patrick.net

"Consumption in US is driven largely by women. Many men in this country — I would say the majority of men — are of the insecure type. They HAVE to slave all their lives to “win” a wife who in return sucks everything (soul, lofty aspiration, spiritual well being, self respect) out of the poor fellow."

Funny, have any of you seen the ad on TV right now for, I believe Coldwell Banker, where the freckly faced wife (who comes across as a total bitch BTW) is having trouble convincing the skeptical husband of plunging into buying a home for the sake of the kids who won't be toddlers forever. On the phone the realtor says something like "you guys can do this". The husband of course relents lest he is shot in the chest by his domineering, controlling shrew of a wife.

@Owneroccupier,

You made a good point about the Prop. 13 refi/HELOC exclusion not being retroactive, however I wouldn't be so sure about the future threat of higher taxes not impacting the voting behavior of current CA homedebtors. Anything that has even hinted at higher property taxes for existing CA homedebtors has always ended up in the crapper as long as I've been voting/paying attention. Plus, there's the fact that so many recent homedebtors are using the refi/HELOC ATM to maintain current consumption, to fill the gap left by incomes.

I'm guessing a large % of f@cked borrowers would strongly oppose any such measure if it were on the ballot today. A few years from now, after the Bubble has popped.... who knows?

@tannenbaum & GentleCheetah,

Yeah, I've seen that commercial too. Actually my wife saw it first and grabbed me the next time it was on, since she knew I'd get a kick out of it. Goebbels/Leni Riefestahl hasn't got shit on Coldwell Banker. Made me physically sick to watch.

There is another amendment that we can propose: houses OTHER THAN main residence cannot be shielded by prop 13, and have to be subject to reassessment every year.

Here is the problem. A lot of investors are taking advantage of prop 13 to build their own investment portfolio, essentially taking inventory off the market (sorry, FormerAptBroker). This is not a fair use of tax money. Rental homes for investment purposes are for commercial uses, nobody should be subsidized when they are making an investment! In the rental home case, it is very easy to argue that it is not an old grandma who needs help, if the landlord cannot cover his new property tax, raise the rent. If he cannot raise the rent, sell. Somebody should be responsible for his own investment decision, not the public.

We can do the following. Once you start to rent your home out, you immediately lose the prop 13 status. You can only designate one of your multiple homes in CA to be a main residence, and to do so, you need to fulfill certain requirement (living in a home for x years in the last y years). This way, we also discourage house hoarding.

Guess I somehow escaped the evil woman that's described above. My wife insists on saving, and isn't neccesarily concerned if we ever buy a house for that matter. She's saved just as much as I have, hence the collective buying power that we potentially have if we do decide to move. She agrees with me that we will only buy a house if we have the funds to do so free and clear, hence preventing us from falling into the typical american obession with mortgages, payments, and jobs to make those payments that suck your life away into oblivion.It's actually a comfortable feeling knowing that we are in no rush, she isn't badgering me about wanting kids, drives a car just as old as mine, and thinks intelligence goes with common sense- hence the lack of value we both see in this state. Guess I was one of the lucky ones.

Oh, and guys, let's not generalize too much about the ladies. Roughly half the population (and bloggers) are women, and we know all the ladies here aren't soul-sucking shrews. They are reasonable clear-thinking individuals just as mystified with this insanity as we are. :mrgreen:

A few years ago during a visit from NC, my mother, a retired teacher, came up with a good measure of value. We were discussing the price (not value) of the condo I used to own and she asked, "where are the teachers supposed to live?".

I am a SW engineer, do OK by most measures, and could not afford to buy my own house at these levels without some creative financing. I accepted an offer on my house last week. I found a nice rental in Mtn View for slightly less than the after tax cost of my mortgage interest + property tax.

@Owneroccupier,

Sounds like a plan to me!
Now, here's what I need for you to do: (1) Write up the proposition in lawyer-speak, (2) file it with the state government, (3) go out and collect a million signatures to get it on the ballot.

Once you've done all that, I'll be delighted to vote for it! ;-)

All kidding aside, I wonder how hard it would be to do it for real.

a gutt-er (not a tear down, but to the studs, is there a name for those?)

Yes, there is a Realt-whore term for this: it's called a "handy-man's special".

Haven't heard the term "shrew" and women combined togther. Interesting concept.

HARM,

I actually have a small plot of beachside land that I am planning to build a cabin on. So I need to be very careful with the lawyer speak so that I don't end up losing my own prop 13 on that :-) I believe many people in power have a vacation property in CA that they rent out for sometime of the year to generate enough maintenance cost. So we need to find a middle-of-the-road approach to take care of these powers as well.

OK, as long as the property is not rented out for more than 180 days of the year, it is classified as owner occupation and therefore are swept under the prop 13 protection. See how selfishness is at work here?

Honestly, with or without me pushing, there will be a very strong backlash on lots of things when this ugly bubble bursts. Prop 13 being one of them. Realtors, mortgage industry, home building, a lot of the free lunches will be gone, as social evolution always goes.

@ HARM

for the 1 million signatures - I wonder if it is possible to do via internet signatures rather than having a clipboard pusher out in front of the Albertsons...

I'd like a vote for prop 13 changes.

Does Prop 13 protect you when your house value is the same but new neighbor houses sell for 50% less in a couple of years and remain like that for another 10 years? - I think Prop 13 will protect you because you will continue paying the up your ying yang taxes you paid earlier while new buyers pay less for the same house.

I've never had much of an active hand in selecting any of our homes or their contents so I'm guilty of being complacent there. It wasn't until the HB started looking more and more hyper-inflated that I got concerned. Like many, I reached a point where co-workers, relatives, friends nor my wife could talk me out of selling.

Prop 13 applies to everyone; you effectively lock your property tax rate at the assessed value of your home. It also statutorially limits the rate at which property taxes can increase every year. It was part of the "Great California Tax Revolt" era (long before I got here). In many other states no such limitations exist, although many states like the Southeastern states self-limit property taxes to an even lower level without having to legislate to control the politicians. In much of the upper Midwest it's the opposite: out of control property taxes. Like I mentioned, in Illinois counties are free to reassess according to their own schedule, and the state raises taxes whenever it gets into trouble (both parties have done this equally).

Getting rid of Prop 13 is currently a political impossibility in the state. A coalition of the CAR, NAARP, and practically every homeowner in the state would be against revisions.

Here's the worst atrocity IMO: companies are also covered by Prop 13 limitations for land they own so long as they use it for "business purposes". There is *no justification* for this, other than they had to do it to get buy-in from interest groups back when they passed it. An attempt was floated to take corporate interests out of Prop 13 legislation. It was DOA. General high-taxation arguments were used. The CA is not competitive stuff. But Prop13 has only managed to shift taxes, not solve the budgeting problem.

If you want my honest opinion, CA is simply too large to be governed responsibly. It needs to be broken into 3 to 4 separate states, representing the proper interests and needs of the regional constituencies.

A bit more back on topic:

The Troll from the last thread responded to my cost/benefit of renting question with very interesting logic. (I asked him to guess my rent compared to the $1200/mo renter in SF):

Randy H, I guess $2,600 / month? And perhaps it should be more like $4,500 / month if someone were to buy it now and rent it out

Does anyone see the fallacy in this logic? The "price" a renter will pay is determined solely by the income needs of the owner based on what he paid for the property? This is ludicrous. The price is determined by both the the demand and the supply. I wouldn't pay $4500 for this place. If that was the going rate, given the current income levels, I'd simply either buy a home myself (because Rent would be = or greater than PITI), or I'd leave the area. And I would be representative of many other potential renters. Thus the going rental rate is much lower.

This is exactly why managing property for rental income is so hard. It's a business, not a hobby. You had better be prepared to make very difficult capital budgeting and operational cost decisions over a long-term planning horizon if you intend to run a free-cash-flow positive rental business. Put up your couple of speculative properties for your PITI (and remember you don't get tax benefits beyond what any business does), and you'll be in for a world of hurt. C'mon, if it were really that easy everyone would be doing it.* **

*Popular books to the contrary excepted.
** Running a business is hard because you only make profit if you create value. At least over the long-term. Luck of timing only gets you so far. And, luck has a nasty habit of running out just when you need it most.

nomadtoons2
See Shakespeare’s “Taming of the Shrew”

Drat, newsfreak --you beat me to it!

@seattledude,

I can't speak intelligently about state RE laws outside CA, but here's how it basically works: It passed in 1978. Anyone who before/up to the proposition's passage has their home's assessed value (for tax purposes) "locked" in at 1% of its 1978 price. Prop. 13 allows the state a maximum of 2% per year increases, which is well below inflation even now --and far below what it was in 1978.

End result: People who bought 28 years ago or earlier now paying a tiny fraction of what new buyers pay in taxes, regardless of income, ability to pay, investment or business property, age (though naturally the lock-in date heavily favors Baby Boomers over Gen-X & Y). Thanks to those other propositions mentioned earlier, Boomers (oops --I mean "Prop. 13 beneficiaries") even get to take their tax advantage with them when they move to a new place of equal or lesser value. The longer you've owned your home(s), the greater the benefit. Corporations also greatly benefit as well. For more info, see Wikipedia:

http://en.wikipedia.org/wiki/California_Proposition_13_(1978)*

*Note: there are some inaccuracies in this article, including this one: "Under Proposition 13, the real estate tax on a parcel of property is limited to 1% of its purchase price, adjusted for inflation, until the property is resold."

Prop. 13 does NOT allow for full inflation adjustment --only 2% max. If the CPI goes up 8%, you can only be assessed for 2% (1/4th).

tannenbaum Says:

“Consumption in US is driven largely by women. Many men in this country — I would say the majority of men — are of the insecure type. They HAVE to slave all their lives to “win” a wife who in return sucks everything (soul, lofty aspiration, spiritual well being, self respect) out of the poor fellow.”

If a man is smart enough and slaves hard enough they will be able to "win" a great wife who not only looks like she belongs on the cover of a bridal magazine, but it a true partner that makes the rest of his life great.

Many guys who are not as smart and/or slave as hard feel like a "winner" when they get a wife that is hot enough to be on the cover of Maxim magazine, but unfortunately many of the unbelievably smoking hot women out there are vacuous and materialistic and will ultimately ruin their lives...

“Consumption in US is driven largely by women. Many men in this country — I would say the majority of men — are of the insecure type. They HAVE to slave all their lives to “win” a wife who in return sucks everything (soul, lofty aspiration, spiritual well being, self respect) out of the poor fellow.”

I'd just like to say I really love my wife. Not only is she gifted in her physical attractiveness, but she is intelligent, engaging, and anything but materialistic. She shares my "Midwestern sensibilities", actually wants to see my insane rent-v-buy HB spreadsheets (even if she thinks the Monte Carlo simulations are a sign I need therapy or more friends to go play hockey with or something), and she even corrects my errors for me. And when she writes an article on my blog, she doesn't even moderate out my comments.

SFWoman Says:

"I am a woman, but I have to agree that most housing purchases I see are female driven. I purchased both of our places, my husband didn’t even see the country place until after I bought it. I just witnessed one of my friends nag her husband half to death until they just purchased a gutt-er (not a tear down, but to the studs, is there a name for those?) at about 6x their income. Other than a few husbands of friends (and honestly, my gaydar goes up around two of them) most of the men I know aren’t as interested in real estate."

As a single guy in SF I've noticed that most females interest in real estate is primarily tied to their natural instinct to "nest". Once they get the nest they want to move up to a nicer none so they can decorate it and impress their friends.

Almost every (straight) guy I know is very interested in real estate. My gaydar might turn on if a guy is just talking about "decorating" the real estate (or comments on my girlfriends shoes and handbag), but most real estate conversations with guys goes in the opposite direction where they are talking about blowing out walls and buying cool power tools to do some of the work themselves...

Does Prop 13 protect you when your house value is the same but new neighbor houses sell for 50% less in a couple of years and remain like that for another 10 years? - I think Prop 13 will protect you because you will continue paying the up your ying yang taxes you paid earlier while new buyers pay less for the same house.

@Phil,

Nope. The Boomers --er, Prop. 13 backers-- already thought of that. From Wikipedia article: assessed values can be temporarily reduced if the value of the home drops below the amount paid.

SFWoman-

That is true. I would like to move to Texas and buy a ranch there. You can get a five acres and a 2500 sq ft SFH for like $200k 30 miles outside of Dallas or Houston. These ranches are not big enough to generate income, obvioulsy, but they enable you to live out in the country and \keep horses and a few animals.

This is very appealing to me becuase I think it would be a great environment to raise our children in. The schools are probably not so great, so it's unlikely that I'll do it, but man, if there were a good private school within a reasonable distance I'd be in Texas in a heartbeat. I would love to have my boys join 4-H, show their animals at the State Fair, and all that stuff. And Texas is one of the few places where such homes are in commuting distance of major cities with the employment opportunities they provide.

My wife won't hear of it, though. She's never been to Texas, and doesn't really know the first thing about it other than what we've all seen on Dallas, but she's dead-set against the idea. This sort of makes sense on the one hand, b/c she was born and raised in LA and really does not know how to relate to people in rural Texas. But frankly, I think the real reason is becuase it's, well, Texas. A hick state. She probably could get along with the neighbors, she is quite conservative, but she just doesn't want to bear the social stigma of moving to a "hick" state or driving a pickup truck. The California image is important to her.

Personally, I think she might change her mind if I could ever get her to visit Texas. She went to school in South Bend, Indiana. As a result, she is not prejudiced against the Midwest, and is willing to move there, even though from what I can see rural Indiana and rural Texas are quite similar.

Interestingly, I bet I could sell her on the ranch idea if it wasn't in, you know, Texas. My grandparents had a place in New Jersey just like the one I am describing in Texas. Unfortunately, those cost $2,000,000, a little more than their $200,000 Texas counterparts. To her, Texas is a deal-breaker, even thoguh she's never been there. There is just too much stigma assocaited with the word.

even if she thinks the Monte Carlo simulations are a sign I need therapy or more friends to go play hockey with or something

Or more sushi.

OT, but everyone seems to be on this thread.

Owneroc mentioned about the desire to profit from current state of RE in the previous thread. To that extent, how possible/difficult it is to use the new upcoming futures and options on housing price index ? S&P is appearently introducing them in April.

http://tinyurl.com/ncofq

Prop 13 clauses exist in Seattle too. For example, I know for sure that in Bellevue (a city east of lake washington), prop tax can only go up 1% a year, that is even worse than us! For us it is 2%, over a course of 30 years, the popular duration of a mortgage loan, CA property tax can go up 81% max while Bellevue properties will only go up 35% max!

As Randy said, canceling it will be next to impossible. But there are certainly much better possibility of plugging the holes, so to speak, so that it is not abused by people who don't deserve such relief. These people include the landlords holding multiple properties for rental purposes, ATM homeowners, flippers, etc.

To BA or Not,

I looked at that future, it bothered me a little bit. Houses are not identical properties. You can swap one for another, anything fluid and transparent must be of commodities, but as we know, except for condos (still you have the floor, directional facing, amenities, floorplan variance), SFHs are anything but a commodity. So a perfect hedge against your own home loss is impossible. Your home may lose 10% while the market loses 50%, or vice versa. But I like his index as an indicator, because he is trying to use the value of the same house, not merely a median value of a neighborhood to derive the true state of the market.

In fact, his idea is not novice. Such index has existed in Hong Kong for a number of years. But Hong Kong people all live in 30-60 storey hi-rise buildings with very similar floorplans. For a development of say 4,000 units, you may only have a choice of 8 floorplans (no kidding!). So the home value is very easy to track, and the price per sqft data is very widely applicable. Not the case here, housing is extremely local.

Another worry I have is such data is fieled through NARs. In the last downturn, if you talk to the people from BA, what happened was transactions were way down, either the agents took the transactions off the record so as to NOT upset the comps, or homeowners hold on to the under-water properties. Too much distortion exist in these data.

That's why I prefer to bet on something else, like shorting builder or subprime mortgage companies rather than shorting housing index. It is a bit too smart by a half.

even if she thinks the Monte Carlo simulations are a sign I need therapy or more friends to go play hockey with or something

Or more sushi.

Sushi is an event she demands participation in.

My husband and I have found that we can be as happy in a small house as we can in a big house....depending on what is going on inside that house.

Now, that may seem like an obvious thing to say, but so often people are concerned about appearences...what designer handbag you carry, etc. Heck, I'd be afraid to carry an expensive handbag in LA for fear of getting robbed!!

Stupid old slogans like "keep it simple stupid' and "it's an inside job" aren't really so stupid where housing is concerned.

Rednecks are a part of the culture; one which adds to the diversity. Hicks on the other hand are to be avoided at all costs. This is the reason I shall not be returning to Clinton County Ohio anytime soon. That place would do well with more rednecks and less hicks.

@astrid,

This is a very serious question which troubles us a lot. We honestly have no idea how to properly plan on our son's college education. Besides maximizing tax deferrals, it's tough to figure out where financial planning meets appropriate upbringing.

We're both #5's by default being neither of us had trust funds, parents with any extra HaHas or qualified for any substantial federal aid, grants or scholarships. Going to college in the 80s sure was fun. It was the 5-year minimum plan because you had to work full-time to pay your own way.

But, at least back then, the great public universities were there to provide affordable education to in-state residents. I was able to pay my way through Ohio State on a 18-23-year-old's wages (although I did do computer work so I got paid much better than minimum wage).

I worry that now things are different. Either the state schools have fallen far behind the "top-tier" schools or they are very expensive. It's kind of funny. I applied to MIT when I was in high school and was accepted. My parents framed the acceptance letter as that was just to prove I *could* have gone there if we were rich. Today, the inflation adjusted cost for Ohio State is more than MIT was then. I seriously don't know how people do it.*

*Actually I do know how they do it. I just don't like the answer that more debt solves all ills.

astrid,

change your 2) to move to Australia. I have family in Australia and it is an incredibly nice country to live in, and if I don't retire in Norcal, I will retire in Sunshine coast, or Perth, Australia, both having very similar climate as us, perhaps even warmer. Perth is almost exactly like us.

I'd say Australia is a much better option than Canada. Canada is honestly too cold for me, the only viable option, Vancouver, rains 9 months out of a year just like Seattle.

Randy,

I think the public universities here like UCLA, UC Berkeley, UCSB are still of very good quality at a reasonable cost. I don't see how that will change in the next couple of decades or so.

The true cost is really getting the kids into good junior high and high school so that they can get in a good public university or private colleges on partial scholarship, hopefully. Given the deteriorating quality of our public schools in CA, that is my biggest gripe. That's why parents are paying premiums to get into good school districts to save that 20K post-tax tuition per kid on private schools.

Owneroccupier,

I agree re: UCLA, Cal, et al. These schools are still expensive when I compare them to what I paid to get my education though; even cost adjusted and as a % of income. Actually, the UC system is a great reason for staying in CA.

I agree regarding finding good primary and secondary schools too. This is a big part of the Marin premium I suspect. This is also why I think people paying $1M for 3BR/1.5BA 950sqft homes in Redwood City are deluding themselves.

*deceiving themselves, because they are delusional. See, product of public edumacation.

Interesting discussions on Prop 13.

It should be noted that the problems with prop 13 are the result of the old law of unintended consequences. It resulted from a “taxpayer revolt” as people became fed up with watching the government at all levels spend wastefully at a rapidly growing rate, and then just raising taxes to cover it. People were literally being taxed out of their homes.

Prop 13 set a maximum tax rate of 1% that could only be increased to pay for taxes approved by the voters. So, for example, if a sewer bond was approved in a town the tax rate could be increased to cover it. I think this part of the law is good.

The problem arises from the annual escalation cap on the assessed value against which the tax rate is applied. This is the provision that has neighbors in identical houses paying different tax amounts. The annual cap was intended to protect people from being taxed out of their homes due to appreciation. It was mostly for the protection of retired people and others with incomes that might not keep pace with inflation – especially housing price inflation.

This was well intended but the low 2% escalation factor has over the many years created the disparity in what neighbors pay. If there is to be such a cap it should be higher than 2%. Perhaps it should only apply to senior citizens.

Prop 13 does benefit long time owners over new owners. As such, it generally benefits older people more than younger people. Because the boomers are older people now prop 13 benefits them more than younger people just as it originally benefited the parents and grandparents of boomers, and not the boomers.

At the time when prop 13 was passed (by two thirds of the voters) most boomers (being very young) probably did not even bother to vote, and very few of them were buying houses yet. Prop 13 was a non issue for them at that time. Of course, it has become a windfall created by their parents and grandparents.

Prop 13 has resulted in reduced government revenues and unequal tax burdens among property owners. However, if prop 13 were repealed nobody would get a reduction in their property taxes. Of course, many would get increased tax bills, and the local governments would get increased revenues.

As for the discussion thread question – Simple ratios such as the price to income do not work well because they ignore too many important factors including interest rates, buyer preferences, accumulated wealth, demographic shifts etc.

I use a fairly simple approach as a cornerstone in my buying decision process. I will buy a property when I can get positive or neutral cash flow with no more than a 30% down payment. In other words, the rent must cover all real expenses (ignoring depreciation and expected appreciation).

This simple formula generally gave me the red light from 1978 to about 1983, then the green light until 1987, the red light in 1987, and the green light again in the mid 1990s until the end of 2003.

Of course, I also study the market cycle and demographics very closely and select my locations very carefully.

Furthermore, I never buy if prices are declining or flat. Why buy today when prices will be lower or equal tomorrow? I wait for the market to prove that it is recovering before I start buying.

As a general strategy I do not sell, even at the top of the market. However, I did sell in early 1989 in Los Angeles because I expected a significant decline in prices. But normally I buy to hold forever.

Whether you are buying to invest or buying your first home you will benefit from good market timing – but not as much as you might think.

Prop 13 was passed in 1978, during which time the boomer generation was well into the phase of life during which many buy their first home. Many were in their 30s at that point. I'm not so sure they were a silent, non-voting constituency, although certainly the GI generation and the Silent generations were the primary movers on the issue. The simple fact is that pretty much no one opposed the measure, and it was one of the most widely participated in elections in CA.

Proposition 13 passed with 65% of voters in favor and 35% against, and with 70% of registered voters participating.

I don't take an anti-boomer generational rant on this issue...yet. What will be telling is if the boomers decide to repeal or weaken prop-13 in the coming ten years. There has been quite a bit of rumbling about "fixing" prop-13, which I fear will come at a time just when the boomers are done with its usefulness (but probably protecting seniors still, of which they'll qualify) sticking GenX and Millenials with the adjustments.

The expenses involved in selling property would exceed the tax savings from such a flip. The tax savings would not justify the selling expenses.

I agree that retired people occupying houses near the work centers is less efficient. However, this becomes an emotional issue when you advocate pushing people out of the neighborhoods where they have lived for decades and where they raised their children and have all of their friends.

I do believe that California would benefit from being split up. I have been in favor of this for about 30 years. I have always thought of it in terms of only two pieces - north and south.

The average boomer was about 23 years old in 1978. The oldest few were 32. People under age 30 generally have a low voting participation rate.

Most people hold their homes until they die or right before they die. Therefore the boomers will be unable to repeal prop 13 after it is no longer useful to them - because they will be dead.

...and (with some exceptions) dead people do not vote.