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Home buyers frequently cite the mortgage deduction as one of the primary reasons for home ownership. Do you think this is a reasonable argument? Do you think additional considerations such as interest rate and pricing would affect the validity of the argument and if so, in what direction?
Secondly, many here have argued that Prop 13 and the $250,000 per person per home appreciation exemption played a much greater role in fueling the current housing bubble. Do you agree?
Your thoughts on the AMT? Was it created by the devil? Has it asked for your first born? Did the AMT invent granite countertops?
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Different Sean's website
Investors in Oz get numerous tax breaks, and nothing much on owner-occupying, so the position is more or less reversed from the US one. However, we are seeing similar rates of investment purchasing, e.g. 40% of new mortgages have been for an investment property in both countries in recent times (altho that could be changing as the bubble bursts and ROI diminishes, which even the dummies who just attended a RE seminar can now see).
There's no Prop 13 in other bubble centres, both nationally and internationally, e.g. NYC and DC.
This might mean that other factors are equally to blame -- historically low interest rates, a shaky sharemarket post-Enron, WorldCom and dotcom, and much more liberal lending products from the banks, with a transformed 'acceptable risk' profile. (We are now beginning to see the fallout from the new acceptable risk products from the banks...)
Sharemarkets are recovering and confidence in stocks is increasing. Property ROI is mined out for another 10 years. The Juglar business cycle is turning another notch...
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Oz OOs get a bigger tax break than the US when they sell, the gains from primary residence is NOT taxed at all. Of course, you get no deductions if you sell at a loss. How to determine primary residence? Any homes that you lived in for the last 6 years and rented out for less than 6 months (ajh and DS, correct me if I'm wrong). If you rent out for more than 2 years in the last 6 years, cap gains are calculated pro rata. So theoretically, I can move into one home every 6 years in Oz and reap all the gains tax free.
In the US, if you live for 2 years out of the last 5, you can claim that home as one of your main residences (up to two), and get that $250K pp, $500K per couple tax deduction. So theoretically, you can move every 2 years and pocket your gains $500K tax free.
Oz encourages property speculation far more than the US. Prop 13 is unusual and confined to California, Oz land tax is a joke. You know how much it is for a million-AUD property in QLD, for example? Around $2500 AUD a year, that's it. I don't know how they assess it, but the tax % of the property is so low that the hike in value won't lead to a big jump in annual holding cost of property tax. Then, the council rate is about $1200-1500, so the total holding cost is south of $5K even for high end properties.
Therefore, although Australia taxes heavily on income, and investment gains, holding property in Oz for long-term gains is very cheap. Those in the highest bracket of 48.5% typically buy negative gearing (slightly negative cash flow) properties to lower their income tax while waiting for appreciation.
This whole negative gearing thingy has just as much of a psychological impact as the mortgage interest deduction. You really have to run the numbers to understand if it works for your scenario. With the exception of those who have most of their income locked in the 48.5% tax bracket and confident of property appreciation, the tax benefit is offset by the negative cashflow one has to sustain throughout the lifetime of the property. If your cashflow is positive, then no negative gearing tax benefit can be reaped.
AMT is a complicated bitch. You CAN deduct mortgage interest but NOT property tax. Property tax for a typical million-dollar home in CA is $10K, while the annual interest on a typical loan for that million-dollar home is around $50K, so you see AMT doesn't dilute the tax benefits so much.
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Different Sean's website
As my father once told me, “You don’t get rich spending a dollar to save 30 cents.”
It's just like buying google shares at $200, and the whole P/E disaster of the dotcom era -- you buy a stock for its perceived capital gain value, not for its dividend. In the case of Oz, investors can write off any losses on investment property against personal income, and thus could get up to a 50% refund from the govt at tax time. A refund for speculating at a loss. They also halved the capital gains tax on the sale of investment property. These things prompted RE gurus/spruikers to encourage people to buy loss-making properties in the belief that the inevitable "conservative" 10% growth a year would put them into positive cash flow territory in, ooh, say 10 or 20 years. Meanwhile, the govt will be equal partners in your loss! The taxman is paying for your property! Isn't life great? So these guys were making a loss to get ahead, in their estimation. It *can* work in that the dollar will inevitably be devalued over 20 years, so a large mortgage now may look like a small mortgage in 20 years time.
However, the price of properties may well collapse, since it's travelling at 200% of historical norm, and since they pushed up the income tax threshholds, most people will now most likely only get 33% back at most. These things have served to cool the market a little. Finally, the Treasurer has relented from his bubble-pumping habits of the past and has done a couple of tweaks to encourage more investment in shares and less in property as boomers approach retirement...
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astrid's website
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justme,
I'm certain someone could track me down if they made an effort - I've narrowed myself down very small population sets, and I have a very unusual knowledge set. Odds are, the best I can aim for is semi-anonymous and not disclose opinions that could get me fired.
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People don't like to pay taxes.
I know of a couple who DIVORCED on paper so that each of them can carry 2 houses on their individual mortgage deduction, instead of 2 per couple. Well on top of this, they sort of hated the marriage tax penalty. They still lived together with kids after the divorce.
The Superhome series also feature some Californian couples who camp out in Vegas 6 months out of a year to evade the CA state income tax. I mean, they actually change their living behavior to cater to the tax codes. I also know of an ex-colleague who moved to Seattle for half a year before he cashed out his options, so that he didn't have to pay CA state tax, running the risk that the stock price might go a lot lower in the meantime. There were plenty of people during the dotcom time who borrowed money to pay AMT for exercising their options and hold for another 18 months to qualify for cap gains tax treatment (a swap of 40%+ bracket for 20%), without regards to the risk of plummeting stock price in the meantime.
Let's face it, people HATE taxes. They do all sorts of crazy things to avoid paying tax.
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http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/02/18/REGL7O6FH81.DTL
"So overall, Bay Area housing has always been expensive and over the years it has become even more so. However, there are a variety of financing options available today that are allowing individuals to break into the market. Just realize that you may need to live farther away and more than one person in your household may need to be pulling in an income. The good news is that your property taxes will rise at only modest levels and your homeowners insurance premiums may even decrease.
Also, keep in mind that home appreciation is on hiatus. With interest rates still near record lows and a healthy inventory, that certainly makes for a buyer's market. Of course, if history is any indication, prices will start to climb again before you know it. "
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Here is my letter to Mr Venezia who wrote the article in the SF Chronicle
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/02/18/REGL7O6FH81.DTL
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Mr Venezia,
Your story in the San Francisco Chronicle on February 18, 2007 is incomplete and potentially misleading. You imply that housing has become consistently less affordable in the Bay Area since 1979. The graph with the article also appears to show this.
But if you use a combination of interest rates, housing prices and income to measure affordability you clearly see three years where affordability was at its minimum, around 1982, 1989 and 2006. In between those years affordability was much better.
By leaving out a key variable, interest rates, you are doing a disservice to your readers.
Gavin
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Unix system engineering, unix operations, WAN network engineers, java programmers, you name it.
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"I know someone who bought a $1M place in Los Altos for cash last month."
Was it condo or townhouse? We looked at a tiny shack in Los Altos with an asking price of $1,050,000 - after seeing it I would not even rent it, let alone buy it.
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wtf Says:
Oh! job market is tight now! should I jump-in and buy now?? or else, doomed to be a renter forvever with my meager savings, worth over a quarter million dollars now??? oh god!! help me!!! please, help me!!!!!
_____
You should sit back. Munch on some Cheetos. Slake it all down with a ice-cold glass of Hi-C fruit punch. Belch. Wipe the crumbs off you shirt. Yawn. Click your heals together five times and say, "there's no place like Silicon Valley, there's no place like Silicon Valley, There's no place like Silicon Valley."
Then wait five years before doing anything with your hard-earned $$$.
Just my two cents.
THE END...
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astrid's website
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I think Detroit would be just fine, it's depressing as heck right now.
I can rent just about forever, so as long as BA rent stays reasonable, a good job market is fantastic for me.
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Randy H.,
I don't see this boom as having been the result of anything other than cheap credit and a bubblehead mentality that took over (get rich quick transferred from dot coms to real estate). I don't think that good economic news will stave off a bubble contraction.
Prop 13 has personally made it far, far less likely that I will ever sell my city condo. Why would I? I like it and it's almost free. I suppose a small number of properties are permanently off the market that would have been sold because the carrying costs are so low, so maybe there is a miniscule contribution to the squeeze in supply?
skibum,
I went on a boondoggle this weekend where we had ski champions ski with us and take us on races at Squaw. Tamara McKinley was one of the skiers we had. She is a Realtor in Tahoe when she isn't skiing.
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Argh, another comment of mine is in moderation.
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I find the article about tech moving to the City proper very encouraging, but not for reasons related to housing prices.
Back in 2000 I interviewed with a number of tech places on the peninsula but fould the idea of working in San Jose (or equivalent) appalling. There were some places up in the City, but they were few and far between. In contrast when I came to Boston, there were many opportunities in Kendall Square (near MIT) which allowed me to live in Boston proper, and still have a 15 minute subway commute.
Meanwhile my friends who moved to the City had to deal with hour-long driving commutes. Not dealing with that commute is one of the best features for a techie in Boston, in my opinion.
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So...... in short, I'll tip my hat :) to the "cheap money" camp!
But to have "continuous combustion" we need to add fuel, right? If it were just cheap money alone 2005 "might" not have happened as this thing petered out of it's own accord. Factor in the added incentive of f@ckin' the gub'ment and it was just too much temptation for blowed up daytraders that felt this was "their window" to go double or nothin' and make it all back and then some!
I mean they were "owed" this, right? I don't know how many times I've heard the flopper's lament what a bummer it is that they missed on their market timing thingee? Now just getting these people to "wait" the TWO WHOLE YEARS seems like an awful lot to ask? I mean if I can pick up a property on the cheap and flip the same day without ever having spent the night there and clear a 100k I should get to "keep" all of that, right? Provided I can just find a greater fool.......? Hmm.
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I've always wanted to have a HF own part of the upside potential of my home, I'm calling "Rex" T O D A Y!!!
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Maybe someone can speak in short understandable sentences to tell me why the REX product is so horrible. I mean, if Bay Area home prices are going to slide sideways for the next 15 years, why not take the money and run. This product seems to bring the vaunted liquidity to the homeowner which many have lamented about on this blog. About the only negatives I can see are worrying about lowball appraisals and "at the time the house is sold, there is a service charge of approximately $15,000."
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FAB,
I do indeed mean committing tax fraud. If one claims a rented out house as their primary residence, then they obviously are not filing their rental income correctly either. The home I'm currently renting in Mill Valley is just such a case.
I am not a tax attorney, tax accountant, or tax fraud researcher, but my anecdotal data (along with the little I've read over the years) leads me to strongly believe that many otherwise normal people cheat in this way. Two of my own hyperconservative, red-state, "how can you live in California with all those ***?" elder Midwestern relatives openly cheat with their musical houses. They will tell you they try to follow the rules but they can't, what with all those illegal immigrants who don't pay any taxes at all.
Come to think of it, a ton of people also cheat on Medicare related stuff. You'd think that everyone over 65 suddenly lived on welfare and ate cat food to survive.
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I actually think inflation is higher than that; I was simply pointing out that it's not in the official numbers.
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theotherside,
news for you, go check the BA housing price in 1975-85, when US was having double digit inflation and Treasury yield hovering in the high teens, the BA housing price barely moved.
Inflation in general does not translate into higher housing price. If you believe in inflation, like I do, buy gold. It is a much better hedge than housing.