patrick.net

Once the LV and AZ markets crash hard and fast, I think a lot of the California retirees will make a run for it. Their kids or grandkids already can't afford California. Also, the bubble burst will be economic hardship, and any inflation will quickly eat into the real dollars available to someone on a fixed income.

Robert Cote,

To add to your observations, the practical inevitability of higher energy prices will empty northern cities even faster, the heating cost in much of the country is already equal to people's mortgages. Given that most of Detroit's housing stock is probably quite old and not very energy efficient, they may quickly reach the point of being unaffordable on heating costs alone.

HARM,

Thanks for adding imagery to older posts. Very nice.

My parents will be visiting me and my wife for the first time here in CA. They have never been to California. Truthfully, I'm a little curious what they will think about it.The price of a 800k SFO house is still around 50k there, 16 times cheaper. Her parents came in March and were absolutly amazed at how expensive it was out here. My folks and her parents see things that most californians have been shell-shocked into believing is digestable, which is that unaffordability is a natural given, and 400k is a real "bargain".To them, they'll probably see it from their perspective. It must look absolutly ridiculous.
As far as Prop 13, this thing was only enacted as a temporary fix for what was then heavy property tax in relation to home values. In other states like TX, the tax helps make sure that values can only reach a certain point and then the price of ownership becomes too high. As a result, the markets are more tame there with the exception of inner Austin, which is still in the 300k range. In California, Prop 13 solved one problem, which was to alleviate the tax burden of the then current homeowners, only to place the burden on anyone not owning a home. Basic science comes into play here. You can't abruptly stop one thing and not expect an equal or greater reaction on another level. Ever since the passage of Prop 13, there has been reliable and frequent housing booms and busts, which places a lot of instability in the entire state. This Proposition needs to be repealed and replaced with something that meets both parties in the middle, where homeowners will have to be somewhat responsible for the tax on their adjusted home value, yet not make it impossible for them to pay in a runaway boom either. This way home prices will be tied more to real income and not speculation and risk by means of unconventional loans. Placing a flexible taxation system on homeowners will cause them to put pressure on government officials to build more supply. The name of the game is create an environment where both parties- homeowners and homebuyers will want to equally cover their asses. It is all one way right now, and this is the sole reason for the imbalance.

Robert,

There was an interesting piece I read somewhere (Sunday NYT?) about Detroit - the question was, why is that city, with such a disastrous economy, not completely empty population-wise? The answer these authors came up with was the ultra-cheap housing stock there. Ramshackle victorians can be had for little money, and that was an implicit incentive for people to stay put there. This goes for other Northeastern declining cities as well. I can't say I've been to Detroit, but at least according to Eminem, it's a hellhole...

skibum,

But wait til higher energy costs pushes that balance towards the tipping point.

Of course, a good chunk of the Detroit probably receive government assistance on housing...

astrid,

Yes, rising energy prices are a real bummer for cost of living in the Northeast. I wonder, relative to the Northeast's heating costs, what the cooling costs in places like the southwest are as well.

Robert,

Your assertion about Prop 13 as a buffer against market risks for homeowners may well be true, but the beef many have with it is that its benefits extend only to long-term owners. Recent purchasers who have paid much higher for their homes pay a much higher burden of property taxes proportionally. Is that fair? The outcome is essentially the tax burden for older Californian homeowners is being subsidized by the younger owners. I would suggest a revamping that distributes the burden more fairly while maintaining protections against arbitrary tax increases.

Robert Cote,

Protects people from arbitrary government distortions? Property taxes are used to pay local government expenses. How arbitrary is that? Do you just hate all taxes. Everybody uses those government services. Prop 13 is just a wealth transfer from the newer buyers to older buyers in the same community.

You and other California property owners can take that Prop 13 with you to the grave. You're ignoring the fact that these house owners are now a hell of a lot richer in equity, and they can easily afford taxes based on their current net worth.

I, and probably many others in their 20s and 30s, are will probably never buy into California under a Prop 13 system. Prop 13 and NIMBYism has distorted California's RE market so that a lot of talented young people can't afford to buy into it. That's what the free market yields, a sub-optimal solution due to the distorting effects of Prop 13 and NIMBYism.

All I can say is that ever since Prop 13, California has been in near financial crisis. The schools are shutting down one by one, not only from the ever-lower number of kids since families are moving out, but from the lack of funds. Roads, bridges, public buildings, state parks, libraries, and on and on all suffer from a severe lack of funds. It makes no sense that the wealthiest area in the world has schools worse than those in most of the country. Property tax serves a purpose, which is first to get enough money in relation to inflation for public institutions. Secondly, it can help keep runaway prices under control. Perhaps I am being bitter, but I think homeowners should have to share as much of the pain as those trying to get in. Likely, an adjustable tax would be better for everyone in the long run. Right now, it's all about homeowners wanting exactly the opposite of what homebuyers want. They want higher values, and less houses, while homebuyers want precisely the opposite. If there isn't a new method founf to equalize the situation, then after this boom and crash,there will be another boom in 10 years, and so on and so on. I may be totally wrong, so if anyone has a better idea, I'd love to hear it.

Prop 13 advocates are basically making the same arguments as proponents of rent control. They allow people who got in first to stay put, even if greater utility and revenue can be derived by people who came in later and got locked out.

Robert, do you defend rent control?

Is there enough critical mass on this board and others to begin a campaign to repeal Prop 13?

Robert,

You argue for a broken system (Prop 13) by trashing a sucky potential alternative. I'm not sure everyone here would advocate an alternative to Prop 13 that involves frequent reassessment of property value. Also, if you break down your DMV example, you are implying that its wrong to have a long-term owner be taxed at the assessment of a recently purchased comparable home. Why is that so bad if home prices merely increased with inflation? Then the increases would amount to a fixed percentage of one's income, assuming income is also rising with inflation. Of course, that's a big if, though.

Skibum,

The only time I've spent in the Southwest (Oklahoma) was in utility inclusive grad student housing in the early 90s, so I don't know how it is lately.

The Southwest is comparatively better off because the housing stock is a bit newer-hopefully more energy efficient and desireable. Also, thus far, it appears to be a desireable part of the country for many people, so there will be more people who can afford the higher utility bills.

I think water rights will be the major constraint in the inland west.

Robert Cote,

Please directly answer the questions posed to you, rather than go off on a tangential point.

(I don't think gas taxes and tire fees cover the actual cost to the government of maintaining roads, dealing with pollution, etc. Nor do they address the nuisance of tall SUVs and RVs on crowded roads. But that's what we're talking about. Please answer the questions you were posed, rather than practice trying to win on rhetorical flourishes.)

On the other hand, we already have a near-national flat tax for some public services - it's called Lotto/Powerball/etc.

"On the other hand, we already have a near-national flat tax for some public services - it’s called Lotto/Powerball/etc."

Taxing the mathematically challenged everywhere.

Robert Cote,

You make a convincing argument. I'd like it if you could elaborate a bit more on your reasoning in:

but if you are either trying to transfer assets or you are in financial trouble the possibility of the “sales price” being lower than the honest price increases.

skibum et. al.,

I agree that many long-time residents unable to use the (quite disgusting) prop-13 one time escape hatch might choose to stay put. But, won't this also add to stickiness, by depressing theoretical inventory? Anything that constricts supply will slow the velocity of price reductions, including long-timers simply staying put for any reason, prop-13 being but one.

I do agree that foreclosures from specuvestors and FBs will clear market quickly, but only once they are officially foreclosed. I see two frictions that slow down this process. (1) Foreclosure is a lengthy process with lots of legal gates. Lenders don't like to foreclose because it's expensive and risky. There are also lots of legal protections for the owner. Assuming most specuvestors and many FBs will get lawyers to help them through this process, it will result in a large surge of paperwork and administravia to process. That leads to (2), it will take some time for courts, lenders and other agencies to gear up to handle any increase in foreclosure actions. More likely, we'll see many months backlog in foreclosure processing. (Note, this need not mean that owners will get a break; they will not. Only that homes aren't recycled into the market as quickly as owners default on financing).

I am also unconvinced about how price efficient the foreclosure market is. From what some here have said in previous threads, I am very suspicious that the foreclosure market is driven by *highly asymmetrical* information. In such a market, prices may stay artificially high.

I do agree that pricing in the RE market is determined on the margins. I do not agree the market is liquid by any measure.

Property taxation is inherently flawed. That is, taxation of property based upon value, be it assessed value, fair market value, book value (as in prop-13), or any other formulae including value as a factor. You can google some thoughtful academic arguments and research to this end.

The answer is to either abolish all property taxation and instead generate revenues through a more equitable mechanism, like consumption taxation or income taxation, or even *realized* capital gains taxation (although I am against this, but it is more fair).

One proposal I've seen that might pass political muster would be to create a formula for property taxation based upon zoning-designation, inhabitable sq-ft, and land sq-ft as factors. Then these taxes could be adjusted, through supermajority votes, when necessary. But all owners of any land would be taxed based upon their community impact. A proposed modification I read would include a resident-count or family-count factor. Note, there'd be no exemption/difference/etc. for whether the land is owner-occupied or leased. The land/structure is the taxable entity.

Robert Cote,

I think you have it in reverse. When I agree with you, you're not evasive in answering my questions. When I disagree with you, you don't answer my questions at all, or cherry pick the favorable ones, or put spins on tangential points.

I still haven't called you a troll. I am calling you evasive because you are in this instance.

I specifically asked about your thoughts on rent control. I asked about your feelings about the proper level of taxation. Those are things you haven't gotten to. I think it's fair to say that's evasive.

To answer the question in the OP:

I doubt any of us will successfully call the bubble in detail. Two reasons:

1) The bubble isn't *a* bubble, but many regional/local bubbles. Timing and prices movements won't be uniform.

2) Predicting the future is for charlatans and fools. If any of our individual predictions were worth their weight in bits we'd already be betting everything we own + whatever we can leverage against that future.

That said, this opens a possible experimental opportunity. We could pick a tight market, say a couple select counties in bubble zones (namely the BA given the gravitational center of this blog), then run some internet surveys (maybe survey monkey...anyone have an account there?) to collect the "Wisdom of the Crowd". When you get enough input into a thing like this, often the aggregate statistical results are spooky in their accuracy.

Randy,

The community pact idea sounds very fair. California's home ownership (especially by low basis homeowners) may soon reach a sufficient low to make that change possible.

What about enacting a consumer( grocery store) food tax? Most states have it, we all have to eat, food is still one of the most affordable consumer goods, so perhaps this would create at least some income for the state.

Randy H,

Interesting thoughts about alternative property tax schemes. I would think that a naive but appropriate way of thinking of this problem is to ask the question, what is the purpose of property taxes? Is it to find an equitable way to extract money from property "owners" for the general good of the local community (infrastructure, services, etc).? Is it to specifically extract money for usage of public works specifically associated with owning property (local road maintainence, utilities, the like)? Or is it just another way to tax people that has become accepted?

I would think the answer to this question (if there is a correct one) would in part determine the best alternative taxation scheme. For instance, why is it appropriate to levy increased taxes because there are more inhabitants or there is more living space in your property? Increased public utility consumption? I don't know. It just seems there is (obviously) no perfect solution.

Robert,

As to the car tax issue. First of all, it has virtually nothing to do with prop 13, which was the purpose of the original discussion. Going further to discuss the matter is unproductive in this forum.

Can you answer my rent control analogy? Is prop 13 in any substantive way different from rent control? If not, do you support rent control?

Robert,

I'm convinced on inheritance tax schemes depressing prices. This occurs even in rising markets, but surely has been dampened during the worst of the boom. I'm not sure how material the effect is, but I agree it exists.

I'm still unsure on:

Then there’s the outright fraud when somebody with lots of debt “sells” their house for a low price because the other debt I mentioned isn’t included in the sales price. Thus the taxable basis and all the other expenses are lowered. Again in a rising market there is no incentive to do an under the table deal like this.

Please explain the incentive to the assignee of the debt burden. The lender will demand full service of their debt covenant. Assuming this is for more than the current value of the asset, I strain to imagine a situation where tax shield benefit exceeds losses, except in a very narrow band where prices are within say 10-15% of nominal losses. And, this ignores both time-value of money (tax benes are realized usually 1 year later) and expectations of future losses in the asset value.

Perhaps this would be more likely at the bottom, not during the period of deflation?

skibum,

Although higher density residence poses a problem, I think the effect might be partially countered by lower density owners being wealthier and more able to pay the tax. This is means testing by choice of residence, which seems fair to me.

The secondary effect is that such a system may encourage more high density housing, which would go some ways to counter the McMansion phenomena.

On property taxation:

My ideas (which aren't mine, I've adopted them from others who did lots of hard work and research) will probably never be adopted. It is for this reason I am markedly apolitical and cynical about the entire public process. It is a system that maximizes for the least-optimal but most-voter-acceptable outcome. The error is in assuming there is any incentive for voters to be informed on the issues. To wit, I tried to read and fully understand a bond measure a few years ago (I think it was the big state one for education right before Arny came into office). I have lots of formal education which enables me to do things like understand duration, yield, yield-to-maturity, and such. I couldn't understand the measure. If I can't, how many others couldn't, or didn't give a sh!t. They just see the TV ads and decide in a American Idol popularity contest fashion.

This is what causes people not to vote and to feel justified in that decision.

Also, I cynically believe that all taxation is, at this point, for the specific purpose of funding general spending. All targeted taxation does is offload other sources of revenue. In taxation, I violate my "there are no zero-sum games" rule. Taxation is always zero-sum, because the political process decrees it so.

Robert,
You and I both acknowledge that Prop never was perfect. No tax or piece of legislation ever is. That said, while I agree that getting rid of it and back-treading to 1975 would put the pressure back on homeowners which would be just as bad as it is for non-homeowners now. I think that there needs to be a middle ground. Everyone pays to an extent that acts more like a baysitter. A reasonable cost to stimy out of control growth, and one that also serves the community better. Basically, a method to return houses more to the standard to simply being dwelling places and not the potential goldmines that people in this state view them as. At the same time, anyone purchasing a home would also have incurred expenses that would make the type of buyers be of higher quality- not like the investors and weasels of today. What the state needs is reform, not neccesarily scrapping . An amendment.

Robert,

Fair enough. You are assuming that Ralph's savior is either (a) willing to assume Ralph's well known high default risk on the private note and/or (b) has "alternative" means to ensure Ralph repays the private note. You're essentially proposing that the mafia will be moving into the home financing business. Perhaps, but lots of Ralphs will either end up in the Chicago River or fleeing.

Robert,

You're toying with semantics here. In practice, both have the same kinds of market distorting effects. You're working from the perspective that direct ownership of property is untouchable. However, property has always stemmed from government grants of rights. Government has always defined what you can own and what terms - people cannot own marajuana or plutonium in this country. Without government to police property ownership right, anyone with a gun can talk in and forceably take over your home. Yes, I know there are libertarian solutions to the problem, but I've yet to see a real world example (warlords, usually) I would be comfortable living in.

Unfortunately, if Randy's observations are correct. This isn't any way to correct the system. In that case, you can keep the system until the negatives of the system grind the entire California economy down, relative to the rest of the country. I'll rent and move out of Cali when I'm ready to buy.

Nomad,

I think a transition period would ease the pain, and there's no reason to adopt the problems of other system. But really, if you look at low basis homeowners, their net worth is such that they can afford higher taxes for sometime, if they wish to sell the house. The market will eventually adjust itself, and such home owners' networth will still be 100,000s higher than if their house stayed at 1975 prices all this time.

astrid,

We're right back to the underlying problem: California is ungovernable as a state. It has too many people, the economy is too big, and it is too diverse. Last I read Italy and Germany were hard enough to govern *as countries*. It is lunacy to believe CA can be run as a state with a Mickey-Mouse form of government.

I am a proponent of breaking up all the big states, and then also promoting large city-metro areas to city-state status. By my guess there would be about 100 or so states in the US, with much more fair and equal representation.

Randy H,

"breaking up all the big states, and then also promoting large city-metro areas to city-state status"

I'll drink to that!

Robert Coté Says:

"How would you like a letter from the DMV:
Dear recent auto buyer, Congratulations on your excellent deal on your vehicle. At the time of purchase you were taxed based on that price however a neighbor recently purchase a similar automobile for considerably more. As such your tax assessment is retroactively increased based on the irresponsible actions of your friend down the street. Cash, check or credit card. Remit now."

The DMV has been sending these out for years…

At the Palo Alto Concourse a few years back I saw an actual letter. A retired guy with a Mercedes 300sl Gulwing bought his car new in the 50's for under $10K and was a little upset to get a letter from the DMV telling him that he had to start paying based on the current value of the car $250,000...

All counties in CA will not let you take your Prop. 13 tax basis with you when you are over 55 and move (a friend's parents just found this out when they moved from Sonoma County to Marin County)...

"he had to start paying based on the current value of the car $250,000…"

But isn't that the risk of having too much money or investing too wisely? :P

FAB,

Maybe this fellow could establish a charitable trust for the car.

Robert Coté said:

Prop 13 correctly protects people and businesses against arbitrary government distortions of the market. That’s the point of government regulation in the first place isn’t it?

I wasn't aware that government is there to "protect' us from itself or market fluctuations. I don't trust the government to police itself, nor do I "need" protection from a well functioning free market. That's not my definition of good government. Personally, I thought government regulations were (among other things) to protect people and the environment against externalities (aka "tragedy of the commons") caused by reckless business behavior guided solely by the profit motive.

astrid said:

Prop 13 advocates are basically making the same arguments as proponents of rent control. They allow people who got in first to stay put, even if greater utility and revenue can be derived by people who came in later and got locked out.

Robert, do you defend rent control?

Thank you. If there were no easy-credit induced housing bubble or anti-development NIMBY laws to begin with, property taxes would be reasonable and there'd be no public outcry for government "protection" from government's high property taxes.

One thing I do agree with Robert on, this state will spend every dime it gets its hands on and then some. We already have a "protection mechansim" for that though: elections. Now if only we could get the public to pay attention once in a while and vote for candidates who understand this, instead of candidates who promise them a free lunch, demagogues who play racial politics, etc.