patrick.net

Well, let's see if anyone's interested. It can be ny time i the future, so there's no hurry.

Wouldn't it be interesting to hear everyone's voice? For those nervous souls, just kick back with a bottle of wine on your sofa and pick up the phone and dial in.

Jack, I'm used to rolling it on the air with people who want to KILL me, so I'm not really frazzled at your initial reaction.

Thanks!

My spelling...yikes!

Well, let’s see if anyone’s interested. It can be any time in the future, so there’s no hurry.

Wouldn’t it be interesting to hear everyone’s voice? For those nervous souls, just kick back with a bottle of wine on your sofa and pick up the phone and dial in.

Jack, I’m used to rolling it on the air with people who want to KILL me, so I’m not really frazzled at your initial reaction.

Thanks!

"I don’t think chaning of prop 13 will fly this year, but let prices drop 20% and people will be screaming about how much “Extra” tax they are paying. "

Since I don't own real estate here, I'm unfamiliar with how it works when property values drop. Don't the taxes drop too as properties are reassessed at lower values?

I think of people like my inlaws who are still paying ultra-low taxes because they bought their SF house in the 70s, and that's what makes me think changing it won't fly unless the changes grandfather people like them in. The older folks are the ones who go out and vote in big blocks, after all, and they don't want to loose their cushy tax situation.

But I do agree that it is prudent to invest in real estate in reasonable places after the coming shake down.

My comments are based on demographic profiles, and the consumer spending habits by age cohort… overlaid upon historical cycle patterns and traditional economic analysis.

I agress this analysis is quite accurate, although I believe the tech bust represent a divergence. (I remember looking at a chart with lagged demographics data plotted on dow)

Peter P,

Yes. Cyclical conditions will affect the general secular trends that I have described. The timing of the cyclical peaks and troughs is yet to be seen, and psychology is a major factor in causing the cycle to be above or below the secular trend line.

Another important factor is that supply responds to demand shifts on a significant lag. This leads to shortages and gluts as supply is out of sync with the cycle of market demand.

e lag effect

Zephyr, in your opinion, how is housing going to be financed in 2025? Inheritance from boomer? Strong economic growth? More voodoo loans?

Zephyr, I love chatting with you. I can feel myself getting wiser. ;)

Real incomes will be higher for the upper half of the populastion. They buy most of the housing, and are thus the real market.

While we know how many people will be in each age cohort far into the future, I cannot predict how our methods of financing will evolve with any confidence. I assume that they will be about the same.

Many will inherit substantial equity and/or homes from their parents. Certainly this will enable people to afford higher prices.

For a point of reference, note that today the averge equity position of homeowners is about 50%, and the average homeowner spends roughly 10% of income on housing. Obviously, the first-time buyer is not in such favorable financial condition.

For a point of reference, note that today the averge equity position of homeowners is about 50%, and the average homeowner spends roughly 10% of income on housing. Obviously, the first-time buyer is not in such favorable financial condition.

In case of inheritance, should we assume that one house will be released to the supply side for each new one on the demand side?

Obviously, the first-time buyer is not in such favorable financial condition.

I can see price/income ratio sustain at a maximum of 4-5. What do you think?

I have no opinion on the appropriate price to income ratio because it ignors several critical factors. Interest rates, equity or down payment, income level, general wealth.

I look at the financial obligation ratios, and the historical consumer spending habits... (their allocation of income to housing expenses and other expenses). This combined with data on income, wealth, interest rates, housing characteristics, and some other lesser factors, enables me to predict what people can afford in the context of normal spending patterns. This tells me my fundamental support level for prices. I measure the actual prices against this metric to get an indication of relative price appropriateness. To this one must apply much judgment to interpret the significance. Market cycle timing, momentum, psychology etc. are all important considerations.

I have been doing this (or similar) analysis for about 30 years using data going back to 1930. However, the data is not so good prior to 1960.

Here's why prop 13 just seems *right* to me:
I believe that people should make educated long-term financial decisions...& that they should have enough information to support such decisions. A variable property tax works too much against rational financial decision making...when planning long-term, what rationale could be used to predict your property tax burden when you retire? Bottom line, you just can't know what kind of shit you're getting into...and for the good of society, homes, of all things, should have as few destabilizing factors as possible.
IMO It would be a sad day to see many older bay area homeowners (i.e. my parents!) have to pay dearly for the irrationally-exuberant home-buying over-bidding orgy of recent years.

I still remember the first time I learned what Prop 13 was...I thought to myself: "HUH??? People think THAT is UN-usual?" The idea that property tax would increase, completely out of control of the homeowner and simply because "the market" said it should, sounded absolutely crazy to me.
Having had no prior knowledge as to how property taxes worked, the alternative to prop 13 just seemed absurd to me (then again, more & more these days the status quo seems absurd to me).

"I have been doing this (or similar) analysis for about 30 years using data going back to 1930. However, the data is not so good prior to 1960. "

Hey, so Zeph, it sounds like you would have very well-informed opinion of Shiller's inflation-adjusted real estate data plot (from NY times article some mos ago). Here's the link:

http://tinyurl.com/8dfja

Do you agree with it's approximate "accuracy" (or maybe, do you think it is a "fair representation of current, relative to historical, real estate valuation?").

By the way, I think everyone should print a dozen or so copies of this plot and hand them out at open houses this weekend.
(***not conduct advice***)

Shiller's inflation adjusted chart is not accurate.

Thx Zeph. I was mildly skeptical...but, well...i'm no economicocentricist & I've never stayed at a holiday inn express, so....

"Shiller’s inflation adjusted chart is not accurate."
Do you know, & is it straightforward to explain, how it is inaccurate?

"I believe that people should make educated long-term financial decisions…& that they should have enough information to support such decisions. A variable property tax works too much against rational financial decision making…when planning long-term, "

Excellent point, SJ Jim. I did notice when comparing the possible purchase of a house here to out of state that Prop 13 makes CA more desirable in at least that one way--you know what you're getting into tax-wise.

Excellent point, SJ Jim. I did notice when comparing the possible purchase of a house here to out of state that Prop 13 makes CA more desirable in at least that one way–you know what you’re getting into tax-wise.

Personally, I think property tax is essentially a form of land rent. IMO, it should be replaced with consumption tax.

I've never stayed there either.

Shiller's data relies on very imperfect CPI adjustment and anectdotal info for the older data (prior to the 1960s most likely). Just on a reasonableness test one who has studied real estate as I have sees a glaring glitch in his chart in the 1930s data. He shows prices RISING during the Great Depression. However, the depression was the era of one dollar foreclosures, and the real prices for real estate collapsed from 1930 to 1934. It was the steepest drop in history on a nominal and inflation adjusted basis. Yet Shiller's chart shows prices rising at that time.

The data for the 1970s and 1980s understates the real increases due to the way inflation was measured (overstated) at the time. However, the dramatic increase of the last few years is accurate in my opinion.

Unfortunately he had to work with faulty and sparse data.

I must go to bed now. Tomorrow I will be working with faulty and sparse sleep.

Hey, I'd like to post a new topic for commentary. Any way I can do that? It's good, I promise!

Never mind, I figured it out :>

"IMO, it should be replaced with consumption tax."

I agree.

No homeowner will vote away prop 13, because you can argue it down during bad times. Here is how it works, and I have done it myself.

When the market price of a house drops, let's say, 20%, all you need to do is to tell the tax assessor to go out to the market to do a re-assessment based on the new market situation. Therefore, if the market tanks, you do get slapped with a lower property tax. Just that when the market is up, you get locked into a lower 2% annual increase. So all home owners are winners when the market is down, and the only loser is the government. When the market is up, existing home owners and the state government are the winners, and the new home owners are losers, but without home value soaring every day, why bother to complain?

Canceling prop 13 will be a political suicide.

LOL Thanks for reccommending me just the same!

Jack-
Haha...sorry for that indignity! Really, you bring up some good counterpoints, not to lump you in w/ the poster boy.

you are far more even tempered in these matters than I am.

Just watch what happens to me if people of conscience get the "L-word" slapped on them, branded as enemies of god, nation, and family, bla bla. Those "grey areas" get lost in sound bites, and could easily become an easy target. Don't want to go there myself.

When the market price of a house drops, let’s say, 20%, all you need to do is to tell the tax assessor to go out to the market to do a re-assessment based on the new market situation.

Does Prop 13 really work that way? It would strike me as very very odd behavior for the guberment. Why would they be inclined to lower tax rates rapidily but not raise them when the value goes up. One thing they absolutely should do is jack the rates when you refi, as you are essentially reselling the house to yourself.

(Jamie and SQT, note I said WISE blog members! LOL)

You cut me Jack, you cut me deep. ;)

Jamie and SQT, note I said WISE blog members! LOL

You say Jack, I say "Bob Ross".

Man, I just never realized all the slick willie to real estate. Ok, you can get your $hitbox reappraised, which will effectively lower your prop tax. But it can only go up by what, 2% a year. Nice bonus. And who the hell ever thought it was a good idea to give someone 500K tax free if they live in a house 2 years before flipping it. I can see if you plow the proceeds into another primary residence, but come on man, why the hand out?

“I’m thinking of jumping ship myself but can’t decide on where.”

"Don’t give up now surfer! The fun part of the trip has just begun!"

What if it's just as dramtic going down as it was going up? Wouldn't that be something to see?

What if it’s just as dramatic going down as it was going up? Wouldn’t that be something to see?

That's a very real possibility, but it might be a rollercoaster without seatbelts.

I have told my story before, but there are a lot of new posters, so I will repeat.

In 1999, I had a job at a dotcom and had cashed out some stock and looked for a house I could afford on one income. I saw some places in Rockridge, a nice neighborhood in Oakland, but the ones I could afford I did not like, so I took a pass.

A couple of years later, me and my g/f teamed up with three other couples and went shopping for a 4-unit building in either Oakland or SF that we could afford together. Some of the couples had much lower incomes, so we were mostly looking at older small buildings in SOMA (an industrial neighborhood in SF that is rapiding turning into a residential one) or Temescal (next to Rockridge, but with more apartments and not as nice). We eventually wrote a bid on one four unit house in Temescal, but were turned down. I don't know why we were turned down, but having eight signatures on the bid probably had something to do with it.

Later on, my g/f, who was my fiance at this point, and I shopped alone. With her income, we could actually look at some halfway decent places. We were ready to bid on a single family home in Temescal when I lost my job.

A year later, I was employed again, my fiance and I bid on a number of homes in Rockridge, but were outbid each time. We finally were able to get a duplex in Noe Valley (a nice, family friendly neighborhood in San Francisco) that had fallen out of escrow after three months. I think the owners were pretty desperate to sell at this point and so when we offered $710k, $11k over asking, they took our offer. I think we got it for about $100k under what it would have gone for if the owners had put it on the market. This was in March 2003.

Since then, prices have gone up another 40-50% and there is no way we could even afford what we have now. We are both pretty happy with the purchase and are now married, with a child on the way. We like the neighborhood and I am especially happy to be a homeowner in Noe Valley. I fell in love with this neighborhood 15 years ago, when I first visited the Bay Area and was considering going to school at UC Berkeley.

It can be a pain being a landlord at times, especially when the pipes on this 100 year old house leak and I have to take a day off work to meet the plumber, but all in all, I am very glad I bought when I did. Our tenants, who are old friends of ours, pay half the mortgage and half the property tax and we rent out a room to another friend for another $800/mo. She will be moving before the baby comes, though.

We have a fixed 30 year mortgage at 5.25% and intend to keep this place until we die. We hope to eventually rent out both units and move to a single family home, but even if we just end up staying here, I will be happy with that. My wife really wants to move someplace where there isn't as much fog and where the schools are better, so when our kid "Peanut" reaches school age, we will probably do that if we can afford it. That would probably be someplace like Orinda or Piedmont or Mill Valley.

About three months ago, I seriously considered selling and banking the gains, but my wife talked me out of it. It is not every day you are looking at a $1/2M potential windfall. I hope we don't regret that choice. The only way it could really bite us is if rents drop a bunch. We are both doing well professionally and I just got a raise and a promotion and we have money in the bank, so I am not too worried about it either way.

I did make a pretty large bet on TOL puts, which has been working out nicely. Thanks to all the people on this blog who motivated me to actually do that.

Jimbo, I think you made the right choice, at least it is a prudent one.

The CPI is not perfect, and never can be. However, it is much better than it ever was before.

It is great to see so many people thinking! That is the first and most important comment.

Is anyone parsing beyond materiality? Get rid of all your possessions and wander around the earth? That was fun at 21; but no more, right?

Next, Of course!
Rates low > asset valuations high > greed followed by fear

Yes, the media did not want to look as foolish as they did during the tech bubble.

Yes, supply and demand
[I was in Boston during that real estate market bust and bought in to (not "bought into") the panic.]

Yes, look how people are running all the numbers, (e.g. solve for $700K at 6% versus $600K at 8% in your depreciation future or maybe $800K at 5% in your appreciation future and look at the capital gain differentials in your analysis as well.

Then of course you get in to things like roommates(jesus), light, your identity, your wife's or girlfriend's identity - don't have a girlfriend or wife? Hmmm, what is the most important thing to a woman?? Daddy. Provider. Hello?

Okay, what's your angle?
I laughed at people for years for buying instead of renting - I didn't really laugh - I am just too wealth-oriented let's say and I had better opportunities for my money. Well, all that wealth building paid off and guess what. At some point you have enough money so that you can actually think like this:

"Do I take this money and try to earn X% or do I want to consume housing with it and if I do, what is worth buying?"

Hopefully, if we the market has in fact soften as all these people had predicted, you will be able to look around and find something truly worth buying with your 'housing consumption' money. This is different from your investment money. Sorry, you all know that.

Many towns and neighborhoods really have a just select number of streets that are really valuable to the residents of the town. These are the streets that once you start owning in the town, you wished you lived on. These are the streets with views that when you wake up in the morning or come home and see the city shimmering (or equivalent) you just feel really good. That's an understatement. People live on these blocks stay there 40 years. The houses were built before the '06 quake. They sit on bedrock baby. This is what people who really make money and create wealth trade up to. This is the end of saving and risk taking. This is the end of hurricanes and floods and fault lines and commutes and the carnival of some other highly trafficked streets. This is the end of moving out to the land of slow minds to save for a few years - it's hot AND cold out there and you are either going to meet a very simple person or (if you are taking a spouse out there) your kids are going to grow up slow. I am just exaggerating now, obviously. Even at retirement age you will want to be here. I see it now. I see old people coming back to the city every month to see their kids and grandkids, to get out of the cold or the heat, just to shop, go to a museum or park, wine country, whatever.

This is the end game for some of you. At the end of passing GO and saving and risk taking there is you and your identity and the people you surround yourself with. Or, you know there is the nomad, hippie, travel thing too, that sounds cool and tastes even better - but know one reading this site is really thinking about that. Most people reading this site seem to be looking for comfort from others - seeking some approval. I hope all these entries are still available in the ether 10 years from now. I will make a note to myself now and put it in a sealed envelope to remind myself to search for these keywords on Oct 24, 2015 (xyzhtc fear).

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