patrick.net

LiLLL,

"Unless you are the Partridge Family or the Jackson 5… :)"

LOL! Have you heard the rumors that Michael Jackson is close to bankruptcy?

To sort of contradict myself from a historical standpoint, my grandfather was amoungst 10 other kids in his family. He and the other 9 were had primarily FOR financial reasons- to be extra hands on the farm, except in his case he went away to college instead, thus limiting his free labor. Maybe people aught to have 10 kids once more for the same reason, except that kids today would help YOU out with taking care of you once you're too old. In fact, it's strange that in many countries, this is still the case. An old-fashioned retirement plan.Not so here anymore, that's for sure.

Apart from winning the lottery (whether literally or through stock options or inheritance or the like), I see the majority of my peers hitting their 30s in the bay area still trying to carve out a niche for themselves. Kids are not even on the table. When I cruise amongst the hoi polloi on weekends, most of those that I see with strollers look more like grandparents. Personally, it's such a rat race here (and really has been for decades) that I'm happy to pay a cheap monthly rent ad infinitum rather than ostensibly living to pay a mortgage. I've already seen up close and personal what happens when people live beyond their means, and the endgame is not pretty; and unfortunately when kids are added to that equation, it makes it spectacularly worse (for the kids).

(First post after two years of voyeurism; as Peter Sellers said: "I like to watch.")

WWII,

That's never going to happen again. Indeed, kids were once a safeguard against old age, but that's really not the case any longer. The chance of coming in with a net profit on kids is just about zero.

This is extremely obvious in Shanghai, my hometown. While my grandparents' generation receive a lot of help from their kids for support, my parents' generation is actually paying out substantial amounts just to support their kids. Most of their children can't even dream about having their own flat without majority support from parents.

chuckleby,

LOL! Welcome to the world of posting and stage II addiction :)

Garth,

No argument here! Where the problem comes in is that if we don't get it fixed when prices "auger in" (and they will) we start the whole process all over again! I AM NOT PRO TAXES! I am "anti-bubble". Really...... truly, I don't need or want any more. Will the re-implementation (prior to 1997) fix the entire problem? Well no. We know that much. But it's a step in the right direction. If bullish, ahem, excuse me "non-bearish" investors insist that CGE is a non-issue they certainly won't have any objections when we repeal it. Guys, this is just a distraction technique. Bulls don't want to give up an inch, mort. int. ded., cheap/free money, opening the MLS, everyone qualifies, CGE and on and on.........

$500k cap gains exemption-

I think this influences people's behavior, too. Here's how.

I'm a late 40's/early 50's Boomer with a 2000 sq foot stucco tract home in Orange County which is now "worth" 900k. I've saved virtually nothing for retirement, I spend every cent I make. I become aware of the huge gains in RE and decide to get in on the action.

I was around during the last r/e bubble and know the market is going to tank eventually. I'm not THAT stupid. The only questions are when it will go down, and by how much.

I learn of the $500 cap gains exemption from my mortgage broker/neighbor/Money magazine/brother the CPA. $500k is just about the balance I should have, but don't, in my 401(k).

I start flipping houses. I watch the market like a hawk and intend to unload them once the music stops. Will I be successful? Who knows. Will the dramtic initial short term gains cause me to lose perspective and become overly optomistic? Perhaps. But one thing is for sure -- I DO INTEND TO SELL. I am not in this to build a real estate empire of tract homes, I am in this for money to spend. In fact, I am ALREADY SPENDING IT right now, thanks to the miracle of home equity loans.

Anyway, this is how I beleive the $500k cap gains exemption influences the market. Obviously not every homebuyer engages in specualtion like this. But there are a lot of them, and they help set the comps for everyone else.

And when the comps go up, younger people who want to buy houses to live in start buying them sooner/taking on too much risk and debt, etc., just as Astrid noted. Young people are interested in building up their net worth too. Even if you don't intend to spend that $500k immediatley, it sure feels great to have it, and there is always the possiblity that you might spend it in the future if you lose your job or something. Even the ability of extracting $500k is seen as a cushion of wealth by many; that equity is money in the bank as far as they are concerned.

astrid, grazie mille!

the level of discourse here is pretty stellar. Personal anecdotes and angst are about all I can reasonably contribute. Still, I loves me my daily fix of patrick.net.

I wrote that:

> I have not met (or heard of) a single
> person who is buying a house in the Bay Area just so they
> can sit on it for two years and cash out under the 1997 cap
> gains law change

Then SP Says:

> I know three of them. All of them factored the
> 500K exclusion into their plan.
> Every one of them then plowed the gains back
> as down-payments and bought houses that were
> about _double_ the size and price of the houses
> they had just sold.

These people did not “cash out” and their situation is no different than it would have been under the old system that allowed the deferral if cap gains on the purchase of a new home pre 1997.

Does anyone on the BLOG know someone that bought a nice home in a nice area for $500K in 1997 then sold for $1mm who is now living in a $500K pile of crap Bay Area home in a bad area waiting to take another $500K tax free?

FAB,

There is one difference btwn people then and people now, the basis has altered. I think the people here have argued that people who have the opportunity to exercise the 500K exemption have gone in the other direction, towards multiple investments properties or bigger investment properties. While on the surface, it appears the same as pre BushCo behavior, those behavior in fact have different motivations.

SP,
I agree to an extent, but me and my wife grew up in traditional areas where family members tend to stick together. Our living so far away out here has caused some problems, which is yet another reason we're probably moving- that and the impractical economics that exsist here as we speak. Diffrent families have diffrent ways of interacting with each other, so this single aspect will diffre from family to family.

Joe Schmoe Says:

> $500k cap gains exemption-
> I think this influences people’s behavior, too.
> Here’s how.
> I’m a late 40’s/early 50’s Boomer with a 2000 sq
> foot stucco tract home in Orange County which is
> now “worth” 900k.

It sounds like you have owned the home for a while and didn’t “buy” it due to the change in the tax laws…

> I learn of the $500 cap gains exemption from my
> mortgage broker/neighbor/Money magazine/
> brother the CPA. $500k is just about the balance
> I should have, but don’t, in my 401(k).
> I start flipping houses. I watch the market like a hawk
> and intend to unload them once the music stops.

1. You should have a lot more than $500K if you are pushing 50.
2. The $500 cap gains deduction only applies to your personal home not the investment homes you plan to flip.

The big question is if home prices continue to drop in OC will you actually sell your home and take the $500K tax free and practice your Spanish so you can rent a little apartment in Santa Ana or Costa Mesa?

For people that can move out of state I think the tax law change will increase the number of “sales” on the way down, but I still don’t see many people who “bought” with the idea of watching prices increase so they could cash out and buy something much much smaller and try to do it again…

WWII, Garth, SFWoman,

Re: kids, my wife was 40 when she gave birth to our eldest, and I was 31. Our oldest was born a year and three months after we were married. Becuase my wife was so much older than I am, we couldn't wait. She was never a carrer person or someone who was intent on moving up the economic ladder; she is a lawyer but has never practiced, she actually moved back in with her parents for a couple of years after finishing law school at Notre Dame. She is not rich, she just didn't care about working at all.

I would have much preferred to delay kids until after we bought a house, but that obviously wasn't an option. I am glad that we didn't wait, however. We have paid an enormous price for this -- I do not advertise this, but we are living with our two boys in run down a one-bedroom apartment -- sure, we could "afford" to rent something bigger and nicer, but it just seems like throwing money away and we cannot bring ourselves to do it -- but it was totally worth it.

In the area where we live, I am one of the youngest middle-class parents. Well, okay, by education and income maybe I am in the upper-middle-class, but as we all know even a good income does not enable one to actually buy anything these days, so call it whatever you'd like. There are plenty of illegal aliens having kids, and the recent Asian immigrants always seem to have a couple upon arrival regardless of their financial situation, but as for middel and upper-middle class white people, only people in their very late 30's/early 40's have kids. I am one of the youngest fathers around, which seems really strange since I am 34, but it's true.

I am happy when people in thier 40's have kids. Kids are a great blessing and it is wonderful to see people have them.

At the same time, I wish people didn't have to wait so long to have kids just to achieve some degree of financial stability. Most people today would probably not have kids at 25, but plenty who have their first child at 45 would have done so at 35 if it weren't so financially difficult.

I am also creeped out when people wait too long. My wife's ob/gyn told her during her last visit that she had 14 patients in their 50's who were pregnant. Not 14 over the course of her entire career, 14 at that very moment. That bothered me. I was happy for the parents but could not help but think they may have made a mistake in waiting that long. I mean, when will you start collecting Social Secuirty before you oldest is finished with high school, you're taking a huge risk. People tend to, you know, die as they get older.

And in the wealthy neighborhoods of LA, you see plenty of triple strollers wherever you go. As you may know, the odds that someone who does not use fertility treatments will have triplets are basically one in a million. I am happy for people who finally get precious children, but a little sad too when I think that society and the financial pressures people face these days makes them feel like they cannot have kids sooner. Was there really any point in waiting an extra five or 10 years to the point where drugs/in vitro are necessary? If you are 18 and wait until 23 it's a great idea, but why should a 40 year-old have to wait unti 45? That is sad.

My neigborhood (Pasadena/Alhambra/San Marino) like WWII's, is almost totally devoid of kids. They are closing elementary schools left and right. Young families, even those who wait until their late 30's/early 40's, are simply priced out. Our oldest son will be ready for school in two years, and I am sort of curious about what the private school situation will be like then. I have a feeling that we will pretty much be able to pick the school that we send our boys to, there will be no waiting lists, testing, or the like.

This really is a dramatic change. It hasn't always been like this. I mean, all of nice neighborhoods have elementary schools. At one time, young families could afford to live in them. No longer.

FAB,

I think you're too restrictive. I think what I've observed is just the opposite. The 500K exemption have lead to the proliferation of people with multiple RE properties and increasingly expensive properties, albeit with the locked in basis. So while prices are not dramatically affected, the volatility and level of speculation has dramatically increased.

Joe Schmoe,

Finally! Some sense from the "old neighborhood"! You've nailed it. Besides learning spanish is a good idea for all Californians (and Oregonians for that matter). You sir, have put the crowning touches on how "this thing of ours" affects peoples brains. "I DO INTEND TO SELL". Says it all for me. You're hardly alone where net worth is concerned. The PBS special that ran Tuesday night said the avg. size of a 401K is $29,000. No, that is not a misprint. $29,000. FAB, I love ya like a brother but your position has dwindled from "ZERO" impact coast to coast down to a few nice homes in a few nice neighborhoods where people who wouldn't be caught dead in 500K dump can't learn spanish. Shall I call the Coast Guard now or can you make it to shore on your own?

Joe Schmoe,

Sometimes, I wish we just had a way back machine that gave families to survive on one income. It feels like women working was a way back rather than a way forward, most women are obligated to work just to make do.

if they want their kids to stay in the state, what plans are they making for them?

I have thought about this a lot. The question is probably moot since the odds that we will still be here two years from now, much less 20, are diminishing by the second.

I don't think that CA will be a very nice place in 20 years when my kids are grown. I will encourage them to leave. However, I do think the state will turn around eventually once the vast waves of immigrants start to assimilate and climb up the ladder of succes into the middle class. I also think that the turnaround will start in about 20-25 years. But unitl then, it's going to get worse. The turnaround will also take a long, long time, and CA will be a horrible mess 20 years from now when things finally do start to improve.

We are doing three things to prepare for the future. First, I am trying to save up a down payment for my kids. This won't help us, because we don't have 20 years to wait, but they do, and I think we will be able to help them. I will not tell my kids about this until they reach that stage in life, and once they do I will require them to contribute quite a bit toward the down payment. But I want to be in a position to help if necessary.

Second, I am doing my darndest to ensure that they graduate without student loans. These are a huge handicap for me, and I will do whatever it takes to ensure that our boys aren't burdened by them. If my wife and I have to eat ramen noodles forever to ensure that we can pay for the boys' college, we'll do it.

Third, and most likely, if they do have to leave the state, we will follow them. When they start having kids of their own they will be able to use our help, and if we are reasonably close by we will be able to provide it. It is more important to be near our boys than to live in California, if we have to move we will do so in a heartbeat.

Having kids is just such a huge commitment though. It means your life is permanently tracked onto one area for 20 years, and you'll be ultra conservative until they are 20 or 25.

DinOR-

Wait, wait! I'm not really a 50 year-old Boomer of my 11:31 p.m. post. That was only hypothetical! I am the 34 year-old Gen-X'er of 12:01. I just want to clear that up.

You are one of the good Boomers; as far as I am concerned, and I mean this, you are a de facto Gen-Xer. But you know how touchy some people are about being mistaken Boomers. And while I don't mean to trot this fact out, I also have more than $29k in my 401(k). My net worth is still negative thanks to student loans, but I do contribute to that thing, I am not like that hypothetical flipper! Please don't confuse me with him!

SP,

Like I say, this practice has become such a "no brainer" that just about anyone can play! Of course, at whatever level their IO qualifies them for. I mean, just look at the spawning of ARM/IO's out there. Is that the financing package of choice for someone who's design is long term? What percentage of CA mort. were ARM's last year? 78%?

Joe Schmoe,

I know that from your previous posts! I just thought you described the "profile" (the one I kept meaning to describe) so much more articulately then I ever could. Btw, when I worked downtown all those years I would see 50 something couples walking and swinging children in their hands. Weeheee! I hate to admit it, but all I could think was "Lord, please let that be their grandchildren!" In a few weeks daughter #2 will be out of high school and on to college. Will we have any children in the future? Let's just say that Mr. DinOR ahem, addressed that issue some time back. We love our kids but I couldn't go through it again.

Interesting pro/con on how the $500,000 cap gain exclusion may have contributed to the bubble.

I wonder how much the bubble was inflated by the morgage interest deduction, especially from unsophisticated home buyers. For example, a few threads back a fellow posted how his $9,600 PITI for last year increased his refund by $10,000.

I think more than a few homebuyers were willing to put up with the extra costs of a mortgage over rent (for equivilent home) because they really believe "they get it all back in tax savings."

Unfortunately, these idiots do not just hurt themselves. In most of the USA, the upward pressure on house prices by "Tax Clown" (with help from "Monthly Payment Dolt", with his steaming piles of ARM and I/O) raised everyone's taxes through increased assessments.

Interesting to see if the cities and counties will forget that the increased taxes are a windfall, and will start screaming poverty when the bubble pops and assessments fall back to previous levels.

Headset,

Welcome back! Did you need any help with you luggage? Believe me, if there's one thing I hate it's having to get on a soapbox and preach on a Friday no less! Something has to be said. Barring some sort of a miracle we are doomed to repeat this cycle of boom and bust where it really had never been THIS big an issue in the past. The RE lobby (Laurie Janick) is there to protect their (realtors) interest, who's looking after ours? Oh and you're right. Local municipalities will be whining the blues here shortly. Got any ear muffs in that luggage?

DinOR,

OOPS, how embarrasing! I guess my rant indicates I need a u-haul for all that baggage.

Anyway, I'd love to see the mortgage interest deduction disappear. If it does, I'm sure they will increase the standard deduction to compensate. That move would really benefit the lower to middle class tax payers, whether they rent or buy. NAR would object, since realtors would lose a propaganda tool.

Interesting read from Krugman in the NYTimes (an old Buddy of Bernanke back at Princeton). Here's the final paragraph for those without access:

As I summarized it awhile back, we became a nation in which people make a living by selling one another houses, and they pay for the houses with money borrowed from China.

Will we have that time? Ben Bernanke, the chairman of the Federal Reserve, contends that what's happening in the housing market is "a very orderly and moderate kind of cooling." Maybe he's right. But if he isn't, the stock market drop of the last two days will be remembered as the start of a serious economic slowdown.

Hold on to your cash and your job. Rapids ahead.

FRIFY,

I have been holding my cash and I can't wait for that white-water ride!

LILLL,

I think you mean "inflated." Deflation would be great, our saved funds would buy more. It is the "inflated" money that would "deflate" our rafts.

Headset,

Uh, if there's anyone with luggage, that would be me! I do recall the incoherent post where someone clearly had never filed "long form" before. I kind of felt bad, but as you say there are a lot of unsophisticated homebuyers out there! And that's what is so sad. I'm not that old but when we bought our first house there weren't near the financing "options" that are in the market place today! While I feel I understand them well enough to know they wouldn't be right for my family I'm not sure I could adequately explain their pitfalls to someone else. Btw, there was a time in this country when you needn't be all that "sophisticated" to buy a damn house.

@Joe Schmoe,

Sometimes our life experiences are so close to one another it really creeps me out. I too married an older woman and we waited to start our family mainly due to high cost of housing, our student loans, low Gen-X salaries, etc. We are just now trying with "medical assist" (she's 40). (fyi to blog regulars: Mrs. HARM is not yet pregnant --I jumped the gun on that one before, was a false alarm).

California --L.A. especially-- is no place for a working or middle-class couple to raise a family. I have many fond memories of growing up here in the 1970s-80s, but that California is gone now probably forever.

LILLL,

It was never my intent to get "wound up" over this issue, but you're right! Not that we have a "model" in place it's very possible that we will continue to roil between utter bliss and total destitution. People keep telling me houses don't trade like stocks. Really? Right now you could go to just about any sub division in America and get very different impressions from homeowners dependent on when they closed! We all remember the "Centex gal" raking leaves. Well b/c she was intending to buy the previous weekend but the kids had a swim meet, she now owes 100K less than her neighbor with the same floor plan! Um, I'm sorry but assuming it was a 750K home now marked down to 650K that's a 13.33% downside for in a WEEK! Other than say, Google most stocks aren't that volatile. It used to be anyone that bought a home and exhibited a little patience would come out a winner. Now we have winners and losers.

newsfreak,

Sorry, but your experience at the bank is altogether too common. When opening the door to homeownership required something more than being able to "fog a mirror" being a homeowner meant something. With all of the exotic (and toxic) loans available out there it holds little more prestige than saying I'm a "car owner". Well whoop dee doo!

HARM-

LOL! You said it. I have thought about that too. Hopefully someday we'll find ourselves bidding on the same foreclosure property! :)

Joe Schmoe Says:

HARM-

LOL! You said it. I have thought about that too. Hopefully someday we’ll find ourselves bidding on the same foreclosure property!

Oh no! You two will reinflate the bubble in a bidding war!

Ray,
I work downtown near the ballpark, and all I can say is that there are literally thousands and thousands of new condos available. Supply is definantly out of the equation. The funny thing about the report mentioning a 25% downturn in sales over last year is that yesterday on CL, the "housingheads" reacted to it like" oh boy- another boom is on it's way!" People are so dillusional these days I gold out little hope for being rational at cocktail parties with those who "bought" total hogwash.

There must be some middle ground between protecting and restricting land use, and providing affordable housing.

To be clear on the subject, I think protecting national parks, wildlife preserves and scenic areas for future generations is a wonderful and morally right thing. However, reflexively stonewalling every proposed new housing or apartment development, and slapping six-figures in unnecessary "impact" fees on the few high-end units that do get built --no matter how deperately needed -- is just pure self-centered NIMBYism.

Not to start another inter-generational blog-war here, but BBs seem especially prone to this mind-set. God forbid anyone born after 1964 have a remote shot at owning a modest house before age 50. I just love the way NIMBY Boomers get on their moral high-horses and loudly insist they're trying to "preserve green-space" and "help the environment". It's more like "preserve/increase my equity" and "help raise property values". I've also noticed how these same hypocritical a$$holes rarely seem to object to HIGH-END multi-million$$ McMansions being built, but try to build modest, affordable "working-class" housing and --whoa!! Hold on a minute there, pal!

Boomers should consider changing their generational anthem from "Talkin' bout my generation" to "F-- you, I got mine!"

HARM,

Old time Oregon "barbershop" joke.

A logger is a guy that dreams of one day owning a house in the woods.

An environmentalist? He already has one.

HARM,

To me, the fascinating question is what will happen to property values in our area. IMO there are plenty of rich people here -- but not enough.

Will rich people continue to buy $mm houses in San Marino and the nicest parts of Pasadena? Sure. Those neighborhoods are as nice as they come.

But will some young Gen X family pay $1.5mm for one of those restored Craftsmen way north of the 210? I think not.

I tend to think that the demographics are at their absolute worst in our area. Virtually all housing in our area entire area is controlled by Boomers. There used to be young families in San Marino, and areas of Pasadena like Hastings Ranch -- but not any more. Pasadena had to close what, 6 or 7 elementary schools last year? Think about that! Pasaedna is growing, we're not talking about Flint, MI here. The population is stable and slightly increasing, and there are plenty of poor people who have kids early -- but the population of school-aged children is still plummeting.

Maybe I am too optomistic, but I actually think that our area may crash harder than others for this reason. Who is the next generation of homebuyers? You and me. But we don't have $1.5 mm to spend. If some grey haired Boomer wants to sell his place to us for that price, well, he can't.

And it's not like successful middle-aged people want to "move up" to Pasadena. It's nice, but not that nice. If I start a successful business and earn big bucks, I might buy a place on PCH in Malibu, but not a generic single family home in the SG Valley. The Boomers living in Pasadena refect this pattern. Did any of those grey haired LL Bean types start out in Palmdale and ultimately "trade up" to Pasadena? Nope. They got in 10-30 years ago and just stayed.

For this reason, I tend to think that the drop might actually be greater here. If an SFH in Palmdale was $100k in 2001 and is $300k today, it might only fall to $200k, 33% reduction. It is possible for a middle class family to afford a $200k home. Maybe mom will have to start working as a cashier at the local florist, maybe dad will need to put in some more overtime, maybe they'll have to defer a new car purchase, etc. It won't be easy, but it can be made to happen.

But when the house is $1.5 mm we are talking about a whole different story. How many 30-somethings in Pasadena can afford that? None, basically. If the price is cut by 33% to $1mm, will that help? It certainly won't help me. I have a great job, but there's NFW I can afford to pay those sorts of prices.

Call me crazy, but I think our area might be in for some of the steepest declines of all. I may be barking up the wrong tree here, but it does seem possible.

Joe,
I totally agree with you. The thing you've hit upon is a fundemental flaw in the plan I think many boomers didn't plan on counting on: Young people simply do not have the money to bail them out. It's a transfer of burden that has so far played out in the form of unrealistic credit transactions- the IO, ARM, refinancing loans, etc. The next phase is dramatically diffrent in that there simply are no more options left: the money that was supposed to be mopped up by the boomers is for the most part gone, gen Y and X only have so much cash in reserves, hence the equation is now heavily out of balance. So here we are. Where will it land? getting back to California demographics as you mentioned above, nobody- not even the well off can deny that demographics are not only unhealthy, but unsubstainable. I think I can stand to say that from my perspectice as someone who's from a region of the country where 1950's middle class lifestyle is alive and kicking, most californians don't realize how bad it is here anyhow. What is percieves as normal is apalling everywhere else. There is no reason that one generation has supremecy over another, and it only exsists in a few select regions of the country too.
The correction we've been waiting for are coming.

@DinOR, thanks.

@Joe Schmoe,

I've often wondered the same. Unless you pack 20 illegals into each one of those $1.5 million houses, there's just no way anyone below top 1-2% can afford a "non-exotic" mortgage on them. As you say, even a realistic 30-40% post-bubble haircut will still not make these houses "affordable" to the likes of us.

Most of my family in our age group have already long since moved away, with me actively seeking my own ticket the hell out. Not sure if CA will eventually become an elite retirement community of HELOC-locked Prop. 13 lovin' Boomers surrounded by dirt-poor tenement dwelling illegals, but the current trends do not bode well.

HARM,
I'm now trying to get used to the idea of what things will be like somewhere else. I've made a few aquaintences with people in Austin, Nashville, etc who've made the move from Cali.They seem to be pretty content with the decision and have me lots of cheaper, smaller towns that are within 30 minutes of each of these cities. We're talking 65-120k range smaller homes from the 50's. Nothing sexy or in a "picturesque" neighborhood, but at that price, We'll just buy and save the rest. now.. realistically, I know I will miss it. the food- the climate, etc, but the other night, the food network did this thing on food in nashville and Austin. You can get good Japanese food.. in Nashville. This wasn't the case a few years ago. Maybe it's diffrent. who knows. But I'm also prepared for things to be diffrent too. I'm fully aware that in a few years I might be buying stuff at Wal-Mart and living in suburb-land. But if that's the worst thing that will happen, then who really cares? I'm already fantasizing about an old ski boat and hauling it to the lake in Austin on the weekends with my few cases of domestic Lone Star beer in tow. Difficult decission I know, but I'd rather not have conversations like the ones we have here( even though you guys are great) for the rest of my life. I'd rather argue about how stupid Wal-Mart and Mcdonalds is, or how blazin' hot it is in the summer. At least those gripes are tangible and somewhat funny.