patrick.net

Here is a nice piece buy Sherry Jackson

erm, allah, that piece doesn't make much sense, and she shows herself to not be in the loop on thinking about the funding of public goods. the arguments she makes are a bit like the ones MLMers make to justify why MLM works so well -- when you analyse the claims and look at the big picture, it breaks down. however, she may have a point about the zealousness of the IRS in the US in chasing amounts owed, yes.

Irwin Shiff used the legal defence that he was insane and delusional by the way, and it seems he has a had a number of ‘fair trials’.

Don't believe everything you read, there are two sides to every story, take a look at this

Wages always lag inflation and if inflation takes off uncontrollably, we will most certainly have stagflation.

Wages also cause inflation. Their relationship is quite interesting.

I also do not buy the argument of house prices adjusting via inflation.

Let's get real. Our wages will not keep up with inflation. Outsourcing is not a temporary fad. Now that outsourcing leveles have stabilized, salaries in BA have started adjusting after remaining stagnant for ~5 years. This does not mean that salaries from now on will start adjusting with inflation.

Wages also cause inflation. Their relationship is quite interesting.

Let’s get real. Our wages will not keep up with inflation. Outsourcing is not a temporary fad. Now that outsourcing leveles have stabilized, salaries in BA have started adjusting after remaining stagnant for ~5 years. This does not mean that salaries from now on will start adjusting with inflation.

I agree.

Who worries about taxes and money and such things? I did until I discovered I am the true biological father of Anna Nicole's baby. Anna and I had an exlusive secret relationship "at the right time". Even my wife is happy with the news. To celebrate, and I've shared this with Patrick, I'm buying all the regulars here a house.

I can also reveal that J. Howard Marshall adopted me....I loved Dad very much.

It's MINE....all MINE!

Taxes in one form or another have been around for centuries, and the penalties for not paying them are usually quite severe.

The discussion was only about income taxes which were only around since 1913.

True. Unfortunately when peak oil arrives, growing and transporting any veggies will be something of an issue

Not if you grow them in your backyard.

alien,

Yes, even basic agriculture consumes a lot of energy. But California is at a relative advantage to much of the world. Its soil is relatively rich and it's pests relatively easy to control (anyone who grown roses on both coasts will attest to this). Much of its water comes from the Rockies or the Sierras and not via aquafer pumping. And while trucking it in still takes energy, it's a lot less energy than flying it in from another country.

The good news is that we don't have to be zero energy consuming or even low energy consuming, we just need to consume less than we do now.

I suppose if it gets really bad, I'll be migrating to Iceland...they grow vegetables under glass there, using geothermal energy.

FAB,

I agree with your comment about people's opinions regarding middle/upper middle class, but disagree with one of your examples.

Law firm partners making "1.5-2.5mm" are NOT making "a little more" than $275K, and neither are they upper middle class. They are elite, and with even average savings/investment habits can join the true upper class when they retire.

I didn't check the bubblizer, but here is a rough calculation.

1M house with 20% down payment. (Yes, just for the sake of argument, don't complain about down payment.)

At current rates 5% ARM PI = 51K per year, and 6% fixed = 58K per year.

Let's say CPI goes to 7%. With the same spread as today, the 1M house with 20% down will cost

For a 10% ARM = 105K pr year and 11% fixed = 115K.

So at least 100K+ per year will have to be spent on P and I for the same house. Considering CPI is high, everything will be more expensive. So saying that a 300K annual income is needed won't be wrong. Even a dual income techie family needs 50% raise for that to happen.

Not impossible. Might happen. But then this means serious drop in real terms for that 1M house. I don't mind this scenario, but seems a tad unlikely.

astrid/alien,

In theory, it should be possible using enclosed agriculture to use much less water than in the open air.

In fact, my WAG for CO2 remediation in the long term (if it becomes necessary on a genuinely industrial scale) is humungous plastic bags filled with algae and water, where the CO2 is pumped in as required.

These could quite possibly be in desert or semi-desert areas, because while the initial water requirement might be high the ongoing requirement would be tiny.

Luckily, my wages *will* go up with inflation and CPI -- I get an annual CPI raise as a minimum. If rents go up 20%, it will feed into the CPI calculation (unlike mortgage payments), and then into people's pay packets. Presto! The housing boom and individual greed has just succeeded in devaluing the entire currency 10%. Ain't it wonderful?

I watched Sam Zell being interviewed on Bloomberg to day, and one of his comments was that he considered the current rental market to be extremely strong, and was expecting high-single or low-duble digit rent increases.

I don't know whereabouts he's referring to, but surely rent rises like that would have a big impact on inflation measures.

allah Says:
Taxes in one form or another have been around for centuries, and the penalties for not paying them are usually quite severe.
The discussion was only about income taxes which were only around since 1913.

Not really relevant, since taxes have always been there to fund the machinery of govt, in whatever form. Since 1913, (progressive) income taxes have been levied to pay for the welfare state and modern public goods -- unemployment benefits (a la the Great Depression), old age pensions, family benefits, roads, street lights, police, schools, medical care and scripts (in some countries), and so on. You are talking about winding all that back, I presume, and letting the elderly forage for garbage when they retire, including your own parents.

So, most definitely, the need for taxes has increased and been stabilised and institutionalised in the form of income taxes, GSTs, VATs, duties, levies, and so on. It's called plucking the goose to get the most feathers with the least squawking.

A few hundred years ago, taxes were levied largely to raise armies. In the case of 18th c. France, they were spent on building bigger and bigger palaces. Nowadays, they go into pensions and benefits, roads, schools, etc.

alien,

No, I hadn't. That does look interesting. I can think of many areas along the Australian coast where that would be a very nice option for growing your own veggies if you lived there. I don't know about the economics on an industrial scale (or the problem at that level of dealing with byproduct brine, which of course applies to ANY seawater desalination technique).

In my previous post I was actually thinking of this mob.
www.greenfuelonline.com

A VERY savvy family organisation (the Smorgons) have quite recently become the Australian agents.

In the case of 18th c. France, they were spent on building bigger and bigger palaces.

... so the people could eat cakes.

Peter P,

I recently read that the quote attributed to Marie Antoniette actually said "let them eat brioche." That's really worse than saying "let them eat cake since her version of brioche calls for 50% or more fat by weight to flour and lots of eggs.

I made a lard 100% of flour by weight version recently (my mom doesn't like butter pastry and I'll be darned if I have to eat it all) and was less than impressed. Waaay too much fat, it loses its breadiness. (the brioche itself rose and baked well -- it was just too much).

Next time, I'm going to try a 50% recipe and up the sugar.

ajh Says:

> I watched Sam Zell being interviewed on Bloomberg
> today, and one of his comments was that he considered
> the current rental market to be extremely strong, and
> was expecting high-single or low-duble digit rent increases.

Sam Zell recently sold ALL the office real estate that he controls in the US (Google Zell Blackstone Equity Office and you will get plenty of hits since it was such a big deal).

Warren Buffett the second richest guy in the US sold the two pieces of California Real Estate he owned last year and now Sam Zell has unloaded so much California Real Estate as such a high price that he will probably move from about the 50th richest guy in the US in to the top 30.

I don’t think that Sam really thinks that we will see big rent increases in the next year and was probably just saying that to make the people that just made tons in fees spending pension money on his property happy.

SP,

I HAVE convinced her that it's cheaper to rent than to own right now. The hard part will be convincing her to sit on the bubble for very long. When I said she'd rather overpay than rent, I meant that she would rather buy a house realizing that it's cheaper to rent than to buy knowing that eventually it'd break even (30 years down the line) than wait. She's worried that my "We gotta wait for prices to fall" means "We're never getting a house."

She's willing to wait for awhile so long as I am willing to agree to a timeline that involves us getting a house not much later than 2 years from now.

So I'm torn between hoping for a meltdown in prices which will be good for me and horrible for a lot of people and a gradual deflation, which I will be stuck buying into before it hits bottom but will be less traumatic to americans as a whole.

Next time, I’m going to try a 50% recipe and up the sugar.

Let's put that on greencrabs. :)

I like both butter and lard. Actually, also olive oil. I do not like peanut oil.

Nigel,

If it's never a better investment to buy than rent, then you should never buy.

But the odds of that are pretty slim.

SFBubbleBuyer Says:

> Nigel, If it’s never a better investment to buy
> than rent, then you should never buy.

It is interesting to comparing buying a car to buying a home.

If you had $1 Million in cash you could either leave it in a Money Market or CD making just over $4K a month, pay cash for a home or condo (and pay about $1.3K in insurance and property taxes) or rent a $1mm home or condo for about $2K a month.

If you had $35K in cash you could either leave it in a Money Market or CD making just over $145 a month, pay cash for a new 2007 (and pay about $150 a month for insurance and taxes to the DMV). Unfortunately you can’t “rent” a new BMW for $73 a month, half as much as the risk free return on the money and have someone else pay the taxes and insurance like you can with a home.

Only an idiot would “buy” a new car when they could “rent” a new car for less than half the cost of the risk free return on their money, but Realtors are able to convince people that this is a good idea with homes every day (for some condos in San Francisco the taxes, insurance and HOA fees are more than rent in the same building)…

the otherside says: Would you call a multi-millionaire an idiot because he spends 10x-20x more on “same quality” food than a upper-middle class guy….?

Yes. Unequivocally and absolutely.

Conclusion:
Some people get high by seeing their bank statement showing $$$, other get high when they spend their $$$ lavishly

Conclusion: Some people are fools. Does that mean we should applaud foolish behavior? I think not.

The remainder of your argument was sensible. Some people do derive great utility and pleasure from owning a house vs. renting the same house. But I would put forth that the Bay Area premium is too far out of balance for most people's tastes... that is, if they had the common sense to consider it rationally. I bet a lot of people moving to the Bay Area purchase homes without ever really considering what rent would be on an equivalent dwelling.

Renting a house is NOT EQUIVALENT to owning the same house,

Becoming a homedebtor is NOT EQUIVALENT to owning a house.

especially if you have kids (school, friends, after school activities) or you hate moving every couple years or you really really like your neighborhood or you hate having a nosy landlord or it does not fit the preferences of your spouse

You can rent and have all this too. Some Landlords don't even live in the state...and how do you know when that great neighbor will leave and some degenerate takes his place? The renter can easily leave.

Conclusion:
Some people get high by seeing their bank statement showing $$$, other get high when they spend their $$$ lavishly

Homedebtors get high when they see their house appreciate in the double digits; they get even higher when they spend their "equity" on their toys, then thay feel pain when their taxes go up and then they feel trauma and panic when the value comes back down to earth. Renters don't experience this. I call this AEDS "Acquired Equity Deficiency Syndrome".

A better way of saying it is:

"Renting is NOT EQUIVALENT to debtorship."

if inflation is higher, rents will surely go higher to compensate for the cost of servicing the loans …

Not always the case, it also has to do with supply and demand.

if you don’t see why, ask yourself what forces will push the price of tomatoes up if inflation is higher but wages fail to catch up….and why are tomatoes different from rents….

If everyone decided not to buy tomatoes because they felt they were too expensive, they would all dry up and be worthless; the owner of them would lose everything.

Rents stabilize very easily when there are more rentals than there are renters. Also, if the rents get too high because of lack of rentals, they could relocate to other areas further away. If the owner can't get enough income to support his loans, he could lose everything!

You're right, tomatoes and rents share similarities.

Nigel Swaby Says:
Wouldn’t you consider the mortgage tax deduction to be some sort of dividend regardless of the appreciation factor?

Yes, sort of, but you're spending a fortune and over-reaching to get a tiny dividend, and one that is not guaranteed not to be removed at some later time by govt. Govts put on and take off these sorts of things regularly, and they are different country by country also. Shareholders in a particular dept store chain here get a 5% discount on their purchases with a shareholders card, but even with the discount, the performance of the shares is so lousy that you would be better off overall just seeking an alternative investment or stock altogether to make more money.

Over the past 35 years, the median price for houses has always gone up in America. That’s not to say it can’t go down, or hasn’t gone down in specific markets. Housing is not on the same level as the lottery, not even close.

It has not 'always gone up' (I assume you mean by greater than CPI?) -- it has boomed and busted at least 4 times. However, the demographics driving housing inflation over the last 35 years include -- much smaller families on average; general inflation and dollar devaluation averaging 3-4% pa; more than one breadwinner per family; various tax breaks; lower cost of other consumer goods, e.g. by imports from China bringing down prices. All those things have now become static -- families can't get much smaller than they are, you can't get any more breadwinners into the family structure short of putting the kids into coalmines, imports from China can't get any cheaper, etc. Further, 'investors' are retreating big-time from property right now due to the incredibly low and pointless ROI. Once the investors go, that's it. It's very much like the lottery now in that over time you will get about 75% of your money back by gambling based on the house odds, which is what will probably happen now if you buy on a sizable mortgage at the top of the current boom which has all the hallmarks of the tech wreck. If you check Patrick's media reports, you will see the trend towards increased foreclosures and a downward spiral of prices worldwide, especially in bubble affected areas.

FormerAptBroker Says:

I don’t think that Sam really thinks that we will see big rent increases in the next year and was probably just saying that to make the people that just made tons in fees spending pension money on his property happy.

Agreed. The planets finally came into alignment...

If rents *do* go up the way some pundits are suggesting, there will be huge flow-on effects into the economy -- reduced 'consumer confidence' (i.e. crap sales figures and retailers going bust), upwards demands on wages, massive inflation as a result, and so on. All these microeconomic promises to landlords about their forthcoming riches translate into macroeconomic chaos. My own employment agreement has CPI built into wage increases, which in turn has rental amounts built into it. Multiply this thousands of times and Presto! -- you have instant currency devaluation lead by housing inflation.

theotherside Says:

and I can assure you that the owners will pass on the increase cost of carry/financing to the renters faster that you can say “Inflation’s up, I am a winner”

*new* landlords might try this, because they will be the ones who are hurting -- someone who bought their rental 30 years ago won't (shouldn't) be in trouble.

further, the ability of landlords to put up prices depends somewhat on supply/demand -- if demand goes down due to a good supply of cheaper, older apartments, or simply inability to pay, they have to suck it up and wear the hurt themselves... You don't see immediate reflexive passing on of new costs to tenants, there is a lag period depending on lease periods, "unreasonable adjustments" g.t. 10% and so on...

theotherside Says:

> Would you call a multi-millionaire an idiot because he
> spends 10x-20x more on “same quality” food than a
> upper-middle class guy….?

Yes, but I have never heard of this happening. Can you tell me where an apple or a steak costs 10 to 20 times more than it costs at a middle class grocery store? (When people eat out they are not just paying for “quality food” they are paying for many other things for example watching the wait staff interact with patrons at a certain restaurant in Yontville is like watching a ballet).

> With your logic, you will recommend to choose a
> husband/wife based on a spreadsheet…

Money will always factor in to a decision and I’m betting that most people will think twice about getting married to someone that had $1 million in credit card debt…

> Your argument is INCORRECT…what’s the point of having
> money after all…have you ever heard of the concept of a
> UTILITY FUNCTION… Renting a house is NOT EQUIVALENT
> to owning the same house,

I would not get any more utility if I owned my place and the people that rent homes from my parents would not be able to much different if they owned and my tenants in the apartment actually have more utility since If I did a condo conversion they would have the nightmare of CC&Rs and a PITA Homeowners Association.

> especially if you have kids (school, friends, after school
> activities) or you hate moving every couple years or you
> really really like your neighborhood or you hate having a
> nosy landlord or it does not fit the preferences of your spouse

Since I grew up in a family that rents homes I’ve been active in real estate and landlord groups my entire life. Very few landlords sell rental homes with good tenants and if you hand carry the rent on the first of the month most have better things to do than “be nosy”. If your landlord…

> Conclusion: Some people get high by seeing their bank
> statement showing $$$, other get high when they spend
> their $$$ lavishly

Since it would cost about $5K a MONTH after taxes MORE than I pay in rent to buy a condo on the block with the exact same UTILITY FUNCTION I have a lot more money to “spend lavishly” and do things like spending $500 on dinner while many of my homedebtor friends are eating frozen food that they buy at club card savings…

theotherside Then says Says:

> your rent COVERS most of the mortgage costs of your
> landlord (which is the case for the majority of renters
> not about to end up on the streets), ie. It may be may be
> INDIRECT but in most cases renting is equivalent to debtorship…

Most landlords have a very small mortgage (or in the case of my parents and many landlords like them no mortgage). You can actually call any title company and find out how much debt a landlord has recorded on the title before you decide to rent.

> Conclusion: Buying a house with a mortgage is really like buying
> a CALL option…downside limited to downpayment (103%
> mortgage anyone )

Buying a home is NOTHING like buying a call option. A 103% loan on a condo in my area would cost at least $75K a year more than my rent…

> In the event that you are foreclosed, if you have a decent lawyer,
> you can still show the middle finger to the IRS even with HELOC/refi … )

If you are a typical moron FB with a negative net worth you can walk away, but if you have worked hard and have a substantial NW there is no way 1. You can get a non recourse 103% loan and 2. That you can just walk away from a 103% loan…

OpinionPlease,

Where did FAB throw out either number?

Monthly PITI for a $1M condo w/ 20% down and 30 yr fixed would be $6-7,000. Even $3,000/month net is a lot of money that could be spent pursuing utility elsewhere.

OpinionsPlease Says:

> FAB, one thing.. $1million condos are renting for
> around $3,500 in the city and not $2,000.

I’m sure you can name a $1mm condo that is renting for $3.5K a month (I bet it is a 2 bedroom).

I have a friend paying just over $2K a month for a 1 BR in a Pacific Heights condo building that recently had a 1BR sell for $1.2mm. I have another friend renting a 1 BR (with parking) on Scott in the Marina for $2,100 across the street from a 1 BR that sold last year for just under $1mm. The 1 BR Condos in the Lake Street area that have been selling for close to $1mm will be lucky to get even $2K rent…

TOS :

I was just trying to calculate income required under the inflation scenario. Not providing complete analysis.

As others have pointed out rents are far more dependent on supply demand and the owner's needs have insignificant impact. It has also been pointed out that there are no creative financing schemes available for renting. During the dot com boom rents here far outpaced inflation. And after the bust they went down and stayed down.

And if you really want to know who will very quickly pass on the cost, then the mortgage banks will do that faster than the landlords. Think about the ARMs. Think what it would theirs resets do that to the housing prices when CPI is 7. So for once and all, let's say good-bye to the scare tactic of rents going up with inflation.

Remember rents are a factor of CPI, not the other way round.

FAB,

excellent rebuttal to thotherside.

StuckinBA,

I actually think the interest rate is about to go down when things really start to blow up.

But that will be too late to save the FBs. However it would be a good time to refinance when we go into Japanese fashion of 1.0% interest rate, haha.

Joe_renter,

I think I will buy a $2M house now if I won a $5M lotto, because real estate is just a part of the portfolio, and since I got the entire amount free (gift from god), I would rather buy a piece of land to stake my value, even if the price is inflated. In fact I did see a friend who cashed out a big option to buy a home all-cash, because he knew the stock was in a bubble, and swapping a stock bubble for a house bubble is not that bad of a deal, at least he gets to enjoy the house.

But I won't take out a loan on top the lotto winning. That's like putting in my own hard-earned money for the house, nah, I will pass.

OO :

The CPI is not offering any excuse to the Fed to reduce rates. I was surprised to see CPI being higher than expected because every Fed governor is talking about inflation ebbing.

Nevertheless, I think Fed will try to reduce rates. No disagreement there. BUT I do not think mortgage rate will follow suite. It's possible that MBS buyers continue to remain complete nut cases as they have been till yesterday. I just don't think it's likely. We will see widening of risk premiums.

OMG... I'd like to club anyone in the head who says it's fine to run up a 1.2 million dollar debt and walk away from it. The only way you can walk away from that is if you have nothing worth the legal hassle of taking, and you don't mind being a financial pariah for the next 7 years. If you have nothing to lose, you have nothing to lose. And it used to be nobody would loan 1.2 million to people like that. The house price run was the only reason why it would make any sense to load a boatload of cash to somebody who was going to default. You take the 6% commission hit on a 15% appreciation and you still make money.

Anybody who thinks borrowing money they can't have a reasonable expectation of affording to repay has no consequences is delusional.

The Reserve Bank in Oz is talking about another interest rate increase sometime this year, rather than a cut. It is also a major Federal election year. While the new Guv'nor of the RBA has bravely and matter of factly indicated at the same time he is independent of the political process and will change interest rates without fear or favour as needed, there will arguably be a local economic feedback circuit of: higher interest -> FBs are even more F'ed; recent investors with big mortgages are also F'ed -> chance of higher rents due to F'ed landlords -> higher CPI -> upwards wage pressure = inflation! the very thing the interest rate rise was meant to head off. However, you keep interest rates low instead = inflation!

It's like you turn the spigot on, and water comes out. You then turn it off, and water continues to come out.

Once you have had long periods of low interest and a speculative RE market, it seems to pathologise the whole economy, something like taking antibiotics for too long which kills favourable microorganisms as well and leaves you with a pathological physiology...