patrick.net

An example from Patrick:

Let's say you buy a house for $400,000, with a $350,000 mortgage.
Then the house drops in value to $300,000, you lose your job, or otherwise must move.
If you can't make your payments, the bank forecloses on you and nets $250,000 on the sale of your house at auction.
The bank's $100,000 loss on the mortgage is "forgiveness of debt" in the eyes of the IRS, and effectively becomes $100,000 of reportable income you must pay tax on. In many states, like California, the bank issues a 1099 to you for that amount and informs the IRS.

However, from http://realestate.msn.com/selling/Article_bankrate.aspx?cp-documentid=5427263

Home-sale exclusion still applies

The exclusion also applies in foreclosures. As long as the "seller," in this case the foreclosed-upon owner, lived in the home as his principal residence for two of the past five years, he can avoid taxes on any capital-gain profit, phantom or real.

It makes you wonder just who the Congress is worried about with the bill to not tax loan forgivenes as income. After all, so many "victims" who lived in their homes for two years are covered anyway.

To be honest, I think Kay Bell over at Bankrate is incorrect. I think once people try the "debt forgiveness as capital gain from real estate" tactic the IRS will slap them down. Just because Kay is saying it is so, doesn't make it so. Do we have any CPAs? Or Tax attorneys on this sight?

Guys,

Don't miss this video: interview with Mort Zuckerman on Housing. This interview came in the last hour.

http://video.msn.com/video.aspx?mkt=en-us&vid=fa5ecd48-83c5-4f82-a4e1-ee105c01274b

I feel sorry for 59% for those in denial.

Duke,

You may be right, especially for a short sale. But if a bank forcloses, isn't the transfer price listed as the amount of the loan remainder? Perhaps that would be looked at as the bank "buying" the house for the loan balance.

patrick's friend,

Thanks for the link. Sounds almost like Zuckerman has been reading housing bubble blogs! ;)

I pretty much agree with him save one minor point. His example of how homeowners and speculators should not be bailed out by the government is how when stock prices drop, the government doesn't just bail out investors. As we've seen recently with Fed policy, that's patently false. Wall Street always gets a bailout - the Greenspan put, and now the Bernanke put.

@Paul,

Funny what passes as "advice" on BankRate isn't it? At NO JUNCTURE did the seller indicate they were under ANY form of "financial duress" yet their "Ask The Expert" goes off about it?

Hey dude, IT'S THE RE FIRM listing his property that's going belly up, o.k?

"Home sale exclusion still applies"

Oh fer' cryin' out loud! Stop already! (See how the REIC works?) Even when they're losing, they're actually winning! How in God's creation can any right thinking person construe a debt NOT PAID as a "capital gain" and as such... yes, part of the all purpose, ever present and oh so flexible cap gains exemption?

Seriously, this has to stop.

@skibum,

Eh..... m-a-y-b-e. Still and all the primary beneficiary of cheap money has been the REIC. When the NASDAQ went from like 5,200 to.... triple digits I wasn't feelin' the love. That and there wasn't any talk about torturing the tax code to minimize... "the pain".

Some fascinating angst coming through on the 'middle class squeeze'. People are begining to notice just how much worse this generation has it compared to the previous generation. A few examples of note:
1. Pensions used to come with the job, free. They were not 401ks funded by our own earnings.
2. Health care was covered by the company. No payroll deductions and no copays.
3. Home prices were 3x income.
4. Energy costs were managable (gasoline, electricity, natural gas).
5. Food was managable.
6. College costs were within the reach of middle class savings.

Duke,

Long time posters here know my position on this. (Boy do they)

The workforce's needs have been largely ignored over the last 10 years due in large part to the fact so few of us planned on being part of it much longer.

I mean, between my ETrade acct. and my 401K "I'll" be retired by the time I'm....

So who cares!

I suppose I am bringing up the notion of how housing fits into an average budget in the broader context of all of the other pressures on the average budget. We may well see RE correct to more logical levels once the broader topic of the economy is broached.
For my part I see incredible asset valuations predicated on impossible corporate earnings given that people can no longer spend money on anything. To be sure, the American problem of deficit spending and massive oil imports harms the American consumer when compared to their foregn counterpart - who now ironically shop in New York for bargains instead of Europe. Which is my way of saying that maybe corporate earnings models can work using the consumer strength of other economies, but here in the US we are quicly losing our ability to do little more then buy less food (maybe that is not such a bad thing), get better but more expensive health care, give up on the notion of retirement, have our children send themselves to school on student loans, and spend our meager earnigins on housing and the commute.
No.
I think the American consumer is too important. I think corporations will have to expect margins to come down as salaries increase which means the stock valuations will have to come down on lower expected earnings. The stock markets loss should be the workers gain. We have simply tipped too far in favor of corporate profit over the needs of the middle class and some correction is very likely to happen.

People are begining to notice just how much worse this generation has it compared to the previous generation.

But we have iPods.

We have simply tipped too far in favor of corporate profit over the needs of the middle class and some correction is very likely to happen.

Pluto is entering Capricorn next year. The very reverse is going to happen. There will be even more corporate profiteering.

Please wait patiently for 2023.

"People are begining to notice just how much worse this generation has it compared to the previous generation."

I agree on this. It has gotten really ugly. No pensions, no retiree health benefits, extremely high health-care and education costs, as well as housing costs in many parts of the country, weakening dollar, etc.

It really doesn't look very good for most members of the post-boomer generations.

You need to be entrepreneurial and lucky, or you're in trouble. Many people in government jobs and academia are still ok, but it has become very hard in the private sector to make it in the long run based on a regular salaried job. Most private-sector salaried-job careers don't even last all that long these days.

I predict that there will be a serious crisis in this country in the future as a result of people being forced out of the workforce with many more years to live, but no benefits, not nearly enough savings, no way to help their kids, and not much of a safety net. Even people who are still in the workforce will simply not be doing as well as their parents/grandparents. We see the latter clearly now, and the picture will get much uglier when these new generations leave the workforce.

I'm convinced we're going in the wrong direction in this country - I can't see how things can possibly work out if the trends of the last two decades continue. Some sort of reversal will have to happen, or it will get pretty frightening. Unfortunately, many of our "thought leaders" in government and academia simply don't see this because they are not personally affected as much at this time.

O.K. Who are you and what have you done with Face Reality!?

Who are you and what have you done with Face Reality!?

He has finally faced reality.

"O.K. Who are you and what have you done with Face Reality!?"

Nothing - I'm the one-and-only Face Reality.

I'm not a believer in the Silicon Valley house-price crash that people have been predicting here for a number of years.

However, I've consistently said that the middle class is facing diminishing prospects in this country.

Well...alright...

It just strikes me that if you asked most people here; "what's the first thing you think of when I say... Face Reality?" you wouldn't get a lot of "Champion of the Middle Class!" type responses?

Or I could just be way, way wrong.

Yes FR is right, RE will crash everywhere but not the BayArea.

Even though I dont live there after reading this blog a few years I have a firm grasp on the subject.

Here is why no bay area crash:
1. Retiring boomers flocking to BA!
2. Continued immigration of homosexuals to live in Castro District.
3. Advances in HIV treatment means group #2 not dying out as previously thought.
4. No decent restaraunts (espcically sushi) anywhere else in nation/world.
5. BART system is excellent (not sure what that is...I'm from los angeles...down here we have buses for individual transit...everyone drives thier very own bus)
6. Rent control means no one ever moves.
7. Medical marijuana prescribed for common cold everywhere in SF.
8. If busted for prostitution you get let off w/warning (but parking fine=$400)

Anyone here a Southpark fan? The episode where Stans parents start driving a prius and move to SF is hilarious.

>>The Limeligth on Castro didnt survive regarless of the so called Google money.

Well their 18 and under night (yes... and under) really didn't endure them to the City....

"Yes FR is right, RE will crash everywhere but not the BayArea."

I didn't say that. Local factors are dominant in real estate. Some places will crash, some will stagnate, and some will appreciate. Silicon Valley just happens to be one of those areas where for multiple reasons prices are very resilient. This has been beaten to death on this blog - go back to the discussions in 2004-5. People predicting a crash in SV have been proven wrong again and again. Yes, some fringe areas haven't done so well, but that's not what we were talking about (at least not what I was talking about).

Housing is becoming less affordable to the middle class in many areas. I don't think this is going to change in the foreseeable future, just as I don't think that education is going to become more affordable. Maybe something will be done about health care finally, but most likely not much, so that's likely to continue to be a serious problem as well.

The future doesn't look bright for anyone who doesn't manage to climb up from the middle class to at least the lower rungs of the upper class. Surprisingly many have actually made this jump in this country over the last couple of decades. You can't spit in SV without hitting someone with a net worth of at least a couple of million. However, this is clearly a small minority, and most will not make this jump, and they will be facing an increasingly harsh reality.

The 'large middle class' phenom is rare and unprecedented historically (looking at say the last 2000 years or even the last 100 years) so the fact that this group is going to be much smaller is simply returning to normal IMO.

It seems to be that large middle class was created temporarily by US post war boom era in the 50's and its been shrinking ever since. We only became #1 in factory jobs by bombing all other factories.

It only feels like a tradgedy because the human lifespan is so short, its very normal to have a large wealthy class, small middle class, and enourmous poor/working poor class. Its globalization.

"its very normal to have a large wealthy class, small middle class, and enourmous poor/working poor class. Its globalization."

Maybe, but it seems that the US has been making particularly big strides in that direction over the last 15 years - certainly much bigger than Europe. Also, historically the US has benefited from a disproportionate amount of the immigration of talent in the world. This will stop if the US economy starts resembling that of a "third-world" country. Opportunity resides with growth, not with decline, and talent flocks to opportunity.

It will be interesting to see how this evolves over the 21st century. As they say - "May you live in interesting times!"

Too bad life is short, though, so I'll get to experience only less than half of the 21st century.

HelloKitty says: The ‘large middle class’ phenom is rare and unprecedented historically (looking at say the last 2000 years or even the last 100 years) so the fact that this group is going to be much smaller is simply returning to normal IMO.

At one point, the whole mammal thing was rare and unprecedented historically. Looking at the previous few million years, big dinosaurs dominated the top of the food chain. Then eventually they didn't any more. I suspect the middle class phenom is like mammals---it is quite resilient and will outlast many larger, more powerful but ultimately inflexible structures. Given the present conditions of the free lower class vs. the true historical lower class of serfs and slaves, I think they will firmly entrench democracy for the next few thousand years.

I WISH the old music instrument store was still in MV but it's GONE.

Yes there's the scientology place. Yes there's the sewing machine place. Yes Ostwald Spengler's Decline Of The West Bone Orchard is still producing soap and fertilizer or whatever they did.

But when the musical instrument store went out of business a couple of years ago, that's it, it was, and is, GONE.

Which sucks, because an instrument store is a sign of a healthy neighborhood, I think, but it is No More.

So, if you want instruments, you go to the one in Sunnyvale, or the really good violin place ..... well ..... I'll say it's near a certain In-N-Out burger, but if I told you more I'd have to kill you, or if you're into guitars, go to Guitar Center or something.

I'd sure rather see an instrument place in MV than all those creepy Scienos.

>>I suspect the middle class phenom is like mammals—it is quite resilient and will outlast many larger, more powerful but ultimately inflexible structures.

Indeed. The middle class will be saved by redefining what it means to be middle class. In the future, it will be everyone from a guy working at Walmart, to Donald Trump (who will be by then only "lower upper middle class")

Short quiz. The middle class most resembles:

1. A hybrid of lower class pay-for-labor and upper class productive assets.

2. A lower class pay-for-labor system with somewhat better wages.

3. A lower class pay-for-labor system with a thin veneer of upper class luxuries.

The middle class is entrenched in a consumer economy. The rich have to sell to someone. If I were the rich, I'd spend more time educating the middle class so that it doesn't evolve itself out of the picture. The present middle class isn't working hard to accumulate long-term productive assets. It has occupied itself with moving its wealth level back to lower class status after obtaining some absurd scraps of luxury. As astrid once put it, stainless steel appliances and granite countertops are the middle class equivalent of the peacock's unwieldy tail. You can't blame the rich for that---nobody is forcing the middle class to imitate them (although some here would argue otherwise).

Don't get me wrong, there are secondary factors weighing on the middle class. But when the biggest anchor about its neck is reckless luxury and rampant entitlement, I have a hard time believing there is truly a middle class "plight".

ex-sunnyvale-renter Says:
I WISH the old music instrument store was still in MV but it’s GONE.

Okay, okay... :-) Don't mean to get into a tiff over this, there was the store window with some instruments in it when I walked by. It was after dinner, so I assumed the store was just closed for the night. Maybe they did shut it down.

Anyways, despite oil at nearly its all-time inflation adjusted high, it looks like Bernanke is flapping his mouth in preparation for another fix for the liquidity junkies. http://tinyurl.com/2pdozv

And anyone have a clue exactly _who_ is going to buy the SuperSIV bonds? The banks claim they will raise money via corporate paper.

SP

Recent news from the SJ Merc

The San Francisco Chronicle. “Of the Bay Area’s 236 ZIP codes, 25 are foreclosure hot spots - places where more than eight of every 1,000 homes were repossessed by lenders this year.”

“Even in expensive areas like Marin County the crisis is beginning to be felt. One of the Bay Area’s highest-priced ZIP codes, 94920, in the tony Belvedere/Tiburon area, was home to nine foreclosures - including a $1.3 million ‘Bel-Aire tract home’ with ‘floor-to-ceiling windows … and French doors leading to the pool.’”

“In the Antioch ZIP code of 94531, the median price stood at $452,000 in July and August, according to DataQuick. But that seems to be dropping fast, putting more homeowners in danger of losing their largest asset.”

“Real estate agent Luis Salas has about 10 listings in the Antioch area; eight are short sales, in which the sellers ask the bank to take the properties for less than they owe on the mortgage.”

“In part, Salas and others blame the steep competition for buyers’ attention. Along the line separating Antioch and Brentwood sit winding streets filled with just-finished homes - more than 40 percent of the housing stock there is considered new, according to the Construction Industry Research Board.”

HelloKitty
"We only became #1 in factory jobs by bombing all other factories."

I am not sure what you are advocating here. :)

ex-sunnyvale-renter,

Some of my fondest memories as a kid were spent hanging around the music shop. We'd blow up speakers and amps and bring them back for a quick fix and of course try every "axe" in the shop. What fun!

Even then, though most shops struggled. I mean your "customers" are 14 year olds that rely on skipping lunch. pooling scant $'s and mowing lawns to buy your products. Most shop owners were hardly in it to get rich. Yet it was fun and they repaired "band" instruments to get by.

Now we have "Musiciansfriend.com" and that was the end of that. Sadly most younger players today will never know what it's like to play an instrument that was set up just for you (let alone have been mentored in how to adjust harmonics, action etc.) Now, if the kid doesn't like the "sound" we just sell them yet another effects pedal.

Brand,
I am going to have to ask you how you can support the claim that "biggest anchor about its neck is reckless luxury and rampant entitlement"

I think the much-higher-then-inflation-rate rises in college tuition, health care, energy, housing, and food are well documented.

Anecdotally I can say that I have little or no luxury and no sense of entitlement. And yet I am a bit embarassed when this blog turns to a food forum as I cannot imagine when I will be able to afford to dine out.

SP,

If you're following M-LEC/SIV graveyard stuff - you are, aren't you? - Yves Smith put up a string of ripsnorters overnight:

http://www.nakedcapitalism.com/

Favorite BB quote: "I would like to know what those damned things are worth!"

So it's official!

The First Baby Boomer is now collecting Social Security! (I'm told she was born one second after midnight on 1 January, 1946) In true boomer fashion (she elected to draw early).

Let the Boomer Death Clock Countdown begin!

Anecdotally I can say that I have little or no luxury and no sense of entitlement. And yet I am a bit embarassed when this blog turns to a food forum as I cannot imagine when I will be able to afford to dine out.

Duke,

Honestly, that attitude's a bit self-righteous, IMO. Maybe you've been feeling the pinch - I'll give you that, and I hope you're doing okay overall. But to begrudge others for doing things that are (a) within their financial means, and (b) an effort to actually enjoy their lives rather than slaving away trying to make ends meet seems sanctimonious to me.

There's a real difference between leisure activities and consumption within your means and spending beyond your means using MEW and what not to "keep up with the Joneses." I doubt most of us here are advocating a monk's ascetic life.

Skibum,
Woa. At what point did I begrudge anyone anything? Was it my embarrassment at not being able to participate in food discussions on a housing blog? Let me clear up this misunderstanding right away. I think any who can afford to dine out and who wish to dine out should dine out. Free of guilt. Honest.
I am also not sanctimonious in the least.
I believe my words stand for themselves fairly well. I simply stated that the position that the middle classess' reckless luxury and rampant entitlement was not supported by statements of fact and that anecdotaly at least I believe this to not be true. I am very open to rebutal.

Duke,

Sounds like it was a misunderstanding re: "embarrassment" - my read on your "embarrassment" comment was how can we on this blog be so decadent and trite as to discuss enjoying food. Seems more like you were expressing personal embarrassment about not feeling you have the means to do so. Sorry about the misunderstanding.

However, aside from that issue, I do still firmly believe the so-called middle class, which clearly is not monotonic, has a significant segment that spends way beyond their means. I think your personal example of not overspending is much more an exception than the rule. If only more Americans had your financial restraint, we wouldn't be in this mess.

Here's a timely piece from the MSM - are consumers finally tapped out?

http://money.cnn.com/2007/10/15/news/economy/colvin_buyingbinge.fortune/index.htm?postversion=2007101609

I think the more relevant question is, why is it always assumed (like in this article) that tapping MEW to spend on crap was EVER a good thing???

Another FB selling fancy car...

http://sfbay.craigslist.org/sfc/car/449367125.html

"..I am in no rush to sell, so PLEASE DO NOT email me with LOW-BALL OFFERS. "
Really?! Guess where these pictures are taken? The school in the background of one of the pictures tells it all. It is Edward Harris Jr. in Elk Grove.

There’s a real difference between leisure activities and consumption within your means and spending beyond your means using MEW and what not to “keep up with the Joneses.” I doubt most of us here are advocating a monk’s ascetic life.

This bubble taught us that we ought to live outside of our means. We just need to time the anticipated bailout correctly.

"Responsibility" is well out-dated. We must adapt. In order to defeat the boomers we must become the boomers.

Interesting article. I still wonder at the magnitudes of things. How many people used MEWs to fund consumer spending versus how many used the money for more appropriate purchases? How many of the middle class used MEWs at all?

I am trying to grapple with the realities of the economy as it pertains to the middle class using hard facts,; neither absolving the middle class by stating obvious distortions of income inequality, nor condeming the middle class by using equally loaded examples of rampant consumerism.

I keep coming back to the following. A huge cost shift has occured over the last few decades to the American worker. Some say this is globalization. Okay. But in the same period we have seen corporate profits and equities valuations soar. I think an article was once posted on this site stating where Henry Ford understood the fact that you can't sell cars if you don't pay your workers enough to buy them. I think we are closer to that reality then the entitlement reality.

My personal experince has certainly seen some of the middle class playing the keeping-up-with-the-Jones game, the majority of my direct observations are with struggles and escalating cost burdens, especially in those areas not reported in the inlfation index.

So, how to put this discussion on an analytic footing? The CPI is flawed. The PPP is flawed and frankly, I just want to compare income and expenditures today versus 20 years ago, WITHIN the US.

Ideas anyone?