patrick.net

Will communication and information affect the course of housing prices? Yes, in the sense that rumors, prejudices and gut instincts are easily, broadly and immediately disseminated today. The smell of fear is literally electric, or at least electronic.

No, in the sense of sharing and fully understanding all the hard data as it is emerging. The pool of essential data is too complex for the average person, or even the interested, educated citizen, to fully absorb until after it's already an accomplished historical fact. For example, as I've noted, the federal House Price Index seems to be the gold standard used by the experts in the mortgage industry like PMI. Consumer Reports uses it too. But it's really hard to understand.

Here's the last HPI report from OFHEO, the Office of Federal Housing Enterprise Oversight:
http://www.ofheo.gov/media/pdf/4q05hpi.pdf

The Consumer Reports and PMI indices compare income levels in various regions to the cost of homes there. They compare average home prices in various metro areas to see if they’re out of whack with incomes there, based on traditional income to price multipliers. Think of pre-qualifying for a mortgage with your own personal income, except these indices try to pre-qualify the “average” person in town to buy the “average” house there.

As I read it, OFHEO computes HPI by tracking repeat sales of a given APN. In other words, they keep records every time a specific parcel sells from one month or year to the next. When each parcel sells, their program looks back in time to compare the price the last previous time when that same exact parcel sold before. The percentage of increase or decrease for all sales in the area is then averaged to determine the change in the HPI there. It's an amazing concept when you think of the sophisticated record keeping and correlation. Can anyone confirm this understanding of the HPI methodology? The notes in the OFHEO reports are not a model of clarity.

Here’s my concern with the OFHEO index as I read it. I gather that the HPI does NOT include homes purchased with Jumbo loans. Doesn’t that skew the bottom line and understate the house price inflation in transitional regions where many homes have jumped up recently from relative affordability (I said relative) to flat out exorbitant? That is, what if a large number of buyers are using Jumbo loans in a given town even though those same house were purchased with conforming loans the last time they changed hands? I realize that the Jumbo loan limits have increased, but have they kept pace?

If many homes have sold with conforming loans before, but Jumbo loans in this run up, then does the inflation for those specific homes just drop off the radar? Are the inflated prices for those transitional homes just trees falling in the forest? Bottom line, I wonder if the OFHEO index understates average house price inflation in these regions that have experienced fastest growth with many sales crossing over the Conforming/Jumbo threshold. For example, Sacramento – a red hot region – started out much more reasonable before the recent run up but has become very pricey. Is the official HPI there understated? Are there any real experts who can comment? Or am I just confused?

Maybe I'll just wait and read about it in the history books in ten years.

From NYTimes

"South Korea Arrests Head of Hyundai Motor"

http://tinyurl.com/kmtcv

This is a hopeful sign, can America have some?

Randy H said:

Seems, at these prices and tax assessments, there would be a whole market for “financially arranged marriages” purely for tax reasons.

This same sca... er thought occurred to me the other day. IOTW you use a combined Deposit Receipt/Pre-Nup/Dissolution Property Settlement to buy a house and marry/divorce the seller. With CA law guaranteeing domestic partnership rights you may not even have to be opposite genders.

Randy H,

BTW I've always assume that inheriting property from you parents is a safe harbor from prop 13 tax reassessment.

NOT CREDIBLE OR COHERENT ADVICE

Randy,

California law regarding transferring prop 13 base in inheritance situation:

EXCLUSIONS FROM REAPPRAISAL:
The transfer of property between husband and wife usually does not require a reappraisal for property tax purposes. These husband/wife transfers are automatically excluded from reappraisal. Other changes in ownership can be excluded from reappraisal, if a timely claim is filed with the Assessor's Office. Some of the common exclusions requiring that applications be filed include:

the transfer of a principal place of residence between parents and children and the transfer of up to $1 million of any other real property between children and parents

some transfers between grandparents and grandchildren when the parent-child relationship between grandparent and his child has been severed
the replacement of a principal residence with one of equal or lesser value by a person who is 55 years old or older

So as long as it is your principal place of residence, the $1mm limit doesn't even apply. Here is another tax shelter, before one dies, roll everything up into one principal residence, then pass it down to kids. But the kids need to determine how to cut up the pie among themselves.

Garth,

No you're speaking my kind of capitalism. I'm a firm believer in creative destruction. So, if it takes complex, engineered, productized "marriage" instruments to finally cause either a) acceptance of prop 13 as a market rule/constraint or b) reevaluation of prop 13, then so be it. And, all that much the better if we can make some money doing it ;)

Seriously, this could be a very interesting discussion. Do you know of any law firms, etc. already doing such things?

All counties should allow seniors to transfer tax base for a less value or equal value home (defined as a home less than 110% of the sold home in one year, and 120% in two years). It's called Prop 60, it is a statewide law.

Any legal expert on the site? Joe Schmoe?

But the kids need to determine how to cut up the pie among themselves.

So, using CME housing future, you could tie value of shares of interest in the house to the index for the market. Then, the children would determine who's going to live in the house and who's going to take the CME shares (which would be financed and deducted from the net value of "equity").

Randy and Owneroccupier,

If anyone is serious about this, a good estate and trust lawyer will be able to put together a trust or a family limited corporation.

I'm pretty clueless about Prop 13 material, but for general estate planning, try to get hold of Price on Contemporary Estate Planning via interlibrary loan (because it's like $260 retail). It's a pretty easy to use handbook on the subject.

FAB,

you'd be surprised at how important physical attraction is for women as well in the mate selection process, especially women from rich families, yup, talking about the heiress.

Look is the most basic form of selection by the nature before we invented money, golf membership, ivy degrees and all that crap. I have personally seen quite a few very handsome guys from ordinary backgrounds marrying up, despite opposition from the heiress' parents.

astrid,

I don't think I am at that stage planning out my estate yet :-)

I just want to point out the fact that most old-timers with lots of equity may not be the driving force for the price going downwards. Even if they want to sell out, their kids may want to take advantage of their homes as tax shield.

So if we wish for a more severe price correction, we should be hoping for more mindless flipping activities. I know everyone hates flippers, but put in perspective, they are blessings in disguise for the bubblesitters, because they take properties off the hands of established sellers at a very inflated price, and when things go sour, they will have to spew the properties out at a lower price much faster than the original owner.

Owneroccupier,

I didn't think you would be. But it's entirely possible that members of your family or friends might be. There are a lot of planning opportunities out there and for someone with $2M plus assets, it's really worthwhile to spend a couple thousand on trusts that can potentially save hundreds of thousands on taxes and reduce family friction at the time of death.

I actually really recommend reading (or even owning) Price. This is what many estate planning professionals refer to and it has some great ideas about using life insurance, trusts, and gifts to avoid taxation. It's still a good idea to use a good estate lawyer when the time comes, but it really helps to be an educated customer.

Even for someone your age, unless you want to leave everything to your spouse, it's something to think about. If the total of you and your spouse's life insurances and assets total over $2M, it's definitely worth looking into.

And flippers help bring equilibrium to the Prop 13 imbalances by causing homes to reassess often.

I thought family limited corps were severely hobbled recently.

Owneroccupier,

I know what you mean about flippers, they will grease the way for whippersnappers to get into established communities. I mostly don't like the flippers because of the systemic instability they bring into the financial market and because they resulted in overly high prices paid by new owner-users.

If they were better regulated and more efficient like stockmarket arbitragers, I'd be all for their presence in the market.

If they were better regulated and more efficient like stockmarket arbitragers, I’d be all for their presence in the market

Flippers are speculators, not arbitrageurs. They carry value risk. Arbitrageurs are rare even in the stock market except for the real big boys who have scale to make it worthwhile to trade on very tiny divergences.

Randy H asked,

Do you know of any law firms, etc. already doing such things?

No. It was an original idea. I thought.

Anyone who did it would keep it very, very quiet.

Randy,

I think you're referring to Bongard v. Commissioners. Yep, there's increased scrutiny on whether the transactions are truly at arms length, but the basic transaction can still be useful in certain instances.

The financially arranged marriage transfer doesn't really work all that well. This loophole is no good for income tax, since that would already be paid. There's already a gift exemption of $12K per person per receiver per year (that means if you had 10 grandkids and is still married to your spouse, you can give them a total of $240K a year!), and there's lots of gift and estate planning opportunities without going into engineered marriages for asset transfer.

Then there's a high level of moral hazard for any would be spouse/intermediary. They can just take the money and run.

Astrid,

Thanks for the tip on Price. Any other good primer you can recommend? I'm planning to draft a trust for my wife and and I.

I might hire an expert but want to refresh my memory on the basics first. I need to start back at square one.

But that's what Garth and I could engineer away. Using deposit certs, housing futures, and lots of other nifty stuff you could ostensibly engineer a financial obligation equivalent to the going fair market value of "your stake" in the arrangement. And, it seems, all of this would be on the border of legality. It would be arm's length, have a valid business and personal purpose, and provide risk-reward benefit to all participants.

Garth and I need to have a beer then consult some shrewd attorneys.

Garth,

I think you're a practicing lawyer so this will be easy, go to a local law library and ask the reference librarian about their estate planning material. The most useful stuff will probably be published by the California bar and ABA.

I wouldn't recommend drafting a trust agreement yourself, you really should have someone who knows the state of the art on the matter. You can use the forms if you do a simple trust, but even then, it's worthwhile to pay a practioner to read over your docs. My recs on Price is for you to be an educated customer, because there are a lot of paid bad/sloppy drafting out there.

Randy,

I still don't see a scenario where marriage transactions make sense. There are easier ways to buy up assets and transfer money. Could you or Garth come up with a scenario where this sort of transaction makes sense?

SFWoman,

You sound like a Seward Johnson granddaughter :)

Astrid said:

I still don’t see a scenario where marriage transactions make sense. There are easier ways to buy up assets and transfer money. Could you or Garth come up with a scenario where this sort of transaction makes sense?

You know we're joking, right? Even so, I'd bet somebody, somewhere, sometime in California in the last 30 years has gotten married to avoid a reassessment. Those wacky humans do the strangest things.

buffpilot,

what you describe is almost in exsitence in CA, it is called anti-deficiency law. You don't need to pay back the difference in loan amount and the market value of the home if you get foreclosed upon. For example, you bought your house at 1M with 20% down borring 800K, somehow the house tanks to 500K and you cannot make your payment, then you turn over your keys to the bank. If this were an investment home, your bank WILL come after your ass for the difference in the loan amount (800K) and what the bank can get dumping the house on the open market (500K). Under anti-deficiency law, the bank has to eat up the difference itself.

Here is also a catch. Once you refinance, you essentially give up your anti-dificiency right. So if a homedebtor ever HELOC'd, most likely he will not be protected when he defaults on his mortgage payment, ass-biting bank on his tail forever.

Garth,

I thought so, but any real life example of such a transaction would be like the Giffon good of estate planning. So I had to ask.

I heard of a couple who got DIVORCED to mitigate tax obligations. How? Well, both are in investment banking making big bucks. Tax law has it that a household can have two homes for mortgage interest deduction, so they ran the NPV and divorced, living next door to each other with 4 expensive homes under their names for mortgage interest deduction.

I am never amazed at how far humans can go to avoid paying tax. I believe that social behavior is largely tuned by tax law.

Well, marriage is basically a contract backed by the power of the state.

As for your example...well, I see a lot of financially based marriage decisions, especially for health insurance, it was just the idea of using marriage primarily as a means to transfer assets that seems weird.

I am never amazed at how far humans can go to avoid paying tax. I believe that social behavior is largely tuned by tax law.

Flat tax!! Consumption based taxation!!

A marriage is a life-long commitment made in front of God. A divorce is rarely justified. Getting a divorce for financial reason is just incomprehensible.

More Dean Dean Baby, get a good laugh for the weekend

http://www.youtube.com/watch?v=Jfy1cTMyz_E

O.O.: That video stinks. The guys are pathetic. I stopped after first 10 secs. What's so funny about it?

As for leaving something to your children, I thought the English system of primogeniture (by the male line) makes a lot of sense. It's cruel to those who cannot inherit. But life is always cruel.

Regarding good looks in mating and marriage: Looks are very important. But I thought the heiresses could just play the good-looking guys instead of marrying them. Somewhere someone said that the insecure marry down and when they marry down they marry good looks. Stupid.

That's why the freedom of choosing a marriage partner, specially for the upper echelon of the society, should be taken out of the hands of the children. They can have affairs AFTER marriage. Such a practice guards against degeneration of the family line.

From wikipedia:

Arguments in favour of primogeniture:

Primogeniture prevents the subdivision of estates and diminishes internal pressures to sell property (for example, if two children inherit a house and one cannot afford to buy out the other's share). In Western Europe most younger sons of the nobility, having no prospect of inheriting land or property, were obliged to seek careers in the Church, the Armed Forces or in Government. Wills often included bequests to a monastic order who would take the disinherited. Many of the Spanish Conquistadors were young sons who had to make their fortune in war. In the late 17th and early 18th Centuries, many specifically chose to leave England for Virginia in the Colonies. Most, if not almost all, of the early Virginians who were plantation owners were such younger sons who had left England because of primogeniture laws. These Founding Fathers of the United States of America were nearly universally descended from the landed gentry of England, with many being descended from English Kings of the late 14th and early 15th Centuries, especially through the prodigious offspring of Edward III of England. William Shakespeare's King Lear can be seen as an argument in favor of primogeniture as the tragically flawed action of Lear is dividing his country into three amongst his daughters. The division of his land marks the beginning of the unraveling of everything else in the play.

Arguments against primogeniture:

The fact that the eldest son "scooped the pool" often led to ill-feeling amongst younger sons (and of course daughters). Through marriage, estates inherited by primogeniture were combined and some nobles achieved wealth and power sufficient to pose a threat even to the crown itself. Alternately, one might think that, as with most property, the land will go to its most useful purpose no matter what the initial distribution (the Coase Theorem). Finally, nobles tended to complain about and resist rules of primogeniture (though this opposition might indicate primogeniture among nobles was good for the king).

Primogeniture also can lead to less than able successors. See for example Christian VII of Denmark who was likely schizophrenic and Afonso VI of Portugal who was a half-wit.

A marriage is a life-long commitment made in front of God.

My wife and I were married by the County of Cook in the State of Illinois, before a judge. We've already outlasted nearly 60% of our peers, most of whom were married in churches and synagogues.

I know at least 1 couple who got a legal divorce, but still live as if married purely for tax reasons. They have no children, which uncomplicates things tremendously. CA has no common-law marriage rules, also simplifying things. The taxation difference was tremendous, primarily due to AMT rules. AMT strongly discourages dual-income high-earner marriages. I've heard of others getting divorced later in life (after kids have left) in order to tax manage inheritances when one partner is a high earner and the other is nearing a sizable inheritance. Again, AMT is the culprit. And it's not always just AMT earnings, but often high deductions activate AMT, thereby taxing the other partner disproportionately.

If politicians wish to preach to me about the import of maintaining the "sanctity of marriage", then they can go a long way towards proving the conviction of their beliefs by removing existing disincentives. Otherwise, it is nothing but cynical, shallow, political opportunism.

Peter P,

You believe in God and Karma? Far out!

There is much to endorse in a quick elopment. They're kind of like starting out a business. You'd think the one with high bonding costs (big diamond ring and expensive wedding) would last longer (because of high barrier to entry, or something); but in reality, the cheap elopments don't come with the (debt, social, mutual expectation) pressures of high priced weddings and can work out better.

My wife and I were married by the County of Cook in the State of Illinois, before a judge. We’ve already outlasted nearly 60% of our peers, most of whom were married in churches and synagogues.

Religions, churches and synagogues were created by men.

I do believe that internet will have SOME effect in reducing the stickiness. At least part of the buyer pool is well informed and behave cautiosly. I don't think there is any way of quantifying the effect.

The main reason stickiness will be less this time is the credit bubble. We can say whatever we want to on these blogs. But when it starts pinching the pocket, it is far more effective. Wait till the ARMs reset. Then we can see how sticky the home prices are. Wait till people are under water for 2 years, then 3 years and then 4 years. In this age of instant gratification, patience is an unheard virtue. It takes tremendous hard work, strong will and faith in yourself to ride out the bad times. Our social structure is just incapable of handling a slow death of the housing bubble.

I don't think we will have to wait till 2015 to see 50% loss in real terms. Anytime between 2008 and 2010.