patrick.net

The "government" thinks in terms of the next election cycle, just like many CEOs think in terms of the next annual report. It's not about what's economically rational but what's going to keep them in their jobs in 2, 4, or 6 years' time. Problems 5 years down the line are just vague abstractions and...they might be caught molesting a page or soliciting for public restroom sex by then.

To the extent that this is influenced by longer term thinking, it would be the lobbying arms of the mortgage and banking industries. Even then, it's not about a consistent policy, but money to get your local congress person through their next election cycle.

This country is run by corrupt idiots. Bush certainly made the whole matter worse with his economic illiteracy, but the miasma has been hanging around for a while.

skibum,

But the housing bubble did happen on Bush and the Republicans' watch, ditto fighting Bin Laden in Iraq, ditto alienating American allies, ditto destroying whatever budget surplus Clinton managed to save up, ditto zero oversight on military contracts to Cheney's former employer...

If you're looking for better alternatives than the Democrats, you're not find it amongst Bush's rubberstamper brigade.

@skibum,

Have I noticed it? Are you kidding me? I can't speak to the BA but a good portion of the homes on the market in OR are of the 2005 vintage! Clearly the 2006 non-builder inventory is distressed property and marketed accordingly. Coincidence?

astrid,

Wrong. The bubble 'collapsed' on Bush and the Republicans watch. Again, to not understand this is to not understand the bubble itself. We had this debate on the Portland blog and I can assure you that 82% of Dem's voted in favor of the 1997 Tax Law that paved the way to flipping as a lifestyle.

Patrick,

I couldn't agree with you more, this is the root of the whole problem. Maybe if we get through all the gnashing of teeth to less expensive real estate, the thanks of the younger generations will convince us of the current error of our ways.

Have to get there first, though.

Actually, sorry, not the error of our ways....

DinOR,

The GOP did nothing to quash the housing bubble and plenty to encourage it. They enjoyed much of the political benefits of people feeling wealthy from house value increases, so they deserve the blame as well. It's one thing to vote in a bad law not know the full extent of the problem, it's another to be the party in control and happily encouraging this bubble to grow and grow.

Furthermore, I am in no way persuaded that the $250K/per person tax exemption is the primary reason for the bubble. It played a role, but lax credit standards and lack of securities law enforcement played a much greater role.

DinOR,

Read my original response to Skibum. I did not exempt the Democrats from blame, I simply argued that because the Democrats were blameworthy, the Republicans are somehow exempt from great blame for the role in the housing bubble debacle.

If you’re looking for better alternatives than the Democrats, you’re not find it amongst Bush’s rubberstamper brigade.

astrid,

I don't mean to imply that my lambasting Dems on their asinine proposals that I'm letting the Republican administration off the hook. The Dems enacted much of the legislation that got us into this mess - i DO think the 250k exemption and the 2 year flipper time frame had a LOT to do with speculation, and Clinton's "great" plan to increase homeownership had a great deal to do with it, and current Dem bailout proposals are simply retarded. However, the Bushies have just been too busy lining the pockets of their Wall Street friends and bailing THEM out to worry about the actual real estate market.

Two words: Ron Paul

An interchange from the House banking panel meeting yesterday:
____________________________

Lucky for Frank, there was only one Presidential candidate at his hearing Thursday, though this '08 prospect wasn't buying into the morality play Frank was eager to sketch. Libertarian Republican Ron Paul of Texas complained that "abnormally low interest rates" -- including the Fed's rate cut this week -- led to a morally questionable bailout of Wall Street.

"We talk about market discipline, but there's no possibility to have market discipline," the candidate declared. "What moral justification do we have to deliberately devalue the dollar?"

In response, the cautious Bernanke left his own moral high ground for the safer moorings of policy commentary on the ills of inflation: "I agree with you that an economy cannot grow in a healthy stable way when inflation is out of control."

OT: Would you take a job offer from Linden Labs (Second Life)? Odds they will be bought out by Google at some point?

In response, the cautious Bernanke left his own moral high ground for the safer moorings of policy commentary on the ills of inflation: “I agree with you that an economy cannot grow in a healthy stable way when inflation is out of control.”

"Growing the economy" is a convenient cover for the truth. The dark secret of the system is this state transition.

State 1:
Let us say there is 1M units of money in the hands of the public. This leads to prices for everything to be calibrated against 1M total units of money. The prices represent a stable equilibrium in this state.

State 2:
Government controls the only legal source of printed money. Say the government now releases another 1M units of money. The supply of this money enters the economy through the banksters. Keep in mind that the money has not YET entered the economy. The banksters can acquire control of assets using 1M units of money from State 2, while the rest of the economy is still pricing assets based on State 1.

State 3:
As the new 1M units are gradually inserted into the economy, prices go up because there are now 2M units of money against the same quantity of assets. The increase in prices is an adjustment to the new equilibrium, where each unit of money is worth half the original (State 1) unit of money. Your average J6P can acquire assets only using the devalued money in State 3, i.e. at higher prices. The only way for J6P to get access to money in State 2 is to get a loan.

The ONLY way to keep this scam going is through continued inflation. When Bernanke says "an economy cannot grow in a healthy stable way when inflation is out of control", I suspect that what he REALLY means is that he (and the banksters he serves) cannot tolerate a situation when inflation expectations are so high that prices in the J6P economy rise to State 3 even when the money supply is still in State 1 - which eliminates the State 2 advantage for those at the top end of the money supply.

Hope this wasn't too abstract - it seems very clear in my head, not sure if I was able to describe it clearly enough.
SP

lunarpark said:
OT: Would you take a job offer from Linden Labs (Second Life)? Odds they will be bought out by Google at some point?

Don't evaluate a job based on speculation of some future event. Unless you have specific info indicating an acquisition, look at the terms Linden is offering you _today_. Is the salary/bonus competitive? Does the role provide an exciting growth opportunity in your line of work? Do you know people there that can fill you in on the culture? Is the commute tolerable? Are their restrooms clean? :-) This is the stuff that will make you happy or miserable on a daily basis.

Every f@cker out there promises new hires that they are the "next Google" or the "next Google acquisition". Don't fall for it.

Not career advice
SP

Thanks SP. It's actually a close friend who is considering a job offer from Linden. They came at him with the stock option/Google thing. There are some other good things about the job too - but he seems somewhat lured by the possibility of a Google buyout.

astrid,

You're probably right. I just get a little touchy when people look at the mess in Iraq etc. and then say "Oh while we're at it..." when further assigning ALL the blame to the GOP? However, once it gathered momentum I'm not sure there was anything anyone could have done to slow the bubble (let alone stop it).

I have sold two homes (pre-1997) and one since. The first two it wasn't so much that there was a huge cap gain bill but I want to assure you, the paperwork and filing were a hassle. Funny how there was little if any profit to speak of? The latest sale netted major tax free dollars and required no extra effort. I owned that one from 1994 to 2004. Which one would you rather choose?

If you're still unconvinced the change in the tax code was a major factor I don't know what more I can say other than the proof is in the pudding.

lunarpark Says:
Thanks SP. It’s actually a close friend who is considering a job offer from Linden. They came at him with the stock option/Google thing. There are some other good things about the job too - but he seems somewhat lured by the possibility of a Google buyout.

Wait a minute - _they_ actually told him that Google was going to acquire them? How credible was the source? Was it a Linden executive, or a contract recruiter?

I have had friends who were told by fast-talking headhunters that some podunk crapshack was a Google buyout prospect. A lot of these independent contract recruiters are basically paid on commission, and a lot of them hype things to the verge of criminal misrepresentation.

Honestly, I have no specific idea on whether there is a Google-Linden buyout in the offing. Your friend should evaluate the position on its own merits in the context of his own career, without ignoring the near-term macroeconomic risks.

Not career advice, Not investment advice,
SP

My friend said that they implied Google might buy them. I'm not sure who in the interview process implied this, but it was someone at the company.

I think he has a lot of mixed emotions right now. I guess their work environment is unconventional - like they meet in virtual reality (even though they are at the same location) instead of the conference room, etc.

I suppose if I wanted to I could take the position that low int. rates and lax lending standards indeed lead to increased LEVELS of ownership and increased VOLUME of home sales but that "I" remain unconvinced that either contributed greatly to increased PRICES!

Now I'll grant you that the REIC is strenuously asserting that the lack of liquidity has contributed to the glut in inventory but I don't think even they truly believe THAT!

We had a glut going in, and a glut going out. An increase in sales volume doesn't automatically translate to an increase in profitability. (Just ask the auto mfrs.) So... "that said" I'm going to kick back on my porch with a mason jar of something strong and let everyone else flail away exhausting themselves to death trying to explain that to ME why 1997 *wasn't a factor.

I would think twice about any company saying xxx is going to acquire us. Most startups will at least say they are good enough to go it alone eventhough it is lip service.

Furthermore, I am in no way persuaded that the $250K/per person tax exemption is the primary reason for the bubble. It played a role, but lax credit standards and lack of securities law enforcement played a much greater role.
Amen... I will point fingers at the cap gains exemption only in as much as it made fraud easier to commit. The honest flippers (live in for two years and out) didn't cause this mess. Casey Serin and his minions did. Analysis of property records several years from now may give us a window into this crazy time and prove that point -- or not. Maybe it truly was death from a thousand paper cuts... a little fraud at every point in the securitization food chain.

Jon, Jon, Jon,

No, you’re definitely NOT priced out of the market. You just refuse to do things the way we True American Heroes are meant to do them. Yes, you SHOULD forsake retirement savings, a new car, vacations. You have no mettle. You have no sack. You haven’t even mentioned eating ramen for dinner every night, for goodness sakes!

A friend of mine when I was growing up went to Calpoly and the program he enrolled in had some crazy dropout rate. The motto was "Study, Sleep, Friends - Pick Two".

That seems to be the proposition of housing these days. If you want it, the "old" sacrifices won't cut it. No, you have to consciously risk your retirement, or go without health insurance, or pray your car lasts another ten years.

Jon,

I'll take by "Friends" they mean... PARTY!

? :)

OT: Would you take a job offer from Linden Labs (Second Life)? Odds they will be bought out by Google at some point?

Maybe we should be thankful that Randy isn't around to see this travesty.

The meeting in virtual space is nothing short of creepy.

The google buyout thing smells of pure horsehooey, unless there is definitive evidence. Man, I'm sure every damn startup touts themselves as the "next google buyout." It's just the new version of the next IPO thing. The jackpot comes from google, not stupid day traders this time. I would just evaluate based on the actual job itself, not some buyout prospect. (like SP says...)

Its crazy what the tech market has become. IPO is impossible so 5,000 companies all want the same big 3 to buy them out.

I suppose one day those 3 companies will scale back the buyouts and cause a tech recession.

Hello Kitty,

Same thing for bio-tech. Each one touting the "potential" for their medical/surgical device, patent etc. Each one claiming "a lot" of companies are watching developments in their research with a keen eye... etc. Truth is, the FDA declines 90% of applications.

Prior to 1997 there were other good exemptions for homeowners from the full impact of capital gains.

People 55 and older got a "once in a lifetime" FULL capital gains exclusion on the sale of their home. My parents took advantage of this circa 1979. I'm not sure when it was repealed.

Everyone could "roll forward" ALL capital gains into a new house. IIRC this was repealed at the same time the 1997 $250K exemption took its place.

Using the "roll forward" and old folks exemptions in tandem, people in that generation NEVER paid any capital gains on multiple chains of home ownership. So I can't believe that the piddling $250K exemption really was a major driver in the recent bubble.

DennisN,

the $250K exemption alone is not. But the exemption on TWO owner-occupied residences, classified as lived-in for 2 years in the past 5, certainly is.

I know of many real-life examples (10+) who took advantage of this and rotated in their residences to apply that $250K exemption multiple times.

DennisN,

I'm sorry, I couldn't hear you? I'm on my front porch drinking out of a mason jar. Wiki 1997 Tax Law, study all the links and get back to me in a week or two. Weather permitting I'll still be on the porch.

OO,

Need a swig?

Not to be mean about this Dennis but I've just gotten worn quite thin arguing this in great detail with folks that aren't sure when it was repealed or to the best of their recollection etc?

The Law was sweeping and complex. If we're going to comment on it, it would be best if we were all well versed in it before venturing opinions. Again, I remain unconvinced that increased liquidity and increased volumes of sales necessarily lead to higher prices. Everyone should feel free to convince me otherwise.

OO,

The 250K exemption would have meant very little if the prices only went up 3% year on a 330K house. I agree that in conjunction with loose lending standards and the post dot.com capital "flight to quality," it helped the bubble expand for upper middle class RE investors.

However, I still contend that the far bigger problem was inadequate screening of buyers and people completely losing track of what they can afford. The inducement on the sale was merely icing on the cake.

$250K exemption is a nice tax cut for home sellers, but it didn't take away at least half of home buy/sell costs. The seller would still be paying 6% fees to realtors and the buyer pay financing costs on the value of the sale. The expected value of the $250K tax exemption on 15% of gains is just not enough to justify the crazy RE price increases.

LOL Skibum. I actually wish Randy WAS here to witness this travesty! The creepy virtual conferences are just well, creepy...

astrid,

Most homeowners (other than Seattle, I know, I know) are married. So... we're talking about 500K (not 250K). Given the avg. 401K is 29K (GAO numbers, not mine) how can anyone say this insignificant?

Perhaps on a one time basis and taking into account "friction" no, this in and of itself may not have been that earth shattering. What DennisN may have missed is that (as OO points out) there were MANY that intended to exploit the law with multiple properties on multiple occasions. Now we're talking! Hence 40% of sales in 2005 were second homes.

Under the old law you had to buy a home of equal or GREATER value to be exempt. One dime cheaper and you would have been at the former, much higher cap gains rate! Remember, 1997 changed all that too so forget about 15%. It wasn't like that.

the 1997 tax change was HUGE

Its possible it was the match that started the housing boom fire. At least in SoCal virtually ALL the gains since 1989 were from 98 and on.

So your investment choices are these:
stock market with 50% margin maximum and lowest tax rate being 15%

OR
you choose housing with UNLIMITED leverage (or negative? with cashback at close) and lowest tax rate is ZERO? The no brainer for the much maligned J6P is housing. zero taxes on a 500k gain(married) you have to be a big time drug dealer to pull that kind of dough and pay no taxes.

Can you imagine the boom in stocks if all stock gains were tax free if you owned a stock 2 years? It would be unprecedented. The impact on housing cannot be minimized of the 97 law.

DinOR,

15% of $500,000 (though very few people outside of NY and CA have seen anywhere near that amount of gain) is $75,000. Nothing to sneeze at, but not an explanation for 50-100% increase in housing value. It's as simple as that. The 1997 act is not sufficiently valuable to explain more than a small portion of the housing bubble.

Hello Kitty,

Thank you. I mean after all, two years IS a long time to hold a stock... isn't it? How else do we explain a 39 month bear market (when typically they're 13 months?) How? Real Estate Party!

HelloKitty,

And I would predict that if Joe and Jane Howmuchamonth could play the stock market for 90-100% leverage with no perceived risk and 15% LTCG or even STCG, they would take it over housing in a heartbeat. Transaction costs are much lower for stocks and stocks don't get brown if I forget to water the lawn.

astrid,

We may have cross posted there but please to note, prior to '97 cap gains rates were more like 33% and 28% (for long term holdings). If 1/3 of 500K is no particular deal....

That and the whole "Magna Carta/outlaw" appeal about it! What? No more cap gains? Well... you do have to hold it two years? Two years!? I'm outta' here!

DinOR,

You've convinced yourself. I'm out.

Hello Kitty,

No "cash back at close" stock purchases? No "Buy a thousand shares of BA and get a big screen TV"? Why... I'm insulted!

DinOR,

also, I know of speculators who took the tax-free gain, and split them into dp for SEVERAL homes. In the old tax law, he would have to pay tax on the gain because he didn't roll the gain into a house of higher value.

This tax law has a multiplication effect that the lawmakers were probably not aware of.

Tax law is the most powerful driver of any economy. Think about it, why do so many people take on huge mortgage loans? If you look at the accrued bank interest, and the tax savings, it probably doesn't represent a net gain to the home buyer. In order to obtain tax savings, you need to pay INTEREST, which, unlike paying down the principal, is gone the moment the money is out of your pocket. The nature of interest expense and tax to an individual is the same, money gone forever. However, people are much more willing to pay mortgage interest, because they would rather pay the bank than the government.

And so it ends, yet another "paying cap gains don't matter" poster throwing in the towel. Sigh...

What they fail to realize is that it's so difficult to argue the case from my... end with regard to older tax laws that no longer exist. Look, if a road was posted 35MPH and you said, see? We didn't have any accidents at 35! Let's make it 45MPH (where people regularly now do 55+) and try to get them to appreciate how generous things have been!

Better yet, good luck telling them it's now back down to 35!