patrick.net

Just wanted to weigh in quickly on the "Greed vs. Preventable" debate.

Let's just say that mortgage burning parties were a mistake this county's lending institutions do not intend to make again! If homedebtors are using their fluffed up and fictitious equity to pay off their CC debt then fine, let's get them into a 40 YEAR mortgage. Better yet, how about getting the home buying public acclimated toward a loan that's NEVER paid!

This IS the "new standard". Amoritizing loans that are one day paid off are for chumps! Besides, in a few years you'll be trading up anyway!

I recently heard a MB quip that prospects are a joke! "They think they're going to PAY OFF a 500K mortgage?" Dude, you can't even pay off your $1,800 Visa Card balance! (True story)

At this rate even if there WERE appreciation (however modest) going forward we now have financial products in place with growing public acceptance that assure NO gains will be permanent!

As for the metaphysical value of housing, I have to say its not very much. Housing is a durable good and its primary value is to provide a sheltered habitat. We can look to Japan for just how low that value can go.

A house that can provide a safe neighborhood, decent schools, good roads/public transportation will have extra things going for it. Meanwhile, a "luxury" house in the middle of nowhere has no such support and is almost entirely dependent on a matter of discretionary taste of a small segment of the market.

SFwoman,
I tend to agree, but I think the more " vacationy" places aka: Miami, San Diego, Aspen CO, and a Hawaii will be hit the hardest. Both coasts will definantly be hit very hard. NYC, LA, Boston, DC, etc will also be hit fairly hard. Basically the more desireable and populated regions will be the first to experience issues. Many already are.
On the other hand, as I have mentioned many times before, the costs of doing business in California and other expensive places has caused a virtual exodus of mainly manufactoring, service, and lower end R&D to go to other states. Manufactoring is king in the SE now. While it is not as sexy as tech or other higher paying jobs, the costs of living are still well within bounds of what is acceptable. Even for low skill jobs. Look at it this way: Nissan, Toyota, Hyundai, Mercedes, BMW, Honda, Saturn, Ford, and of course a myriad of parts and electronics producers like Mashusta, Denso, Alcoa, and DataSouth are all in this region. The average pay at a plant like this is around $20 an hour. The average house is between 65-120k. That is easily afforded by someone working in manufactoring. My brother is probably going to go to work for Denso- a Japanese parts producer. Yet he already has his own house he paid 38k for 2 years ago.
I think that tha forementioned places will suffer some economic setbacks but some parts of the country, like the SE will not that affected because they have an economy based heavily in actual capital producing industry. They are in fact at the same level that California was perhaps 30 years ago- back when CA was in what many consider to be in a "golden age" when the average man could afford to live here.

Dinor,
I can say that firsthand, In know way too many people who are living the life that you mentioned above. My best friend is now in over 20k of CC debt, and is trying to sell a couple of condos that he was hoping he could flip. I really feel sorry for him. he's a good guy who got all caught up in the hype. I just found this out. It made me think hard about some of the thoughts I've had. I've been thinking for years that investors are evil scum and they will get what they deserve. The attitude now that seems to now be raging after years of pent-up anger is that it's time to let the investors fry and bite their fingernails as punishment for ruinin the RE market. But then I hear from people like my friend, who believed everything he was told about RE, that it was " safe", and that all he had to do was wait and now suddenly finds himself in 200k in debt. There seems to be something inside me that wants to blame the industry more than the individual investor. Indeed CC debt is going to pale in comparison to the myriads of families that will have hundreds of thousands of dollars in housing debt.

astrid,

So true. I like to call it "chasing last year's winner". It's done all the time with all types of investments. That's dumb enough, but imagine this for a minute if you will.

You are GIVEN a 100K+ profit on a flip you held for two years. Mostly your "improvements" included taking out the trash and a little weeding. Prior to the sale you make a final dash to gussie up your curb appeal, get multiple offers and pocket 100K.

You're nowhere near 59 1/2 so this is a true "kiss me". Rather than diversify you plow the money into SEVERAL homes to repeat the process with a modest down on each.

You were given a perfect opportunity to walk away. Instead you joined SDCIA.

I'm just surprised we haven't had a perma bull or FB ask "where did the money go?"

all well put, SHTF... altho sydney lead the way in the boom, and liberalised credit products from the lending institutions meant that cashed up sydneysiders (and others) went marauding around the country speculating everywhere once they'd mined out sydney -- always chasing the next 'hot area for growth'... still doing it now targeting perth and darwin...

ah well, who cares, as long as david hasselhoff can sing the 70s ozzie glamrock anthem 'jump in my car' in a spirit of transpacific melding:

http://video.google.com/videoplay?docid=-3382491587979249836

I predict 2008 to 2012 will be good years to buy exotic vacations and slightly used European handbags/cars with cash.

SHTF,

Well said. I'd recently come to the realization that the specuvestors/flippers everyone from David Lereah to the Toll brothers is blaming are not nameless, faceless people. They are are co-workers, neighbors and friends.

Where my wife works it seems like 3 out of 5 employees has done some sort of flip or "investment property" purchase. (We live between mountains and the coast) so several have props. at both.

Is it the industry or the individual to blame? I don't really know. Won't go so far as to say I don't care, largely b/c the dust is still settling.

Think of it this way. I have a client that recently sold a rental (on acreage) he'd bought in the early 80's. On a 400K profit he owes about 70K in cap gains. In a word, it's a mess! He owns two small businesses but neither are profitable enough to do a meaningful SEP contribution. He has grandchildren so we can do a little into 529 Plans (a whopping $180 tax savings). We are now looking into CHARITABLE contributions just to help off set the tax liability. In order for him to make the tax bill of 70K go away he would need to donate 250K!

Look at this mess. If this is what people had to go through every time they sold a home do you think we'd be looking at a HOUSING BUBBLE?

Sean,
I was curious, what areas of Australia are considered the lower cost areas? For example, Georgia and Texas are considered low-cost alternatives here, so I assume Perth would be the equivelant?

Oh, btw let's safely assume he'd already burned through his "one time exemption". This was never his primary residence (and he's too nice a guy to claim that it ever was). Not sure we can say this of Randy H's LL and his desire to keep the utilities in his name.

Scumbag.

SHTF,

LOL! No personal experience but internet chatter suggest Perth is not a low cost alternative. It sounds like Australia doesn't really have affordable for locals RE anymore...it's basically the state of CA in the form of an island continent.

DinOR Says:
In a word, NONE.

AGREED.

DinOR,

Sometimes its better to just pay your cap gain taxes and be glad that there is cap gain to pay taxes on. And the cap gain taxes aren't too bad, that's much lower than income tax - no one would quibble if they did nearly so well in stocks. The rate is too low to worry too much about tax consequences and definitely not prime candidate for charitable giving.

Since your client has already sold the property, I guess the only way to defer may be to 1031 the profits for a like property. But that's a really bad idea right now.

Astrid,
hmmm.. Well that must be awful then if your whole country is like that. I can't imagine the US being totally unaffordable. I've never been to Australia but my wife has family there, so we might be able to go perhaps in a few years. Some of my Australian friends have told me that people in Sydney are actually WORSE than people in San Fran in terms of snobbish attitudes. he equates them more to Parisians than anything else. Again- I've never been there but I'd sure love to see what it is like. heard it is a stunning place.
Sort of a funny story.. years ago we had some friends from the UK come and visit. They were an older couple in their 60's. He claimed that when he was younger, he figured the entire US was deserts with big cities here and there and that cowboys were all over the place. he got a big surprise when he came here ans saw that virtually every state was diffrent.

astrid,

Agreed, agreed and agreed.

It's too late for a 1031 (already took the check) although charitable giving may make sense here b/c he has heirs young enough to milk it for a second lifetime of "pooled income".

Would I rather not have had the profit on which the CG tax is now due? Uh, HELL NO! My point is simply that if more people were subjected to these types of hoops would we be AS eager to throw borrowed money at RE w/both fists?

SHTF,

I've never been to Australia and I don't have any motivation to visit in the near future. (Though I might emigrate there if the opportunity presents itself) Flat dry continent filled with poisonous critters and STD infested marsupials and the occasional locust plague is not my thing.

It's funny to hear Sydney compared to Paris, since it's an Anglo-Saxon backwater city filled with descendants of convicts, and a long flight from any other major city.

Austingal,
Your Aunt seriusly thinks people should buy in MA right now? that market has been tanking for almost a year now. Perhaps she has convinced herself into believing what she says. I recall years ago when Ryobi tool company paid for some of us salesmen to come out and spend 3 days at a hotel looking at their tools. We would do things like drop the tools off of a ladder, take them apart, drive screws, cut boards, discuss motor windings- all as an effort to sell us on their tool's superior quality. The thing is that we all knew they make crappy products. That said, when we came back, I could tell you anything you wanted to know about their products, and found myself trying to get people to but them simply because someone else had told me all the info I coul possibly want to know about them. A RE agent who's job is to get people to buy is just the same.

DinOR,

Obviously, when I yak on a blog I'm just talking out my ass. But my instinct would be to avoid charitable trusts altogether, the tax savings are likely to be too low to be worth the complexity of the form.

SHTF,

"I guess there might be nuggets of wisdom here that perhaps starting with a bunch of former lunatics makes a great country or something like that. Maybe that’s why we relate so much to Australians."

Not disagreeing with you at all. Just finding the comparison to Paris to be a bit exaggerated. Also, at least BA is not geographically isolated. We're within driving distance of great cultural monuments like San Fernando Valley, Mexico City (lots of poor brown people!), LA (no comment), Salt Lake City, and so on.

Plus, our native marsupials are not STD infested. We have God's own marsupials.

SHTF, astrid is right, everyone in oz has got gold fever in housing -- not much respite, as 85% of the population lives in 1 of about 5 major cities... and i remember seeing a bus tour of 12 regional towns advertised for investors -- they would literally bus people around to these little country towns to convince them to buy RE bargains for future exploitation of the locals -- higher cash flow and lower growth prospects -- but it's an investment! lower cost areas are a handful of small regional centres of maybe 80,000 people or less, down to some little 1 horse towns, back o' bourke, and beyond the black stump...

sydney people are a bit funny, not sure if it's a convict/settler class-based thing or a pseudo-parisian thing... people are actually warmer in the states which were NOT convict settlements... jamie kennedy said the following: Sydneysiders suck: Kennedy

the marsupials don't generally have STDs, there are 4 strains of chlamydia attacking koalas, including pneumonia, and the tasmanian devils (a là warner bros) have contracted a form of facial cancer, possibly spread by a virus, which is threatening to wipe them out...

the major cities range from 1 to 4-5 million, they're about 1,000 km apart from each other tho... much of the country's wealth probably stems from primary resources. tom cruise bought property in sydney, as have others, for the harbour and city views...

astrid,

Not that it's all that important but they've made major strides in making charitable giving "turn-key". It's just as easy as buying shares in a mutual fund and no more complicated or expensive than that. You get the income, your HEIRS get the income and on their passing every dime goes to the charity of your choosing. So, TWO lifetimes of income and (a percentage deducted from your current taxes).

For those out there with a perplexing tax issue contemplating CG it's really simple and straightforward. You even get to "name your foundation". Again, if you're in this position something may have gone wrong from a tax planning perspective but if you find yourself here there's no reason to be intimidated by the process.

*Not tax advice

How much of the recent gains will become permanent and material?

It depends upon the metro/city/neighborhood. It could well be that Manhattan retains nearly all of its recent* gains while outburban Las Vegas loses most gains.

I wouldn't be surprised to see the Bay Area retain somewhere around 50% of recent gains. I had hoped for 100% reversion to pre 2002 prices, but I no longer think that is reasonable. Fundamental demand in the area could well start kicking in around 20-25% reversion. This would be at about a 8-12% nominal drop.

I suspect resistance comes from the much more rapid than expected refinancings out of ARMs, strong Bay Area employment, moderating inflation. In such an environment prices will stay extremely sticky, and work in favor of enticing buying demand after lethargic price reductions.

*Recent=2002-Present, or whenever the big spike occurred locally.

Well.. I guess I will have to claim ignorance when it comes to knowing as much about Australia as I'd like to. It doesn't help that a big movie when I was younger was " Crocadile Dundee" with Paul Hogan. I remember years ago when I helped run a film festival. We had this film submitted by this one guy. We got it via email. It was funny as hell. Anyhow, the guy was from Australia and had mimicked an American accent so well that we thought he was from here. I asked him how the hell he did such a good job. " I watched a lot of American TV when I was a kid." that's sort of embaressing if you think about it. Australians probably think we're stupid by watching the crap Hollywood spews out. My parents said they saw "American Chopper" T-shirts in London. Oh boy!- another role model to live up to.
I plan on going to Australia someday along with a lot of other countries so I can make better judgement calls when it comes to what places are like Versus what I see on TV or hear from other people.

DinOR,

So if you're facing short term capital gains, or alternative minimum tax from sale of shares (which have to be sold before a year is up because of a company takeover) - you could put it in a charitalbe trust instead? Or doe it not work in that kind of situation?

Seconded - it was normal for everyone to drink beer for breakfast. It was the usual way to kill all water-born parasites, bacteria etc..Although it wasn't as powerful as beers today are.

The water would indeed kill you, and brucillosis is always a threat with unpasteurised milk.

SFWoman and LILLL,

You caught me. That whole comment was half to mock my own ignorance and phobias.

I'm extremely ignorant about Mexico and most of Latin America (aside from a few revolutionary/civil wars here and there, and some snickering about Frieda Kahlo's unibrow). I know it's a big city next to a big volcano, but that's about it.

I didn't think I'd catch anything from Australian marsupials. It's just a bit weird to know that koalas are under threat from a venereal disease and the Tasmanian Devils are dying from carcinogenic bites.

Australia doesn't appeal to me as a place to visit. I don't like beaches or deserts. But as a place to live, it offers a lot: Mediterrean climate, universal healthcare, a relatively young and dynamic population, a reasonably pragmatic government, and close proximity to the lush mountainous islands of New Zealand and SE Asia.

At the end of they day, only senior executives who make 200-300k per year can really affort a million dollar home - hopefully they will be smart enought to realize a tract home is simply not worth that much money.At the end of they day, only senior executives who make 200-300k per year can really affort a million dollar home - hopefully they will be smart enought to realize a tract home is simply not worth that much money.

There's a real big flaw in that:

1) It assumes that people are completely rationale. Prestigious neighborhoods will always exist.

2) That these people have a choice of where they can live. Housing to some degree is not a perfect commodity due to the location aspect. You can't work at Google in Mountain View, and live in Atlanta.

Even millionaires are at the mercy of the market.

"Seconded - it was normal for everyone to drink beer for breakfast. It was the usual way to kill all water-born parasites, bacteria etc..Although it wasn’t as powerful as beers today are."

How strange. The premodern Chinese (at least from 1000 AD onwards) do not have a beer equivalent and their rice wines tend to be at least 8-9% alcohol. However, drinking wells are very common and urban drinking water is boiled, so that might account for the difference.

Since I'm already veering towards OT, I'd like to add this New Yorker article on the significance of demography.

http://www.newyorker.com/fact/content/articles/060828fa_fact

I think that prices will drop an average of 65% in SoCal, and probaby 50-60% in the SFBA.

(The lesser drop in the BA is due to the fact that there really is a lot of wealth there. Also, the BA is not as poverty-stricken as Los Angeles, it still has a [small] middle class.)

In my opinion, the declines will be greatest in the nicest neighborhoods. This is something new -- in past crashes, my understanding is that the poor neighborhoods were hit hardest, while the nice neighborhoods with good fundamentals were able to retain their value becuase their residents have greater financial resources. This time, I think the opposite will be true. Your affordable working and middle class 'hoods will crash by 50%, while your uppity 'hoods may fall by as much as 70-75%.

There will be a few arees that see declines of 80, even 90%. I can't think of any in California at the moment, altough some of your more ambitious efforts at gentrification might fall into this category. But I can see a house in Las Vegas that is currently selling for $450,000 to be $90,000 in four or five years. I can see that very easily.

"But I can see a house in Las Vegas that is currently selling for $450,000 to be $90,000 in four or five years. I can see that very easily."

If that happens, the utility costs may overtake mortgage payments. Some of the exurbs of Las Vegas may be abandoned altogether because utility, insurance, and HOA fees are higher than the value of the property.

(The lesser drop in the BA is due to the fact that there really is a lot of wealth there. Also, the BA is not as poverty-stricken as Los Angeles, it still has a [small] middle class.)

In my opinion, the declines will be greatest in the nicest neighborhoods. This is something new — in past crashes, my understanding is that the poor neighborhoods were hit hardest, while the nice neighborhoods with good fundamentals were able to retain their value becuase their residents have greater financial resources. This time, I think the opposite will be true. Your affordable working and middle class ‘hoods will crash by 50%, while your uppity ‘hoods may fall by as much as 70-75%.

The first paragraph seems inconsistent with the second. Isn't SF an "uppity hood"?

My guess is that the areas that will get hit hardest are the commuter burbs. Especially in So Cal and NV, there are a lot of outlying areas where builders have been selling mcmansions in the desert for $400-$800K. No one will want these with high prices for energy and water, poor construction of recent developments, etc..

Comment on rents:

There has been a lot of talk about rents rising as a result of the HB. I don't see it. If we are headed for a recession and HB crash, then the middle class will hold on to their houses. The bubble-sitters with decent incomes which hold up in the recession will be weighing whether it makes more sense to rent or buy as prices fall. Some will buy, increasing supply of upscale rental housing. The young, poor and lower-middle class will move in with their parents or move to lower cost areas (out of state for US citizens, out of the US for immigrants with better prospects and family ties in other countries). Plus, with the huge inventory overhang that already exists, a lot of these houses will be rented out, which will further increase competition among LLs for good tenants.

Most informed people agree that the HB is unwinding, which could well lead to a recession. It is incongruous to think that rents will rise in a recessionary environment. If anything, they should fall.

Claire,

The best way to deal with the AMT is to stay clear of it to begin with. If you even THINK you and your husband are close to flirting with it seek professional help immediately!

Can CG negate the impact of the AMT directly? Is the question posed in such a way that you are only in the AMT slightly and even the smallest of donations will salvage your situation? I wish I could answer that in concrete terms. Anyone here willing to hazard a guess? I'm afraid I'm out of my depth. Randy H? Peter P?

DinOR Says:

Is it the industry or the individual to blame? I don’t really know.

It's like a Dr. Phil episode, a dysfunctional family. The FB's are the "users" and the mtg industry/RE complex are the "enablers," to borrow some pop-psych BS crap terminology...

Conor,
Did you look at the gory stats from the Existing Sales Data?

http://www.realtor.org/Research.nsf/files/EHSreport.XLS/$FILE/EHSreport.XLS

YoY national median price up only 0.9%, WEST is DOWN 0.3%!

Can we say, "national median YoY price decline?" Oh, wait, I thought real estate prices have never declined on a YoY level since WWII. Ooops.

Joe Schmoe,

So I guess we can put you in the "recent gains NOT permanent" camp!

I'd sure love to see some of the LV homes now at 450K down to 90K! Of course at that point they'd be rentals (and none too desirable at that!)

I've already witnessed first hand homes that would have been selling for 650/700K a year ago NOT selling at 450K today! So huge declines already. I must admit though that astrid* has a point. At some juncture it simply may not make sense to even continue services to these farther flung "communities".

There is other shocking news I feel I must now reveal.

I actually think it would be COOL to live in a modern day "ghost town"! No whiney neighbors. No traffic. No nothing. Doing cannon balls off the balcony of a McMansion that would have sold for 750K in 2005 at 3 in the morning? Hey, why not?

That is what we're talking about here, isn't it?

Ghost Towns?

Instead of having names like Lago, Rocky Gulch or Goldfield they'll have names like "The Estates at Willowglen" or "Insert Self Flattering Name Here".

*Lago (from the Spaghetti Western classic "High Plains Drifter")

Who can name the origins of the other two?

SFWoman,

But, but, bu..... Where did the money go? When someone has their retirement ace in the hole (damn it I meant "home") appraised at 1.1 mil and it sells for half of that where did the money go?

Sheesh.

Let's hope she didn't borrow against that "appraisal".

"Vanishing Farms"! LOL!

Absolutely right! It's the Amerikan way! Kill off indigenous peoples, claim land, pave it over in asphalt (then give it an indigenous name!)

By naming our ghost towns of the future after the very features we've destroyed it helps instill a sense of history in our children!

"Daddy, why do they call this place Whispering Pines?"

Well you see back in the day when money was cheap........