WatchBy Joe Schome.
To me, one of the most interesting aspects of the bubble is that its effects are felt differently in differnet areas. Not just on a nationwide level -- appreciation has been mostly flat in TX, while prices have tripled in many parts of CA -- but the bubble even affects different regions of the same state in a disparate way.
For example, while the median price in the SF Bay Area is higher than the LA median, I think that SF is nonetheless far, far more affordable than LA.
For example, you can get a 2BR condo in a decent school district like Walnut Creek (average SAT score 1140) for $200k. To get a 2BR condo in an LA school district with that kind of average SAT score, you'd have to spend at least $400k, and probably $600k.
The disparity in SFH prices isn't as pronounced, but there is a disparity there too. For example, as of this posting there are 32 SFH's for sale in the SF Bay Area's best public school district, Cupertino (average HS SAT score 1251). In San Marino, the LA area's best public school district (average HS SAT score 1231), there are 5. Now, Cupertino has roughly two and a half times as many listings as San Marnio and is about four times as populous, so it's not an apples-to-apples comparison, but the fact remains that Cupertino is cheaper. Also -- and this is really important -- SFH's are not the only type of housing for sale in Cupertino. There are 2BR condos in Cupertino starting at $545k. San Marino is zoned solely for single family homes, there is not a single condo in the entire community. The cheapest avaialble listing of any kind in San Marino is a 1,000 square foot 2BR house for $798k.
So viewed in this light, while the SF Bay Area may have a significantly higher median price than LA, it is actually far more afforadble. A middle class, college-educated family not might want to live in a 2BR condo in Walnut Creek, but they can afford to do so if they stretch just a little bit. In SoCal, by contrast, the situation is much worse for middle class families. While there are several $200k condos in Walnut Creek, a place with very good schools, there is not a single 2BR condo listed for less than $200k in Compton, SoCal's worst public school district. Thus, the folks in SoCal are getting squeezed by the bubble a lot more than folks in NorCal.
The bubble is even more intersting in places like NYC. There, a generic 2BR condo in a one of the nicer areas of NYC's Upper West Side will cost you $949k. We're talking about Jerry Seinfeld's apartment here, not a high-end place with a view of Central Park or the river. The upper-income suburbs of New York are dirt cheap by comparison. Private schools are a must. Mehdham, NJ has SFH's starting at $374k; Scarsdale, NY (a city with an average per capita family income in excess of $200k) SFH's start at $600k. Values are all over the map in the NYC area. Clearly, the bubble affects different regions differently.
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Tannenbaum,
From Realtor.com. Here are a couple of listings, both in the Walnut Creek School District:
http://www.realtor.com/Prop/1064079981
http://www.realtor.com/Prop/1065890686
I am not saying that Walnut Creek is all that -- I spent a couple of weeks there last year taking depositions and found it to be pleasant but very dull -- but it's a decent place to live, and there are condos there for $200k. Along these same lines, I am not saying that a middle class family would want to live in a 2BR condo -- I wouldn't -- but at least they can.
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Glen,
I'm fine with AMT for everybody. I'd like a graduated flat tax return that can be filled out in 15 minutes flat. The tax system is a rather wretched system for social engineering and works mostly as a permanent employment program for accountants and tax lawyers. Right now, it's really just the upper middle class getting pinched by the AMT...I'd like to see the wealthy and the uber-wealthy being forced to take income and pay their proper share of income taxes.
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Glen,
I would say tax everything equally, to avoid confusion.
I think homes should be taxed annually for a portion of their rental value. That's what normal states (not CA) do and it accounts for the dual value of homes as both a consumable good and investment.
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On another note, I never really thought of Walnut Creek as being in the Bay Area. I guess I'm very Peninsula'ed.
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Just wait until Bush pushes through tax reform next year. One of the “big ideas” is to eliminate the deduction for state income taxes (possibly to be replaced by a deduction for sales taxes).
I am all for tax reform, but this may disincentivize charitable donations because minions like me will not be able to itemize anymore.
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Randy,
The legislature in Texas recently reduced property taxes. It is quite possible that Texas will have a "taxpayer revolt" at some point and they may end up with something like Prop 13. Needless to say, this would be good news for anyone who bought in early.
Besides, CA property taxes are not cheap if you buy in a bubble market (1.25% x $600,000 = $7,500). And what is a couple extra thousand a year when you save $200-400,000 on the purchase price?
http://www.texasrealtors.com/web/1/rally/letter051606.htm
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"Just wait until Bush pushes through tax reform next year. One of the “big ideas” is to eliminate the deduction for state income taxes (possibly to be replaced by a deduction for sales taxes)."
I guess the argument for is to prevent high income tax states from getting a free ride on federal tax deductions (so the citizenry doesn't feel quite as much of a pinch). The argument against is that this is an awful lot of like double taxation.
I don't think such a thing could ever get passed. All the governors (except for states without income taxes) will cry bloody murder and it'll be harder to get through than even a mortgage deduction. At least most people do not take a "below the line" mortgage interest rate deduction. People will miss an "above the line" state tax deduction much more.
Refusing to do anything about AMT will squeeze rich blue states much more than going after state taxes. I doubt taking out state tax deductions will have much traction outside of a tiny minority of starve the beast types.
California has really appallingly high taxes, esp. given the poor conditions of its public schools and roads.
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Glen,
It's not just Prop 13, it's the whole proposition system of government. Something like 80 or 90% of the state budget is tied up by passed propositions. It doesn't leave much money for discretionary improvements or efficient expenditure.
Incidentally, it doesn't do much for making CA state legislature or the governor accountable for anything. The only way they can raise money for big projects is to borrow against the future with bonds.
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"Only the little people pay taxes" * Leona Helmsley (The Queen of Mean)
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This will result in a de facto automatic sale of appreciated RE on death, which should loosen up the housing supply. Also, more elderly people would choose to sell their appreciated houses and move to Florida before they die as the result of such a system (in order to avoid the tax). Good riddance.
Unfortunately your proposal would be shot down by the #1 voting block - the elderly.
It's not surprising that retirement homes and assisted care facilities are often voting stations during election times. :(
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Mr. Vincent,
Personal benefit does not equate to good tax policy. Prop 13 discourages new housing and artificially inflates the value of existing housing stock. It's also oppressive on young families, precisely the sort of people this state should do more to keep. It decreases school funding to an extent. Finally, it encourages the housing market to be illiquid, as would be buyers are barred from entry due to high prices and would be sellers are reluctant to sell because they got such a low tax basis.
If Prop 13 does not exist, houses would be cheaper and more plentiful, and in the long run that good for everybody. A house is a place to live, it's not a lottery ticket for some early buyers to get rich from.
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PROP 13 DID NOT CAUSE THIS HOUSING BUBBLE! When prices revert to trend, you renters will love prop 13 after buying your house.
Mr Vincent,
Given that I was (a) not born early enough to have my "tax basis" arbitrarily frozen in time in 1978, and (b) even after prices revert to the mean, I would STILL be paying far more than my birth-Lottery neighbors, I seriously doubt that I will ever grow to love Prop. 13.
The only good thing about Prop. 13 is the tax RATE cap (1.25%), which --it's true-- does apply to all homedebtors. What makes Prop. 13 so horrendously distorting, though, is the "frozen in 1978" price BASIS for the house. This is what results in the infamous "I pay $10,000 for a tract home identical to my neighbor, who only pays only $500" scenarios.
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When prices revert to trend, you renters will love prop 13 after buying your house.
Ahhh, "you renters"
How about we refer to you as Mr. Asshole?
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Randy,
Honestly, I think the advocates for the poor have more than just a rhetorical dislike for a national VAT. Most of the poor are not paying taxes outside of SSI and Medicare. A national VAT will increase their tax burden.
If the current tax system worked the way it ought to, I'd be against a VAT system, since it'd probably mean lower corporate taxes and more squeeze on marginal income workers. But realistically, the current system is so messed up that the opposite would be true. The corporations would probably end up paying more in taxes and spend less effort structuring their deals based on tax planning. The marginal income people will simply learn to live with less (and they won't feel it as much if everyone around them is also poor or if conspicuous consumption just went out of fashion) and deal with a less complicated tax system. My main concern would be the shock to our consumption based economy - I think the shock will have to come sooner or later, but it's still a scary thing to contemplate.
I'm curious to know what the VAT would cover. I assume it would cover all services, rentals, insurance policies, etc. not directly taxed under the current regime. Enforcement would be a lot easier if everyone goes to a traceable cash card/credit card system.
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Astrid,
I think we may be past the extraction point.
Just for fun sometimes I'll walk around the neighborhood on the weekends and go through a couple of the hundreds of open houses. On Sunday, the agent was closing an open which was for two condos in a four unit building in order to get to his next open which was for 4 units out of a 4 unit building. It's empty!
I love renting!
Paul
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Mr. Vincent,
I agree with your points that Prop 13 is a political third rail and most (shortsighted, in my mind) people who bought into them will loath to lose them. But I cannot agree that Prop 13 is good tax policy.
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Randy,
Thanks for the use-tax explanation. About the only fly in the ointment (aside from having to overcome all the powerful, entrenched interest group opposition you mentioned) is the fact that rich people spend very little of their income/net worth on consumption, while the poor spend the large majority of their income/net worth just to survive. This would make it somewhat regressive.
Of course, as you said, they could set the tax rate much lower on "essential" commodities, like meat, veggies & milk, while higher on "luxury" goods. Something tells me that the rich --as always-- will find new ways to exploit the system and lobby heavily to create brand-new loopholes to replace the old ones. It might work fairly well for a while (10-20 years out?), but after the tax lawyers, PACs and lobbyists go to work on it, who knows?
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HARM,
You've made the assumption that property taxes are inherently part of life in your "life is unfair" response. They are not!
Paul
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Paul a country can run without taxing ppl or service only when it has other resources of generating money. In Oman Sultan gets certain percentage of oil money and runs the Goverment. However in most of the countries they have taxation to run Goverment.
King_Cobra,
But how does oil (the resource) "generate money"? Ultimately, it generates money mostly by being sold to consumers in other countries. That money then gets spent on rich sultans, lavish construction projects (Google "Dubai" and "The World") and social welfare.
Basically in, SA, Oman, UAE, etc. taxes are "collected" by the government having a monopoly on the greatest resource in those countries, which other countries desperately need and will pay for: oil. Taxes are an unfortunate global reality, but whether they are paid indirectly by state-run monopolies (Arab world) or directly by taxpayers/consumers (Western world), they must still be paid.
Again, there is no such as free government.
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I don’t know where you are from, but I’m guessing you are either not from LI or you are a hermit that doesn’t know anybody.
More than half of my friends have already left to buy in states such as NC, PA, GA, TX, IN even FLA, some are in the process of moving and many of the others who bought are starting to regret it.
No, I'm from LI.
My friends moved to places like DC, Boston, and the City. But then again, most of my friends became doctors/lawyers/consultants/bankers.