patrick.net

Someone is saying this in a previous thread:

Hey “Pete”, you really need a reality check. The engineers/programmers writing an accounting program cannot program if he/she does not understand accounting. A engineers/programmers cannot program an insurance program if he/she does not understand the insurance rating system, … The hardest part of being an engineer/programmer is to understand the domain, the business, … The technology aspect is something an 18 year old college freshmen can understand.

But if you can afford to buy, do me a favor and buy it on your own. Don’t use a real estate professional. The test they take to get the license is a joke and they get paid based on the percentage of the selling price. There is NO BUYER’s AGENT! Why should they negotiate for a lower price when they’re getting the cut of the selling price! They’re the biggest thieves around.

If this is the prevailing view of the market, I guess the magnitude of the correction may exceed our wildest expectations.

After your write off the interest, your “$3000+” a month in PITI comes out to no more than $1500 a month. But more importantly, you’re building up equity. After 15 to 20 years, you should have your home outright.

Especially this part. New math intrigues me.

I should’ve listened to the nay sayers of the stock market. Not the nay sayers of the real estate.

Umm...why is it any different this time?

If this is the prevailing view of the market, I guess the magnitude of the correction may exceed our wildest expectations.

Perhaps the very idea that "real estate is different" has pushed expectations (and prices) farther and longer? I notice people fall back to this argument when cautioned.

It's like "logic in a bubble": keeping one's mind free of contradictory data:
http://tinyurl.com/bvpa9

BTW, if $3000+ PITI is $1500 after tax, I am calling my broker.

"Looks like the housing market is weakening according to the selling price"

I find this quote somehow fitting:

"When the only tool you have is a hammer, every problem begins to resemble a nail."
--Abraham Maslow

I thought I'd return after some time away to catch up on the news. It's interesting not being on this blog for a while to remove the biase that we naturally are part of with talking to like minded souls.

Two of my indicators of the Great Fall:
1. My husband is now willing to discuss renting a house - this is someone who has owned a house for a long time, is from a working class background where you just don't rent but always buy, but I ran the numbers for him to buy versus rent and it's pretty much a wash for us - the only part that changes is if the market drops or we need to move in the next few years (which we intend to do) and then the numbers look very scary. That and my yardstick for buying a place is - can we afford to live on one wage? came up negative.

2. I'm on the Palo Alto mothers club, when mentioning renting I've had quite a few mothers ping me to say what reasoning did I have as they were seeing the market drop around them and wanted some extra data; of course I pointed them to this blog and the RE links:) Six months ago the subject came up on the same list and the outcry of a bubble was shouted down as being ludicrous.

We were still keeping a good eye on the South Bay and Peninsula market (mainly the Peninsula) and the market has definitely gone down. Our agent is pursuing us and said houses are going for asking or under nowadays, plus we are seeing houses just not moving. They are still up for ridiculous prices but I've seen houses drop 300k in Los Altos over the last few months before selling. Not bad...

Here's an interesting comment taken from the BusinessWeek article "If Housing Slumps, How Safe Are You?"

I am a lawyer and I represent illegal aliens in deportation. In all but one of 35 cases I currently have on docket the illegal owns a home. But it is the loan terms that fascinate me. One lady finished school at second grade, speaks no English, and works for a recycling company binding cardboard boxes. She makes about $30K per year and is a single mom with three children. She has a $430K interest only loan that she used last year to buy a $430K condo - 100% financing - she paid $3,000 in closing costs. I tried to explain that her monthly payments will rise substantially in four years. She does not believe me, did not understand what I said and told me the loan and real estate agents specialize in real estate and would have told her if her payments could go up. If 34 of my clients with risky loans and no school past at best eighth grade are surprised by rising loan payments, we should be afraid. This is the last group desperate lenders pander to, meaning we're near the end.

Buying real estate without an agent is like going to court without a lawyer, you have a fool for a client.

Excellent analogy!

I don’t worry about job creation. America always creates new jobs. That’s what we do. The business of America is business. Besides, lack of job creation was not the cause of stagflation, government over-regulation was. Price controls and the like caused stagflation and lack of job creation. That is not going to happen this time around, which is why I don’t worry about stagflation.

Lack of jobs--in particular high unemployment--is in the very definition of stagflation. I don't care about the source in this analysis; I care about the effect. Anyways, what makes you think gov't regulation itself isn't cyclical. With SOX, CFIUS, rising protectionism, etc., we could well be heading into another regulatory influence job loss cycle.

It is not true that the majority of people who bought real estate in the 1970s were those with significant cash reserves. It simply is not true. People bought homes and refinanced later when interest rates came down. That’s what will happen this time even if interest rates triple. Speculators and investors are not the majority of home buyers. People are, and people will always buy houses. They always have.

My data is from Mankiw, et. al. and a consolidation of about 75 studies from economics departments across the US. Of course, the interpretation of data is debatable, but I'd like to know your sources.

Further, the 1970s and 80s stagflation cycles witnessed the largest shifts of wealth in the US since the Great Depression. These shifts were away from middle class and into upper class. If you want to assert that lower nominal home prices helped these families, I would like to know how so. Finally, the cycle in the 70s created an inflation gap of over 70% between the urban/coastal populations and the inland/rural populations, which has failed to close ever since. Because durables and many services are nationally priced, these populations have been significantly economically harmed--including by dragging down relative RE nominal prices--comparatively.

I'm sure there will anecdotes of people "making a killing" in the RE downturn. My drumbeat is that this will be the exception, not the rule.

...And, you are right that the majority of housing RE in the US is owned by individuals, not investors. But, the majority of this housing stock also does not turn over rapidly either, and when it does it is either consumed (sold off as it is inherited) and/or shifted to alternate savings. There is almost no measurable economic wealth effect; it is merely a savings effect.

@ScottC: Actually, realtors are in the business of selling, since the seller is their client

At the risk of acquiring a nasty permutation of title, and of speaking for someone else... I think you're missing Shmend Rick's point. There are no sellers without buyers, and Realtor®s make money at the point of transactional friction between the two. So Realtor®s advise sellers, cultivate buyers, create and protect markets, and when the machinations succeed, receive a check putatively from the seller (written by the lawyer, most often), but funded by the buyer.

So tell me again what business they're in exactly? That's right, the transaction (-al friction) business. Sounds like buying and selling to me.

Totally false. As a contractor, you can write off anything from your breakfast, lunch, dinner to the clothes you wear, not to mention gas, car, computer, trasnportation,

Most of these expenses are limited to 50% deductibility, and have floors and ceilings. If you are filing as a sole proprietor, then you'll also experience significant pressures from both AMT and the specifics of the rules on the big-ticket deductions like cars. A general rule of thumb is that it is 15% more expensive to contract than earn salary (net), until you hit the 120K level, where the costs go up because of AMT.

I am currently, and have been often in the past, independent. I've filed as S1, C-Corp, S-Corp and LLC. By far, the most preferential treatment is S-Corp for independent contracting, but you can't deduct a lot of those things if you take that route.

So tell me again what business they’re in exactly? That’s right, the transaction (-al friction) business. Sounds like buying and selling to me.

Floor traders?

A1337: You could always hose yourself down before you step inside the party and go as the burst bubble...

HZ is again dead on. Mortgage interest deduction only benefits marginal earners in a narrow band, which is increasingly elusive in CA. AMT kicks in pretty quickly for CA earners, although I read somewhere that a significant portion of folks just ignore AMT even when they owe it (probably out of ignorance). They may gain from mort-int, but they are unwittingly cheating on their taxes.

The biggest tragedy is that mortgage interest, like everything else, benefits the very rich more than anyone, since they can utilize it for earnings over .5M and usually they have the wherewithall to structure specifically to maximize tax benefit. Personal wealth managers make quite a business financing rich folks' RE so they can reinvest in higher returning portoflios (like PE funds), and effectively arbitrage the low interest rates plus taxpayer subsidized deduction.

"We were still keeping a good eye on the South Bay and Peninsula market (mainly the Peninsula) and the market has definitely gone down. "

Interesting anecdotes, Gabby, and I hope you're right about the peninsula. I check listings there periodically, mainly San Mateo area, and the prices still make me want to puke. But I'm not seeing the what's-sold side of it. I'll have to start keeping a closer watch.

The realtor does no selling or buying; he simply negotiates the deal.

I have to agree.

Don't worry too much about for whom the agent works. The fact is that one does not have to buy if the terms are not right.

Meanwhile a buyer can’t rely on the selling agent to tell her what is the “right” price. No selling agent will tell you that you are over-paying. But that is what this board is for.

Very true. The buyer can only rely on herself to find out the "right" price. She can. however, "rely" on the agents to negotiate towards that price or there will be no deal.

ScottC, are "exclusive buyer's agents" popular in Texas?

Everyone wants someone else to look out for them, but no one wants to sign an agreement with an agent to represent them.

I cannot imagine buying without representation. Why don't people want to sign the agreement?

Because it will limit thier buying options possibly.

How so?

Anyone can look up an article on the web, but how many have actually lived and worked in the business? I rest my case.

So you have no data, just anecdotal supposition. That's fine. It will sure comfort those in the middle class who were seperated from approximately 27% of their real wealth during the period.

And for reference, I didn't look up any articles on the web. I have been studying econometrics for the past 12 years, and have personally contributed to two such macroeconomic studies. Even so, I don't require that to argue my points.

Being an Asian myself, I resent the fact that Bay Area has become a big Asia magnet. Excuse me, if I want to live among my people, I would have stayed in Asia. The fact that I fled that place is because there are something very undesirable that I recognize of my culture, and my own people that I don't want to be associated with. The flocking of Asian population into Bay Area is exactly what makes me think twice about whether I want to put down my roots here. I know quite a few Asians who share the same sentiment as mine. We purposefully avoid high-Asian-concentration neighborhoods.

Randy H,

I am curious as to the specific reasons for your preference for the S-Corp over the LLC.

I am curious as to the specific reasons for your preference for the S-Corp over the LLC.

Ditto.

"But then they don’t teach that in econometrics or macroeconomics, do they?"

No they don't. You have to work in the business or go to real estate trade school for that kind of specific information.

Economists are generally more interested in how and why the world works the way it does, rather than the specifics of a given job or its pay structure.

BTW, I have also "wasted" many years studying and applying that "useless" economic theory.

Funny thing though, I negotiate several hundred million dollars of business/investments each year. I wonder how that can be possible with all the time I wasted studying economic theory and investment finance.

As for Randy, nobody cares one wit about econometrics or macroeconomics, meaningless classroom hypotheses that have no bearing on the real world. Exactly what does either have to do with real estate law or, much less, the practice of real estate? Nothing. And so you have no point. Have all of the twelve years you’ve wasted studying textbook nonsense prepared you to negotiate one deal? No.

ScottC, economics is an art. Is it useful? I think so, it is a good tool. Can it replace real world experience? Probably not. However, it is quite far from meaningless.

I am not exactly a fan of economics but I do find it amazing at times. Randy is doing a very good job explaining the stuff as well.

As for Randy, nobody cares one wit about econometrics or macroeconomics, meaningless classroom hypotheses that have no bearing on the real world. Exactly what does either have to do with real estate law or, much less, the practice of real estate? Nothing. And so you have no point. Have all of the twelve years you’ve wasted studying textbook nonsense prepared you to negotiate one deal? No.

I am sorry you do not care about economics; it is of course your right to believe anything you wish. I do resent the personal affronts, however, as I've done nothing to directly attack you, and I shall not. If you don't wish to have a spirited debate and instead rely on proclaiming yourself right and alternate opinions invalid, then I guess there is no point to the discussion. Just for reference, economics, among many other topics both textbook and real-world, have prepared me well for negotiating in many circumstances, RE being one where I have fared quite well (with the use of agents, I might add). I find having a broad, open mind beneficial.

Randy,

so with the big picture in mind, what will this inflation do to the US? Will there be further polarization of income and wealth so that the US is only comprised of two classes: the rich and the poor? Will that make this country rather unattactive to live in?

Whether from a book or on the street, the more you know, the better off you will be. Economics is powerful knowledge when combined with some practical experience.

I have found it to be the edge that has enabled me better understand what I experience and see. This has helped me to out perform nearly all of my peers for 30 years.

Zephyr & Peter P

I am curious as to the specific reasons for your preference for the S-Corp over the LLC.

Back when I had an LLC (CA, circa 1997) it was essentially an S-Corp. where the member-managers (the partners) had limited liability vis-a-vis the others' actions. The primary concern was taxes. In both, the taxes pass through to partners--the firm cannot retain earnings. This allows for usually better tax treatment than a C-Corp. However, in 1999/2000 the value of the LLC was seriously reduced by court rulings, and they found that the partners could still be held severably liable in most cases. Further, because they effectively removed some big-ticket deductions from partnership-style companies (mainly car leases), and forced a lot of other perks into taxable income status, the C-Corp became again a bit more attractive (which is what I formed the next time round).

The final consideration for me was the "single-member" penalties incurred by a LLC that aren't by a S-Corp. Remember that now, both are effectively of equally limited liability.

Assuming a 1-member manager LLC, LLC's are taxed self-employment on distributions whereas S-Corps aren't (they're just taxed as income). The LLC demands you to include any debt you carry for the corporation in the basis, which can help in accounting if you need to show a lower valuation, but can hurt your credit score if it's just you. The LLC does let you add new members later without a tax hit, so if you plan to grow you may want the LLC.

***not legal advice, and information is dated as of 2000. LLC law was still evolving at the time I last was informed on the subject fully***

Randy is the best thing to happen to this blog since Surfer-X. Delightful, measured, intelligent and eminently civilized posts.

Have a beer, Scott. It'll be OK.

Cheers,
prat

Randy is the best thing to happen to this blog since Surfer-X. Delightful, measured, intelligent and eminently civilized posts.

Here here.

Or would that be "Hear hear?" ;)

In other, non-defending-the-only-person-making-anything-resembling-sense, news:

http://tinyurl.com/cfoqy

Down 13% in NY?

Cheers,
prat

Thanks, I was not aware of the single member penalty for . I also thought the LLC would provide the limited liability even with one member.

"However, in 1999/2000 the value of the LLC was seriously reduced by court rulings, and they found that the partners could still be held severably liable in most cases."

What jurisdiction/state was this in?

Or would that be “Hear hear?”

To quote the philosopher: "A little bit from column A, a little bit from column B."

Also: "My Homer is not a communist. He may be a liar, a pig, an idiot, a communist, but he is not a porn star."

cheers,
prat

Randy, thanks for the insight on LLC.

SactoQt, how is your new home?

Also: “My Homer is not a communist. He may be a liar, a pig, an idiot, a communist, but he is not a porn star.”

Huh? What? Doh!

Loooooooooooooooove the new home. I'd buy it if I could. :)
The move was grueling though......