patrick.net

OpinionsPlease Says:
Quick survey/question. Do you think it’s harder to buy during an upcycle or a downcycle?

Whatcha think?

The definition of 'harder' partly depends on how much the banks are willing to lend you in the cycle also. In a downtrend after a huge uptrend, they are more likely to be thinking prudentially. Therefore, it might be harder to borrow enough, or they may require more security (lower LVR).

The other thing that might make it 'hard' is supply/demand -- how many reasonable quality properties are on the market? Are people rushing to sell before the bubble bursts, or as prices are sliding? In which case supply may well outstrip demand. Therefore it would be easier to buy in a soft market as other buyers hang back, waiting for further falls, and sellers are desperate to sell as high as possible.

It would be 'harder' for you in the long run if you caught the poor little bouncing cat's dead body halfway down and paid 30% more than next year's deflated price...

There’s nothing “too smart” about putting one’s self in legal jeopardy due to failure to pay taxes.

Astrid, when I say too smart, watch this video...2 and a half minutes into it you will see Irwin Schiff. He was the first one, many others have been fighting this since.

allah,

I'm quite aware of the tax-dodgers' arguments and I think they're absolutely ridiculous. Every soverign in history has retained the right to tax its citizenry and I'm very thankful for the fact. I don't harbor any illusions about exactly how brutish and short my life would be without said soverign.

“He was the first to realize that taxes were not required by law. The IRS put him away without a fair trial. I give him credit for trying to fight the system! ”

There's always some pseudo-libertarian nut who wants to overlook the fact that taxes pay for roads, trains, schools, hospitals, street lighting, firemen, police, teachers, nurses, doctors, and a whole lot of other public goods which constitute what we essentially call 'civilisation'. If you want roads, you're going to have to raise the money to build them somehow. However, I would probably object to my taxes being spent on a military machine which is costlier than the rest of the world's combined... but I suppose there are other, more targeted ways to protest that legally and produce better targeted publicity...

There’s always some pseudo-libertarian nut who wants to overlook the fact that taxes pay for roads, trains, schools, hospitals, street lighting, firemen, police, teachers, nurses, doctors, and a whole lot of other public goods which constitute what we essentially call ‘civilisation’. If you want roads, you’re going to have to raise the money to build them somehow. However, I would probably object to my taxes being spent on a military machine which is costlier than the rest of the world’s combined… but I suppose there are other, more targeted ways to protest that legally and produce better targeted publicity…

Well, I don't want to hijack this thread with the income tax law; I am just saying that the IRS hasn't been able to admit that paying taxes is the law but rather voluntary. Did you see Sherry Jackson who was a former IRS agent who said "show me the law"? Irwin Schiff was the first to fight it, that is all I was pointing out.

I agree that some of the funds go to building roads, etc. but not all of it and I think that alot of the funds are finding their way into high government officials pockets.

allah,

The US tax system, just like US legal system, is not something you can opt into in part. You either live under its rules and its protection, or you move to a different soverign (or you could raise a mercenary army and take over a small Latin American country as a tax haven) that suits your taste better.

I absolutely hate how a large part of my tax dollar is spent by the current federal government and I'm seriously considering moving out of this country, but I would not shirk on my legal obligation to the US government. It's unethical and it's very dangerous to my health.

The US tax system, just like US legal system, is not something you can opt into in part. You either live under its rules and its protection, or you move to a different soverign (or you could raise a mercenary army and take over a small Latin American country as a tax haven) that suits your taste better.

I think this will soon happen. There are some that want to overthrow our government. One thing I hate about the gov is the way they devalue our dollars; money we have saved all our lives. This is total bullshit and totally unfair!

One thing I hate about the gov is the way they devalue our dollars; money we have saved all our lives. This is total bullshit and totally unfair!

Stop whining and get a loan! :)

Not financial advice.

Well, I don’t want to hijack this thread with the income tax law; I am just saying that the IRS hasn’t been able to admit that paying taxes is the law but rather voluntary. Did you see Sherry Jackson who was a former IRS agent who said “show me the law”? Irwin Schiff was the first to fight it, that is all I was pointing out.

Right, the federal govt omitted to somehow make it a legal requirement to pay income taxes, whereas they succeeded when it comes to murder, theft, spitting in the street and jaywalking. Very careless of them.

Irwin Shiff used the legal defence that he was insane and delusional by the way, and it seems he has a had a number of 'fair trials'. If paying income tax is declared to be 'optional', then what would happen? Everyone would make an individual decision to opt out, and there go the roads, schools, etc etc. I'm not saying that Federal, state and local govt are spending the money wisely, but if govt didn't exist, it would be necessary to create it -- and how do you pay for the machinery of govt? Taxes in one form or another have been around for centuries, and the penalties for not paying them are usually quite severe. I would like more democratic input into the way that money is spent (after all, you are the flagship model of 'democracy and freedom' there, aren't you? showing the light to the rest of the world), and you can demand accountability from your govt as a formally democratic institution. An active media would act as watchdog, you would hope.

Here is a nice piece buy Sherry Jackson

erm, allah, that piece doesn't make much sense, and she shows herself to not be in the loop on thinking about the funding of public goods. the arguments she makes are a bit like the ones MLMers make to justify why MLM works so well -- when you analyse the claims and look at the big picture, it breaks down. however, she may have a point about the zealousness of the IRS in the US in chasing amounts owed, yes.

Irwin Shiff used the legal defence that he was insane and delusional by the way, and it seems he has a had a number of ‘fair trials’.

Don't believe everything you read, there are two sides to every story, take a look at this

Wages always lag inflation and if inflation takes off uncontrollably, we will most certainly have stagflation.

Wages also cause inflation. Their relationship is quite interesting.

I also do not buy the argument of house prices adjusting via inflation.

Let's get real. Our wages will not keep up with inflation. Outsourcing is not a temporary fad. Now that outsourcing leveles have stabilized, salaries in BA have started adjusting after remaining stagnant for ~5 years. This does not mean that salaries from now on will start adjusting with inflation.

Wages also cause inflation. Their relationship is quite interesting.

Let’s get real. Our wages will not keep up with inflation. Outsourcing is not a temporary fad. Now that outsourcing leveles have stabilized, salaries in BA have started adjusting after remaining stagnant for ~5 years. This does not mean that salaries from now on will start adjusting with inflation.

I agree.

Who worries about taxes and money and such things? I did until I discovered I am the true biological father of Anna Nicole's baby. Anna and I had an exlusive secret relationship "at the right time". Even my wife is happy with the news. To celebrate, and I've shared this with Patrick, I'm buying all the regulars here a house.

I can also reveal that J. Howard Marshall adopted me....I loved Dad very much.

It's MINE....all MINE!

Taxes in one form or another have been around for centuries, and the penalties for not paying them are usually quite severe.

The discussion was only about income taxes which were only around since 1913.

True. Unfortunately when peak oil arrives, growing and transporting any veggies will be something of an issue

Not if you grow them in your backyard.

alien,

Yes, even basic agriculture consumes a lot of energy. But California is at a relative advantage to much of the world. Its soil is relatively rich and it's pests relatively easy to control (anyone who grown roses on both coasts will attest to this). Much of its water comes from the Rockies or the Sierras and not via aquafer pumping. And while trucking it in still takes energy, it's a lot less energy than flying it in from another country.

The good news is that we don't have to be zero energy consuming or even low energy consuming, we just need to consume less than we do now.

I suppose if it gets really bad, I'll be migrating to Iceland...they grow vegetables under glass there, using geothermal energy.

FAB,

I agree with your comment about people's opinions regarding middle/upper middle class, but disagree with one of your examples.

Law firm partners making "1.5-2.5mm" are NOT making "a little more" than $275K, and neither are they upper middle class. They are elite, and with even average savings/investment habits can join the true upper class when they retire.

I didn't check the bubblizer, but here is a rough calculation.

1M house with 20% down payment. (Yes, just for the sake of argument, don't complain about down payment.)

At current rates 5% ARM PI = 51K per year, and 6% fixed = 58K per year.

Let's say CPI goes to 7%. With the same spread as today, the 1M house with 20% down will cost

For a 10% ARM = 105K pr year and 11% fixed = 115K.

So at least 100K+ per year will have to be spent on P and I for the same house. Considering CPI is high, everything will be more expensive. So saying that a 300K annual income is needed won't be wrong. Even a dual income techie family needs 50% raise for that to happen.

Not impossible. Might happen. But then this means serious drop in real terms for that 1M house. I don't mind this scenario, but seems a tad unlikely.

astrid/alien,

In theory, it should be possible using enclosed agriculture to use much less water than in the open air.

In fact, my WAG for CO2 remediation in the long term (if it becomes necessary on a genuinely industrial scale) is humungous plastic bags filled with algae and water, where the CO2 is pumped in as required.

These could quite possibly be in desert or semi-desert areas, because while the initial water requirement might be high the ongoing requirement would be tiny.

Luckily, my wages *will* go up with inflation and CPI -- I get an annual CPI raise as a minimum. If rents go up 20%, it will feed into the CPI calculation (unlike mortgage payments), and then into people's pay packets. Presto! The housing boom and individual greed has just succeeded in devaluing the entire currency 10%. Ain't it wonderful?

I watched Sam Zell being interviewed on Bloomberg to day, and one of his comments was that he considered the current rental market to be extremely strong, and was expecting high-single or low-duble digit rent increases.

I don't know whereabouts he's referring to, but surely rent rises like that would have a big impact on inflation measures.

allah Says:
Taxes in one form or another have been around for centuries, and the penalties for not paying them are usually quite severe.
The discussion was only about income taxes which were only around since 1913.

Not really relevant, since taxes have always been there to fund the machinery of govt, in whatever form. Since 1913, (progressive) income taxes have been levied to pay for the welfare state and modern public goods -- unemployment benefits (a la the Great Depression), old age pensions, family benefits, roads, street lights, police, schools, medical care and scripts (in some countries), and so on. You are talking about winding all that back, I presume, and letting the elderly forage for garbage when they retire, including your own parents.

So, most definitely, the need for taxes has increased and been stabilised and institutionalised in the form of income taxes, GSTs, VATs, duties, levies, and so on. It's called plucking the goose to get the most feathers with the least squawking.

A few hundred years ago, taxes were levied largely to raise armies. In the case of 18th c. France, they were spent on building bigger and bigger palaces. Nowadays, they go into pensions and benefits, roads, schools, etc.

alien,

No, I hadn't. That does look interesting. I can think of many areas along the Australian coast where that would be a very nice option for growing your own veggies if you lived there. I don't know about the economics on an industrial scale (or the problem at that level of dealing with byproduct brine, which of course applies to ANY seawater desalination technique).

In my previous post I was actually thinking of this mob.
www.greenfuelonline.com

A VERY savvy family organisation (the Smorgons) have quite recently become the Australian agents.

In the case of 18th c. France, they were spent on building bigger and bigger palaces.

... so the people could eat cakes.

Peter P,

I recently read that the quote attributed to Marie Antoniette actually said "let them eat brioche." That's really worse than saying "let them eat cake since her version of brioche calls for 50% or more fat by weight to flour and lots of eggs.

I made a lard 100% of flour by weight version recently (my mom doesn't like butter pastry and I'll be darned if I have to eat it all) and was less than impressed. Waaay too much fat, it loses its breadiness. (the brioche itself rose and baked well -- it was just too much).

Next time, I'm going to try a 50% recipe and up the sugar.

ajh Says:

> I watched Sam Zell being interviewed on Bloomberg
> today, and one of his comments was that he considered
> the current rental market to be extremely strong, and
> was expecting high-single or low-duble digit rent increases.

Sam Zell recently sold ALL the office real estate that he controls in the US (Google Zell Blackstone Equity Office and you will get plenty of hits since it was such a big deal).

Warren Buffett the second richest guy in the US sold the two pieces of California Real Estate he owned last year and now Sam Zell has unloaded so much California Real Estate as such a high price that he will probably move from about the 50th richest guy in the US in to the top 30.

I don’t think that Sam really thinks that we will see big rent increases in the next year and was probably just saying that to make the people that just made tons in fees spending pension money on his property happy.

SP,

I HAVE convinced her that it's cheaper to rent than to own right now. The hard part will be convincing her to sit on the bubble for very long. When I said she'd rather overpay than rent, I meant that she would rather buy a house realizing that it's cheaper to rent than to buy knowing that eventually it'd break even (30 years down the line) than wait. She's worried that my "We gotta wait for prices to fall" means "We're never getting a house."

She's willing to wait for awhile so long as I am willing to agree to a timeline that involves us getting a house not much later than 2 years from now.

So I'm torn between hoping for a meltdown in prices which will be good for me and horrible for a lot of people and a gradual deflation, which I will be stuck buying into before it hits bottom but will be less traumatic to americans as a whole.

Next time, I’m going to try a 50% recipe and up the sugar.

Let's put that on greencrabs. :)

I like both butter and lard. Actually, also olive oil. I do not like peanut oil.

Nigel,

If it's never a better investment to buy than rent, then you should never buy.

But the odds of that are pretty slim.

SFBubbleBuyer Says:

> Nigel, If it’s never a better investment to buy
> than rent, then you should never buy.

It is interesting to comparing buying a car to buying a home.

If you had $1 Million in cash you could either leave it in a Money Market or CD making just over $4K a month, pay cash for a home or condo (and pay about $1.3K in insurance and property taxes) or rent a $1mm home or condo for about $2K a month.

If you had $35K in cash you could either leave it in a Money Market or CD making just over $145 a month, pay cash for a new 2007 (and pay about $150 a month for insurance and taxes to the DMV). Unfortunately you can’t “rent” a new BMW for $73 a month, half as much as the risk free return on the money and have someone else pay the taxes and insurance like you can with a home.

Only an idiot would “buy” a new car when they could “rent” a new car for less than half the cost of the risk free return on their money, but Realtors are able to convince people that this is a good idea with homes every day (for some condos in San Francisco the taxes, insurance and HOA fees are more than rent in the same building)…

the otherside says: Would you call a multi-millionaire an idiot because he spends 10x-20x more on “same quality” food than a upper-middle class guy….?

Yes. Unequivocally and absolutely.

Conclusion:
Some people get high by seeing their bank statement showing $$$, other get high when they spend their $$$ lavishly

Conclusion: Some people are fools. Does that mean we should applaud foolish behavior? I think not.

The remainder of your argument was sensible. Some people do derive great utility and pleasure from owning a house vs. renting the same house. But I would put forth that the Bay Area premium is too far out of balance for most people's tastes... that is, if they had the common sense to consider it rationally. I bet a lot of people moving to the Bay Area purchase homes without ever really considering what rent would be on an equivalent dwelling.

Renting a house is NOT EQUIVALENT to owning the same house,

Becoming a homedebtor is NOT EQUIVALENT to owning a house.

especially if you have kids (school, friends, after school activities) or you hate moving every couple years or you really really like your neighborhood or you hate having a nosy landlord or it does not fit the preferences of your spouse

You can rent and have all this too. Some Landlords don't even live in the state...and how do you know when that great neighbor will leave and some degenerate takes his place? The renter can easily leave.

Conclusion:
Some people get high by seeing their bank statement showing $$$, other get high when they spend their $$$ lavishly

Homedebtors get high when they see their house appreciate in the double digits; they get even higher when they spend their "equity" on their toys, then thay feel pain when their taxes go up and then they feel trauma and panic when the value comes back down to earth. Renters don't experience this. I call this AEDS "Acquired Equity Deficiency Syndrome".

A better way of saying it is:

"Renting is NOT EQUIVALENT to debtorship."

if inflation is higher, rents will surely go higher to compensate for the cost of servicing the loans …

Not always the case, it also has to do with supply and demand.

if you don’t see why, ask yourself what forces will push the price of tomatoes up if inflation is higher but wages fail to catch up….and why are tomatoes different from rents….

If everyone decided not to buy tomatoes because they felt they were too expensive, they would all dry up and be worthless; the owner of them would lose everything.

Rents stabilize very easily when there are more rentals than there are renters. Also, if the rents get too high because of lack of rentals, they could relocate to other areas further away. If the owner can't get enough income to support his loans, he could lose everything!

You're right, tomatoes and rents share similarities.

Nigel Swaby Says:
Wouldn’t you consider the mortgage tax deduction to be some sort of dividend regardless of the appreciation factor?

Yes, sort of, but you're spending a fortune and over-reaching to get a tiny dividend, and one that is not guaranteed not to be removed at some later time by govt. Govts put on and take off these sorts of things regularly, and they are different country by country also. Shareholders in a particular dept store chain here get a 5% discount on their purchases with a shareholders card, but even with the discount, the performance of the shares is so lousy that you would be better off overall just seeking an alternative investment or stock altogether to make more money.

Over the past 35 years, the median price for houses has always gone up in America. That’s not to say it can’t go down, or hasn’t gone down in specific markets. Housing is not on the same level as the lottery, not even close.

It has not 'always gone up' (I assume you mean by greater than CPI?) -- it has boomed and busted at least 4 times. However, the demographics driving housing inflation over the last 35 years include -- much smaller families on average; general inflation and dollar devaluation averaging 3-4% pa; more than one breadwinner per family; various tax breaks; lower cost of other consumer goods, e.g. by imports from China bringing down prices. All those things have now become static -- families can't get much smaller than they are, you can't get any more breadwinners into the family structure short of putting the kids into coalmines, imports from China can't get any cheaper, etc. Further, 'investors' are retreating big-time from property right now due to the incredibly low and pointless ROI. Once the investors go, that's it. It's very much like the lottery now in that over time you will get about 75% of your money back by gambling based on the house odds, which is what will probably happen now if you buy on a sizable mortgage at the top of the current boom which has all the hallmarks of the tech wreck. If you check Patrick's media reports, you will see the trend towards increased foreclosures and a downward spiral of prices worldwide, especially in bubble affected areas.

FormerAptBroker Says:

I don’t think that Sam really thinks that we will see big rent increases in the next year and was probably just saying that to make the people that just made tons in fees spending pension money on his property happy.

Agreed. The planets finally came into alignment...

If rents *do* go up the way some pundits are suggesting, there will be huge flow-on effects into the economy -- reduced 'consumer confidence' (i.e. crap sales figures and retailers going bust), upwards demands on wages, massive inflation as a result, and so on. All these microeconomic promises to landlords about their forthcoming riches translate into macroeconomic chaos. My own employment agreement has CPI built into wage increases, which in turn has rental amounts built into it. Multiply this thousands of times and Presto! -- you have instant currency devaluation lead by housing inflation.

theotherside Says:

and I can assure you that the owners will pass on the increase cost of carry/financing to the renters faster that you can say “Inflation’s up, I am a winner”

*new* landlords might try this, because they will be the ones who are hurting -- someone who bought their rental 30 years ago won't (shouldn't) be in trouble.

further, the ability of landlords to put up prices depends somewhat on supply/demand -- if demand goes down due to a good supply of cheaper, older apartments, or simply inability to pay, they have to suck it up and wear the hurt themselves... You don't see immediate reflexive passing on of new costs to tenants, there is a lag period depending on lease periods, "unreasonable adjustments" g.t. 10% and so on...

theotherside Says:

> Would you call a multi-millionaire an idiot because he
> spends 10x-20x more on “same quality” food than a
> upper-middle class guy….?

Yes, but I have never heard of this happening. Can you tell me where an apple or a steak costs 10 to 20 times more than it costs at a middle class grocery store? (When people eat out they are not just paying for “quality food” they are paying for many other things for example watching the wait staff interact with patrons at a certain restaurant in Yontville is like watching a ballet).

> With your logic, you will recommend to choose a
> husband/wife based on a spreadsheet…

Money will always factor in to a decision and I’m betting that most people will think twice about getting married to someone that had $1 million in credit card debt…

> Your argument is INCORRECT…what’s the point of having
> money after all…have you ever heard of the concept of a
> UTILITY FUNCTION… Renting a house is NOT EQUIVALENT
> to owning the same house,

I would not get any more utility if I owned my place and the people that rent homes from my parents would not be able to much different if they owned and my tenants in the apartment actually have more utility since If I did a condo conversion they would have the nightmare of CC&Rs and a PITA Homeowners Association.

> especially if you have kids (school, friends, after school
> activities) or you hate moving every couple years or you
> really really like your neighborhood or you hate having a
> nosy landlord or it does not fit the preferences of your spouse

Since I grew up in a family that rents homes I’ve been active in real estate and landlord groups my entire life. Very few landlords sell rental homes with good tenants and if you hand carry the rent on the first of the month most have better things to do than “be nosy”. If your landlord…

> Conclusion: Some people get high by seeing their bank
> statement showing $$$, other get high when they spend
> their $$$ lavishly

Since it would cost about $5K a MONTH after taxes MORE than I pay in rent to buy a condo on the block with the exact same UTILITY FUNCTION I have a lot more money to “spend lavishly” and do things like spending $500 on dinner while many of my homedebtor friends are eating frozen food that they buy at club card savings…

theotherside Then says Says:

> your rent COVERS most of the mortgage costs of your
> landlord (which is the case for the majority of renters
> not about to end up on the streets), ie. It may be may be
> INDIRECT but in most cases renting is equivalent to debtorship…

Most landlords have a very small mortgage (or in the case of my parents and many landlords like them no mortgage). You can actually call any title company and find out how much debt a landlord has recorded on the title before you decide to rent.

> Conclusion: Buying a house with a mortgage is really like buying
> a CALL option…downside limited to downpayment (103%
> mortgage anyone )

Buying a home is NOTHING like buying a call option. A 103% loan on a condo in my area would cost at least $75K a year more than my rent…

> In the event that you are foreclosed, if you have a decent lawyer,
> you can still show the middle finger to the IRS even with HELOC/refi … )

If you are a typical moron FB with a negative net worth you can walk away, but if you have worked hard and have a substantial NW there is no way 1. You can get a non recourse 103% loan and 2. That you can just walk away from a 103% loan…