As the steroids pump up the muscles, the cheap credit pumps up the bubble.
Take away the cheap credit, the bubble must shrivel like the muscles of a girly boy cut off by his steroid pusher while living too far from the Mexican border.
How far can designer body modification analogies be stretched to explain past economic modifications of all girly boy market interventionists?
As credit is cut off, will girly boy financial geniuses lose their financial powers and be reduced to pumped up wannabes with sand kicked in their faces?
At the end of the “correction”, will the housing market/girly boys be:
10% cheaper/smaller? 20% cheaper/smaller? 30% cheaper/smaller? 40% cheaper/smaller? 50% cheaper/smaller? God help us, even cheaper or smaller than that?
NO, I tell you, this spring prices will be at an all time high and they will PUMP YOU UP UP UP!
True or not? Offended or not?
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FollowBefriend (4)44 threads4,602 comments Los Altos, CA
I have a bit of a different perspective on why RE prices are sticky-down. After reading some perspective from FAB a few threads ago I had an epiphany.
F#cked Buyers are likely to get caught up in "escalation of commitment". That is, if you're 1 payment away from foreclosure, you will sell on a "needs-based pricing". You really have nothing to lose, so you're willing to take every bigger gambles in hopes of getting out of the hole you're in. This is well-studied behavior, and hard to argue with since like 90% of people tend to act this way when tested in experiments. These guys are the sticky sellers, not the fast, at any price sellers.
On the other hand there are long-time residents, many of which own all or their home, or most of their home, or used to own it all but took out say 20% as cash in the recent bubble. The key here is they've been long-time owners. They bought for 50%, 80%, 150% discount of today's prices. They may miss the top, but they are likely to consider their "winnings" very differently from the FB. It's very easy to live with, "gee, I should have sold 2 years ago when I could have gotten $1.4M instead of $1.1M, but then I bought this place for $385K in the 80s". Remember, people don't think in percentages, they think in nominal numbers, so the old-fashioned buyer is the guy who really isn't so sticky going down.
FollowBefriend1 threads6,749 comments
So true! I have a client in LA that bought in the late 80's. He owes about 60K on an 900K property. By his estimation, it's not all that special. Now that his mother back in the midwest is getting on he is thinking he may have to sell and move back to help any way he can. Now, if he sells for 900K great! If he sells for anything above 600K that's great too! At the very least he'll walk away with over 500K tax free! His motivations are more about family (and obligations) than they are about money. Would he have preferred to have listened to me and have sold back in "05"? Well sure, but either way he and his wife are going to be just fine and at this point it's more about getting AN offer, not multiple offers.
FollowBefriend2 threads2,498 comments
There are some mitigating factors to your hypothesis. For long-time owners, additional considerations are, if they sell and purchase a new residence in the BA, unless they downsize significantly assessment-wise, or move out of the bubble zone, they are looking at the penalty of significant property tax increases. This is a disincentive to selling. I also wonder how many long-term owners plan to estate their homes to their children, with the exact thought that their children would otherwise not be able to afford a home in the BA. Certainly, this sentiment might change if prices drop significantly. Of course, this is all speculation.
FollowBefriend819 comments nomadtoons's website
Not sure how much I'd count on folks leaving their houses to the kids. Social security and retirement options will be a thing of the past or in very bad shape come a few years when all the boomers retire. They will need other methods to assure their viality in retirement. I imagine many will sell their home for a smaller home or condo in order to get more financial security. It could get nasty too if there is more than one kid too, since one or the other will have to concede half of the value.
Great observations about Alameda. While I was never stationed there I visited a number of times in the service. Back in the 80's it was a little rough but always a fun place. If you want to see total yuppification you really should visit Portland. They seem to have it down to a science!
FollowBefriend15 threads5,071 comments astrid's website
Randy, DinOR, George, and Co. have debunked the buying from desperate specuvestor tactic. I want to add a couple wrinkles to the observation.
Firstly, much more likely than not, the specuvestors will lose their bet and the house will go into foreclosure. It seems to me that there will soon be a large number of foreclosed houses, much larger than any market’s ability to absorb them. It seems to me that the best time to buy will be in foreclosure, when there are a large number of houses and a tiny number of cash buyers. (vulture fund solicitations to rich Asians?)
Secondly, watch out for the long time homeowner who withdrew home equity during the bubble. These people may be even more overextended than new home buyers.
Thirdly, prop 13 considerations. The lure of prop 13 might be enough to convince people to stay put.
Yup, it still has a tiny amount of that look and feel. I moved here after 4 years in Berkeley. I like it because it reminds me of the hundreds of little towns sprinkled all over the appalachians back home. Very little of the boue collar element is still here, but many of the businesses are. People are also VERY animate about not tearing down anything. There is a tiny newspaper shack built on the corner of park and santa clara next to the waffle diner. It is from the 40's. One day, the local Elk's club decided to tear off the ugly 80's plastic siding from the shack to reveal and restore to origianl clapboard siding. Locals driving by thought they were tearing it down and complained. When a company bought and decided to restore the Alameda theater, built in 1926, it caused such an uproar that there are signs for both sides: " Say NO to the cineplex!"- and "Bring back the movies!". There is a big worry about gentrification, ironically even amoung the yuppies that are takin over the town. So anything new tha comes down the line and BAM! instant anger. it's ironic because this kind of behaviour is what causes prices to go out of control in the first place. There is a delicate balance between preservation and continuing a tradition of a maintable community for future generations.
"Lastly, if the boom means that a new price standard has been set, and 500k is now the norm to pay for a small house, then this is unacceptable. I’ll pack my bags and get the hell out of here, cut my losses, and get on with my life somewhere else."
San Jose, although historically priced a little higher than other areas in the West, was never this insanely unaffordable. In fact, it was actually affordable to the average dual income family.
Either the Bay Area will become the new, largest Beverly Hills for the world's rich, or sanity will once again be restored.
I think sanity will be restored. Although what's sane in the BA is considered outright insane in other areas of the country.
The worm will turn.
Businesses are leaving; young couples priced out are leaving; peasant illegal aliens are flooding in and...well...we are all watching and waiting for history to play itself out on the California stage of illusion.
It will be an interesting ride, no matter what happens...
One thing is for sure: what happens during the next five years will set the tone for what happens in the next 20 years, good or bad.
Oops, looks like Skibum got there ahead of me on Prop 13.
Nomad's observation is great. Unless the real wages in this country starts shooting up all over (quite unlikely, especially with so much debt to deal with), California should be looking at a 70-80% correction in real dollars in most locations. The houses here are just too expensive for the amount most people make here.
Also, there's way too much BA SFH POS mascarading as upper middle class housing. (I think they should be torn down to make high quality, higher density multi-family housing.) If the majority of the POS housing stock stays, it'll an albatross on LA and BA's long term growth. Why would a young family want to live in tiny 1,000 sq. ft houses no matter what the price?
Also, the amount of price compression in most California markets is crazy. BA SFH under 500K are unliveable, BA SFH under 1M are largely tiny and barely better than apartments. However, once you get past $1.5, you start to get some places that most people anywhere would recognize as nice or very nice.
Once the LV and AZ markets crash hard and fast, I think a lot of the California retirees will make a run for it. Their kids or grandkids already can't afford California. Also, the bubble burst will be economic hardship, and any inflation will quickly eat into the real dollars available to someone on a fixed income.
To add to your observations, the practical inevitability of higher energy prices will empty northern cities even faster, the heating cost in much of the country is already equal to people's mortgages. Given that most of Detroit's housing stock is probably quite old and not very energy efficient, they may quickly reach the point of being unaffordable on heating costs alone.
Thanks for adding imagery to older posts. Very nice.
My parents will be visiting me and my wife for the first time here in CA. They have never been to California. Truthfully, I'm a little curious what they will think about it.The price of a 800k SFO house is still around 50k there, 16 times cheaper. Her parents came in March and were absolutly amazed at how expensive it was out here. My folks and her parents see things that most californians have been shell-shocked into believing is digestable, which is that unaffordability is a natural given, and 400k is a real "bargain".To them, they'll probably see it from their perspective. It must look absolutly ridiculous.
As far as Prop 13, this thing was only enacted as a temporary fix for what was then heavy property tax in relation to home values. In other states like TX, the tax helps make sure that values can only reach a certain point and then the price of ownership becomes too high. As a result, the markets are more tame there with the exception of inner Austin, which is still in the 300k range. In California, Prop 13 solved one problem, which was to alleviate the tax burden of the then current homeowners, only to place the burden on anyone not owning a home. Basic science comes into play here. You can't abruptly stop one thing and not expect an equal or greater reaction on another level. Ever since the passage of Prop 13, there has been reliable and frequent housing booms and busts, which places a lot of instability in the entire state. This Proposition needs to be repealed and replaced with something that meets both parties in the middle, where homeowners will have to be somewhat responsible for the tax on their adjusted home value, yet not make it impossible for them to pay in a runaway boom either. This way home prices will be tied more to real income and not speculation and risk by means of unconventional loans. Placing a flexible taxation system on homeowners will cause them to put pressure on government officials to build more supply. The name of the game is create an environment where both parties- homeowners and homebuyers will want to equally cover their asses. It is all one way right now, and this is the sole reason for the imbalance.
There was an interesting piece I read somewhere (Sunday NYT?) about Detroit - the question was, why is that city, with such a disastrous economy, not completely empty population-wise? The answer these authors came up with was the ultra-cheap housing stock there. Ramshackle victorians can be had for little money, and that was an implicit incentive for people to stay put there. This goes for other Northeastern declining cities as well. I can't say I've been to Detroit, but at least according to Eminem, it's a hellhole...
But wait til higher energy costs pushes that balance towards the tipping point.
Of course, a good chunk of the Detroit probably receive government assistance on housing...
Yes, rising energy prices are a real bummer for cost of living in the Northeast. I wonder, relative to the Northeast's heating costs, what the cooling costs in places like the southwest are as well.
Your assertion about Prop 13 as a buffer against market risks for homeowners may well be true, but the beef many have with it is that its benefits extend only to long-term owners. Recent purchasers who have paid much higher for their homes pay a much higher burden of property taxes proportionally. Is that fair? The outcome is essentially the tax burden for older Californian homeowners is being subsidized by the younger owners. I would suggest a revamping that distributes the burden more fairly while maintaining protections against arbitrary tax increases.
Protects people from arbitrary government distortions? Property taxes are used to pay local government expenses. How arbitrary is that? Do you just hate all taxes. Everybody uses those government services. Prop 13 is just a wealth transfer from the newer buyers to older buyers in the same community.
You and other California property owners can take that Prop 13 with you to the grave. You're ignoring the fact that these house owners are now a hell of a lot richer in equity, and they can easily afford taxes based on their current net worth.
I, and probably many others in their 20s and 30s, are will probably never buy into California under a Prop 13 system. Prop 13 and NIMBYism has distorted California's RE market so that a lot of talented young people can't afford to buy into it. That's what the free market yields, a sub-optimal solution due to the distorting effects of Prop 13 and NIMBYism.
All I can say is that ever since Prop 13, California has been in near financial crisis. The schools are shutting down one by one, not only from the ever-lower number of kids since families are moving out, but from the lack of funds. Roads, bridges, public buildings, state parks, libraries, and on and on all suffer from a severe lack of funds. It makes no sense that the wealthiest area in the world has schools worse than those in most of the country. Property tax serves a purpose, which is first to get enough money in relation to inflation for public institutions. Secondly, it can help keep runaway prices under control. Perhaps I am being bitter, but I think homeowners should have to share as much of the pain as those trying to get in. Likely, an adjustable tax would be better for everyone in the long run. Right now, it's all about homeowners wanting exactly the opposite of what homebuyers want. They want higher values, and less houses, while homebuyers want precisely the opposite. If there isn't a new method founf to equalize the situation, then after this boom and crash,there will be another boom in 10 years, and so on and so on. I may be totally wrong, so if anyone has a better idea, I'd love to hear it.
Prop 13 advocates are basically making the same arguments as proponents of rent control. They allow people who got in first to stay put, even if greater utility and revenue can be derived by people who came in later and got locked out.
Robert, do you defend rent control?
Is there enough critical mass on this board and others to begin a campaign to repeal Prop 13?
You argue for a broken system (Prop 13) by trashing a sucky potential alternative. I'm not sure everyone here would advocate an alternative to Prop 13 that involves frequent reassessment of property value. Also, if you break down your DMV example, you are implying that its wrong to have a long-term owner be taxed at the assessment of a recently purchased comparable home. Why is that so bad if home prices merely increased with inflation? Then the increases would amount to a fixed percentage of one's income, assuming income is also rising with inflation. Of course, that's a big if, though.
The only time I've spent in the Southwest (Oklahoma) was in utility inclusive grad student housing in the early 90s, so I don't know how it is lately.
The Southwest is comparatively better off because the housing stock is a bit newer-hopefully more energy efficient and desireable. Also, thus far, it appears to be a desireable part of the country for many people, so there will be more people who can afford the higher utility bills.
I think water rights will be the major constraint in the inland west.
Please directly answer the questions posed to you, rather than go off on a tangential point.
(I don't think gas taxes and tire fees cover the actual cost to the government of maintaining roads, dealing with pollution, etc. Nor do they address the nuisance of tall SUVs and RVs on crowded roads. But that's what we're talking about. Please answer the questions you were posed, rather than practice trying to win on rhetorical flourishes.)
On the other hand, we already have a near-national flat tax for some public services - it's called Lotto/Powerball/etc.
"On the other hand, we already have a near-national flat tax for some public services - it’s called Lotto/Powerball/etc."
Taxing the mathematically challenged everywhere.
You make a convincing argument. I'd like it if you could elaborate a bit more on your reasoning in:
but if you are either trying to transfer assets or you are in financial trouble the possibility of the “sales price” being lower than the honest price increases.
skibum et. al.,
I agree that many long-time residents unable to use the (quite disgusting) prop-13 one time escape hatch might choose to stay put. But, won't this also add to stickiness, by depressing theoretical inventory? Anything that constricts supply will slow the velocity of price reductions, including long-timers simply staying put for any reason, prop-13 being but one.
I do agree that foreclosures from specuvestors and FBs will clear market quickly, but only once they are officially foreclosed. I see two frictions that slow down this process. (1) Foreclosure is a lengthy process with lots of legal gates. Lenders don't like to foreclose because it's expensive and risky. There are also lots of legal protections for the owner. Assuming most specuvestors and many FBs will get lawyers to help them through this process, it will result in a large surge of paperwork and administravia to process. That leads to (2), it will take some time for courts, lenders and other agencies to gear up to handle any increase in foreclosure actions. More likely, we'll see many months backlog in foreclosure processing. (Note, this need not mean that owners will get a break; they will not. Only that homes aren't recycled into the market as quickly as owners default on financing).
I am also unconvinced about how price efficient the foreclosure market is. From what some here have said in previous threads, I am very suspicious that the foreclosure market is driven by *highly asymmetrical* information. In such a market, prices may stay artificially high.
I do agree that pricing in the RE market is determined on the margins. I do not agree the market is liquid by any measure.
Property taxation is inherently flawed. That is, taxation of property based upon value, be it assessed value, fair market value, book value (as in prop-13), or any other formulae including value as a factor. You can google some thoughtful academic arguments and research to this end.
The answer is to either abolish all property taxation and instead generate revenues through a more equitable mechanism, like consumption taxation or income taxation, or even *realized* capital gains taxation (although I am against this, but it is more fair).
One proposal I've seen that might pass political muster would be to create a formula for property taxation based upon zoning-designation, inhabitable sq-ft, and land sq-ft as factors. Then these taxes could be adjusted, through supermajority votes, when necessary. But all owners of any land would be taxed based upon their community impact. A proposed modification I read would include a resident-count or family-count factor. Note, there'd be no exemption/difference/etc. for whether the land is owner-occupied or leased. The land/structure is the taxable entity.
I think you have it in reverse. When I agree with you, you're not evasive in answering my questions. When I disagree with you, you don't answer my questions at all, or cherry pick the favorable ones, or put spins on tangential points.
I still haven't called you a troll. I am calling you evasive because you are in this instance.
I specifically asked about your thoughts on rent control. I asked about your feelings about the proper level of taxation. Those are things you haven't gotten to. I think it's fair to say that's evasive.
To answer the question in the OP:
I doubt any of us will successfully call the bubble in detail. Two reasons:
1) The bubble isn't *a* bubble, but many regional/local bubbles. Timing and prices movements won't be uniform.
2) Predicting the future is for charlatans and fools. If any of our individual predictions were worth their weight in bits we'd already be betting everything we own + whatever we can leverage against that future.
That said, this opens a possible experimental opportunity. We could pick a tight market, say a couple select counties in bubble zones (namely the BA given the gravitational center of this blog), then run some internet surveys (maybe survey monkey...anyone have an account there?) to collect the "Wisdom of the Crowd". When you get enough input into a thing like this, often the aggregate statistical results are spooky in their accuracy.
The community pact idea sounds very fair. California's home ownership (especially by low basis homeowners) may soon reach a sufficient low to make that change possible.
What about enacting a consumer( grocery store) food tax? Most states have it, we all have to eat, food is still one of the most affordable consumer goods, so perhaps this would create at least some income for the state.
Interesting thoughts about alternative property tax schemes. I would think that a naive but appropriate way of thinking of this problem is to ask the question, what is the purpose of property taxes? Is it to find an equitable way to extract money from property "owners" for the general good of the local community (infrastructure, services, etc).? Is it to specifically extract money for usage of public works specifically associated with owning property (local road maintainence, utilities, the like)? Or is it just another way to tax people that has become accepted?
I would think the answer to this question (if there is a correct one) would in part determine the best alternative taxation scheme. For instance, why is it appropriate to levy increased taxes because there are more inhabitants or there is more living space in your property? Increased public utility consumption? I don't know. It just seems there is (obviously) no perfect solution.
As to the car tax issue. First of all, it has virtually nothing to do with prop 13, which was the purpose of the original discussion. Going further to discuss the matter is unproductive in this forum.
Can you answer my rent control analogy? Is prop 13 in any substantive way different from rent control? If not, do you support rent control?
I'm convinced on inheritance tax schemes depressing prices. This occurs even in rising markets, but surely has been dampened during the worst of the boom. I'm not sure how material the effect is, but I agree it exists.
I'm still unsure on:
Then there’s the outright fraud when somebody with lots of debt “sells” their house for a low price because the other debt I mentioned isn’t included in the sales price. Thus the taxable basis and all the other expenses are lowered. Again in a rising market there is no incentive to do an under the table deal like this.
Please explain the incentive to the assignee of the debt burden. The lender will demand full service of their debt covenant. Assuming this is for more than the current value of the asset, I strain to imagine a situation where tax shield benefit exceeds losses, except in a very narrow band where prices are within say 10-15% of nominal losses. And, this ignores both time-value of money (tax benes are realized usually 1 year later) and expectations of future losses in the asset value.
Perhaps this would be more likely at the bottom, not during the period of deflation?
Although higher density residence poses a problem, I think the effect might be partially countered by lower density owners being wealthier and more able to pay the tax. This is means testing by choice of residence, which seems fair to me.
The secondary effect is that such a system may encourage more high density housing, which would go some ways to counter the McMansion phenomena.
On property taxation:
My ideas (which aren't mine, I've adopted them from others who did lots of hard work and research) will probably never be adopted. It is for this reason I am markedly apolitical and cynical about the entire public process. It is a system that maximizes for the least-optimal but most-voter-acceptable outcome. The error is in assuming there is any incentive for voters to be informed on the issues. To wit, I tried to read and fully understand a bond measure a few years ago (I think it was the big state one for education right before Arny came into office). I have lots of formal education which enables me to do things like understand duration, yield, yield-to-maturity, and such. I couldn't understand the measure. If I can't, how many others couldn't, or didn't give a sh!t. They just see the TV ads and decide in a American Idol popularity contest fashion.
This is what causes people not to vote and to feel justified in that decision.
Also, I cynically believe that all taxation is, at this point, for the specific purpose of funding general spending. All targeted taxation does is offload other sources of revenue. In taxation, I violate my "there are no zero-sum games" rule. Taxation is always zero-sum, because the political process decrees it so.
You and I both acknowledge that Prop never was perfect. No tax or piece of legislation ever is. That said, while I agree that getting rid of it and back-treading to 1975 would put the pressure back on homeowners which would be just as bad as it is for non-homeowners now. I think that there needs to be a middle ground. Everyone pays to an extent that acts more like a baysitter. A reasonable cost to stimy out of control growth, and one that also serves the community better. Basically, a method to return houses more to the standard to simply being dwelling places and not the potential goldmines that people in this state view them as. At the same time, anyone purchasing a home would also have incurred expenses that would make the type of buyers be of higher quality- not like the investors and weasels of today. What the state needs is reform, not neccesarily scrapping . An amendment.
Fair enough. You are assuming that Ralph's savior is either (a) willing to assume Ralph's well known high default risk on the private note and/or (b) has "alternative" means to ensure Ralph repays the private note. You're essentially proposing that the mafia will be moving into the home financing business. Perhaps, but lots of Ralphs will either end up in the Chicago River or fleeing.
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