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Market Conditions in Los Altos Hills : Real Estate Advice

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Sun Feb 7, 2010
Optimizedprime answered:
Paul wrote:
> [...]
> Keep in mind that the best locations are never available for rent.
>

Typical Realtor myth: the only "rentals" to be found in the world are 1br apartments in skid row.

Maybe people believed this kind of stuff before they invented the Internet, but now it takes about 30 seconds on Craigslist to clear this up. Take a look at this crappy old place that the unfortunate renter would be forced to put up with since obviously only crappy places to live are for rent:

http://sfbay.craigslist.org/pen/apa/1581443267.html

Yes, you can rent the above-linked home which recently sold for $8m two years ago for $12.5k/month (note: the property tax alone on this place would be $6.6k). So yeah, what a rip-off: pay effectively $6k/month to make use of a $8m asset. Only an idiot would put that $8m in the bank and make about five times that rent in interest.

Impossible you say? It is. The real idiots here are the ones that paid $8m for that house. Based on price-to-rent ratio, the future value of that home will be more like $2.5m.

And to the other poster's point, prices here have fallen somewhat, but have they fallen enough?

Home values in many communities in US have fallen (corrected) to proper price-to-rent ratios. Los Altos has not. Not even close. Based on price-to-rent ratios that coincide with historical precedent as well as simple math, Los Altos home prices still tend to be anywhere from 20% to 50% too high.

The "rule of thumb" for price-to-rent ratio is: $5k/month per $1 million in purchase price. In other words, if you see a house for $1 million, can you rent it for $5k? No? Then don't buy. If the rent on the place is $3500, it's worth about $700k. If the purchase price is more than that, then don't buy.

Wait until the inevitable correction unless you want to be one of the millions of Americans whose life-savings down payment was flushed down the toilet and who are now in the process of mailing the keys to their house to the bank.

The fact that prices in Los Altos haven't corrected yet should scare the hell out of anyone thinking of buying here (unless the money means absolutely nothing to you and/or you can live with the fact that the same amount of money today will buy you 50% more house sometime in the future).



OP
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Sun Jul 12, 2009
Optimizedprime answered:
The housing crash is not going to bypass Los Altos Hills. The "high-end" areas are set to be the last to fall, but will fall the most for three reasons.

First, there are no more "upgrade buyers" as existing home equity is now almost non-existent--and it won't be back for a long, long time.

Second, non-conforming (i.e. non-government-sponsored) loans are almost impossible to come by and our banks here in the US are going into "Japan mode" where they quietly don't loan any money to anybody while they slowly recuperate.

Third, demographics are against you: Baby Boomers are moving from Big Houses next to work (viz. Los Altos, LAH, etc.) to small places in the middle of nowhere to retire without the kids. This bodes very badly for places like Los Altos Hills.

All this points to two things: 1) short term, expect 50% price drops from 2008 peak; 2) long term, expect that prices here will NOT keep up with inflation for a long, long time. Also, on an inflation-adjusted basis, prices will NEVER back back to peak in our lifetimes. This Bubble was funded by impossible financial structures which will be outlawed for a generation at least.

Check out: http://www.patrick.net/housing/crash.html

The analysis on there is very simple: a house's RENT is what determines it's "value" to people minus what you expect to make on appreciation. Nobody believes houses are going up in the next decade, so the rent-to-price ratio MUST therefore return to Earth. In Los Altos Hills today prices are at least DOUBLE the correct ratio and in many cased 3-4x the right ratio.
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