patrick.net

bikes2work Says:

> Lunarpark and Palo Alto Renter, The place you looked at in
> Los Altos went for cash. No loan, just cash. I don’t know why.
> If places like that sell for cash, I can’t see anything being
> “affordable” around here anytime soon.

Over the years I have seen a lot of real estate sell to Asian buyers (and a few properties sell to non Asian buyers) as “all cash” (no loan recorded on title) but more often than not they have a private loan from friends or family. There are very few people in the world smart enough to save $1mm that don’t know that they have an arbitrage opportunity where they can invest $1mm and make more than the after tax cost to borrow $1mm…

Randy H Says:

> I forgot another reason the mortgage tax deduction
> is so psychologically powerful:
> Lot’s of regular, otherwise law abiding Americans
> feel quite comfortable cheating, claiming rental homes,
> investment homes, vacation homes, etc. as primary
> residences.

By “cheating, claiming rental homes, investment homes, vacation homes, etc. as primary residences.” Do you mean “committing massive tax fraud by not only taking the interest deduction but not declaring any of the rental income”?

RentingForever says:

"Have you guys noticed this type of attitude in your neighborhood?"

Honestly I don't see the conditions the article describes at all. I would say the complete opposite is happening. Particularly in the boroughs, I see increased FSBO signs, asking prices at least 15% below last summer and some as much as 30%. The talk of the town is about how some poor sucker is close to foreclosure. I personally came across 4 foreclosures in just one weekend while browsing around in Northern NJ. Inventory of condos in Manhattan have certainly decreased, but I see no evidence that this is a result of increased sales.

In my neighborhood this weekend, we drove by a home that has been on the market for seven months now. We noticed a new FSBO sign and lying beside it, half buried in the snow, was the RE/Max realtor sign that it recently replaced.

It’s cold and quiet in the Northeast.

It looks like the Bubble is not just on the coasts… From Ben’s BLOG:

“The Kansas City Star reports from Missouri. “Last year, the average resale price of existing homes declined in almost half, 44 percent, of almost 100 ZIP codes tracked by The Star in the six-county area. ‘The market has been going up and up and up, and what goes up must come down,’ said agent Sue Walton.””

The tax break can be considerable, if you are at the overall marginal rate of 40-50%, which most Bay Area home buyers will tend to be.

On a $1M, 30 year fixed rate 6% mortgage, it is about $2500/mo, at least initially.

But that assumes that you will get a tax break on the "T" part of the PITI. If you are paying AMT, which more and more people are, then you lose that and the overall tax break is more like $2k.

Which is still pretty substantial.

Personally, the Prop 13 tax break is one of the reasons why we may keep our duplex as a rental property instead of selling it, if and when we buy a bigger place. The numbers probably wouldn't pencil out otherwise.

Yeah, the midwest is getting hit the hardest right now. This is actually pretty good evidence that this was a credit fueled boom, like the bubble proponents have been claiming all along.

"The Realtors' survey showed that sales were down in every region in the fourth quarter, while prices fell everywhere except the West.

The fourth-quarter decline in prices was led by a 4.2 percent drop in the Midwest, followed by a 3.7 percent decline in the South and a 2.5 percent fall in the Northeast. Prices were up by 0.4 percent in the West."

Randy H,

You're absolutely right! When everbody is doing it this totally "legitimizes" their actions. Remember, these are people that do their tithing, volunteer and file every year. Strategies of this sort are openly discussed w/CPA's, lenders and fin. planners.

I have personally sat in on client conferences where "musical houses" are being discussed. We can poo-poo it all we want but the truth is virtually anyone that owns multiple properties considers it. But no, it's not a factor.

I find the article about tech moving to the City proper very encouraging, but not for reasons related to housing prices.

Back in 2000 I interviewed with a number of tech places on the peninsula but fould the idea of working in San Jose (or equivalent) appalling. There were some places up in the City, but they were few and far between. In contrast when I came to Boston, there were many opportunities in Kendall Square (near MIT) which allowed me to live in Boston proper, and still have a 15 minute subway commute.

Meanwhile my friends who moved to the City had to deal with hour-long driving commutes. Not dealing with that commute is one of the best features for a techie in Boston, in my opinion.

Plus my wife, who is a consultant-type, can walk to work in just 15 minutes (in the other direction from me, towards the financial district). The Bay Area seems so big and scary now.

I suppose the peninsula life-style will become more appealing now that we are having a baby. But it wasn't during our 20's...

Jimbo,

It would be pretty futile to claim this was anything other than a "credit fueled boom" which is the quick and easy answer everybody seems to be comfortable with so who am I to challenge that? :(

I got into an epic battle w/SoCalMortguy as he insisted his industry (and the scumbags that work it) take ALL the blame! Fine, whatever. Cheap money explains it all, right? Then how do we explain the "insatiable" demand for second and third homes? How hard up do we have to be in order for this to make sense? If writing off MID on your primary home is "good" then writing off MID on your second and soon to be "primary home" must be twice as good! :)

I have to agree, things wouldn't haven't gotten near as silly w/9% mort. money but the very instant rates were "percieved" as relatively or slightly cheaper, the fuel hits the "pilot light" and Kablammy! Ignition!

So...... in short, I'll tip my hat :) to the "cheap money" camp!

But to have "continuous combustion" we need to add fuel, right? If it were just cheap money alone 2005 "might" not have happened as this thing petered out of it's own accord. Factor in the added incentive of f@ckin' the gub'ment and it was just too much temptation for blowed up daytraders that felt this was "their window" to go double or nothin' and make it all back and then some!

I mean they were "owed" this, right? I don't know how many times I've heard the flopper's lament what a bummer it is that they missed on their market timing thingee? Now just getting these people to "wait" the TWO WHOLE YEARS seems like an awful lot to ask? I mean if I can pick up a property on the cheap and flip the same day without ever having spent the night there and clear a 100k I should get to "keep" all of that, right? Provided I can just find a greater fool.......? Hmm.

DinOr,

Nice analogy. I can't help thinking that capital exiting the equity markets in 2000 - 2001 played a contributing role. That was a lot of money looking for a home. Easy credit no doubt proveded the spark, but there was a lot of fuel for the fire.

otherside,

Won't this product only be available to people who have equity in their houses? There go most people who have bought in the Central Valley the past couple of years, or recent purchasers in the city, or people who bought in Sonoma County the past couple of years. I don't think it will help the FBs.

But but bu... these are our homes! Not some fly by night specuvestment, right? Oops, guess not?

I've always wanted to have a HF own part of the upside potential of my home, I'm calling "Rex" T O D A Y!!!

The Bay Area seems so big and scary now.

I suppose the peninsula life-style will become more appealing now that we are having a baby. But it wasn’t during our 20’s…

Just remember, cars=freedom. Sitting in traffic=super mega freedom. Other countries would die to have our freedom(tm).

This guy has a lot of freedom:

http://www.burbed.com/2006/04/20/bay-area-man-wins-longest-commute-award-370-hours/

SFWoman,

Well... uh... actually you're right! In the case of these late to the party specuvestors Rex would just make the deal directly with their lender! I mean, C'mon. :)

But what if you're not a boomer? What if I want to sell the house next week and move to La Paz (with cash in hand) for that much deserved "ride into the sunset" after a demanding career at DMV? What if I want to rent it out to my buddy 'cause it'd be ideal for "grow" operations? Huh, HUH?!? :)

Call Rex T O D A Y!!! And DON'T D E L A Y!!! :)

Even though this is about as desperate and rock stupid as it gets, it's not new. The Portland Development Commission made a similar "sell your soul" deal with the devil when they started the loft craze in NW. It isn't hard enough just getting along with your spouse and family NOW you've got a HF manager in between the sheets too? Uh, no thanks. My life is PLENTY un-rewarding as is. :(

And where the f@ck do they come off making all kinds of reassurances like you won't have to pay any taxes on it? The guy didn't even make the usual qualified disclaimer like "in (many) cases the cash out re-fi "may" be taxeductible!"

Whadda country! You just buy a house and they give you cash (which is just as good as money) TAX FREE! Whadda country! I've argued (with limited success) that I am *not* a boomer. Well with a deal like this I don't give a rat's die'n @ss WHAT you call me! (Honey, wouldn't it be nice if we got a "maid" when we get settled in La Paz?)

SP,

Why do you hate Amerika? :(

This is the God send boomers have been waiting for! Now they can get that Harley AND a motor home they so richly deserve T O D A Y! Oh and don't forget about the "maid"!

No. Wait a minute, theother and Rex are on to something here! I'm taking the deal! That's the ticket! (Oh and don't forget boomers, if you get a "maid" the wife get's to have a "lawn boy"!) See you guys in La Paz, I'm outta here! :)

I think we are finally starting to see cracks in "Fortress San Francisco" at least in my neighborhood, Noe Valley.

Stuff that would have sold even six months ago is just sitting there. There are a couple of $1.25M 3/2 homes just not selling.

I saw a 3/2 2000 sq ft victorian priced at $998k last week, which is probably 25% below comporable homes in the nieghborhood. It sold in the first week though.

There are other signs that the worm has finally turned, like the brand new 4000 sq ft home that supposedly sold in October for $3M back on the market again at $2.87M. Maybe the new owners realized that since the home next door, which is more or less a carbon copy, sold for $2.6M in January and they found a way to get out of the deal.

Mostly, no one is even trying to sell. The inventory is shrinking, but the few homes that are being sold are going for a big discount. I will be curious to see what the new owners of 417 27th Street actually paid.

DQ and everyone else claims that this neighborhood has stabalized and as recently as a month ago I would have agreed with them, but it is starting to look like prices are actually finally starting to come down.

DinOR Says:

> Randy H, I have personally sat in on client conferences where
> “musical houses” are being discussed. We can poo-poo it all
> we want but the truth is virtually anyone that owns multiple
> properties considers it. But no, it’s not a factor.

There is a big difference between “legal” “musical houses” (I know a guy that actually moved in to his weekend place in Sonoma and after renting his home in Marin commuted for two full years so he could “legally” call it his “primary residence” and take $500K of the gain tax free when he sold it.) and the “illegal” calling a home a primary residence and taking a tax deduction on the interest and not declaring the rental income…

FAB,

Good point. Frankly this thing is so flimsy it's basically un-enforced. Even if a "disgruntled former employee" turned me in, it's still more or less "he said/she said". I guess if I knew the whip was coming down in the form of an audit I could always run out and "create" the documentation to at least raise the believabilty of my claim? No matter HOW recklessly I'd shot my big dumb mouth off! I suppose I could always say that I was compliant with the "spirit of the law"?

Maybe someone can speak in short understandable sentences to tell me why the REX product is so horrible. I mean, if Bay Area home prices are going to slide sideways for the next 15 years, why not take the money and run. This product seems to bring the vaunted liquidity to the homeowner which many have lamented about on this blog. About the only negatives I can see are worrying about lowball appraisals and "at the time the house is sold, there is a service charge of approximately $15,000."

FAB,

I do indeed mean committing tax fraud. If one claims a rented out house as their primary residence, then they obviously are not filing their rental income correctly either. The home I'm currently renting in Mill Valley is just such a case.

I am not a tax attorney, tax accountant, or tax fraud researcher, but my anecdotal data (along with the little I've read over the years) leads me to strongly believe that many otherwise normal people cheat in this way. Two of my own hyperconservative, red-state, "how can you live in California with all those ***?" elder Midwestern relatives openly cheat with their musical houses. They will tell you they try to follow the rules but they can't, what with all those illegal immigrants who don't pay any taxes at all.

Come to think of it, a ton of people also cheat on Medicare related stuff. You'd think that everyone over 65 suddenly lived on welfare and ate cat food to survive.

Randy,

the worst thing for California is not Medicare, but Medicaid. All, I mean every single parent of 1st gen immigrant is living off Medicaid. Do you know how big of an expense that is?

Now, I am 1st gen, and I choose NOT to import my parents, because honestly they have a much better lifestyle in Australia, so do many others from Europe. But those from 3rd world countries are particularly motivated to bring in their parents and live off Medicaid, which promises to offer SAME benefits as Medicare, which is denied to elderly immigrant for their first 5 years of residence. I say shut the elderly immigrant off entirely, if someone wants to import his or her parents, make him/her pay for it. I have no intention to pay for someone else' parents who have made 0 contribution and will not be able to make any, to America or California with my tax dollars.

A friend of mine told me about his dad who is on Medicaid, got a $90K bill for a 4-day hospital stay. Medicaid foot the entire bill, there goes your and mine hard earned state tax money. I have no problem paying for free education or medicare for immigrant KIDS, because they are much more likely to support my future, but I don't want to pay one single cent to immigrant parents.

The current parent immigration policy of America is very f*cked up. It basically attracts poor parents from 3rd world countries while discouraging well-off parents from developed countries.

@ theotherside-

Huh???

Where is published inflation 3.5%?

I actually think inflation is higher than that; I was simply pointing out that it's not in the official numbers.

theotherside,

news for you, go check the BA housing price in 1975-85, when US was having double digit inflation and Treasury yield hovering in the high teens, the BA housing price barely moved.

Inflation in general does not translate into higher housing price. If you believe in inflation, like I do, buy gold. It is a much better hedge than housing.

I'll second the comment from OO.

I was working with a fellow last year and we were discussing inflation. He said, "I hope inflation picks up, I just bought a house." My response was, we already had the inflation in housing and now it will come in other forms.

I'm starting to think the best real estate investment is to go buy hundreds of acres and start farming corn. That ethonal demand is making an already imbalanced market in short supply and higher prices as a result.

oops - meant to add "not investment advice!"

Paul,

if you believe in inflation in the form of agricultural goods, buy DBA. I loaded up on DBA the moment it came on market a months ago. It is called Powershare Deutsche Bank Agricultural commodities.

Gold? ... I'm not even going to start it.

California home prices rocketed up in the 70's. This is what lead to Prop 13. They stopped appreciating in about 1981 and stayed stagnant for about 5 years.

http://www.census.gov/hhes/www/housing/census/historic/values.html

I can't find seperate values fro the Bay Area, so if you have them, please share.

Tax question: If you buy land (out of state) but continue to rent in CA, is there any tax benefit? I think not, but I thought someone here might know for sure.

EBGuy,

To my way of thinking this yet another attempt to "gut" the equity out of your home. Be it reverse mortgages, cash out re-fi's or Rex it seems there are forces at work in this country that won't rest until Americans have ZILCH equity in their home!

In this particular instance you're trading away your future (like we don't do that enough already) for a stipend up front for all your immediate gratification "needs". Now I could see this perhaps being of value if it really was coming from the standpoint of filling a need like establishing a long term care policy or even funding an annuity to supplement lifetime income but this is just more "hit and run" sales.

I tell you what, I'll give you 15% of your 401k account value today (tax free?) and you can spend it in any fashion you like! Then when you transfer or retire I'll take 52.5% of the appreciation. Fair enough?

Even if your home DID appraise for a cool mil you'd only be getting a 150k. Where you gonna go with that? They may "give" it to you "tax free" but that will be the last act of generousity. Other than an annuity/muni's anything you invest in WILL be taxed! Neither typically appreciate anywheres near enough to fill the hole we've created. The only way I can see this making sense is if you had a strong suspicion you were terminally ill. Seriously, can anyone else think of a personal financial situation where this would be applicable?

lunarpark,

Raw land? Or a SFH?

There are a handful of firms that will custody RE, notes, deeds and tax liens in your IRA. The fees are pretty reasonable and you would be able to reap some tax benefit by considering it an IRA contribution. I believe there can be additional benefit b/c you should be able to claim property tax paid to another state.

NTA

Jimbo,

I remember someone posting the BA specific housing price here before, perhaps FAB. The housing value shot up at the first half of the 70s but stayed the same for the next 7-8 years for inflation to catch up, which I believe will be the situation in the next 5-10 years. The only uncertainty is the unprecedented debt level of Americans. In the 70s, the US savings rate was still single digit positive.

I am of the camp that either of the two scenarios will likely happen:

1) Rampant stagflation of 20+% for the next several years as we print money to bail out failed banks, funds, and everyone in the financial food chain, while housing price stays stagnant, or slightly down on paper.

2) Deflation - when we cannot inflate any more, deflation is bound to happen, housing price crashes 50%+. But I highly doubt if the second scenario will happen because inflation is in the best interest of every single government around the world, and I never dare to underestimate the government's ability to inflate.

So from prop 13 point of view, those people who can buy in the slight dips before rampant stagflation catches on may not be a bad idea since in 10 years, our annual prop tax will be like worth nothing.

Or another group of beneficiaries will be those who put their money into assets that will shoot up with inflation, and swap out of those assets when inflationary period is over and buy back into real estate. Even certain sectors of the stock market will benefit tremendously (not subprime or housebuilding for sure).

Those who will be screwed the most will be those holding cash, USD cash.

theotherside,

investment is all about investing in the right asset class at the right time. I don't think buying a house is generally a bad idea, in fact I own one, but it is a bad asset class to be in right now.

When all the resets are over by 2010, I will start looking at housing again. Right now, I am having much more fun with other asset classes.