patrick.net

NVR,

I also noticed that the couple mentioned in the WaPo article had a 5.75% FIXED RATE mortgage (but w/ kids in college!!) felt that was 'too high' and jumped at the chance to gorge on a 1.95% ARM! "It seemed like a godsend". Yeah, you're right, under 6% for the first time since Sputnik is pretty abusive?

I suppose there are things we could be willing to look past (as this was in 2004 before toxicity was widely known) but what did they THINK was going to happen? That aside I hope they do get their case heard.

A 750K house may drop to 350K in a no-mortgage environment

You're kidding here, right? $350k would still represent a 6-7x multiple of median CA HH incomes, which is *still* higher than the long-term historical average of around 5x. And we're talking what prices might theoretically be in the complete absence of mortgage lending. Without loans, prices would have to crash to levels supported *only* by buyer incomes and savings.

Without loans, prices would have to crash to levels supported *only* by buyer incomes and savings.

If I have to bet:

2M will drop to 1.5M
1M will drop to 600K
750K will drop to 350K
500K will drop to 200K
400K will drop to 100K

(NOT FINANCIAL FORECAST. NOT INVESTMENT ADVICE.)

Without mortgage, the low-end will be decimated, but the higher-end will come out relatively fine.

Don't forget that even without mortgage, people can still rent.

The lower-end will still be partially supported by cash buy-to-let investments.

"Instead of eliminating property taxes, I agree with ol’ Henry George that a land-value tax should be the only tax"

Even better... instead of taxing based off the value of that land, come up with a flat rate for a square foot. How could you get more fair than that?

Sounds good but then the guy with the quarter of an acre on the beach pays the same property tax as the guy living in the desert.

What is everyone's gut feel for the future of mortgage interest rates? Seems like their slipping upward even while the Fed is lowering.

If Bernake somehow stimulates the economy a little bit, what is the likelihood he will start raising the rate like mad to combat inflation?

Seems like alot of the price drops in housing could be moot for buyers sitting on the sidelines waiting for the bottom. By then the rates could be significantly higher. A 5% hike in rates would take away about 50% buying power. 50% seems to be the biggest drop I've seen predicted for housing (by Schiller), and only in certain markets. And a 5% hike up in rates seems likely in the next 5 years unless our government decides to make the dollar toilet paper.

Any thoughts?

Peter P,

I don't know if your "model" is BA specific but we've already seen huge price plunges in I.E and SAC etc. and that's WITH... "something" of a mortgage market.

Well, many here have said lowering the rates was not going to do anything for the lending business or to stabalize home prices. Seems that was the correct prediction. Government backed loans will continue to be cheap, with the increased risk unsecured loans and mortgages/TDs will become more expensive. The market will determine the risk premium built into the rates. Some subsidized rates, like dealer financed car loans will probably drop as an incentive to keep the production lines running. It is going to be an interesting time where we can all make a lot of money if we figure out the directions things are going.

I don’t know if your “model” is BA specific

It is mostly BS specific. :)

Yeah, it is a guesstimate about the Bay Area.

Fuzzy Math,

Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!

Down the road rates will come around and you can always refinance the loan. You can't renogotiate the price of the home.*

Patrick 101*

"Sounds good but then the guy with the quarter of an acre on the beach pays the same property tax as the guy living in the desert."

Yeah, not really sure what unintended consequences that would have. We are used to thinking of tax on dynamic quantities like income and value... not a tax on some unchangeable quantity like square footage of land.

That would probably just create alot of highrise buildings.

I do like the idea of not needing appraisers though.

Well I don't know about "BS"? I just appreciate your quick-and-dirty "sliding scale matrix"! (Someone had to do it)

DinOR Says:
February 27th, 2008 at 12:46 pm
Fuzzy Math,
"Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!"

Yes, yes, and yes!!!
God, I can't tell you how stupid I think people are who say, buy now interest rates are going to go up!

Administrator Says:

> I agree with ol’ Henry George that a land-value tax
> should be the only tax. Here’s the argument:

Since land does not always generate income a high tax on land will basically take land away from anyone that does not own land producing a lot of income.

Does it make sense that an older couple retired and living on Social Security in Sonoma County would pay higher taxes than a NBA player making $5mm a year renting in Mahhattan?

> * Most wealth is land.

This is not true since most land generates little or no income.

> * No one creates land (except perhaps in Holland).

It would not be hard to turn Richardson Bay in Marin in to a subdivision since at high tide it is only a few feet deep.

> * Collecting rent on land is merely sponging off of the
> increased productivity of dense communities, without
> giving anything back.

Just like collecting a high salary in a dense community could be considered “sponging off of the
increased productivity of dense communities” unless you gave it all back.

> * Homelessness and poverty are the result of city land
> monopolization by the rich.

Homelessness and poverty (in the US) are caused by stupidity and/or laziness and have nothing to with land use or the rich…

> * It’s impossible to hide land, so tax collection is easy.

True

> * Taxing income and sales is bad, because
> it discourages commerce.

We have been taxing income and sales for my entire life and we sure don’t have any lack of commerce in the US.

> * Taxing building value is also counterproductive.
> You want good buildings and maintenance.
> Tax only the land value

This makes no sense and would have a strawberry farmer in the Silicon Valley who makes $70K a year on a few acres paying the same tax as the owner of a 10 story office building who makes $10mm a year from the land (and building)…

Thanks, DinOR --beat me to it.

“Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!”

Even better, cheap money and cheap asset!

There are always undervalued assets at any point in time.

"Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!"

Not gonna argue that!

Fuzzy, the appraisers aren't really needed for the general assessments. There are standard construction costs that can be backed off to calculate the raw land value. The tax bill and assessor records actually do seperate the two and then track both. For an income property you use that figure to depreciate the structure. I am interested in the concept of raw land taxation. Again though you will run into that prop 13 dilema when a forward thinking types buys a bunch of gold or other hedge for the future tax increases and for all intents and purposes keeps the original basis and finds a way to pay the tax from an endowment type setup. Then 20 years from now people will be complaining that they have to pay more for gold than the older people did.

Not to be picky, but it's important to point out that it's always better for the borrower, but not the seller (and possibly the lender).

Peter P Says:
February 27th, 2008 at 12:55 pm
“Always better to buy cheap assets with expensive money than buy expensive assets with cheap money!”

"There are always undervalued assets at any point in time."

All things being equal it is a inarguable concept. I'll trade a lower purchase price for a higher interest rate any day of the week. That's what caused the bubble in the first place, the opposite tradeoff.

Yes, it is the purchase decision. As a seller you want interest rates to drop, then you can push the price higher for the next fool.

an inarguable

I suppose one could also argue that cheap money (in and of itself) doesn't necessarily create value? Let's just look at lumber/bldg. mat. prices. At the height of the boom dimensional lumber went sky high. Why? Was it suddenly of better quality?

Yet the slightest uptick in rates and all of a sudden building suppliers were stuck with a pipeline of over-priced inventory. I guess one of the ways going forward we can determine if we're over-bidding on tulips is to simply take a step back and ask; "Is this demand truly needs driven (or propelled by access to too much cheap money?)"

Oh, that's what we've been doing here the last 3 years! My bad.

Cash would be A-ok for me: Unlike ~95% of the public, I actually *have* some.

A-OK for me also. If cash does become king, we may find out we have more savers than we think. Savers tend to put away cash quietly in contrast to the loud complaining of the debtors.

Perhaps we should... ahem, amend Patrick's contribution ever so slightly?

In a n-o-r-m-a-l world you can't renogotiate the price of the home!

With all the "Mod-Squading", Don't 1099 me bro', Jumbo raising (rate lowering) "mortgage rescinding" and Cap Lifting going on I'll have to re-think my position? :(

@DinOR, word.

How does the old saw go? "If you're going to do something stupid, do it with large numbers of other people."

DinOR, in 2004 I hit the 1 million mark in net worth and felt poor because everyone had access to cheap money. It was one of those flukey situations where everyone with a house thought they were Donald Trump and moved massive amounts of borrowed money around.

Next bubble coming, collector cars. Now instead of "What's my house worth?" the new show on is "What's my car worth?"

Guys, can we please stop the madness?

“If you’re going to do something stupid, do it with large numbers of other people.

Yeah, that is a smart thing to do. ;)

I know, I collect Japanese swords so who am I to criticize, but man these boomers wasting all this effort to constantly count their pennies is really getting under my skin.

Why can't they just own something and enjoy it for what it is rather than only caring what they can flip it for?

Can someone recommend a commodity futures broker with reasonable (NOT necessarily rock bottom) commissions and great customer service?

I want to hedge with gold options. GDX/XAU options just don't track GLD well. :(

Thanks.

Oh, this show is great. The guy told the boomer his car might be worth 18K not 22K and he started arguing with him. Just as I thought, the graph showed the price tripled in the last couple of years, right in line with the easy credit we're talking about. These boomers, I tell ya!

DinOR, in 2004 I hit the 1 million mark in net worth

Malcolm, that is very impressive for someone your age, assuming no inheritence. I would tend to discount equity in a principle residence, cars, and collectables when calculating net worth, since these are non-productive assets.

@Malcolm,

"A cynic [Boomer] is a man who knows the price of everything but the value of nothing."
--Oscar Wilde

The tax bill and assessor records actually do seperate the two and then track both. For an income property you use that figure to depreciate the structure.
Not to be overly attentive to details, but shouldn't you get an appraisal to assess the values of the building and land as "the man" tends to error on the side of allocating more to the non-depreciable asset (land). At least this is what I've read (Holmes Crouch book, I think). I suppose you have to weigh the overall benefit of the appraisal vs. its cost.
Euro broke $1.50 today; okay, I am starting to get worried.

Oscar Wilde. Important of Being Earnest. Cucumber sandwiches. :)

Malcom,

They already have such a show. (It's called the Barrett-Jackson Auto Auction) Happens every year in Y-O-U-R.... favorite town!

Yes, no inheritance and that WAS including the principle residence that has dropped by $100K. Take off about another $250K in taxes that I then paid in 05, and 06 and now I'm where I am. To be considered a true millionaire you would have to exclude your home as you say. You could always borrow against it, put the cash in the bank, and have the same net worth excluding your home and loan note. That is, if joining the millionaires list is really that important. To me it wasn't I was happy just to pay off my house.