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Is this Bubble 2.0?

We are a young couple and have lived in Fremont for past 6 years. We are planning to buy a 600K 2/3 Bedroom House in Fremont/Newark Area. But the prices are very discouraging. Not to mention the bidding wars. Prices have shot up and I have a bad feeling of another approaching Bubble burst. Any Advice? Is summer/fall 2014 a bad time to buy?? Should we wait until 2015?
  • June 25 2014 - Fremont
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Answers (27)

Yes. The models don't match reality.

Personally, I am a buyer in this market, and I think that people who don't take advantage of these mortage rates will regret it.
  • June 28 2014
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Profile picture for Blue Nile
In 2007, there were quite a number of posters predicting what the housing pricing curves were going to look like after the housing bubble deflated for various regions.  The predictions essentially fell into 3 groups:

1) The most prominent view appeared to have been the "L-shaped recovery"; sharp drop, and then "flat" for many many years, except "maybe" increases proportional to inflation.  This is essentially the "over-damped" LCR dynamic response.  Most of those posters appear to be gone from the site now.

2) The second most common was the "over-correction", and then "bounce" or "decaying oscillation".  Many referred to this as the "dead cat bounce".  Some took the position that the bounce would occur before the bubble fully deflated, and many of those stated it would be due to government interference with "free markets", such as the 2009 "tax credit" incentive for "first time buyers".  Many of those posters also are gone from the website now.  This is essentially the "under-damped" LCR dynamic response.

3) The 3rd most common was that with all the government intervention and attempt to inject cash into the economy by the Federal Reserve and mega corporation bail-outs, and refinance give-away opportunities for people that signed mortgage commitments with minimum wage jobs, and "stimulus" building projects to create government subsidized jobs,... that shortly after the bubble correction, there would be massive inflation and housing prices would soar in response to the devaluation of the dollar.  Those that held that view are still saying ... just wait, it is still coming.

At the time, all the arguments sounded "reasonable", and I could not discern any distinct likelihood of one verses another, other than to say that likely each market area and each market price range would likely experience a slightly different response, at a different response rate.  They didn't all bubble the same, and thus the correction to the bubble would not be the same either.  One other thing I stated was that regardless of what would be the typical correction response, government intervention would mess with that, and distort the timing as well as amount of correction.

My "intent" was to go back to each of their posts and see how accurate their predictions were, and if the reasoning they provided held true.  Unfortunately I didn't keep links to most of them, and the keyword search doesn't work that well on the forum.

There was a 4th position stated by many Realtors... that "markets are cyclical", and that there would be other peaks and valleys, and that it wasn't even a "bubble" but just a typical market cycle.  But none of them could provide any data on the period (or frequency) of such cycles, nor did they attempt to account for the changes of magnitude of any such "cycles".

I was of the opinion that there are "seasonal cycles", but that longer term cycles are not cycles at all, just response to economic situations, mostly caused by political actions and media hype.

A 5th position was that real estate prices always go up because no one is making any more land, and since world population would continue to grow, the rise in prices would always exceed inflation.  This was mostly a NAR propaganda "talking point" and the bubble correction showed it to have little to no merit.

A 6th position was that "no one has a crystal ball" and that markets are always "unpredictable" so one shouldn't even attempt to try.  Those that stated such positions stated that if people could, they would be billionaires, and that if it were "possible" certainly the mega financial institutions wouldn't have needed any bailouts from the government.  Many of those that took such positions are still active on the forum.

My position was that those that analyze such factors are not looking to get rich quick, and don't have substantial resources to be making such gambles in the first place, and that the mega-financial businesses didn't care as they only look at short term profits not long term sustainability.  Not to mention, if all their competitors were doing it, they would be foolish not to.  The federal government would not allow all the mega financial institutions to collapse, not to mention the government already had a history of bailing them out in the past (Bank of America, after foreign loans went bad).

A 7th position?  When subsidies for mortgage rates ends, that the increase in mortgage rates would lower the price of housing and the lows would be much lower than the inflation corrected response.  Many still hold that position, especially if mortgage interest rates go back up to double digits again.

I've been of the opinion that can't be quite correct due to the "price persistence" related to the average days on the market and escrow time frame requirements.  Not to mention, the Federal Reserve has been tightly controlling the monetary supply to manipulate interest rates, so the likelihood of double digit mortgage rates in the near future was quite low.
  • June 27 2014
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I'm about to commence a dissertation, which will contain chapter(s), about the accuracy of the predictions presented here, on this fine network, and the affects, and effects, of anonymity.

I could potentially earn a PhZ.

It appears, based on early analysis of the big data set, that the more anon you were, the more clueless you were. And oddly, the more professional sounding your analness appeared to be, the less accurate you were.

The main issue I'm having, is working out the big guys circular-passive-aggressive-devil's-advocate-jerk issues out of the bigassdata set.  My algorithm turned around the other day, and said "really?", after interpreting a particularly intense gigabyte.
  • June 27 2014
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How accurate have Zillow forecasts been, hpvanc? Any data on how their 2011 forecasts panned out?
  • June 27 2014
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Profile picture for hpvanc
While it doesn't address your area specifically, here is an article, "The riskiest housing markets in the U.S." based on Zillow analysis, presumably based on analysis from Zillow Economist Stan Humphries that indicates that in the Bay Area both San Jose and San Francisco are at significant risk for a new correction. Based on everything I read, it looks like the entire Bay Area is suffering from a housing affordability crisis, the next economic hiccup for the area will probably force rents back down, and property values should follow in a normal rational economy. The problem is, that while irrational markets are easy to spot, it is extremely difficult to predict when they will correct.

Personally I would wait and plan to evaluate the situation again in 2015.
  • June 27 2014
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Profile picture for Blue Nile
For the Silicon Valley, the rapid rise in housing prices in 1999 through 2001, and then leveling off until the housing bubble hit, seems to be directly related to the dot-com bubble.

Though many start-up internet companies did not survive, the growth of companies like Google and Ebay in the area increased housing demand... and those companies are now well established and still growing, so the demand for housing created by these large internet companies is "not reversible".  The inflation adjusted "steady state" of the housing market "changed" with the establishment and growth of these companies creating additional jobs for the area, changing the jobs to housing ratio.

Looking at the 3 to 4 years after Oct 2000 on the Fremont Housing Bubble Chart gives the indication that a steady state was reached in 2000, with minor oscillations following.  Though the dot-com bubble deflated just like any other bubble, the new companies that survived in the region increased the need for housing in the area near those new businesses.

So, the "steady state" should be about where indicated on the chart, and one doesn't need to expect a correction for the housing price rise in Silicon Valley during the dot-com bubble years.

California as a whole is a different issue; the patterns are not very similar, and it didn't have the rise and leveling off as seen from the dot-com effects in the Silicon Valley and San Fransisco Bay area.

Of course, one now also has to factor in the growth of Facebook since 2004, and other major tech firms such as Twitter...  As that was during housing bubble years, that is a lot more difficult to filter out.  It does appear that it shifted the "steady state" just as the growth of Google and Ebay did.


  • June 27 2014
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Profile picture for Blue Nile
It wasn't exactly "hidden" it was a "political decision", both by Congress and by HUD, and lobbied for by the National Association of Realtors (and others) to increase housing ownership percentage (slightly).  Lax underwriting standards with little regulation in order to get more people to "qualify" to buy...; they didn't care if they could make the payments as long as the values were increasing and that it could be liquidated for more that was borrowed if there was a default.

And the "investors" buying MBS was demanding the securities with higher return... which could only mean more of the higher risk loans being packaged with each security.  Investors knew that; they have always known that rating systems are skewed, and that one needs to evaluate their own risk and risk tolerance.  There wasn't much demand for securities that produce 1 to 3% return, as that doesn't meet the investors' objectives, in spite of less risk.

Greed?  It was as much "expectation" as anything else.  Put people in a bubble economic situation, and they will respond essentially the same way every time.  That is a "normal" economic response, and as predictable as what happens when your car goes over a bump or dip in the road.  Those that pretend it can be completely avoided are wearing blinders.

NOVA:  Economic Bubbles
  • June 27 2014
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The sub-prime lending didn't cause anything. It was a symptom of the overarching cause, which was pervasive, unregulated, organized crime strength, greed.  The financial markets crash was actually caused by the fact that Wall Street buried the sub-prime paper, in with the good paper, and called it all AAA, while betting against the paper they were calling AAA. All while selling said AAA paper to each other 10 times over. The Real Estate market crash was caused by the fact that we ran out of easy money Buyers, mainly due to the absurd greed led pricing, to fuel the greed of organic, professional corporate, and amateur corporate new Sellers and re-Sellers. The two events just kind of happened to coincide.

California is a bubble. The whole concept.

It is also funny that the subprime talk comes up in a discussion from a Fremont, CA post.

  • June 26 2014
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A slowdown in price increases . . . so, they won't go up in the next year, or maybe not as much as we might expect?
  • June 26 2014
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Profile picture for SteadyState
Yes - if you can wait - wait till first quarter 2015. The agents in the Bay Area are already noting a slowdown in home price increases
  • June 26 2014
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The reason for our last crash was due to subprime lending; i.e., anyone could get a loan without properly verifying "stated" information.

These days lenders are more strict when it comes to lending. So yes, home values are increasing but no, we're not on the brink of a bubble. We have a pretty healthy market going on right now.
  • June 26 2014
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Profile picture for sunnyview
"But, you know, home ownership is a compromise investment. "

Thumb. I agree with you. I think that a house can be both an investment and a home. You are right they may not perform as well as other investments, but if you keep your financial wits about you they can be a reasonable long term play for many people.

I just get very nervous when I see people looking for the quick money flip or buy up and expecting to short the real estate market on margin. That is where you can lose big if the market takes a turn. 

If you can afford your payments and the market is up you win, if the market is down you still have a place to live for a fixed amount. However, once you borrow too much or reach outside of your financial means that "safe" choice disappears in a down market. I don't think that it always make sense to buy, but it doesn't always make sense to rent either. You have to consider priorities and run the numbers.
  • June 26 2014
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When I started in real estate, back in the day, nobody ever asked any questions about resale. In the late '90s, people started to ask if we thought that they'd be able to sell in "a few years" at a profit, during the boom it was "a couple of years," and now, I don't hear that often at all.

But, you know, home ownership is a compromise investment. You have read me here, advising people that if they want to buy a home that's a good investment, there are better investments than in their own home, and better homes to live in than their investments.

And, I have also posted that once you consider the future strength of the market, you are placing a bet. Whether you hold or move, that's your bet on the market.

Our OP, asking if this is Bubble 2.0, is now in the position of betting on the market. This makes them a speculator, and speculation is what it is.

  • June 26 2014
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Profile picture for Blue Nile
As I stated, I have no clue what the "goal" was... it has never been clear to me.  Perhaps the goal was only to "get rid of the cow"?  Perhaps the intent was to show that a spouse should always affirm the decisions of the spouse already made, rather than tearing the spouse down and destroying their self-worth?  Perhaps the goal was to show that the "rich-get rich and the poor get laid off, ain't we got fun"?

Regardless, the "goal" of most house buyers I know is to provide a stable living environment at a reasonable cost, which sometimes can be done better by renting, especially if one doesn't have the skills, energy, mobility or resources to do required upkeep and maintenance.  Having the equity in one's house disappear within 3 years to me doesn't provide "stability".  And if the goal is "at a reasonable cost", then certainly they are going to be competitive price shopping, and watching for "sales"... and anyone that "shops the sales" knows it is all about the timing.... there will always be parties liquidating for various reasons, and one doesn't get the most for their money by jumping at the first mark-down; but by knowing how much mark down there will be, the timing of the mark downs, and how fast it will clear from other buyers, based on "experience".  Inside knowledge of the selling party is also often helpful (such as knowing seasonal changes, and knowing required inventory clearance for inventory tax accounting, where they pay tax on any inventory on hand...

The money goes farther, and one is free to do more things with less stress if they don't spend too much on one portion of their budget.  And retirement years are a lot more comfortable too if a house is paid off, and there is extra cash-flow for other things.

NO, it is not about "flipping", never said it was, and never meant to imply it.  "Buy and hold" is a much more appealing strategy to me.

Marrying for money may work in some cases, but it could bankrupt one in other cases, or drive one crazy if choosing an incompatible spouse.

As "3-girls" used to post, who timed the market correctly, sold before the bubble correction, rented better at a fraction of the cost during the correction, and bought something different at the "bottom of the market"...  much better to not have to do the lawn and other tasks to have the weekends free to do what they want, while they watch their neighbors slave over mowing and weeding and painting, with payments so high that there is nothing left for going to a movie or out to dinner.
  • June 26 2014
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Profile picture for sunnyview
"The idea that homes are a short- or medium-term play is fairly recent."

True, but many people do not stay in their home more than 5-6 years. That length of time increased when people could not sell, but before the market shake up that selling before the 7 year mark was common. 

Buying a house takes money so you have to decide whether you are buying lifestyle, an investment or a mix of both. I think that homeownership has benefits that should bring stability not financial stress. 
  • June 26 2014
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OK, but in that case, the goal was to go to the market, sell the cow, come back with money.

With residential real estate, the goal is typically to own a place of one's own. The idea that homes are a short- or medium-term play is fairly recent.
  • June 26 2014
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Profile picture for Blue Nile
That LCR response (car shock absorber...) curve again, for various amounts of damping:


Note how without additional "step input" (or government intervention...[bump/dip in the road]), that the amount of time on each rise and fall is almost equal.

We are just about at the peak of the "first bounce" on an under-damped response.  Of course, there was those two "blips", where Congress artificially inflated housing prices by offering an income tax incentive to home buyers. 

So, measuring off of the chart, assuming no new government intervention (which of course the government will always step in just to mess with people...), it looks like about 2 years until the bottom after the first oscillation bounce.  Based on the Federal Reserve commitments, mortgage interest rates should be about 1% higher than present at that time.  And the Federal Reserve is still shooting for higher inflation, but it is not at all clear if they will meet their inflation targets.
  • June 26 2014
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Profile picture for Blue Nile
"But there's more to life than getting the "best deal."" -

Reminds me of that Fable we used to read when we were younger, about the Farmer that took a cow to market to sell it; and by the time he came home he came home with nothing.  He told his wife about all the great trades he had made, and ended up with a sandwich which he ate.  And the wife approved of every trade and agreed there were all great trades.

And I absolutely never understood the moral of the story, and I still can't figure out what the point was.  Perhaps "better to be a blessing to others, than to have resources for tomorrow"?

What-ever.  It is not what we were taught, and I can't see living that way.
Sure there will be "losses" along the way, but one doesn't need to choose loss from the outset, and certainly not every time.

Why even go to the market if one is going to come back with "nothing"?  Might as well keep the cow for the milk....
  • June 26 2014
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- if one had waited to buy until 2012,

Well, the thing is, Pasadenan, most of my first-time buyer clients buy for lifestyle reasons. Given the choice between paying $2500/mo for a rental with no assurance that their lease will be perpetually renewed, and buying a $450,000 house, they'd prefer to buy a house, so long as they are confident that prices won't be lower by the time they move in. That was the fear - a better house would come up that was cheaper six weeks from now.

The thing about lifestyle choices is that the people living those lifestyles get older. The balance sheet is just some electrons or some ink on a page, but the couple with the baby in 2006 is the couple with a six-year-old in 2012, and there's something that people really like about owning their own home.

And when I say, "nobody," well, there's always a contrarian. The conventional wisdom was that if the market stopped falling, it wasn't going to surge up anytime soon. Many of the "regulars" here either furthered or supported that opinion, and basically said that anyone who was bullish about the market was a shill whose opinion should not be trusted.

There were better buys in Seattle in 2012 than there were in 2008, for sure. But there's more to life than getting the "best deal."
  • June 26 2014
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Profile picture for Blue Nile
"start enjoying the benefits of home ownership" -

1) Maintenance responsibilities
2) Emergency repairs
3) required yard care
4) Periodic equipment replacement
5) Mandatory Property taxes
6) garbage collection service fees
7) security
8) Liability insurance
9) Noisy obnoxious neighbors that you can do nothing about
10) Neighborhood dogs barking and Rooster's crowing
11) City bills for sidewalk repairs
12) Yard watering expense
13) time to water the yard and prune
14) Code changes requiring "upgrades"
15) Continued mortgage payments of one gets laid off
16) Not enough space for growing family when having children, thus needed building additions as well as building permits
17) Code enforcement citations
18) Plumbing services such as roto-rooter
19) three trimming
20) repair of new cracks in driveway
21) killing and removal of weeds
22) pest removal, termite treatment, replace rotted wood, regularly clean off dirt from siding
23) window washing
24) roof repair after heavy winds
25) late night loud neighborhood parties
....
Yes, lots and lots of "benefits" I've enjoyed as an owner for many many years!
  • June 25 2014
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If you wait until 2015 I'm sure your landlord will be happy to give you receipts. If you wait 30 years more than that, they may even thank you. Would you rather have a home, or a pile of receipts? I am not going to say you should buy now, or wait one year then buy, without knowing you, your family needs, your financial situation and so forth, but it seems like the best time to buy is when you can afford it, if you are currently renting, doesn't it? You should at the least, be fully ready to execute a contract at any time. If some incredible home comes up for sale, and you are second in line, you won't get it, but if you are ready and have an excellent broker or agent working for you then you will likely be the one to move into that lovely property and start enjoying the benefits of home ownership!
  • June 25 2014
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Profile picture for Blue Nile
"Nobody saw this run-up coming" -

Professor Roberto Ribas saw it coming, and posted it multiple times in 2011 & 2012.

I posted at the end of 2012 that prices had bottomed out in most of the nation, and that interest rates bottomed out too, and that it was the right time, if people were looking for the bottom.

"Well, prices here in Seattle have, for the most part, come back or exceeded the previous highs" -

Yes, but inflation corrected, on still "lost money", and if one had waited to buy until 2012, they would have had substantially more gain on their investment, and wouldn't have had to refinance to get lower interest rates.

Though nobody times the market perfectly, only foolish people buy high and sell low.

And what about the people that bought in 2006 in California?  Not only did they lose most of the equity or down-payment, but they also got locked into higher property taxes due to Proposition 13.
  • June 25 2014
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Profile picture for Blue Nile
Here is the inflation corrected trend chart, scaled for  $ 600k in 2014 dollars in October 2000:



What one needs to decide is what happened between May 1999 and April 2001, and is this "reversible"?  Did California's bubble start earlier?  If so, why didn't the inflation corrected numbers come down to the steady state after the bubble correction?  Was there something else that increased housing demand in 1999, especially in the San Francisco area?
  • June 25 2014
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Profile picture for Blue Nile
Here is the trend charts for Fremont... from Zillow's Research/data page...

This is prior to correction for inflation, and prior to scaling for the desired price range.  But it at least will give a clue how the market is reacting:



Yes, the prices are above the anticipated inflation curve presently, and yes, they are starting to level off, and will drop a bit... but look where they are to the inflation curve and where the inflation curve will be when the prices start dropping again... trying to time the low may mean that inflation will work against you in this case.

The two reasons for the higher prices is subsidized interest rates (FED purchase of MBS) and tech jobs in the area hiring.  It is not anticipated that the tech industries will be doing any major layoffs in the the near future, and when the FED stops subsidizing the rates, it will only mean your payments will be higher for a new mortgage.
  • June 25 2014
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Nobody saw this run-up coming, so everybody who warned buyers away from the market a couple of years ago cost those people this market appreciation.

Now, nobody really can see whether prices will fall again or when, so basically it just becomes a bet on the future: do YOU think it will be worth waiting 'til later?

I thought it was a good time to buy in 2008, and everybody thought I was crazy. Well, prices here in Seattle have, for the most part, come back or exceeded the previous highs, and people are six years older and so are their kids, so was it better to buy high and enjoy homeownership or wait until you were "sure" that the market was going to stop falling?

All the best,
  • June 25 2014
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Profile picture for sunnyview
Where the market is headed is anyone's guess. It does feel bubble like in the Bay Area, but with interest rates remaining low and inventory remaining low it is uncertain if or when prices will stabilize anytime soon.

During the last bubble, prices stayed on the rise as long as money was easy to get. This time may be similar. If you can rent for less than you can own, I might consider renting and saving as much as possible for a down payment. That way if rates go up, you will be able to keep your payment reasonable even at a higher rate and still have some buying power left if prices do soften.

It is a hard market, but you have to run the numbers and then trust your gut. 
  • June 25 2014
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Profile picture for Blue Nile
No, it is not a "bubble", but it might be an under-damped response to the poor political decisions and NAR lobbying that lead to a bubble in the first place.

See the thread:
http://www.zillow.com/advice-thread/How-drastic-will-the-next-home-value-drop-be/545594/

Although the market bubble responded slightly different in Fremont the patterns are similar.

Remember, that the Federal Reserve and Congress are working as hard as they can to decrease the value of the dollar.

They also plan to allow mortgage interest rates to creep up, requiring higher payments for the same purchase at the same price.

Rush to buy?  Hardly.  But procrastination based on economic speculation?  Likely not a good idea either.  Why buyers did not want to buy in 2012 when the opportunity was "good", I have no clue.
  • June 25 2014
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