WHAT!? Oh, no! I had no idea! OMG. Well, I'm glad you had the fun experience of living in that neighborhood with all the restaurants and shops, and then got out alive!

I just googled and yes, I think it's Zocalo's. There's a restaurant called Cafe Paradis or something like that nearby, and it seems like a nice 'hood with interesting places to go.

You know, I initially thought a REO would be a terrible idea because they're usually in bad shape, but now that you explain that you can inspect the place, it sounds more interesting. Too bad you didn't get this one, but as you say, it can only get better, with more possibilities coming up. Would you fix the place up before moving in? Is that your plan?

Nah, you can go inside a REO--I did--you have to go through your buyer agent though since usually the listing agent for the bank won't lift a finger to sell the place (must be a sweet gig--all you do is list the property, fax offers to the bank, and collect your commission).

Unfortunately the bank rejected my offer today in favor of another offer. But I'm sure there will be more inventory to choose from all over Oakland and SL, and maybe even Alameda in the next few months.

Are you thinking of Zocalo's in SL?

I used to live up the street from that donut shop. Moved though after they found that body in the Rose Garden, and a guy got shot to death at the gas station.

I appreciate the explanations from you, David, as well as David Gordon and other posters! It's fascinating! Over and OVER I remember people saying, "...and it's just a little bungalow, nothing special - how can they ask $750,000?" Looks like people won't be making those comments much longer.

Funny you should mention Grand Lake. I was just there today - sweet! I went to a donut shop that makes its own donuts and uses no trans fats, Daily Delectables. So many cool restaurants and of course the Grand Lake Theater. There's a way cool cafe in San Leandro, though, very friendly, a whole community of people hang out there. It's in the downtown area where there's a pretty good number of shops and the like. Phooey, can't recall its name.

Keeping my fingers crossed for your bid on this cool-sounding REO! But David, I thought you can't even go inside a REO before you bid? Or did you see photos?

Exactly, Janis. When assets are overpriced, they're overpriced, and the only way to change that is to either cut the price or devalue the currency they are currently valued in (inflation).
That's the only fundamental, long-term "cure."

SL is a little 'burby for me, but in general it's safer than Oakland, but crime has ticked up recently, although, unlike Oakland, residents are really working to do something about it before it becomes a bigger problem. Can't comment too much on business-friendliness, it does seem that way, however, the retail scene isn't as happening as, say Grand Lake.

REOs, well, some are in better shape than others.
Putting in a bid today on one that seems in pretty good shape--needs new appliances and kitchen cabinets, and some cosmetic bathroom fixing. Otherwise though is pretty darn solid, with new windows, floors, and a low (less than $2500) termite report.

Well, I've decided you guyz are right. Perhaps I'm distorting the message here, but something that occurred to me: In 2001, the dotcom boom busted, and the feds cut interest rates and gave taxpayers a rebate to try to solve the problem, and it did no good at all. Wasn't it that 12-step guy John Bradshaw who said the definition of insanity is doing the same thing over and over and expecting different results?

David, you recommended San Leandro and I just wanted to say I think SL is a really cool city! Somehow I have this belief SL is safer than Oakland - I see it as a more business-friendly city. Maybe I'm just blowing smoke. Obviously, safety varies from 'hood to 'hood within Oakland, too.

Very interested in your comment, David, about REOs! I think of REOs as something to be avoided, worse-than-fixer-uppers, full of pitfalls? But perhaps not? Man, there are some simply shocking bargains out there when you look at the auctions, for example.

Try out San Leandro too. Lots of REOs out there, and convenient to the Peninsula and SF. I've seen places at pretty much 40% off 2005 prices.

Janis, in 1975, the unemployment rate was 8.3% and inflation was 9%, and it just got worse from there until about 1982 (when inflation started dropping) to 1984 (when unemployment started dropping). After all if inflation=jobs, we'd all be moving to Zimbabwe right now, that is if we hadn't already all moved to the paradise that was Weimar Germany.

Thank you, Janis.

Again, as David alluded to, a taxpayer bailout will likely just drag out the inevitable repricing/correction of housing prices. No puny $168B bailout can prevent it. And inflationary wage/income increases will have to be strong for awhile to catch up to the level where real-term price-to-income ratios need to get to.

The market needs to be taught a lesson and let natural forces play out, and they will, eventually.

As far as timing the market on the buy side in the near- to mid-term, that depends on where one is looking purchase. I am strongly considering a beaten down (in price, that is) house in Oakland somewhere in the next 6-24 months. Probably not until at least the end of this year, and likely 09 or even 10. After all, this is a moving target and we are in uncharted waters as far as a historical home price correction goes. But Oakland may be one of the first to reach bottom as far as the "inner-bay" areas (i.e. not counting solano, sac, modesto, etc.) and some homes are already priced at 30-40% off from peak. There is a house currently listed at 410k under its Jan 07 sales price in a good neighborhood. And maybe it will go even lower to a full 50% off. That is pretty amazing.

I live in SF currently and enjoy it here, but the pricing is not coming down yet (in desirable areas anyway). I feel the condo glut will be feeling the affect this year at some point, but that may be minimized due to foreign buyers with their stronger currencies buying them up. I am not sure.

But it sure is fun to watch! And who doesn't love a sale?

Oh eek! I had no idea! I thought inflation = jobs. Looks like it's time for some basic research. Thanks!

Unemployment rates in the '70's were higher.

The '70s, to me that's those frightening cartoonish hairstyles, clothing and music. So there was a whole lotta inflation in the 1970s? Why is inflation so bad, if people have jobs?

Oh. I forgot another alternative, which seems to be the way we're going initially--a wage/price inflationary spiral to get wages and other prices to the point where current home prices make sense, i.e. the situation where home prices are flat in nominal dollars and are repriced lower through inflation-adjusted dollars.

No one (except maybe those heavily invested in gold) wants a wage/price inflationary spiral. It will be the '70's all over again, and in a sense the past few years have been reminiscent of that lost decade.

Janis,

The fundamental problem with taxpayer bailouts is that they use income (taxes) to support asset prices at levels that are unsupportable.

The fundamental problem with private bailouts is that by essentially easing credit to people who have already proved uncreditworthy, they restrict available capital to more creditworthy borrowers. Bank capital is not a limitless resource, and by restricting supply to other borrowers, that will raise the price (interest rates) even to people with good credit ratings, in order to prop up less reliable borrowers. Hence the lukewarm support to private work-outs. Because even if homeowners like their asset prices, it doesn't help them that much if they can't tap that equity.

The basic issue here is that we have an asset class that needs to be repriced to a lower level. That is not painless and no bailout will make it so. It's impossible.

Thanks for the good words, Mr. Gordon! And congratulations on timing the market - that totally ROCKS. I have a question for you, and one for readers in general: since you have succeeded in timing the market as far as when NOT to buy, when do you plan to strike (as it were)? You gave a range of six to 18 months.

My other question for readers in general. So far, no one has spoken in favor of bailouts, indeed many are vigorously opposed, and there seems to be lukewarm support at best for plans like the one developed by Countrywide and ACORN. Is this just because the "anti" faction is more vocal, or is everyone's point of view being represented?

I started out pro-bailout but now that so many smart people have pleaded their case, I'm beginning to waver myself!

As usual I seem to agree with David here. I do not like the idea of homeowners being bailed out for a bad decision or bad timing. I personally have timed the market correctly (yes, some luck involved, but mostly the result of serious research in recent years) and should myself and others in my position not be "rewarded" for our diligence and sense of timing?

Most buyers in recent years bought more than they could afford because they were convinced it was a good investment that would continue to appreciate at a 20+% clip, not because they were buying what was right for them and their family and the value would appreciate over time (you know, that crazy old-school buy and hold approach?).

Like David said, many of these workouts are basically bailing out people who made poor decisions.

And prudent buyers/sellers/investors may get the short end of the stick by not getting as good of a deal as they would have. I also have many friends who will be buying in the next 6,12,18 months in the bay area and I want us all to get the best deal possible as those who choose not to buy at the top of a frenzy should be duly rewarded IMO.

Good post, Janis.

David, as always you make good points - 0ne of them is the comment about how a lot of people can't afford their payments at any positive interest rate. Along those lines, this quote from the MarketWatch article I linked to in the original post:

"The Mortgage Bankers Association reported last month that subprime ARM borrowers who already had a repayment plan or loan modification in place but were unable to avoid default anyway accounted for 40% of the subprime ARM foreclosures."

If two sides on a contract want to rewrite, that's fine with me.

It's not the best outcome for people looking to buy, as it removes a subset of desperate sellers, nor is it really the best outcome from a "moral hazard" point of view, as the owners still got the tax benefits, etc of owning, get lower rates.

The real issue here is that a lot of people can't afford their payments at ANY positive interest rate.

What I foresee happening is essentially a "short sale" to the current owner, reducing the principal amount owed, which will also reward irresponsible behavior. However, I can't complain too bitterly if it is a private work-out between two parties to a contract.