patrick.net

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.

Randy H,

As I see it, big state government face two major problems:

(1) administrative problems for the government: too many conflicting interest, too much complexity

(2) voter apathy and unwillingness to identify with the state.

astrid Says:

"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."

You can't use net worth to pay property taxes...

I think that Prop. 13 is unfair in that the taxation is unequal, but as an apartment owner I like the fact that rising property taxes won't force me to sell a building…

There are many older widows living in Pacific Heights and Presidio Heights paying under $2K a year in taxes. It doesn't seem fair that we should raise their taxes to $50,000 a year + just because the home their late husband bought for $50K in the 1960's that was selling for $500K in the early 90's is worth $5mm today…

In the last 5 years the value of my apartments has doubled (gone up by millions of dollars) but my cash flow has gone DOWN (rents are down a little and expenses are up a little)...

HARM, Randy, Robert, etc.,

Once you guys start thinking governments are truly irredeemable, even at the local level, then my arguments become pointless.

I know I'm getting into hot water here, but California is ungovernable due to it's overly liberal status. There are few heavily liberal areas in the world that aren't in some sort of economic problem. Look at France for example. They are probably a decade further ahead than California. The cost of housing leaves young families and especially immigrants out cold.They also have very heavy unemployment because of the same reasons Ca may very well encounter- the out migration of manufactoring and even many white collar jobs to lower cost regions like Romania and Yugoslavia. This causes a lot of tension, and you see where it got them this summer. Not to say this would ever happen here, but it is entirely possible with the scales so heavily leaning to one side. I'm not conservative, but believe you need elements of both parties working together. This isn't the case in CA and as a result things are out of hand. A totally liberal population means NOTHING ever gets passed because anything that government does is seen as hostile.

I think that Prop. 13 is unfair in that the taxation is unequal, but as an apartment owner I like the fact that rising property taxes won’t force me to sell a building…

This sounds reasonable to me. Why not just cap property taxes at 1% and let the "assessed value" ebb and flow with the market? Everyone's tax basis will be the same, therefore "fair". If prices (and tax assessments) start shooting up due to insane lending practices and reckless speculation, then the public should direct its anger at the culprits: irresponsible lenders, specuvestors, the government that incentivizes this behavior. If prices start shooting up due to anti-development NIMBY laws, then the public can direct its anger at local officials or (if approved by directly by voters) ITSELF.

FAB,

But that's how any reasonably efficient market works, it uses dollars amount to approximate need and resource allocation. These widows have 2 options: (1) move out and get a huge windfall or (2) do a reverse mortgage and stay there til death. I don't think that's such a horrible prospect compared to the young families currently priced out of SF due to price illiquidity.

Also FAB, as a good businessman, if your apartments are yielding significantly poorer relative to their value on the open market, that probably means it's a good time to sell and roll the money into a different venture. I know cap gain/income taxes complicate the picture somewhat, but shouldn't that be the general idea of an open, efficient market?

Nomad,

I think you should replace the “liberal” in your 10:54 am post with the words “stonily conservative” or “reactionary.” The people in power are totally unreceptive to new ideas, that’s why it got so bad.

:P

Astrid,
I totally agree. I recall when Prop 13 was mentioned to Arnold, he mentioned that whoever brought it up again would have to" do 50 pushups". I think politicians here are scared to do anything because anything new will likely cause the masses to erupt in protest. Ever notice every time a new measure goes up, the yards het packed full of " No to this", "No to that!", etc etc?

HARM, Randy, Robert, etc.,

Once you guys start thinking governments are truly irredeemable, even at the local level, then my arguments become pointless.

Astrid,

Please re-read my statements above more carefully ("tragedy of the commons", etc.) I am not arguing that government has NO purpose or is irredeemable. I am agreeing with you that government cannot (and should not) be used to "protect" certain groups from price swings and other economic fluctuations in a functioning free market.

The more "fair" the government tries to make markets (by imposing price/wage caps, rent control, incentivizing RE speculation, NIMBY laws, agricultural subsidies, punitive tariffs, etc.), the LESS "fair" markets become. Keep taxation fair and asset-class/age/gender/race nuetral and spend it on the stuff people expect government to do (protect civil rights, enforce the law, protect borders, provide education, ensure clean air/water, etc.).

HARM,

Yes, I know most people here actually find governments to be useful.

But the opinion seems to be that it's badly degraded and trapped in an ever worsening cycle of ineffectiveness and capture by special interest. And there's no way to alter that cycle.

I wasn't necessarily disagreeing with that assessment, it just makes me sad to think that it was so, precisely because a government is able to do so much good in correcting the problems of a totally free market.

nomadtoons2 Says:

"I know I’m getting into hot water here, but California is ungovernable due to it’s overly liberal status. There are few heavily liberal areas in the world that aren’t in some sort of economic problem."

Most of the people I know in San Francisco could be described as "very well educated liberals". The problem I see is that most of these people think that the rest of the population is poor only because of "racism" "classism" or "not enough education" (they have never really known any "poor" people). These smart liberals have worked their ass off their entire lives getting good grades high SAT scores and promotions at work (while doing volunteer work in their spare time) and don't understand that a huge part of the population is not like them and tries to do as little as possible every day…

A good friend from grad school had a real wake up call when he went from managing a bunch of super smart overachievers at McKinsey to managing a bunch of stoners at a tech firm in 2000. The kids working for him at McKinsey all had 4.0 GPAs, went to top 10 schools and would do anything to get good letters of recommendation to top 5 grad schools. The stoner losers were the best a start up firm could find in the 2000 hiring boom and would do anything possible to avoid working...

I recall when Prop 13 was mentioned to Arnold, he mentioned that whoever brought it up again would have to” do 50 pushups”. I think politicians here are scared to do anything because anything new will likely cause the masses to erupt in protest.

@nomadtoons2,

Yes, for most voters here, Prop. 13 is a sacred cow, and politicians (wisely) view it as a third rail that will destroy them if they dare touch it. It will remain this way unless/until enough voters recognize the imbalances it has created and demand change.

newsfreak,

"I agree, like the illegal aliens, we may not need so many NEW laws, as we need enforce laws on the books."

Precisely, if people don't like a law, they should get together and change it. Giving amnesty for lawbreakers is no way to run a nation of laws.

But the opinion seems to be that it’s badly degraded and trapped in an ever worsening cycle of ineffectiveness and capture by special interest. And there’s no way to alter that cycle.

_nod_ to astrid & newsfreak

A huge of the problem to me is an endlessly expanding government that (a) refuses to enforce many of it's own laws (anti-corruption/monopoly laws, immigration laws, etc.), and (b) incessantly demands MORE POWER to encroach upon my civil rights, confiscate my property, tells me what to eat/smoke/fuck, etc. The far Left is really no better than the far Right in this regard, IMO. Both sides are "Big Government" when it suits them.

I don't think I'm an anarchist for advocating reigning in government power and mis-spending when it gets too large and too corrupt. I just recognize bad government for what it frequently is: a cause of my misery, not a solution.