patrick.net

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.

DinOR - It would just be five acres of raw land, no house.

lunapark,

do you plan to do anything with the raw land?

It is actually not a bad idea to buy raw agricultural land in California (way out, no chance of conversion into residential of course). Because raw land holders are protected by the Williamson Act in terms of prop tax, even a sweeter deal with prop 13, if you leave it to the wild or save for agricultural reasons. You pay almost nothing to keep holding the land for the designated purpose.

"do you plan to do anything with the raw land...It is actually not a bad idea to buy raw agricultural land in California"

It would be in the Midwest. It's something my husband wants to do (he is from that region). I'm not particularly interested. We are trying to compromise on this somehow, so I'm looking at ways that it could be beneficial. In my mind, it is not a good financial investment, but it's not just about the financial benefits/non-benefits. He has always wanted to build his own house and have a few acres. He's looking at buying the land now and building on it 5-10 years down the road.

Why do people cite inflation like it's going to help with your mortgage payment? At least recently, CPI has been going up while wages have been STAGNANT. That makes your mortgage an even worse deal because you're not making any more money, but everything else is getting more expensive, eating away at your cashflow.

If wages started going up again, then maybe inflation would make that house less expensive in nominal dollars.

Inflation is very helpful if:

* you have fixed rate, simple interest, no prepay penalty debt
* you can afford to service that debt
* inflation rises faster than _expected_, in other words, the loan's interest rate was mispriced too low.

Out of curiousity...I'm interested in doing a rent vs. buy comparison on this Nob Hill property...does anyone have an estimate for how much it would sell for?

http://sfbay.craigslist.org/sfc/apa/279468562.html

1072 WASHINGTON STREET (CROSS OF MASON STREET)

Newly renovated painted, hardwood floors throughout. Bright with lots of natural light in all rooms. Building is detatched on all 4 sides. On 2nd of 3 story/flat. A gracious classic Edwardian building. Safe and secure area. Convienient location. Walking distance to Financial & Northbeach districts. It’s only a couple of blocks up to the top of Nob Hill with its world famous hotels and historical Grace Cathedral. Also within easy reach are Downtown, Union Square, and the Theatre District. There is also nearby access to multiple bus lines and the Hyde/Powell or Mason/Powell Street Cable Cars.

Featuring:

Approximately 2200 square feet
8 Rooms
4 Bedrooms/1 Living Room/1 Dining Room/1 Kitchen/1.25 Bathrooms
# All Refinished Hardwood floors
# All new modern luxurious kitchen
# New Cherrywood cabinets in kitchen
# Granite counter tops/back splash
# New appliances (refrigerator/freezer,dishwasher,s/s sink w/disposal& s/s gas stove/oven/hood)
# New Limestone kitchen floor
# New full bathroom with shower over tub w/sliding glass doors
# Marble shower walls and surround marble floors in bathroom
# All new double pane windows
# New Water Heater
# Coit Tower views
# Window coverings
# Washer/dryer hookups
# Locally owned and managed

(It has asking rent of $4000)

SJ_oldtimer,

What you are saying is true. The concept of the standard deduction is to make things simple for the majority of taxpayers (so they don't have to itemize). It's primary purpose is not to be a tax break. So I am told by my friend who works at the IRS.

If this irks you there is one standard "tax planning" way around it...basically you take the standard deduction on year 1. Then on year 2 you itemize and try to double up all your deductions to year 2. This is relatively easy for charitable giving. On medical expenses its a bit harder. On the mortgage deduction it's impossible (as far as I know).

Boston Transplant,

True, "bunching" actually works and works well (particularly if you have some sort of business). As with any strategy, it has it's limits and that's what I'm up against right now. My Schedule C is all but tapped out. There's a strong temptation to start yet another "business" but my "spidey senses" tell me that's a great way to flag yourself.

Broadly speaking, inflation is only useful if nominal wages go up in the same time period. Nothing bankrupts masses of people faster than high inflation on consumables without matching wage inflation. In such situations, real estate and other non-essentials will become very very cheap in real dollars.

lunarpark,

Go a little easy on the guy, o.k? :)

Like a handful of others here, I too am a native MW and have tinkered w/the notion of spending summers back in the corn belt. Yeah, I know, weird huh? Here's a way that hopefully you can both live with.

Open a "self-directed IRA" and find a seller that will take a very modest down payment. (The paper is lousy w/them back there). Then make sure your annual payments do not exceed your contribution limits. You'll want to structure things so that you will have the land paid off by the time you are ready to retire (or well prior).

From there you can go about it one of several ways. If you'd like to build/occupy prior to 59 1/2 you may do so by taking a "72(t)" (early IRA distribution) OR find a non-recourse lender and actually build the home and rent it out to cover your construction cost obligation. That way you'll have a "summer home" paid off by the time you retire OR you could simply continue to rent it out and use the rental income to augment your retirement. Please do not be intimidated by the 72(t) thing. It's just the standard IRA Withdrawal Form and it's one side of one sheet of paper w/one page of instructions attached. It's really no big. You're young enough to have plenty of time to research and execute! :)

Just a bit off topic here (just a bit :lol:)..... Aside from the news that this article brings, I have never seen an article that has so many spelling and grammar mistakes than this one!

DinOR - Thanks! I would have never even *thought* of the above. I'm going to look into your suggestion.

Btw, I lived in the Midwest for a while. I actually like it there. My largest concern is employment. I can see living there when we're "older" though.

http://finance.yahoo.com/expert/article/richricher/24515

"Throwing Good Money After Bad"

Btw, I lived in the Midwest for a while. I actually like it there. My largest concern is employment. I can see living there when we’re “older” though.

Don't be surprised if companies start relocating there in the near future to avoid having to pay high salaries in the "more desireable" areas; they have been outsourcing to other countries for a reason, there isn't a reason why they can't outsource to other states.

I think the inland West and the South will be preferred over the Midwest. Fewer unions. Fewer ethnic minorities. Less burdensome tax structure.

OO,

I thought that when someone sponsored an immigrant to the United States, either a benevolent society or an individual sponsoring a relative, they did sign an agreement that they would reimburse the government for any welfare type expenses that the person incurs. I read that someplace, that it wasn't enforced because of political pressure from groups that sponsor people from China and Russia to come to the US.

Also, the Williamson Act thing is interesting. My country house (a small former ranch) is Williamson Acted. I still pay property taxes based on what I paid for the place when I bought it, but there are restrictions on any development I can do on it. My next door neighbors' place has Williamson Act on it and I have deeded access to trails on their property, so they can't do any development at all on their 500+ acres.
I don't think my taxes were much lower, but because my property can't be subdivided I'm sure I paid a much lower price for the property.

lunarpark,

No problem. The Custodial Bank I normally use is PENSCO Trust actually on Sansome Street. They have a very good internal compliance officer that makes sure I don't do anything stupid. There are a lot of "me too" firms out there that may be cheaper yet adequate for what you are looking to do. Some are "flat rate", others charge based on "assets under management". It just depends on what you want to do. If you anticipate a lot of investment activity (fixer uppers etc.) then flat rate makes more sense.