August 16, 2009 9:03 AM
Sure, REpornaddict, I don't really expect to see many apples from the 06/07 time period selling for more today - that's because I'm fairly confident that the central tendency of prices is down much more than 5-10%. I should have worded my "surprise" a little better - I mean that if values on average are only down 5-10%, I'm surprised that we don't see some "up" apples. But since they're down more like 15-20% in NV, I'm not :)
About whether you would see instances of higher apple prices even if "everybody" knows that prices are "down" - sure you would, if the trend of price declines was really centered around a 5-10% decline. In any market, some people "overpay" (relative to "FMV") and at least a few "underpay" (pick up a good deal in hindsight). Also, streets change and there are lots of exogenous micro factors that impact a particular property (for instance, a house sells in 06, but all the houses around it are a mess - but by 2008 3 or 4 of them have been renovated and the street looks "nicer", etc.). 5-10% is a pretty small margin to be made up and random noise in the sales would do it.
I think we'd see instances of this - even at 15-20% down on the central tendency, if someone who "underpaid" two years ago sells to someone who "overpays" today. That was the point of my apple challenge - I actually did expect to see some instances of this. In fact, even at 15-20% down from peak in Noe (my guesstimate of actual value declines) I'd expect to see a few. I'm still waiting :) (We have seen some places sell for just a bit under 2006 prices, though, so maybe that's close enough.)
Posted by: LMRiM at August 16, 2009 9:31 AM
"for more than their previous sale within a specific timeframe (which I forget)."
Almost. The timeframe was to prevent posts of the form; this last sold in 1910 for 15 cents and currently is selling for a million so the market is going up, up, up!
The various aggregate numbers indicate that the big runup ended in spring of 05 (although there was some additional appreciation in the RealSF™ until sometime late 07 early 08.)
The cutoff on apples of May05 was so that we could more easily distinguish what had happened since then from the effect of the big runup.
Posted by: diemos at August 16, 2009 9:39 AM
Also, streets change and there are lots of exogenous micro factors that impact a particular property (for instance, a house sells in 06, but all the houses around it are a mess - but by 2008 3 or 4 of them have been renovated and the street looks "nicer", etc.)
Isn't that sort of the definition of gentrification? Or at least one of the main effects? In this particular case, the Upper Noe Rec Center, which is almost directly across the street, was being remodeled in 2007 and is complete today. If you want further evidence of gentrification, look at all the nice new restaurants near 30th and Church. But shouldn't this effect more than just one home? The whole neighborhood is continuing to gentrify, in spite of the stubborn refusal of most Socketsiters to acknowledge that fact. In fact, I think you guys have formed your very own bubbble, a Pessimism Bubble :-)
Posted by: NoeValleyJim at August 16, 2009 10:15 AM
"in spite of the stubborn refusal of most Socketsiters to acknowledge that fact."
Not at all. I've always acknowledged the effect of gentrification. I've just also always said it should affect rents just as much as prices so gentrification should have no effect on the price/rent ratio. The current price/rent ratio indicates that Noe Valley houses are overvalued, even with the effect of gentrification.
Posted by: diemos at August 16, 2009 10:24 AM
I found the permit for the kitchen remodel for 303 30th St, it is 200005049056. It includes "REMODEL KITCHEN, NEW CABINETS & APPLIANCES" and was initially filed 5/4/2000 and appears to have been completed, along with a bunch of other work including a new bathroom on 7/20/2002.
Now it is possible that a kitchen remodel was done in mid-2002 and then another one two years later, but I think you need to provide evidence of that claim. Especially since I live around the corner from this place and would have probably noticed this second round of major remodeling.
Posted by: NoeValleyJim at August 16, 2009 10:34 AM
So, if you're smart enough to buy a place across from a rec center that is going to be fully renovated by the time you sell, and you buy when prices are already declining or at least not rising (according to REpornaddict, 2006 was the peak), and you are lucky enough to buy in one of the few areas of SF that has been seen to be relatively "immune" from the price declines affecting The Fake SF™, and....
...then you'll only lose the equivalent of four years of college tuition at a private school for one of your kids, and bullish posters on SS will tout your experience as a "success".
As a bear, I can live with that.
Posted by: LMRiM at August 16, 2009 11:05 AM
As expected, a wishful thinking one liner and no comment on the meat of the subject. Aren't we predictable...
The fact that you are still talking in this thread is proof that you are shameless, and useless.
Posted by: anonn at August 16, 2009 11:33 AM
That permit is expired. The kitchen work appears to have been done later than 2004, but obviously that would have been prior to the 2007 sale. My mistake: you aren't right about when it was done but as noted by ex-SFer, it would have affected the 2007 sale price, not the 2009 sale price.
The most recent listing noted only that the 3.5 baths had been renovated, and they refinished the floors and otherwise, it doesn't look like much else was done. That's probably no more than a $65K job ($55K for the baths and $10K for the floors - A guess, but I doubt it's too far off). Subtracting out the $65K, they are down 10-12%, which isn't too bad.
This was not an apple, but pretty easy to make the adjustment, and it's held up better than average. As noted by LMRiM, the average, by definition, will have some above it and some below it.
This was a good one for you. No question.
Posted by: tipster at August 16, 2009 2:31 PM
the truth of the matter:
this endless debate over the fate of SF RE is a microcosm of a greater bulls/bears debate, which is indicative of one's psychological makeup much more than accepting the inherent limits of 'economic analysis.' this bulls/bears syndrome will go on forever, just like endless debates over politics, religion and how to raise children. there are some solid facts both sides use, many more interpretations attached to those figures & facts, and a whole lotta opinions. you're trying to definitively answer something that does not have a definitive answer. does god exist? is a socialist based form of government superior to a self-oriented capitalist one? raise the kids in a sheltered suburb or in a socio-economically diverse city?
don't you guys see it's all along the same lines?
personally, this endless debate can get tiring, hence my reduced participation as of late. on the one hand, i appreciate all the hours of effort the bears put forth- certainly helps me play devils advocate, for someone who actually owns several properties in SF. on the other hand, the often glib and snarky know-it-all attitude can get old. to me it's a double sided sword.
clearly there are huge psychological elements driving the regulars here, so my appreciation of their efforts is negated by their self serving attributes. it doesn't take a psychologist (but being married to one certainly helps :) to ferret out, for instance: robert's clear need to flex his statistical prowess; lmrim's need to demonstrate the smart saving of his shekels by renting (along with a healthy does of what i call post-libertarian political-economic leanings); tipster's head banging of anything negative wrt SF RE; ex-sf's detailed deliberations; san fronzi's tireless rebuttals, along with a rather strong socialist housing and economics agenda; diemos' snarky sarcasm; anonn's enfant terrible attitude; and all the other players.
the quality of this discursive blog is reaching its limits. you can't analyze what is not analyzable. the often defaulted to notion here that fundamentals of economics trumps everything (at least eventually) is assumed, but is not true, nor proveable. the field of economics is far from providing conclusive answers to most of our pressing issues. it is self evident that leading economist disagree all the time; hence it is far from being a hard science, and to treat it as such can do more harm than good. human nature, deep seated beliefs and intent however, do enter the equation, and perhaps often trump it. persuasive language leads eventually to semantics which eventually leads to propoganda which eventually leads to s/he who shouts the loudest and is most impassioned. i see lots of smarts, lots of offense/defense, lots of semantic acrobatics, and lots of energy being spent; but i seldom see wisdom.
Posted by: 45yo hipster at August 16, 2009 2:43 PM
Be sure to drop by from time to time, you know we love the first hand reports from the trenches.
Mark your calendar for the January 1, 2012 for the big bubble post-mortem party.
Posted by: diemos at August 16, 2009 3:13 PM
Not a Socialist. I am against Socialized housing actually. The market should take care of everyone's needs if it were let to function properly. Prop 13, rental control, lax credit standards and many other things are messing up with the market and we have this monster of a situation where median family income is ~70K and median houses are 8 to 12 times that in the past 3 years. That's messing up with the market and giving way too much importance to it in people's lives.
Sorry these threads always end up with the same crap. If the current Healthcare Reform debacle is proving something: no matter how right you think your ideas are, if you let bullies talk you down your ideas are not much worth anything in the end. Obama will not get what he wants and the resulting mess will be yet another Democrat compromise monster. That's a lesson for everyone to learn.
Enjoy the free time!
Posted by: San FronziScheme at August 16, 2009 4:23 PM
~70K and median houses are 8 to 12 times that in the past 3 years.
LOL X 2
Posted by: anonn at August 16, 2009 4:59 PM
Thanks for the correction, fluj. Homes, not houses. If we took houses, the multiplier would be much higher.
Posted by: San FronziScheme at August 16, 2009 9:16 PM
"The market should take care of everyone's needs if it were let to function properly."
Really? So if there were no regulations the market would provide some utopia where everyone's needs would be meet regardless of their individual abilities?
Posted by: Rillion at August 17, 2009 9:38 AM
Posted by: LMRiM at August 17, 2009 9:59 AM
We need regulation for safety, zoning and other practical stuff. But for the pricing and taxing of housing, regulations usually end up hurting people more than they help.
Prop 13 for instance kept grannies in their homes in the 80s. But it created a lack of turn-over which in turn created artificial scarcity. This scarcity creates artificial higher prices which prevents many working families from settling in the city. You end up with homeowners who are either retirees living on SS scared to move out or millionaires with not much room in between. No wonder this city is so NIMBYist.
Same thing for rent control. It scares prospective landlords and decreases the pool of available rentals. Therefore rental prices for available units go to insane levels and you're left with either high earners or long timers.
Some regulation is OK. The current healthcare debacle proves the government needs to be present in the equation. But I am convinced price-intervention by the Gov't in RE it counter-productive.
Posted by: San FronziScheme at August 17, 2009 10:00 AM
The market is a blind Moloch that dispenses resources according to it's algorithms. If you have money in your hands all the treasures of the earth will be laid at your feet. If not, you don't exist. The market does not love you and it does not care what you need.
If you have no money in your hands then all the housing the free market thinks you "need" is a cardboard box underneath an underpass.
Posted by: diemos at August 17, 2009 10:13 AM
LMRIM, nice one word answer with no explanation for the rational behind it. Care to elaborate? How would the market provide housing to those without the ability to pay anything?
Posted by: Rillion at August 17, 2009 10:43 AM
The market does not love you and it does not care what you need.
Yes, but that's the good part. It's a cold slap in the face to realize that other people are not willing to pay to hear your poetry, and that you may have to get up in the morning, and do something that others are willing to pay for, or else you will end up in a cardboard box. The babies being thrown into the fire here are just our assumptions about how others value our work.
Just being a precious snowflake with needs and desires doesn't obligate a farmer to provide you with food, or a builder to provide you with a roof, and in many cases this type of cold feedback is the only thing that can break through our constructed illusions, including many shared illusions.
Posted by: Robert at August 17, 2009 10:57 AM
I hear you but it's not that clean cut. The partial market-based pay scale and taxation system have to be taken into account. Also employers have to pay their workforce enough to live close-by otherwise they wouldn't find anyone for their jobs. These are feedback loops that can help prevent the situation you are describing.
The issue is really the unemployed. I think the unemployed housing should be addressed through an insurance system. Either state-managed or private. If private, it needs strict guidelines. You pay a mandatory % of your rent into this insurance and you get rental assistance when your EDD kicks in. You need limits and controls to prevent abuse. Then there is the chronically unemployed: it's a very small portion in this country but still to consider.
About the "money in your hands/no money in your hands", the Reagan years followed by the Bush tax cuts have tilted the pretty good balance we used to have before. It is one of the reasons for the wealth distribution imbalances of these past years.
Posted by: San FronziScheme at August 17, 2009 10:58 AM
Markets are but one avenue for the allocation of resources - they're not the only avenue. The others are private societal institutions, in the US historically primarily family, community, church and non-religious charity (probably in that order).
In the absence of all these governmental giveaways, those other institutions would naturally strengthen. This can be seen in a larger sense as a "market" response.
For an individual who has no family, no community, no church, and no one willing to give to him out of the goodness of his heart, I don't think the answer is to force citizens to "give" to them. By definition, those individuals are not highly regarded, and the people who are in charge of the dispensing of the gifts will just look at their charges with contempt. And if you spend some time around a low income housing project, or an area heavily dependent on welfare, you'll see the results. Of course, the primary purpose of most of these programs is not to assist, but rather to slake the guilt of certain segments of society for having "so much". Funny how they like to give away others' money but not their own.
Posted by: LMRiM at August 17, 2009 10:58 AM
"Of course, the primary purpose of most of these programs is not to assist, but rather to slake the guilt of certain segments of society for having "so much". Funny how they like to give away others' money but not their own."
Again you can't seem to discus an issue without throwing in some insults towards those that might have a different view of things.
Posted by: Rillion at August 17, 2009 11:55 AM
A final note on Unit 2, if it's not a comp, then I would say it's something much worse. I attempted to search the property records back to 1995 (when, I believe, Salma originally bought the property) and can't find anything to tie the owner of Unit 2 to an interest in the property (so the low prop. taxes are unexplained). I'll withhold judgement for now and hope that WaMu made a wise decision on funding Unit 2's loan...
Posted by: EBGuy at August 17, 2009 12:46 PM
"Of course, the primary purpose of most of these programs is not to assist, but rather to slake the guilt of certain segments of society for having "so much"."
LOL. The primary purpose is to keep the hoi polloi quiescent in their districts so that they're not bothering the aristos.
Posted by: diemos at August 17, 2009 3:17 PM
"Of course, the primary purpose of most of these programs is not to assist, but rather to slake the guilt of certain segments of society for having "so much". Funny how they like to give away others' money but not their own."
actually, lmrim, this is part of the church and community alternatives to the market. In SF non profits are especially prevalent and the private donations they receive help out alot of folks in need. So what's wrong with the limo liberals (or caring, considerate humanitarians; your choice) assuaging their guilt and at the same time privately providing a safety net? It's perfect.
Posted by: 45yo hipster at August 17, 2009 4:40 PM
^^^ You bring up a reasonable pont, 45YOH, but if it's working perfectly, why are the libs always crying and demanding more funding for everything?
Truth is, it's working perfectly for the politicians and their buddies. Not so well for the people ostensibly being "helped". As I said, spend some time in an area dominated by welfare giveaways and handouts and get to know the people there. I did - growing up in the Bronx in the 1970s. "Great Society" lol - no one is going to convince me that these programs do more good than harm in aggregate.
But like I said, it works great for the political class. When Obama puts his daughters in DC public schools and Feinstein supports some low income housing for Pac Heights, I'll change my tune. I'm pretty confident I'll be singing it for a long time to come :)
Posted by: LMRiM at August 17, 2009 5:42 PM
For the record, here is the url(not sure how to create the html tag) to unit #4, asking price $1,795,000.
Posted by: TwinPeaks at August 17, 2009 6:38 PM
As I said, spend some time in an area dominated by welfare giveaways and handouts and get to know the people there.
What do you think Silicon Valley was, from 1940-1980? Stanford was just a small liberal arts college like Oberlin before the government began pumping in billions in DoD grants during the cold war. Don't forget all those slackers like Richard Feynman and Bill Joy. You think those aerospace firms in Sunnyvale were selling to the "market"? At market prices? How about ATT up until the 1970s? Stanford and the land grants for his railroads?
IIRC, Carnegie stole the Bessemer process from Germany -- we did not respect foreign patents at the time -- then married the daughter of the secretary of the navy, got the U.S. to impose a heavy steel tariff on Europe, all while his father-in-law proclaimed a need to build a new "steel navy". He was the second richest man, after Rockefeller -- no need to talk about the oil industry and government welfare.
So I guess whether something creates dependency or not depends on the number of zeros on the taxpayers' check. Too few zeros and you don't want to live there, enough zeros and it becomes an exclusive community of over-achievers, who even have money left over to fund various libertarian think tanks.
Hayek once said that with the development of the market, humanity was given a new organ -- a new "eye" that conveys precious price information. But you have to be at least somewhat deranged to view it as an all seeing eye. It is limited in its spectrum, and distorted by psychology and culture. Sometimes, it sees things that aren't there, and other times it misses the important stuff like a virus that can kill you. That doesn't mean we get rid of the eye. In the same way, government is a hand. There is an enormous power in organization and hierarchy. When you really want to do something big, like send a man to the moon, build a dam, develop an integrated circuit, discover DNA, vaccinate the public, split the atom, or invent jet aircraft -- that's not something that the eye can do for you.
You need a large organization of people and involuntary funding for those types of things. That's why no country has managed to industrialize without a combination of heavy tariffs and government led industrial coordination -- including very massive subsidies.
All throughout history, from the days of monarchies to european colonization, those that have been able to organize themselves and levy heavy taxes outperformed and conquered those that were disorganized and "free". It may not be a pleasant thing to think about, but we need both organs, all their abuses notwithstanding.
Posted by: Robert at August 17, 2009 7:06 PM
Cause and Effect?
Are they dysfunctional because they receive welfare?
Or do they receive welfare because they are dysfunctional?
Posted by: diemos at August 17, 2009 7:40 PM
It's the former, diemos.
Robert, I'd be happy to trade relative shares of government spending 1950 with Federal spending this year. (I wouldn't use 1940 as the baseline due to WWII effects, but 1950 would be ok even given the Korean War.) We could start by eliminating Medicare spending entirely (begun in 1965), cutting social security welfare transfer payments by a huge amount (I'd have to look up the share of GDP back then, but I'd imagine it was no more than 1 or 2%) and more than doubling (perhaps tripling?) the share spent by DoD. :) It's so hard to really separate out the factors that lead to good outcomes because we've got no way to run the historical experiments - no way to turn back the clock and ask what if I guess.
Posted by: LMRiM at August 17, 2009 8:11 PM
lmrim- all i was saying is that alot of charity related activities have become privatized, which supports a market oriented politics, as you prescribe. as in all political debates that never end...it's a matter of degree and nuance. it seems most here don't think pure/mostly market driven policy would work in the long run, and i agree. i always thought that kernels of libertarian philosopy are forward thinking and great, but taken as a whole, well it's pure folly (and elite folly at that.)
Posted by: 45yo hipster at August 17, 2009 9:55 PM
I'd be happy to trade relative shares of government spending 1950 with Federal spending this year.
I think this is a common misconception. Download the NIPA tables for the U.S., and you'll see that during WW2 the government share of GDP was 47%, but it quickly fell to around 20% and has stayed there ever since. Actually, there is lots of volatility, so indeed in 1950 it was only 15%, but in '52 it jumped to 23%, etc. There is also a very mild downward drift in the numbers:
Period__Average Government share of GDP
And note that the GDP data starts to skew recently because of imports. If you back out NX and just divide government expenditures by consumption + investment, you get the following, which I believe is a more accurate measure of the "size" of government relative to the domestic private sector:
Period__Average Government share of GDP (less net exports)
Notice a more dramatic shrinkage.
Anyways -- not trying to be argumentative, just making the point that government is weaker across the board now than it was in the 1950s, and civil liberties are much greater. But, it has interfered in things like school busing and some social services which really tick some people off, I guess.
However, it's not clear that these actions are responsible for the delinquency that you see in housing projects, or the poor quality of education in schools. I think the answers are much more complicated than just blaming government, although I do think all housing projects specifically should be torn down.
Posted by: Robert at August 17, 2009 10:08 PM
I do think all housing projects specifically should be torn down.
Better yet: sell the housing projects to specuvestors at the top of the next bubble who will Dwell them into "luxury" condos or lofts at great expense. See the specuvestors quickly lose their shirts, have the bank repo the whole thing and sell the new and improved project units for pennies on the dollar. Direct the former project dwellers to the now perfectly affordable units and make them proud homeowners.
Voila. The homeownership society.
Posted by: San FronziScheme at August 17, 2009 10:23 PM
No time to really go into it now (off to bed), but you've got to look at total spending, aggregating the state spending with Federal (my post could have been much clearer). Especially with Medicare and the growth of state bureacracies. If you had a good link to the aggregated data, I'd appreciate it!
Also, Robert, have you given any thought to the changing composition of GDP in the NIPA calcs? I really should track it down (it's in a BEA publication that accompanies the NIPA tables), but I think that "plug" numbers like OER now account for 15-20%+ of the reported GDP figures. I'd be curious as to comparability of GDP in 1940 (much more production-based, quantifiable econmomy) to a more service- and asset-based economy today. Maybe I'll do some rereading tomorrow morning about what goes into the calc today, and whether we should really be "trusting" the $14-15T numbers that are thrown around. One thing is for certain, we know the numerator in those GDP share calculations are right because government is actually writing the checks!
Agreed about the housing projects. And I suspect the true costs of forced "integration" efforts exceeded the benefits in hindsight.
Posted by: LMRiM at August 17, 2009 10:27 PM
These figures include state and local spending -- it's government in all forms. If you click on the link and download the data you can see the breakdowns, and of course the BEA has more details available.
But, be aware that GDP measures purchases, just as GNI measures receipts. So, the ratios I cited measure output consumed by government as a fraction of all output consumed domestically. So it tells you how large the "government consumer" is in comparison to the private consumer. It does not measure transfers, whether taxes paid to government or things like social security checks mailed out. That data is measured in the GNI tables, but the GNI tables tell a similar story to the GDP tables, the difference of course between the "G" in the GDP table and the "TX" in the GNI table being the deficit, which was much larger in the 1950s than today.
Maybe what you are interested in is something like the total federal and local budgets divided by GDP, which is a different number. But, actually, that's a bit of a strange ratio to look at, since you are dividing total spending by net output. Why not divide total spending by the gross output -- i.e. by the gross intermediate product, as all transactions are typically taxed? Even that wouldn't be a very meaningful measure. What I actually think you are interested in is some measure of control or influence, which is hard to pin down, as it includes motivating people by tax laws and regulations, but I suspect government control now is less than it was in the 1950s, when the government set how much interest banks would pay in checking accounts and effectively fixed the prices of many commodities. I think people underestimate the degree of control that government had over business prior to the de-regulation of the Reagan era, but the question is up-to-debate.
As to issues like owner equivalent rent, I think that's more a question for influencing PCI than GDP. OER is a small component of GDP, but the largest component of the PCI basket. I don't have the figures ready at the moment, but I can look at them later. In any case, these are ratios of nominal amounts.
Posted by: Robert at August 17, 2009 11:07 PM
Sorry, Robert,I really should have looked at your link before I typed such a quick response on the NIPA data. It's been almost a year since I looked at them last with any attention.
About your larger point regarding what we should be concerned with, from my point of view, the question is how many resources are allocated politically versus by more narrow "market" forces, and in that sense you've really got to look at transfer payments and regulatory burden. I mean, if you regulate the 14-16% of the economy represented by health care spending (directly spending roughly half of that) to the extent that the government does, you've effectively removed that much of the economy from "private" hands and subsumed it within government. At least I'd argue that. I still don’t really see how you get to 20% numbers for “government share” when government is currently expending $5T (on an annual basis) in a $14T economy, but I’ve still got a lot to learn :)
Anyway, that’s getting all way too deep for a trader like me, but I really appreciate your post – lots to think about there.
Unrelated, but what do you think about Asian equities these days? FWIW I've given up a bit on my original plan to continue to accumulate Asian equities for a few years. The almost parabolic rally looked to be too much from a trading/price action perspective. For me, time to hedge some of the gains and wait for a more sensible entry point. So much for sticking to a game plan :)
Posted by: LMRiM at August 18, 2009 8:22 AM
I really enjoy this discussion. I apologize for the long post, but this is an old thread :)
At least I'd argue that. I still don’t really see how you get to 20% numbers for “government share” when government is currently expending $5T (on an annual basis)
When you say "5T", you are referring to the sum of government budgets. Budgets include things like transfers to other actors (financing payments, dividends, etc.) as well as purchase of input goods, purchase/replacement of capital goods, and labor costs. Obviously as the stages of production grow, the sum total of budgets grows as well, even though GDP remains the same. As borrowing grows, budgets will grow as well, even though GDP remains the same. If two separate companies produce the same amount of output, then the sum of budgets will tend to be higher than if just one company did it, even though GDP remains the same, etc.
If you were to graph the private sector budgets against GDP, you would find that they start at (roughly) 200% of GDP in the 1950s and are probably around 300-400% of GDP today. These are swag numbers, of course.
In the same way, if you were to graph the sum of government budgets to GDP, you would also get an increasing graph (but increasing at a slower rate than private sector budgets).
This does not mean that government is "larger" now, anymore than it means that the private sector is "larger". They can't both be larger! All it means is that the economy is growing and the number of transfers, subcontractors, interest payments, etc. grows faster than output. A budget to output ratio really measures complexity, and it will always be an increasing graph, regardless of whose budget you are measuring.
Btw, I have no doubt that at some point, government budgets will total more than 100% of GDP, but by that point the private sector budgets will be 600% of GDP -- that is unless we collapse under the weight of this complexity.
Net output is not something that you want to be comparing budgets against. It's not clear why you would want to look at budgets in the first place, when things like net deficits (G-TX), the total tax burden (TX/GDP), the sustainability of the debt burden (Debt/TX), and consumption of output (G/GDP) -- these are what you want to measure when deciding whether something is growing.
Moving on, I think we should make distinctions between "consumption", "control", "complexity", and "interference".
Consumption relates to how much of economic output the government consumes, and how much is left over for the private sector. That is the 20% figure I cited.
"Control" is how much the government directly controls the economy. During WW2, it was total control -- a command economy, with central planning of production, rations, wage controls, price controls, job-choice controls, etc. Now, the day after WW2, that didn't just go away. It was a slow process of unwind, really coming to a close in the Reagan era. So that in the 1950s we had much greater control over the economy than we do today. It's true, we didn't have so many transfers, but that just means that the tax rate was 90% and government spent the money to build bombers instead of sending a check to grandma.
But you don't need transfers. It doesn't matter whether you give money to the poor by raising the minimum wage, by making a transfer, or by meeting in a smoky room and deciding to negotiate raises with your employees in exchange for anti-trust exemptions or the interstate highway system. The effect is the same, and the control is the same.
And that control, up until the 1960s, was really unprecedented. It extended to running open assassination campaigns against americans, telling hollywood which movies to make, banning books, arresting people in the wrong political party, price fixing, loyalty oaths, government decisions on wages, government control of borrowing and banking, 90% upper bracket rates, etc. Now, it's true there was no busing, so that if you were a white middle class guy with no "unamerican" thoughts, then perhaps you felt less interfered with. Particularly if your eyes weren't open to the government-backed cartels that ran the economy. As to healthcare, it wasn't 14% of GDP, it was 5%, and a huge chunk of that was directly provided by the military/VHA.
Over time, that "smoky room" control was fading, complexity increased. Partly because the direct control was diminishing: doing things via regulation is ceding direct control to a process. Hence the number of pages in the federal registry grows all while it gets harder to actually do anything. This is pushed along by an infantilized public that craves ass-covering, rights, and due diligence/due process. In other words, an increased level of public participation leads to all sorts of regulations, permits, hearings, and general Kafkaization. This is present in both the public and private spheres.
This excess complexity is a real problem, and is choking productivity, both within large businesses and within government. It's much harder to get things done nowadays -- hence the billions it took to build the stupid T line when we could have had 2 golden gate bridges for that amount in an earlier era that was less complex (but more centrally controlled). Why was it so expensive? All the hearings, EIR, consensus gathering, and permits, and other processes when in an earlier era, a powerful group of people would decide to do it and no one would dare question them, and it would get done quickly with a lot of people getting maimed in the process.
Finally, there is "interference", which I think is a strange thing to measure. Saying that government interferes with business is a bit like saying that a mountain interferes with a deer. Regulations set the landscape in which people go about chasing money. There will always be a landscape -- there is no void in which the deer is just floating. There is 100% interference with business, and there always was, because there were always things that you would prefer to do if there were no laws to stop you, and there were always things you didn't want to do, but laws made you do them. Everywhere and always the landscape is set by laws and culture -- it is and always was dominated by absurdly irrational and contradictory desires and prejudices, replete with silly hoops to jump through, and things that have nothing to do with markets. That is the ground on which the market is built and you compete for profits within that space. In fact, all the silliness and obstacles provide for pockets of profit opportunity to begin with, when in a perfect empty plane all profits would immediately be driven to zero via competition. Something needs to interfere with that competition and provide opportunity to the resourceful.
Posted by: Robert at August 18, 2009 10:26 PM
Excellent post, as usual, Robert.
I get the point about budgets not necessarily reflecting the "control" or "share" aspects that we want to get at. (I sort of did when I wrote it as well :)). But that's why I mentioned the allocation by more narrow "market" forces. To lampoon the analogy, think about a government whose primary economic action was to tax 100% of th income of the population, retain 20% for administration and police/enforcement costs, and then redistribute out the entirety of the remainder back to the "people" on the basis of a politically-derived schedule of need. Would we say that government share is only 20%, just because it remains that the final spending decisions of the 80% that is redistributed back out remains outside of government? Obviously, that's just a lampoon, but I'm sure you get the idea :)
Your breakdown of control, complexity, consumption and interference seems a useful model for analysis. I don't think I've seen it collected in a few words before - thanks!
About the post-WWII economy, well, what do you expect? FDR did a lot of damage to the American system :) I don't tend to think of 1945-1980 as some golden age, that's for sure. I wonder how much of the economic success of the period (primarily 1945 through 1970 I guess) was a result of the US's special place as victors in a shattered "first world". I mean, there sure are a lot of benefits when you are the manufacturing/production king and you set all the rules of exchange (including reserve currency regime). How much of the success was despite the heavy controls?
I'll leave the cultural control issues for another time - too controversial :)
Anyway, thanks again. Moving on, any changed view of Asian equities from your end?
Posted by: LMRiM at August 19, 2009 7:34 AM
Thanks, LMRiM. I actually *do* think of 1950-65 as a golden age of industrialization, and the growth was worldwide. IIRC, the U.S. didn't outperform europe (east or west) in that period, although we started from a higher (pre-depression) base. By 1965, that output gap narrowed, as if the destruction of the war never happened.
Rebuilding blown-up infrastructure is a fantastic demand stimulus for the industrial sector, and it's politically feasible if you are standing on smoldering ruins. The U.S. was politically disadvantaged by being the non-destroyed victor, but the cold-ware proved an effective substitute, so we did our own high-tech industrial deficit spending. As it is, I think everyone did the right things, economically, and smart people seemed to be in charge. Eisenhower may have been the last "middle-class" president we'll ever have. He lived solely on his military/government salary and then pension, and refused to do a book deal or to do the expensive honorariums because he thought it would degrade the presidency. It was just a different world! Obviously, being a government bureaucrat all his life, or "cog" as you call it, he favored universal health-care.
In terms of your 80/20 example, of course that would be very corrosive, but my personal belief is that you don't need all that much: opportunity, a goods market in which people can express preferences, a reward system, and culture. Prediction markets/money markets can be regulated like utilities -- and often are -- with positive outcomes. I think empirical studies of the Laffer curve showed that the revenue maximizing rate is between 65-85%.
That's a lot of interference before people start becoming less productive, and it basically shows that people are not profit-maximizing creatures, neither are they utility maximizing creatures. They do have preferences for some things, and expect to be able to express those preferences via consumption, to be rewarded for effort, and to have a chance to play the game. After that, it's all cultural.
Btw, I believe that's why there isn't a lot of long-run variation in economic growth, neither across time nor across the "developed" world -- really the world that shares certain cultural traits. Even though those countries have had very different policies. To me, complexity is much more of a problem than interference.
Certainly there is no reason to believe that if medical care was regulated or directly provided as some form of utility, that it would hinder innovation and production anymore than receiving police service or electrical service prevents economic dynamism today. It would greatly increase opportunity, though, and we might even reach the level of small business participation and risk-taking that you see in Europe :P
About Asia -- I don't like China one bit now, especially after the run-up. There are the usual asian problems (aging population, lack of transparency, structural imbalances), but a new wrinkle going forward will be that demand is now recognized as being precious, so that access to foreign demand will not come as cheaply to China as it has in the past. That plus the lending explosion spells trouble to me. Maybe some of the carbon-insanity will be used to add tariffs or restrict trade somewhat. Asia is good generally because of the cultural capital, but why not wait until the domestic debt bubble bursts and things clarify somewhat before dipping back into China?
But these are general observations -- who knows what the mob of lucky chinese stock pickers will do next!
I do like Japan, though, on a valuation basis, and if your baseline is for an extended period of stagnation, then that seems more fully priced into Japanese equities than anywhere else. I think they are at 1985 levels or so now, and there is less uncertainty there. I haven't looked at Korea in a while -- perhaps they are similar to Japan.
Posted by: Robert at August 19, 2009 9:12 PM
PropertyShark is showing Unit 3 (the other half of the dynamic development duo) hitting the auction block on Nov. 3 with an unpaid balance of $882,794. Original loan amount was $800k with World Savings (variable).
Posted by: EBGuy at October 16, 2009 3:21 PM
... And some more pent up supply will soon be hitting the MLS. The condo at 647 Grand View Avenue #3 was (finally!) taken back by the bank for $899,253 on March 4.
Posted by: EBGuy at March 23, 2010 4:58 PM
Sigh. Was it really only 6 months ago that we had discussions of this caliber on SS. Better times.
[Editor's Note: And on that note, we'll challenge you to lead (the discussions) by example.]
Posted by: diemos at March 23, 2010 5:11 PM
Read the thread. They were all on some nonsense, got set straight, and then took it macro (except fronzi who stayed offbase). If this gets deleted you'll not see me again.
[Editor’s Note: Try responding to a reader’s right on-topic comment (which has the potential to actually get the discussion right back on track) with something more than an "LOL" at "all those scorched earth bear[s]" (which is more likely to derail the discussion once more). Regardless, save the "threats."]
Posted by: anonn at March 23, 2010 6:29 PM
The discussion he was sighing about was not on topic.
Posted by: anonn at March 24, 2010 9:38 AM
I'll withhold judgement for now and hope that WaMu made a wise decision on funding Unit 2's loan...
The property taxes have been updated; Unit 2 is showing a tax basis of $1,657,500. Oh, and it looks like taxes are past due.
For those of you keep track at home, only Unit 3 has thus far been foreclosed. Unit 1 still has a NOTS from July, 2009; the owner is the same as the recently foreclosed Unit 3. Units 2 and 4 are current on their WaMu mortgages (well, no NODs at this point). No one seems to be current on their tax bills.
Posted by: EBGuy at March 24, 2010 12:34 PM
"The discussion he was sighing about was not on topic."
No it wasn't. But it was still a great discussion.
Posted by: diemos at March 24, 2010 5:40 PM
To be fair, for once it wasn't satchel being a jerk in his very ill-intentioned r.e. blog career. Funny how he could be civil and even generous when discussing macroeconomics, but could only be a complete prig when talking SF r.e. What was the real story there? Hard not to think sour grapes in the end. Plus I will always remember how he tried to haze me about a particular property, got proven utterly wrong, and then never owned up to it. That was fake as all get out.
Posted by: anonn at March 24, 2010 8:38 PM
Would anyone even buy any of these units?
Posted by: Lash at June 2, 2010 8:17 PM
Unit 1 was foreclosed on April 2.
Posted by: EBGuy at June 2, 2010 9:09 PM
Posted by: SocketSite at October 20, 2010 2:41 PM