patrick.net

Jon,

I'll take by "Friends" they mean... PARTY!

? :)

OT: Would you take a job offer from Linden Labs (Second Life)? Odds they will be bought out by Google at some point?

Maybe we should be thankful that Randy isn't around to see this travesty.

The meeting in virtual space is nothing short of creepy.

The google buyout thing smells of pure horsehooey, unless there is definitive evidence. Man, I'm sure every damn startup touts themselves as the "next google buyout." It's just the new version of the next IPO thing. The jackpot comes from google, not stupid day traders this time. I would just evaluate based on the actual job itself, not some buyout prospect. (like SP says...)

Its crazy what the tech market has become. IPO is impossible so 5,000 companies all want the same big 3 to buy them out.

I suppose one day those 3 companies will scale back the buyouts and cause a tech recession.

Hello Kitty,

Same thing for bio-tech. Each one touting the "potential" for their medical/surgical device, patent etc. Each one claiming "a lot" of companies are watching developments in their research with a keen eye... etc. Truth is, the FDA declines 90% of applications.

Prior to 1997 there were other good exemptions for homeowners from the full impact of capital gains.

People 55 and older got a "once in a lifetime" FULL capital gains exclusion on the sale of their home. My parents took advantage of this circa 1979. I'm not sure when it was repealed.

Everyone could "roll forward" ALL capital gains into a new house. IIRC this was repealed at the same time the 1997 $250K exemption took its place.

Using the "roll forward" and old folks exemptions in tandem, people in that generation NEVER paid any capital gains on multiple chains of home ownership. So I can't believe that the piddling $250K exemption really was a major driver in the recent bubble.

DennisN,

the $250K exemption alone is not. But the exemption on TWO owner-occupied residences, classified as lived-in for 2 years in the past 5, certainly is.

I know of many real-life examples (10+) who took advantage of this and rotated in their residences to apply that $250K exemption multiple times.

DennisN,

I'm sorry, I couldn't hear you? I'm on my front porch drinking out of a mason jar. Wiki 1997 Tax Law, study all the links and get back to me in a week or two. Weather permitting I'll still be on the porch.

OO,

Need a swig?

Not to be mean about this Dennis but I've just gotten worn quite thin arguing this in great detail with folks that aren't sure when it was repealed or to the best of their recollection etc?

The Law was sweeping and complex. If we're going to comment on it, it would be best if we were all well versed in it before venturing opinions. Again, I remain unconvinced that increased liquidity and increased volumes of sales necessarily lead to higher prices. Everyone should feel free to convince me otherwise.

OO,

The 250K exemption would have meant very little if the prices only went up 3% year on a 330K house. I agree that in conjunction with loose lending standards and the post dot.com capital "flight to quality," it helped the bubble expand for upper middle class RE investors.

However, I still contend that the far bigger problem was inadequate screening of buyers and people completely losing track of what they can afford. The inducement on the sale was merely icing on the cake.

$250K exemption is a nice tax cut for home sellers, but it didn't take away at least half of home buy/sell costs. The seller would still be paying 6% fees to realtors and the buyer pay financing costs on the value of the sale. The expected value of the $250K tax exemption on 15% of gains is just not enough to justify the crazy RE price increases.

LOL Skibum. I actually wish Randy WAS here to witness this travesty! The creepy virtual conferences are just well, creepy...

astrid,

Most homeowners (other than Seattle, I know, I know) are married. So... we're talking about 500K (not 250K). Given the avg. 401K is 29K (GAO numbers, not mine) how can anyone say this insignificant?

Perhaps on a one time basis and taking into account "friction" no, this in and of itself may not have been that earth shattering. What DennisN may have missed is that (as OO points out) there were MANY that intended to exploit the law with multiple properties on multiple occasions. Now we're talking! Hence 40% of sales in 2005 were second homes.

Under the old law you had to buy a home of equal or GREATER value to be exempt. One dime cheaper and you would have been at the former, much higher cap gains rate! Remember, 1997 changed all that too so forget about 15%. It wasn't like that.

the 1997 tax change was HUGE

Its possible it was the match that started the housing boom fire. At least in SoCal virtually ALL the gains since 1989 were from 98 and on.

So your investment choices are these:
stock market with 50% margin maximum and lowest tax rate being 15%

OR
you choose housing with UNLIMITED leverage (or negative? with cashback at close) and lowest tax rate is ZERO? The no brainer for the much maligned J6P is housing. zero taxes on a 500k gain(married) you have to be a big time drug dealer to pull that kind of dough and pay no taxes.

Can you imagine the boom in stocks if all stock gains were tax free if you owned a stock 2 years? It would be unprecedented. The impact on housing cannot be minimized of the 97 law.

DinOR,

15% of $500,000 (though very few people outside of NY and CA have seen anywhere near that amount of gain) is $75,000. Nothing to sneeze at, but not an explanation for 50-100% increase in housing value. It's as simple as that. The 1997 act is not sufficiently valuable to explain more than a small portion of the housing bubble.

Hello Kitty,

Thank you. I mean after all, two years IS a long time to hold a stock... isn't it? How else do we explain a 39 month bear market (when typically they're 13 months?) How? Real Estate Party!

HelloKitty,

And I would predict that if Joe and Jane Howmuchamonth could play the stock market for 90-100% leverage with no perceived risk and 15% LTCG or even STCG, they would take it over housing in a heartbeat. Transaction costs are much lower for stocks and stocks don't get brown if I forget to water the lawn.

astrid,

We may have cross posted there but please to note, prior to '97 cap gains rates were more like 33% and 28% (for long term holdings). If 1/3 of 500K is no particular deal....

That and the whole "Magna Carta/outlaw" appeal about it! What? No more cap gains? Well... you do have to hold it two years? Two years!? I'm outta' here!

DinOR,

You've convinced yourself. I'm out.

Hello Kitty,

No "cash back at close" stock purchases? No "Buy a thousand shares of BA and get a big screen TV"? Why... I'm insulted!

DinOR,

also, I know of speculators who took the tax-free gain, and split them into dp for SEVERAL homes. In the old tax law, he would have to pay tax on the gain because he didn't roll the gain into a house of higher value.

This tax law has a multiplication effect that the lawmakers were probably not aware of.

Tax law is the most powerful driver of any economy. Think about it, why do so many people take on huge mortgage loans? If you look at the accrued bank interest, and the tax savings, it probably doesn't represent a net gain to the home buyer. In order to obtain tax savings, you need to pay INTEREST, which, unlike paying down the principal, is gone the moment the money is out of your pocket. The nature of interest expense and tax to an individual is the same, money gone forever. However, people are much more willing to pay mortgage interest, because they would rather pay the bank than the government.

And so it ends, yet another "paying cap gains don't matter" poster throwing in the towel. Sigh...

What they fail to realize is that it's so difficult to argue the case from my... end with regard to older tax laws that no longer exist. Look, if a road was posted 35MPH and you said, see? We didn't have any accidents at 35! Let's make it 45MPH (where people regularly now do 55+) and try to get them to appreciate how generous things have been!

Better yet, good luck telling them it's now back down to 35!

Imho, BOTH the 1997-tax-change and easy-money lending got us to where we are.

Low interest rates and poor lending diligence (both caused by excess liquidity) were the enablers. The 1997 tax change lowered the friction.

(I just hope this round-and-round-the-tree debate doesn't cause either DinOR or astrid to take their bat and go home.)

SP

RE: whether the cap gains overhaul of 1997 did anything to fuel the RE bubble? How appropriate the current post over at CR:

http://calculatedrisk.blogspot.com/2007/09/q2-mortgage-equity-withdrawal-1403.html

Check out the MEW chart - notice the huge inflection point at - you guessed it - 1997???

Now I can't prove causation, but the correlation is stunning.

SP,
Yeah, let's not let astrid v. DinOR turn into Randy v. allah...

BTW, If we haven't discussed the effect of these rules changes in detail before, it would be a worthwhile post, IMO.

OO,

Well!!! I must admit even for all of my BITCHING even "I" never thought of that? How very convenient!

Look, the last thing I want to do is run off yet another quality poster like *astrid. And I hate to "pull rank" here but these are things that I've lived, in real life. Not just an on-line forum. Older cap gains rates were downright punitive and many empty nester couples stayed in over-sized, near empty homes waiting for their "out". It's hard to get people to appreciate that with the RE "orgy" we've had the last few years.

Older cap gains rates were downright punitive and many empty nester couples stayed in over-sized, near empty homes waiting for their “out”. It’s hard to get people to appreciate that with the RE “orgy” we’ve had the last few years.

I think any cap-gain tax is overly punitive. It is an archaic idea that needs to be scrapped.

DinOR :

I understand you point ... at least I think I do. And I tend to agree. The effect of that tax law is hard to assess at this point after all the madness, but it seems to have a big psychological impact. Housing instead of being a shelter became a vehicle for speculation. In that sense it is really the match that started the fire as HelloKitty said.

The party was already started when the lenders joined bringing crack with them.

HelloKitty :

India does not have capital gains tax for stocks held more than a year. There is no tax on dividends earned by individuals either.

I am not expert on this, so don't know since when these laws are in place.

This week while coming to office on Monday I saw an Open House sign in Cupertino. I thought the Realtor must have conveniently forgotten to remove the sign after the weekend. But I saw it every day. Actually 2 different houses. Seems weird. Who goes to open houses on weekdays ?

Cupertino inventory seems to have jumped unusually, it is at 98 per ZipReality from 80 a month ago.

Cupertino inventory was at 131 this time last year (but that is based on mlslistings.com which also counts sale pending properties).

I also noticed some weekday open house signs in Cupertino and Mountain View this week.

Thanks guys, I appreciate the vote of confidence. To me it's a slam-dunk. But it's not worth losing a good friend over. We've lost ONE great contributor and I don't want to be held accountable for making it TWO!

*astrid, I didn't mean to beat it to death and I'm sorry.

DinOR

Now I can’t prove causation, but the correlation is stunning.
Or maybe it has to do with securitization. I tend to agree with Astrid. At any rate, I dont see the capital gains exemption leaving us any time soon (unless, say, Citizen HARM makes a run for the White House). I will throw in the towel if we don't return to historic norms during this downturn and give The Exemption credit for the structural change in the market.

Was watching PBS last night and caught a show on the London Blitz and subsequent firestorm. Here in the Bay Area, Antioch is burning down and its getting hotter:
July 07 median $425k (down 18% from the previous year)
Aug 07 median $385k (down 25% from the previous year)

Here is a $trillion dollar question for all posters here.

What kind of effect do you guys think will the Roth conversion of 2010 have on the stock market, the commodity market, etc.?

If you are not aware already, by 2010, all families regardless of their income can convert ALL their existing 401K into Roth, which will be completely home free in terms of tax for as long as you live. Right now, the conversion is limited to a household with AGI of less or equal to $100K.

I know we will convert ALL our 401K at that point. I know several others who will do the same as well. If you have worked and saved for at least several years, your 401K should be no small chump change. I think Roth will have some impact on the stock market, although not as huge as the 97-tax-change.

Everytime conservatisim is tried, it works.

what astrid said...

OO,

Why would converting one account's type to another matter ? Even if someone has to sell holdings in one account and buy in another that should almost be a zero sum game. But isn't the converted amount taxable ? I don't think it's as tax free as you say. The tax can be paid in installments over 2 years. But it will be taxed. I would prefer to pay taxes as late as possible.

Something is happening much earlier. In 2008. There won't be any capital gains tax for lower income brackets. Some parents may use it as a strategy to give stocks as gifts to the kids to sell them etc. That has more potential to affect. Although I expect the effect to be minimal.

Stuck,

you do have to pay tax on conversion as what you would pay for 401K withdrawal. But you pay no tax whatsoever after that for whatever gains you make in Roth.

Think about it this way. The government is allowing you to make a part of your after-tax money tax-free from now to eternity. Let's say someone has a $200K 401K account, the accrued gains will be taxable when forced withdrawal happens @59.5. Roth allows you to accrue gains tax free for as long as you live, there is no forced withdrawal either after you reach the retirement age.

It is not going to impact 2010 or 2011, but it is going to impact the stock market if a portion of money there will not be taxable from this moment onwards. I am just not sure what the impact will be.

New thread: Today, we are all Canadians.

"for some lame reason, the stinking poli-Repubs are scared to be conservative."

There is no percentage in it for them. "Vote for me and I'll leave you alone, but you'll get no plunder either" does not have mass voter appeal.

seriously, how are we going to get randy back?

Maybe we could go, hat in hand, and beg for his return. I think I will send him an email right now. One from you wouldn't hurt either DS.

yep

Well, I left the BA two months ago, and I guess I was used to seeing FOR SALE signs all through the week, the thickets of them would just get a bit thicker over the weekends.

I thought about doing a tour of open houses for the snacks, maybe write something on-line about my findings, but never got up the guts.