patrick.net

DS,

There's a certain irony in zidane2 fulminating about 3rd world immigrants, given that zidane1's Algerian parents emigrated to France. IIRC from the World Cup bio's, Zinedine Zidane grew up in a VERY poor and tough neighbourhood.

People keep saying that Cupertino has good schools.

I think they mean, high scores on standardized tests.

Unless you're genetically wired to think that high marks on standardized tests means the same thing as "good education" (perhaps from centuries long tradition of civil service exams), well, most people with common sense know that there's more to good schools and good education than high scores on standardized tests.

I forgot the rule "Google first, ask later" and wrote :
Is property tax deductible under AMT ?

The answer is obvious no. That's a big OUCH !

So let's take these oft-quoted 2 income tech couples. In CA 200K of income virtually guarantees AMT due to high state taxes. (That's an irony in itself, but let's tackle it some other time.) I hope people realize this before buying.

So if they buy a house for 1M, the approx 12K of property tax WILL NOT be deductible as they will be hit by AMT. I will pay 22K on rent this year. Even if I win the lotto and get 1M, by buying the house, I will only "save" 10K per year on housing costs, assuming NO costs like HOA and insurance. And not get 30K of SAFE interest after tax.

Buying a house at this time at these prices never made any sense. But AMT makes it even worse.

Anyway. Looking forward to the game tomorrow. I am rooting for Colts. I have heard enough of this Peyton Manning cannot win big game BS.

Imagine if AMT eliminated the mortgage deduction??

hold on, much of the bubble growth has been in low-lying seafront property...

Spike66,

Nice cameo. 'My' NY is about half way between yours and the Algonquin roundtable. But the tone is NYC alright.

Sid Finster,

Yeah, I have a buddy that lived in the Temecula, Perris, Moreno Valley area for years and oft boasted that while they do not have a "wine country" the DO have "pit bull farms" and the "meth country"?

(He'll be hammered before half-time I'm sure)

GO BEARS!

CB,

Sorry to hear of your "entrapment". FWIW I've been railing about this for years (obviously to no avail). As always, anyone that's sec. licensed has to be extra careful about giving out tax advice but any time I have clients that are heading down this path it's time to take drastic measures!

Once you fall into the AMT trap it's difficult if not impossible to get out of it. Are you a W-2 or a 1099 guy?

wtf,

You've always had great posts in the past so I hope your dismissive attitude regarding the SINGLE MOST IMPACTFUL EVENT OF OUR TIME is just a joke, right?

AMT is serious sh@t! If you happen to be no where near it, count yourself lucky! As more and more "rank and file" Americans find themselves in tax hell the guilty pleasure will wear off. Believe me.

Google it for articles....... and weep.

Malcolm,

Ahhh, the CPA's best friend! I swear, these twisted f@cks LOVE IT! (More bill-able hours!)

I had a struggling practice, that is until more and more of my clients fell crank first into the AMT! Now I'm thinking about getting a 30 footer!

I was at a party last night. The Chinese couple who sat next to me own a house in Cupertino. The husband was talking to a lady who is a recent immigrant from Russia. He told her she needs to buy a house right away because prices are still going up, and that it is best to buy in Cupertino because of the schools.

The best couple of the evening had to be the 19 and 20 year old engaged couple (she's also pregnant). They somehow managed to buy a house in San Jose a year or so ago. Neither one of them come from money and I imagine their combined income is probably around $60k.

I still haven't made it through an entire party in the Bay Area without someone bringing up real estate. It's bizarre.

Does anyone have good graphs of housing prices in the Bay Area from say, 1981 or earlier to today? I know they have increased out of trend if you measure from the end of the bust (1997) but that was after 7 years of stagnation and decline in some places (LA).

The long term trend for CA real estate is 6% appreciation/yr. This is since WWII. How far off that trend are we really?

Please no trough to peak measurements, that really distorts the numbers.

I sympathize with your plight, CB, especially since we will be in the same one ourselves this year.

The Republicans don't care about us since we are primarily concentrated in "Blue" states and the Democrats don't care because we are "rich." The WSJ complains about how upper-middle class homeowners are increasingly snared by the AMT, but I don't think anything is going to be done about.

The one small solace is that we are racking up AMT credits that we will eventually be able to use to lower our tax burden, if we ever fall back under AMT (probably upon retirement).

Okay I found this:

http://www.realestateabc.com/graphs/calmedian.htm

Which comes out to about 8%/yr overall apreciation since 1968. There was a bigger "bubble" in the mid-late 70's, after which real esate under performed for about 17 years. The increase from 1981 to 1997 averaged 3% a year.

Notice there were no big drops, as so many on this blog have predicted, though there was one eight year (!) span over which prices dropped.

These must be nominal prices, too, so the inflation adjusted numbers would look worse.

Perhaps that is how the "bubble" will play out: 20 years of no real growth in real esate prices. I think that is much more likely that than the Big Bust everyone is hoping for.

If the Bay Area has 10-20 years of no real estate price increases, then buying a house was a terrible investment for any normal person. You have a huge negative return from inflation, taxes and maintenance. Renting was by far the better alternative.

I believe that prices will come down, because that is the inevitable outcome of a bubble. Things generally cannot plateau at an astronomical price. Perhaps Randy or others can cite instances where this has happened. Buying a Bay Area house doesn't make financial sense unless you can assume ongoing appreciation. I don't believe there are enough people for whom the emotional premium of owning is denominated in $100,000 increments.

When HP, Dell, and other major tech firms were overvalued during the bubble, their stock prices didn't stagnate at the high levels. They eventually came down. Housing as a market may be highly inefficient, but it is not immune to the laws of economics. ANY time people start touting that a particular sector, commodity or ANYTHING else is immune to the laws of economics, or that the laws are "different", THAT is the sound of a canary dying in a coal mine.

Jimbo Posted a link to a great graph and said:

> 8%/yr overall apreciation since 1968.

Around 1900 the median home price was just over $1K in 2001 after 100 (One Hundred) years of massive job growth and quite a bit of inflation in California the median price went up just $250K, then in the next 4 (Four) years in a period with many high paying jobs leaving the state and very little inflation the median price went up by over $250K to $524K (looks like a bubble to me)...

By "real" growth, I mean inflation adjusted growth. But yes, renting would be better, assuming rents stay stagnant, too, but that is a big assumption.

Rents will probably go up about as fast as incomes, which should be a percent or three faster than inflation.

I agree that this is a bad time to buy, if you are primarily interested in real estate as an investment.

Whether it is better to buy or rent depends on how long you intend to stay, what you think t he inflation rate is going to be and how fast both rents and home prices are going to appreciate.

I did this math about two years ago and came up with home buying making sense if you intend to hold for 10+ years.

Of course it would make no sense at all to buy a declining asset.

FAB, you and I have very different definitions of what a "bubble" is. Just the normal boom bust cycle of California Real Estate is not a bubble to me. You can see from that graph I posted that home prices actually increased at a faster rate for longer in the mid to late 70's than they did recently.

A "bubble" is when prices increase at an increasing rate, to the point where they are disconnected from all financial fundamentals. Usually prices are 10X or even 100X what they should be worth based on a rational valuation.

Good examples of bubbles include Dot Com stocks in the late 90's, the South Sea bubble, the Mississippi Finance bubble in France. Other examples are the "Nifty Fifty" stocks in the 70's and the Japan land market bubble in the 80's.

In all cases, prices dropped 75-99% after the bubble popped and always quite rapidly.

I don't think that describes California Real Estate today, but I know that puts me in the minority here.

Brand Says:

> I believe that prices will come down, because
> that is the inevitable outcome of a bubble. Things
> generally cannot plateau at an astronomical price.
> Perhaps Randy or others can cite instances where
> this has happened.

I have never heard of any “bubble” hitting a “plateau” without a solid reason (say the average wage in a remote area going up after a large company moves there).

Looking at the link Jimbo posted with median home priced reminded me that high end homes in La Jolla, Hillsborough and Ross were selling for ~$1mm in 1989 (~5x the median) and dropped a lot more than average/median homes by 1994. In the current bubble cycle I’ve noticed that high end homes in La Jolla, Hillsborough and Ross are pushing $5mm (almost 10x the median). I’m wondering if these homes will drop as much this time and if watching the price of homes nearby drop by $500K a year will make more people run for the doors (and sell making things drop even faster) than the drop of “only $100K a year” back in the early 90’s…

FAB, you really can't compare gold standard prices to "currency" economy prices. The gold standard stabilized the prices on durable goods for a dozen decades.

btw, someone at work said that FDR actually took us off the gold standard? I thought that this move is oft attributed to Nixon? But gold was siezed by the government in the 1930's, IIRC. Perhaps one of our resident goldbugs can clear up the history at work?

FAB, yeah I thought it would work itself out that way, too, that is why I bought TOL puts.

I did okay, but I would have done better buying KBH puts.

I guess the global redistribution of wealth upwards has helped maintain the price of high end homes. Let's see if that continues.

My dream house is "only" $2M anyway, so I don't think I am going to be helped much either way...

Jimbo: One thing I have often wondered is how many super-expensive homes get resold? They are often uber-customized for the original owner. It seems just as likely that someone who wants to build a $4M home would acquire the appropriate land and then build their own "perfect" home.

Of course, if you're going to buy or build a $4M home, then money probably isn't a concern anyway...