patrick.net

As orbitron says, this is very simple. The home is inexpensive, it's the land that cost so much, as least here in coastal California. Just look at your homeowners insurance policy and they are only insuring the dwelling, not the land. Only the building burns down or blows away in most instances. Homeowners insurance is very cheap in my opinion and that's why, the are not insuring the ground underneath your house. You might have a million dollar property, but the replacement cost for the insurance company is a fraction of that.

EconPete, you have clearly never been to Europe.

The house cannot be worth $23,000 in bay area because a luxury apartment nowadays (2 bedroom) can easily cost more than that to rent in 1 year. The pricing of the landlords as well as the purchase/paying power of the local population determines buy/rent ratios with regional variations of course.

lurking says

As orbitron says, this is very simple. The home is inexpensive, it's the land that cost so much, as least here in coastal California. Just look at your homeowners insurance policy and they are only insuring the dwelling, not the land. Only the building burns down or blows away in most instances. Homeowners insurance is very cheap in my opinion and that's why, the are not insuring the ground underneath your house. You might have a million dollar property, but the replacement cost for the insurance company is a fraction of that.

What you didn't say is that you never even "Own" the property/land that the house sits on. Try not paying property tax for a year or so. See who actually owns the land. You are renting that spot of land from the government, even after you think you have "paid" for it through the mortgage or cash that has exchanged hands from one "owner" to the next.

Who is the nitwit? ForcedTQ doesn't "own" mulitiple highly taxed, devaluing assets.

EconPete says

Who is the nitwit? ForcedTQ doesn't "own" mulitiple highly taxed, devaluing assets.

I don't feel that my properties are "highly taxed" by the CA counties, they are not devaluing, and they are paid for cash cows so I don't buy your silly argument. Hint: I may write the checks, but the tenants are paying by virutue of pass through.....you probably couldn't have figured that out on your own.

Price of house = Price of land + Cost of building & structure less depreciation + cost of home improvements made from time to time less depreciation

Is the land price that is appreciating. In fact, land is more than 80% of the house in SV. You can acquire an old badly maintained house for nearly the price of the land.

Quote from lurking
"I don't feel that my properties are "highly taxed" by the CA counties, they are not devaluing"

http://www.zillow.com/local-info/CA-home-value/r_9/#metric=mt%3D34%26dt%3D1%26tp%3D5%26rt%3D4%26r%3D9%252C3101%252C1286%252C2841%26el%3D0

Let me guess, all your homes are in Mono County which is the only county that didn't depreciate in value Y-o-Y. ha-ha
Sure looks like a lot of red to me buddy!

Gold, bonds, and stocks all have a zero annual tax rate, other than inflation which is a moot point because real estate is also subject to this tax. Real estate unfortunately is a taxed asset. Therefore relative to other actual investments your assets are taxed heavily.

EconPete says

Let me guess, all your homes, lurking, are in Mono county

Ah, no, you guessed wrong, as usual. I can't say as if I have ever been to Mono County. When I go to the mountains I prefer Placer, El Dorado, and Shasta counties, but I don't own anything there either. It's all coastal CA metro rentals for me. That's where the money is in my opinion. If you read any of my posts you'd already know that.

lurking says

Yeah, yaah, this is a tired argument. I have no mortgage on most of my properties and I pay tens of thousands of dollars in taxes every year and will continue to, and to the surprise of many, I don't mind paying them. I guess I won't have to try your approach and not pay the taxes to see what happens. I'm smarter than that and know what will happen. You are a nitwit.

Nitwit? You are showing your true colors here. The argument is not tired, and in fact, has not been talked about enough. If more potential home buyers/owners/mortgage holders and rental tenants alike actually thought about this for a minute and really understood the gravity of the property tax system, they would have ammunition to use. Research back to the begining of the property tax in California and see why it was started, what it was funding and how it has evolved. You don't mind paying them after all that research? REALLY? Prop 13 has protected you well it would seem.

Rent Seeking is your game. I will assume your rentals were purchased a while ago, at or below the going rates current for that time. That was your starting point for property taxation. I would also assume that, as rent prices fluctuate upwards, you have continued to raise your rates to stay "competitive." Correct on my assumptions? Well, if so, then your "profit" from said rentals has continued to escalate, all the while your exposure to increased taxation is limited to a 2% increase per year courtesy of Prop 13. So you pass those limited increases on to your tenants for sure as you said, while increasing the profit you see courtesy of limited taxation.

Sure you don't mind paying capped taxes. Rent-Seeking without regard is fun, huh?

My approach, not paying them? Never said I did that, that was an example meant to show you WHO actually owned that property. Most people don't actually think about that. You get it yet?

EconPete says

So, when the average home in 1950 was $7,354 and inflation adjusted is $70,000, why are people paying between $60,000 - 180,000 for these homes? The 1st and 2nd owners of the home built in 1950 didn't absorb any of the depreciation! Maybe homes are not subject to the laws of thermo dynamics (ha-ha). More probably, the 3rd and 4th owners will be t
he lucky ones to assume the full depreciation of the home.

Marketing, loan terms that make it easier for people to spend more money, and a larger labor pool that includes women. 1950 is about where we got the modern 30 year mortgage.

In the 1920s banks were making 2-3 year loans and life insurance companies 6-8 years. By 1940 the numbers had increased to 10 and 13 years respectively. By 1950 the average mortgage length was 15 years.

In the 1920s banks were making loans at 50% loan to value ratios and the life insurance companies somewhat lower. After WWII they'd reached 70% and S&Ls would write loans for 75% of property values.

ForcedTQ says

What you didn't say is that you never even "Own" the property/land that the house sits on. Try not paying property tax for a year or so. See who actually owns the land. You are renting that spot of land from the government, even after you think you have "paid" for it through the mortgage or cash that has exchanged hands from one "owner" to the next.

You own the land. Who gets the money when you sell the house? If you weren't charged property tax, then the needed revenue would come from some other tax. Seriously, to say that homeowners don't own their land (after paying off the mortgage) is just a facetious remark.

Bigsby says

If you weren't charged property tax, then the needed revenue would come from some other tax.

The "Needed" revenue is debatable, and probably should come from another defined source that is not dependent upon someone's ability to pay that is eroded by the "ownership" of an asset that has a value which is ever increasing due to the value of the currency which it is valued in ever decreasing.

If one truly "Owned" something, a "Tax/Fee/Assessment/Charge" which is left unpaid would not preclude the continuance of ownership by said individual.

To "own" land "fee and clear" and live on it is to be an occupant of that land that you have paid a sum (or inherited) to transfer certificate of title to the previous occupant of said land.

I don't see how your argument of "Property Taxes are a necessary revenue source" changes who actually has control of "your" property.

Lol, they depreciate after you sign your buyers contract.

orbitron says

It's called "land value" plus the value of the house given its current condition.

This isn't rocket science.

If it was really "land value" than the price of new construction should be low if you own your own lot. It isn't.

Land appreciation alone does not explain the long-term increase in prices.

Part of the difference between 1950s and 2010s housing cost for new construction is that we build bigger and better houses today than the crapholes built in the 1950s. Of course, profit margins are also higher.

Only CA has expensive land.

Everywhere else, people just build outside of downtown.

Dan8267 says

Part of the difference between 1950s and 2010s housing cost for new construction is that we build bigger and better houses today than the crapholes built in the 1950s. Of course, profit margins are also higher.

xenogear3 says

Only CA has expensive land.

CA desert you can buy for pennies.
New construction cost depends a lot from local labor costs and local permit requirements. Materials cost same everywhere.
Bigger house is actually cheaper per SqFt.
Crapholes are built today as well.

The answer to the OP's question is really quite simple:

1. the price of housing is only partially dictated by the value of the physical materials that make up the dwelling - - which is the only component subject to physical depreciation (excluding rare cases when land is actually destroyed - - mud slides, etc.). All parts of a car are subject to physical depreciation. With a car purchase, you are not paying for an included product (land) that is not generally subject to physical depreciation.

2. The price of housing, like everything else, is mostly a function of supply and demand for the good in question. What do you think would happen to housing prices is 75% of the world's population died tomorrow? Even though the underlying properties would not depreciate in any physical sense, they would be worth far, far less because demand would drop relative to supply. A more common example is what happens to the price of housing in a community when a major employer decides to locate in that community, bringing jobs to that town? What happens to a factory town when the factory closes? The price people are willing to pay for housing drops, even though physical depreciation does not occur.

note: btw, I do not mean to imply that housing in this county trades in a truly free market. Government intervention warps the supple/demand equation, but does not alter the fundamental concept.

tjjenkins says

think would happen to housing prices is 75% of the world's population died tomorrow? Even though the underlying properties would not depreciate in any physical sense,

The stench from all the decaying bodies would not be good for house prices though. Especially, the people that rot away unknown in the attic. You'll never get that odor out of the house.

xenogear3 says

Only CA has expensive land.

Everywhere else, people just build outside of downtown.

Really? Try any coastal property anywhere in the country. How about the Florida Keys? Or a nice lakefront property in a good area? Land is cheap if it's in an undesirable location. This is true in CA as well.

tjjenkins says

2. The price of housing, like everything else, is mostly a function of supply and demand for the good in question. What do you think would happen to housing prices is 75% of the world's population died tomorrow? Even though the underlying properties would not depreciate in any physical sense, they would be worth far, far less because demand would drop relative to supply. A more common example is what happens to the price of housing in a community when a major employer decides to locate in that community, bringing jobs to that town? What happens to a factory town when the factory closes? The price people are willing to pay for housing drops, even though physical depreciation does not occur.

note: btw, I do not mean to imply that housing in this county trades in a truly free market. Government intervention warps the supple/demand equation, but does not alter the fundamental concept.

I like the way you put this. A breakdown in what the core cost components in realty costs are. The Land component will fluctuate as you said due to actual demand of the micro realty climate, population density, ability to pay (wage level), at a much greater rate than the improvement cost on two different properties in two locations with different micro demands. Improvement costs stay pretty close to the same zip to zip (ability to pay has highest bearing on price in this instance). With the actual land, what is being traded, is the right to occupy that land /with real property improvements, wh ich is the right to rent (pay property tax to the government).

The few that are left [from the 1890s] are in very poor shape and are in very poor neighborhoods.

Huh!? Not only have you never been to Europe, you probably haven't spent much time in the northeastern USA either.

(Incidentally, where I live, in Tokyo, housing really does depreciate fully over about 50 years and is typically unlivable after that much time. My own apartment, built in 1970, has an assessed value of about $12,000, with the land under it worth ten times that much. But in the USA, where well-cared-for prewar and 19th-century homes aren't even mildly difficult to find?)

ForcedTQ, agreed entirely on how property taxes destroy the fundamental principle of ownership. You don't own something if it can be taken from you by another party if you don't fulfill an obligation imposed unilaterally by that same other party. I'd much rather see this tax money raised through estate taxes. That way the owner truly owns his home until death, and the inheritors will pay tax on what is basically unearned income for them.

ForcedTQ says

What you didn't say is that you never even "Own" the property/land that the house sits on. Try not paying property tax for a year or so. See who actually owns the land. You are renting that spot of land from the government, even after you think you have "paid" for it through the mortgage or cash that has exchanged hands from one "owner" to the next.

Bingo.

It's hardly "ownership" if I have to pay someone a good bit of money every year just for the privilege of keeping it.

You never get to own it, property taxes almost permanently go up by 3% annually unless you bought at the top of the bubble and saw some temporary decline.

[...]

curious2 says

This terminology goes back to feudal times, when local lords leased land to their vassals. Today, the feudal lord is replaced by the elected government.

How appropriate.

Curious2, interesting relationship between easy credit, home prices, and local tax revenue.

There have been a couple of long term studies. Shiller did one of SF from 1860 to 2000 or so, which has the obvious problem that not many house built in 1860 are still extant. The other one was IIRC of Amsterdam and covered a 300 year period. That one has more validity to my mind because those are mostly the same structures and the records are excellent. Appreciation was between 1% and 2% over the long term, corrected for inflation. There were long periods of price depreciation in there, timing is important...

Hi. I wondered the same thing through accounting school. I was thinking about it tonight and put some pieces together. I believe the missing piece is market value. Market value is going up a lot faster than depreciation. So, depreciation has been kept out of the equation and is only considered on noticeably older homes. As long as the market value of houses continues to rise, homes will be seen as an appreciating asset. When we have more homes than people, and they can't be sold for megabucks then depreciation will begin to take its toll in market value.

What are your thoughts on this?

Ben G says

Hi. I wondered the same thing through accounting school. I was thinking about it tonight and put some pieces together. I believe the missing piece is market value. Market value is going up a lot faster than depreciation. So, depreciation has been kept out of the equation and is only considered on noticeably older homes. As long as the market value of houses continues to rise, homes will be seen as an appreciating asset. When we have more homes than people, and they can't be sold for megabucks then depreciation will begin to take its toll in market value.

What are your thoughts on this?

Depreciation is a GAAP concept, non-cash matching principle. In the housing industry, you'll be better served to understand cash concepts and cash replacement cost, permanent costs.

A house that rents for $25 a month in 1930 is renting for $5000 a month today in San Francisco. When you follow irrelevant concepts like depreciation, it does not jingle with cash reality.

The four things that matter in real estate are":

location Grade (A-F)
condition Grade (A-F)
Permanent cost (High to Low)
Gross Yields in correlation to the above.

Those grades will tell you what the gross yields will be. An A location A condition like a New home in Palo Alto with a 3% gross yield is probably better than A grade F location Grade B condition home in Vallejo with gross yield of 12%.

Concurrently, I would never buy real estate in Texas at any cost over 200K due to a 3% permenent cost from property tax and heavier maintence from the hot sun on a bigger roof for more to maintain. It makes no sense to carry an asset that has so much permanent costs and so much to square feet to maintain in relation to rent.

SFace says

Those grades will tell you what the gross yields will be. An A location A condition like a New home in Palo Alto with a 3% gross yield is probably better than A grade F location Grade B condition home in Vallejo with gross yield of 12%.

Why would it be worth making a real estate investment at 3%? I can get nearly that much from a long-term CD, and with much less risk.

This may be a philosophical difference. I want return on investment. Maybe you want speculation instead.

Homes do tend to just up & die in more humid climates.

Plus what was built 100 or 50 years ago doesn't really match the rising standard of living we have now, so replacement can also be more economical than remodeling.

Both of these factors drive the Japan market, where it's very common to raze and rebuild.

But my mom's CA place was built 30+ years ago -- new roof, garage door, WH, AC, insinkerator, carpet, painting, still perfectly livable.

Kitchen appliances could use replacing, and new triple-pane windows, insulation, exterior work to bring up to 21st century standards.

Definitely, if you want to talk depreciation, think of having to remediate anything pre 1970 that is chock full of lead paint and asbestos, gotta be gutted. Foundations made out of rebar don't and won't last either. Although, cracks in floating slabs are normal, I guess landscaping can help but I nary see a basement that does not leak water .. eventually. They just keep making cheaper, some of these houses from the 50's are pretty solid, but it's all about keeping a good roof on the house, and how about those asbestos siding you still see around. These 10-20 year roof's made with tar .. simply designed to have to be replaced. Now, I see they've got plastic slate for a 50 year roof, vs. clay, 100 year roof, copper nails, etc.
In Europe they've got roofs that are 500 years old.

Luxury apartment? Try regular to crappy apartment build in the 80's in San Ramon. dublin hillz says

The house cannot be worth $23,000 in bay area because a luxury apartment nowadays (2 bedroom) can easily cost more than that to rent in 1 year.

everything says

In Europe they've got roofs that are 500 years old.

No one suspended the laws of physics in Europe. Slater and Clay tile realistically last around 80-100 years there and here. Really fanatical care in a very mild climate could maybe stretch that as far as 200 years, but I doubt it. The limiting factor is the nails. The reason you see so many clay roofs in Europe is fire codes dating back 1000 years or more. In France all the buildings are stone because of fire codes. The US had mostly slate ad clay tile roofs until the civil war because of fire codes, then much cheaper metal roofs became available. Asphalt shingles pretty easily go to 20 to 30 years with decent care. Since clay and slate (requiring a very strong roof specially designed for the weight) cost 800 per square and asphalt costs 100 per square the economics are not hard to figure out. Asphalt shingles are cheaper long term even with replacing them every 30 years.

Heraclitusstudent says

That's utter BS.

The ground will move and ruin the foundations.

The wood will always end up twisted and deformed just from the cycles of dampness followed by drying. Large beams will sag with age.

I lived in a 100 year old house in upstate NY and a 160 year old house in NEPA (North East PA). Foundations were original and just fine. No twisted or deformed wood either. Sorry, but you are just wrong. Don't let the siding or roof leak long term and houses will last pretty much forever.

Heraclitusstudent says

That's utter BS.

The ground will move and ruin the foundations.

The wood will always end up twisted and deformed just from the cycles of dampness followed by drying. Large beams will sag with age.

Modern wood from fast growing trees (used nowadays in the US) is soft and can't last 30yrs if exposed to the climate.

Clay tiles are porous and get cracked by frost and generally don't last more than 40yrs.

Honest question - so how about a modern house built using:

1) A lot consisting of stable ground. Lets say as evidenced by the intact foundation of the now torn down late 19th century Victorian that used to occupy the spot.

2) If the soil is heavy clay install a drip irrigation system to keep the soil from drying out.

3) Build the house following every building code to the letter.

4) Build the house using exterior grade parallel strand lumber or similar. This is specifically designed to address your concerns regarding soft lumber:

http://www.apawood.org/level_b.cfm?content=prd_lvl_main

Beams made this way should not twist, split, bend, crank or rot.

5) Treat all "natural" wood with boracare or similar termite/rot pretreatment.

http://nisuscorp.com/builders/products/bora-care

6) Seal the entire subfloor, floor and walls with a layer of kilnz or similar product prior to installing flooring.

5) Install top of the line fiberglass framed windows and doors.

7) Use rebar in all concrete (may be code these days)

8) Use ipe for all exterior wood (decking and/or siding). If feasible also use for subfloor.

9) If stone siding is preferred spec real stone, not painted concrete. The latter tends to chip over time exposing the concrete color whereas chipped stone just looks the same.

10) Cabinetry - Hickory or harder:
http://en.wikipedia.org/wiki/Janka_hardness_test

11) Spec rockwool rather than fiberglass as insulation

12) Roof - Stone coated steel:

I believe if a house is built using these basic criteria it will last a very very long time and may not cost much more than a "standard" house.

Heraclitusstudent says

If you look at Europe, it's only better because houses are built in stone and/or concrete. Even so, I'm pretty sure 90% of houses are less than 150 yrs old. The one that are older were likely completely redone with only outside walls staying in place.

I think that has a lot more to do with the violence of European history than the quality of the construction.

everything says

Foundations made out of rebar don't and won't last either.

In San Francisco and the Bay Area in general, some houses are so old that you have stone or brick foundations. Generally speaking, the buyer should have replaced these long ago, but many people are cheap. I even saw one place with a ramshackle addition (definitely not to code and not level with the existing house) where they added additional stone foundation to match the existing stone foundation, instead of doing it right. That stuff doesn't work in earthquake country.

everything says

These 10-20 year roof's made with tar .. simply designed to have to be replaced. Now, I see they've got plastic slate for a 50 year roof, vs. clay, 100 year roof, copper nails, etc.

In Europe they've got roofs that are 500 years old.

I'm calling shenanigans on the 500 year roof that you're claiming.

In addition, most of the 30, 50, or longer roofs you can buy don't really last that long most of the time. What bob2356 said on the rest.