there is an exemption if you move for work or for illness for the 2 year limit. I know people that have moved six months after they bought a house and said it was work related. Your taking a chance at getting audited but the IRS is already swamped and the job market sucks, meaning people need to move a lot so there is probably a ton of cheating going on on the tax exemption.
Great piece, CR. Perhaps the next logical subject is the myth that perfectly rational homebuyers are taking interest-only loans with 100% financing (80/20) in order to minimize their annual income tax bill?
This one has become something like conventional wisdom.
It seems that there is a significant portion of the population (including business journalists) for whom any appeal to minimizing taxes--logical or not--makes any high-risk idea sound "prudent." And, of course, if the "bubble" is being fueled by "prudent" behavior, it cannot therefore be a bubble.
As an aside, I continue to be amused by the feckless naifs who cheered on the frothy rise of neighborhood property values, only to find themselves coming to Jesus when their homes were reassessed for property taxes. (And I continue to be deeply concerned about long-time homeowners on fixed incomes in (formerly) modest neighborhoods who own their homes outright and are facing real hardship with their property tax bills.)
tbizzle, I'm sure there are people gaming the system . Hopefully it is a small number.
tanta, Wow. Using 100% financing to minimize their tax bill - I hadn't heard that one - but it sounds like something that would become "common wisdom".
I think it's pretty simple: home purchases are made on a cash-flow basis. When interest rates are low and mortgage interest is tax deductible, it's easier to buy up, and it distorts the housing market. Of course, perversely, if your income falls, because the deduction is worth less as you fall down the progressive income scale, your actual cash flow for the home goes up.
That's going to make a nasty surprise for some folks, as is their ARM moving out of the fixed phase.
While the $250,000 tax exemption could not cause the bubble, once started the bubble could be sustained and enhanced by the exemption.
Due to the exemption there is more money available to be rolled into the next purchase. I also would not limit this to "expensive" homes--your first real estate could be a one-bedroom condo. When you sell the (presumably appreciated) condo, you still have more money with which to bid on a 1000 square foot starter home, and so does every other prior owner.
So, the exemption has contributed to the size and duration of this bubble. How much, I'm not sure--one could think of the saved tax as buying down the mortgage interest rate since you effectively have to finance a smaller amount on the next purchase--or one could say that the amount financed remains a function of income and interest rates while the tax savings is gravy that goes straight to the seller.
without speculators, there is no house bubble. the fact that over one third of homes purchased last year were for non-owner occupants (investors/speculators)should be enough proof of this. take the speculator out of the market, and it's crash time. the 250/500 thousand dollar exemption has little effect on non-owner occupant buyers.
conversely, though, take away the lowest long term capital gains rate since wwII for real estate only, and the 250/500 exemption, and the asset class playing field will be leveled, somewhat. it is not inconceivable that the next administration could do exactly this. greenspan is already talking about the need for raising taxes to deal with the deficit. actually, unless "helicopter money" ben takes over for greenspan, real estate tax breaks could be altered before the next administration is seated.
1) I know people who have, and plan to continue to, buy and sell every 2 years to take advantage of the '97 Act. A potential flaw in CR's analysis is the idea that people will make lateral moves in price for higher basis. Instead, people are using appreciation to buy up. (They're not swapping one $800K house for another, they're using appreciation to buy a $1.2M house.)This may make sense in an appreciating market with a rising income. Of course, this is a house of cards if appreciation slows.
2) There may not be massive movement from high-priced housing areas to lower-priced areas, but there is significant movement. I live in a town in Central Oregon that has doubled in size in the past few years. All of the growth has come from people in California, Washington, and other higher-priced markets cashing out their equity and buying houses here at 50% the price of their former home. People are flocking here without jobs but confident that the lower cost of living is worth the risk. This is happening in small towns throughout the west. Of course, house values here have consequently doubled in the past few years. We are now an offical "boom" market as defined by the FDIC. Again, this could not occur in the fashion it has to date without the '97 Act.
"What is the better deal: 1) To have a $48K immediate increase in debt plus payments of $4K more per year or 2) to have a future tax liability of $70K?"
But according to my mortgage broker friend, many people out there are acting based on an algorithm in which mortgage debt is never to be paid off. Mortgage interest is just like rent, except it's the rent paid by smart people, because it's tax-deductible and offset by the 20% annual increase in home prices. So avoiding the tax is of paramount importance. As long-term interest rates continue to decline (as they must, lest the world as we know it come to and end*), housing prices can only continue to rise at an ever-faster pace. Look for Congress to increase the tax exemption to $1,000,000 before the end of W's reign.
Once long-term rates reach 0%, there will be no limit to how much you can borrow on an interest-only loan. The Chinese government will ensure that this happens, as otherwise there'll be now way to create export manufacturing jobs for all the 400 million farmers they have to move off the farm.
The tax law change is bearish for prices once they stop rising:
Under the old law, it was very expensive to cash out and bank your profits, since you owed taxes on the entire gain.
However, now nervous holders face no tax bill (at least up to $500k in gains and only 15% of gains above that) to cash out.
Bottom line, this change will help pop the bubble because homeowners are now much more likely to sell at the first sign of weakness than in the past
six percent solution, I agree that without any tax benefit, people would have less money after a sale ... but I was comparing the '97 law to prior tax law. Under the prior tax law anyone could move up and pay no taxes, so the consequences are the same.
Yancy, I am sure people are moving from expensive areas to less expensive areas and taking advantage of the tax exclusion. But that doesn't explain why the expensive areas are appreciating faster than the less expensive areas (if it was a result of the '97 tax law, the opposite would be happening).
jm, I agree. People are acting like mortgage money doesn't count. If someone would loan me a Billion dollars, 0% interest, IO (i.e. no payments) and non-recourse for 30 years on a home ... I'd take it too! Oceanfront on kauai sounds nice.
Mark, I agree. I think that might very well happen - the '97 tax act might contribute on the downside. I'm going to think about that some more.
As per yancy's claim... I know twopeople doing the two year flip too... both buy 'cheap' beat up fixers, live in them while they fix and try to make it last two years and have the gain fall in under the minimum... they are both single males who when and if married (one young & not married yet, other older & divorced) would not do this... too disruptive to the family. BTW - during the bubble years both have turned homes ofer MUCH faster than the two years... on the order of buy-fix-sell in less than six months... they pay cap gains but don't mind... they are making a killing right now.
There are few tax benefits to the flipers - they don't live in the properties (strictly income generating vehicles) and frequently don't hold on to them for more than a few months if not only weeks or even days...
The tax code argument is a red herring... thanks CR for clearing the air.
The econopundits at NRO have made this argument. But then Lawrence Kudlow never is very clear as to his underlying economic modeling approach. Nice analysis CR!
We did just that. We sold for 1.2 and are renting for $2500/mo (incl. gardener & pool maint.) while we wait for signs of sanity to return to the r.e. market. (Yes, we're prepared to wait a long time.) We invested our 1.2 in Ford's money market initially earning 3.27 yield, now (4 months later) 4.07. No more property taxes, no more home maint. costs & worries, no more concerns that we had way too large a % of our funds (incl. retirement) tied to one asset class that could turn illiquid in a heartbeat. AND, we're net positive AFTER taxes on our savings.
There are two reasons to own the home you live in. You can't beat it if you plan to live where you are for a LONG time, & it's a nice investment if you think your net real estate value will increase in deference to alternative rental costs going forward. To anyone who's playing the housing market like it's the new stock market, consider who, besides those who are benefitting from your enthusiastic bets agree with your reasoning?
One thing that frustrates me in popular analysis is the desire to have a very small number of variables. It is true that at times we need to make very simple models with primary variables to give a glimpse into major mechanisms.
But even popular modeling should give some glimpse into secondary variables and the reality that they often strenghen or contradict trends and that the complexity of social and economic systems is such that mathematically it's often impossible to predict what they blossum into.
It is fairly obvious that the tex exemption you talk about is not a primary variable in any explanation of housing markets. Is it secondary?
I think so and probably with more effect than reason would dictate. Fed by accountants and lawyers, ordinary individuals give tax considerations far more than rational weight.
It really isn't an either/or situation. There is a long list of things that are leading to high housing prices including:
a set of social myths and herd behaviors which would be usefully categorized much further, they include demonstrably false beliefs that housing always rises, momentum of current markets and many more.
low returns on conventional investments and fear of stocks.
low interest coupled with all sorts of loan vehicles pursued by an apparently insane financial industry. At this point, one needs to wrap around to my first point and include it in social beliefs while also adding some categorization of methods of propagation (bankers, real estate agents, the media, know it alls in bars.)
Some rational exploitation of the situation, there is big, very big money to made in booms especially when one can be highly leveraged. I'm sure some individuals have cashed out quite well from feeding the frenzy, other rational individuals have calculated with some rigor that the game isn't over and that another feast is still possible, they may be wrong, but they are ratonally market timing.
Conversely some individuals might believe in the probability of hyperinflation, in which if they can hold, they win as their real debt dwindles. Others with few resources find that they can get once unimaginable credit, make interest only or even negative interest payments similar to rent, if things blow they walk away with what they had before which is essentially nothing, if the mob belief is true they can pocket a tidy profit.
All of these things add up. In many cases they feed and multiply each other. The very frightening reality is that based on previous bubbles we might have a situation of further increases in which bubble warnings are "discredited." This happened in the late nineties and brought many one time skeptics into the market. Dow 30,000 or 20% yearly increases in real estate enter into the realms of possibility among the doubters.
I remember this clearly from the nineties. Form 1996 or so not knowing much about the stock market, I felt it was too high, but by 1999 I wasn't su
Observer, great comments. I've heard from several people that the '97 Act was THE reason for the bubble, so I wanted to disagree with that assertion. (Like you wrote it may have a secondary impact, perhaps due to misinformation).
I can imagine perspective buyers being told how they will get $500K in tax free appreciation if they invest in a condo today ... sure, but will they see ANY appreciation?
I believe the real driver is speculation: both flippers / investors (who are probably acting rationally) and homebuyers using excessive leverage due to "exotic" financing.
Remember now that I pay considerable attention to world stock markets and I am increasingly impressed that the year is building in fine stock in almost every major market. We have a broad based stock rally, and real estate in the form of REITs is yet again a leading sector. I have no conclusion, but the breath of the market should be considered impressive given the economic worries internationally.
Is anyone selling any Tax Myth homes? I would be happy to take care of your Mythical proceeds. Its charitable, I would be making sure that that mythical money, just in case it is real, didnt remain in circulation! We wouldnt want it showing up in home price appreciation! I would buy bonds err wait, I mean open a new Quiznos somewhere.
What is the better deal: 1) To have a $48K immediate increase in debt plus payments of $4K more per year or 2) to have a future tax liability of $70K? For most situations the answer is #2, so the Tax Relief Act of '97 isn't motivating people to buy and sell similar properties.
Come on, there are never just two options! CR you gotta think big! Go large!
3) $680,000 in debt with exotic instruments and $170,000 down on Property B; $100,000 down with $500,000 in exotic debt on rental property C; 2005 CLK 320C $399 a month; clothing, cell phone and computer made in china - cost: almost free; Rinse and Repeat.
If your choosing to invest in either the stock market or buying a bigger house, then the 0% cap gains drives that decision making.
If you expect 7% returns on stock at 15% cap gains, then you only have to 5.95% return on your home. So, if your thinking is to eventually retire to something smaller, then pre 1997, if you expected 7% returns on stock at 28% cap gains, then you would have to expect the same on your home, since you weren't planning to roll it all up into the final purchase. Obviously, that's more beneficial for housing than stocks and the 1997 definitely made investing in stocks more attractive.
Surprise, I've decided to take the contrarian position.
there is one impact that might be happening in more expensive areas. Long time homeowners over 55, with significantly more than $500K in equity, might not move to less expensive housing to avoid paying taxes. This might reduce inventories of expensive homes, but I doubt this is a widespread problem.
it's not 15% long term cap gains. it's !5% plus you state tax. in cal, that could be 25%. in fl., and a hand full of other states, it would stay at 15%.
after exepenses, for all practical purposes, there is no year over year speculative money to be made in san diego. from may, 2004, to may, 2005, the average house value has only increased 7.5%. once realtor's commissions, closing costs and holding costs are tallied, the investment yields a neg return.
Wonderful comment, Observer. You might find the following interesting:
SF Chronicle, 6/26/05:
"Traditionally, interest-only loans and option ARMs were niche products sold to higher income borrowers who wanted to increase their tax deduction (by making their entire payment interest-only)or redirect the money they would have devoted to principal into other investments.
But recently, these loans have been pitched as an affordable product to people who are stretching to buy any house, or a bigger house."
Notice the conflation of "interest only" and "option ARM." Like those "traditional" high-end borrowers ever subjected themselves to negative amortization in order to buy blue chips.
And here's Washington Mutual's website this morning:
"Consider a Option ARM:
--To minimize your house payment to pay off other debt.
--To control how much tax-deductible interest you pay monthly.
--To maximize your buying power.
--If your income tends to fluctuate.
--If you are confident that your income will rise over the years."
Now, tell me what the purpose of the phrase "tax-deductible" is other than pure mystification? You don't get to choose the amount of interest due; you get to choose to pay less than the amount due, which results in negative amortization. The less interest you pay in a calendar year, the lower your tax deduction. The only thing a short payment does for you is increase current cash flow in exchange for higher payments later, unless you wish to argue that paying future interest on capitalized interest at a higher rate of interest is good for you because you'll have a bigger tax deduction right at the point that your income conveniently rises as you are confident it will.
Mortgage lenders know damn well that you can hook a whole lot of people into a crummy deal by making them think they're "controlling" their taxes, or that they're making the same "savvy" moves as their financial betters. Perhaps "tax meme" is a better phrase than "tax myth."
The tax thing is often very much an emotional, deep psychological force.
I have been very pleased that a number of financial writers especially on the net are increasingly stressing, "paying taxes is a good thing, it means you've made money" and "don;t let tax considerations drive your investments." It is an appeal to reason and numbers.
But people resent taxes, those on payrolls have never paid them directly so suddenly seeing them as part of transactions is shocking. An entire industry has sprung up playing the meme of save taxes. Real estae agents and bankers are dishonest with the savings on home loans, they'll do the first years interest, but not include standard deduction. Thus I've encountered people paying $1,200 or so a month saying it's actually 900 and somthing.
The math isn't done. And finally the right has aggressively pursued the concept that taxation is robbery and that it is immoral to pay and it must be minimized. "They" are taking "our" money.
observer: When the tax revenue goes to frivolous wars and related pork, it is robbery. Albeit in a different sense than the right-wingers' who are concerned about social spending.
Readers have probably moved on as am late in commenting.
The deduction on selling out = only one part of the taxes equation.
For one, that's all money not put in R&D
and technological development ...
alternative energy technologies.
kThey're all dreaming...
They party is over.
People riding around in expensive foreign made care...and we're going to pick up the the real tab for their medical insurance costs while buying foreign made? Same for all their spoiled guppies partying and going to univs-- in programs we do not need as a country? No, No, No way!
Do all these house wealthy idiots (and who are scheming to pass on to their soft,spoiled offspring-- all while ruining the country due to their real estate machinations that they all schemed on to hemorrhage this country) really think we are going to pay for the Medicare? All the dummies pumped through these univs and their 20 yrs. behind tuitions and overpaid staffs esp. in CA...and looted retirements by all the govt. employees)?
AND: while they all partied and gorged on entertainments and foreign made goods... and schemes for massive tax reductions ...while they paid some other kid a couple grand a month and other insults (less than $110k while on any war front & $110k in oil stocks & $100k in motel stocks[which all the yuppies and guppies are using] and more in insurance benefits to those losing limb or life in foreign deserts to protect their soft, spoiled butts...
If they say "well yes". ask them what it is! LOL - coupon discount propecia and Besides this type of merriment (Watson carisoprodol) but yeah c'mon. tell one of the 8 writers to get up off their ass and write a review. or end the blog. . prevacid naprapac 375
If they say "well yes". ask them what it is! LOL - coupon discount propecia and Besides this type of merriment (Watson carisoprodol) but yeah c'mon. tell one of the 8 writers to get up off their ass and write a review. or end the blog. . prevacid naprapac 375
oh i agree - I invite you to join our lightworker group in flowing Pure Unconditional Love to the mass consciousness of humanity and to Gaia. the consciousness of planet Earth.
there is an exemption if you move for work or for illness for the 2 year limit. I know people that have moved six months after they bought a house and said it was work related. Your taking a chance at getting audited but the IRS is already swamped and the job market sucks, meaning people need to move a lot so there is probably a ton of cheating going on on the tax exemption.
Great piece, CR. Perhaps the next logical subject is the myth that perfectly rational homebuyers are taking interest-only loans with 100% financing (80/20) in order to minimize their annual income tax bill?
This one has become something like conventional wisdom.
It seems that there is a significant portion of the population (including business journalists) for whom any appeal to minimizing taxes--logical or not--makes any high-risk idea sound "prudent." And, of course, if the "bubble" is being fueled by "prudent" behavior, it cannot therefore be a bubble.
As an aside, I continue to be amused by the feckless naifs who cheered on the frothy rise of neighborhood property values, only to find themselves coming to Jesus when their homes were reassessed for property taxes. (And I continue to be deeply concerned about long-time homeowners on fixed incomes in (formerly) modest neighborhoods who own their homes outright and are facing real hardship with their property tax bills.)
The critical factor seems to be long term interest rates. If rates stay low, real estate speculation may continue for quite a while.
tbizzle, I'm sure there are people gaming the system . Hopefully it is a small number.
tanta, Wow. Using 100% financing to minimize their tax bill - I hadn't heard that one - but it sounds like something that would become "common wisdom".
Best to all.
I think it's pretty simple: home purchases are made on a cash-flow basis. When interest rates are low and mortgage interest is tax deductible, it's easier to buy up, and it distorts the housing market. Of course, perversely, if your income falls, because the deduction is worth less as you fall down the progressive income scale, your actual cash flow for the home goes up.
That's going to make a nasty surprise for some folks, as is their ARM moving out of the fixed phase.
While the $250,000 tax exemption could not cause the bubble, once started the bubble could be sustained and enhanced by the exemption.
Due to the exemption there is more money available to be rolled into the next purchase. I also would not limit this to "expensive" homes--your first real estate could be a one-bedroom condo. When you sell the (presumably appreciated) condo, you still have more money with which to bid on a 1000 square foot starter home, and so does every other prior owner.
So, the exemption has contributed to the size and duration of this bubble. How much, I'm not sure--one could think of the saved tax as buying down the mortgage interest rate since you effectively have to finance a smaller amount on the next purchase--or one could say that the amount financed remains a function of income and interest rates while the tax savings is gravy that goes straight to the seller.
without speculators, there is no house bubble. the fact that over one third of homes purchased last year were for non-owner occupants (investors/speculators)should be enough proof of this. take the speculator out of the market, and it's crash time. the 250/500 thousand dollar exemption has little effect on non-owner occupant buyers.
conversely, though, take away the lowest long term capital gains rate since wwII for real estate only, and the 250/500 exemption, and the asset class playing field will be leveled, somewhat. it is not inconceivable that the next administration could do exactly this. greenspan is already talking about the need for raising taxes to deal with the deficit. actually, unless "helicopter money" ben takes over for greenspan, real estate tax breaks could be altered before the next administration is seated.
2 Comments:
1) I know people who have, and plan to continue to, buy and sell every 2 years to take advantage of the '97 Act. A potential flaw in CR's analysis is the idea that people will make lateral moves in price for higher basis. Instead, people are using appreciation to buy up. (They're not swapping one $800K house for another, they're using appreciation to buy a $1.2M house.)This may make sense in an appreciating market with a rising income. Of course, this is a house of cards if appreciation slows.
2) There may not be massive movement from high-priced housing areas to lower-priced areas, but there is significant movement. I live in a town in Central Oregon that has doubled in size in the past few years. All of the growth has come from people in California, Washington, and other higher-priced markets cashing out their equity and buying houses here at 50% the price of their former home. People are flocking here without jobs but confident that the lower cost of living is worth the risk. This is happening in small towns throughout the west. Of course, house values here have consequently doubled in the past few years. We are now an offical "boom" market as defined by the FDIC. Again, this could not occur in the fashion it has to date without the '97 Act.
"What is the better deal: 1) To have a $48K immediate increase in debt plus payments of $4K more per year or 2) to have a future tax liability of $70K?"
But according to my mortgage broker friend, many people out there are acting based on an algorithm in which mortgage debt is never to be paid off. Mortgage interest is just like rent, except it's the rent paid by smart people, because it's tax-deductible and offset by the 20% annual increase in home prices. So avoiding the tax is of paramount importance. As long-term interest rates continue to decline (as they must, lest the world as we know it come to and end*), housing prices can only continue to rise at an ever-faster pace. Look for Congress to increase the tax exemption to $1,000,000 before the end of W's reign.
If you think mortgage rates can't go lower...
Shakeup in the lending business | The Japan Times Online
Once long-term rates reach 0%, there will be no limit to how much you can borrow on an interest-only loan. The Chinese government will ensure that this happens, as otherwise there'll be now way to create export manufacturing jobs for all the 400 million farmers they have to move off the farm.
The tax law change is bearish for prices once they stop rising:
Under the old law, it was very expensive to cash out and bank your profits, since you owed taxes on the entire gain.
However, now nervous holders face no tax bill (at least up to $500k in gains and only 15% of gains above that) to cash out.
Bottom line, this change will help pop the bubble because homeowners are now much more likely to sell at the first sign of weakness than in the past
six percent solution, I agree that without any tax benefit, people would have less money after a sale ... but I was comparing the '97 law to prior tax law. Under the prior tax law anyone could move up and pay no taxes, so the consequences are the same.
Yancy, I am sure people are moving from expensive areas to less expensive areas and taking advantage of the tax exclusion. But that doesn't explain why the expensive areas are appreciating faster than the less expensive areas (if it was a result of the '97 tax law, the opposite would be happening).
jm, I agree. People are acting like mortgage money doesn't count. If someone would loan me a Billion dollars, 0% interest, IO (i.e. no payments) and non-recourse for 30 years on a home ... I'd take it too! Oceanfront on kauai sounds nice.
Mark, I agree. I think that might very well happen - the '97 tax act might contribute on the downside. I'm going to think about that some more.
Best Regards to all. Thanks for the comments!
As per yancy's claim... I know twopeople doing the two year flip too... both buy 'cheap' beat up fixers, live in them while they fix and try to make it last two years and have the gain fall in under the minimum... they are both single males who when and if married (one young & not married yet, other older & divorced) would not do this... too disruptive to the family. BTW - during the bubble years both have turned homes ofer MUCH faster than the two years... on the order of buy-fix-sell in less than six months... they pay cap gains but don't mind... they are making a killing right now.
There are few tax benefits to the flipers - they don't live in the properties (strictly income generating vehicles) and frequently don't hold on to them for more than a few months if not only weeks or even days...
The tax code argument is a red herring... thanks CR for clearing the air.
The econopundits at NRO have made this argument. But then Lawrence Kudlow never is very clear as to his underlying economic modeling approach. Nice analysis CR!
We did just that. We sold for 1.2 and are renting for $2500/mo (incl. gardener & pool maint.) while we wait for signs of sanity to return to the r.e. market. (Yes, we're prepared to wait a long time.) We invested our 1.2 in Ford's money market initially earning 3.27 yield, now (4 months later) 4.07. No more property taxes, no more home maint. costs & worries, no more concerns that we had way too large a % of our funds (incl. retirement) tied to one asset class that could turn illiquid in a heartbeat. AND, we're net positive AFTER taxes on our savings.
There are two reasons to own the home you live in. You can't beat it if you plan to live where you are for a LONG time, & it's a nice investment if you think your net real estate value will increase in deference to alternative rental costs going forward. To anyone who's playing the housing market like it's the new stock market, consider who, besides those who are benefitting from your enthusiastic bets agree with your reasoning?
I know people who sold to rent 4 years ago. Boy was their timing off.
Property taxes (in CA) are more likely to limit resales for people in theirs any length of time. They could double or more on a trade.
One thing that frustrates me in popular analysis is the desire to have a very small number of variables. It is true that at times we need to make very simple models with primary variables to give a glimpse into major mechanisms.
But even popular modeling should give some glimpse into secondary variables and the reality that they often strenghen or contradict trends and that the complexity of social and economic systems is such that mathematically it's often impossible to predict what they blossum into.
It is fairly obvious that the tex exemption you talk about is not a primary variable in any explanation of housing markets. Is it secondary?
I think so and probably with more effect than reason would dictate. Fed by accountants and lawyers, ordinary individuals give tax considerations far more than rational weight.
It really isn't an either/or situation. There is a long list of things that are leading to high housing prices including:
Conversely some individuals might believe in the probability of hyperinflation, in which if they can hold, they win as their real debt dwindles. Others with few resources find that they can get once unimaginable credit, make interest only or even negative interest payments similar to rent, if things blow they walk away with what they had before which is essentially nothing, if the mob belief is true they can pocket a tidy profit.
All of these things add up. In many cases they feed and multiply each other. The very frightening reality is that based on previous bubbles we might have a situation of further increases in which bubble warnings are "discredited." This happened in the late nineties and brought many one time skeptics into the market. Dow 30,000 or 20% yearly increases in real estate enter into the realms of possibility among the doubters.
I remember this clearly from the nineties. Form 1996 or so not knowing much about the stock market, I felt it was too high, but by 1999 I wasn't su
Observer, great comments. I've heard from several people that the '97 Act was THE reason for the bubble, so I wanted to disagree with that assertion. (Like you wrote it may have a secondary impact, perhaps due to misinformation).
I can imagine perspective buyers being told how they will get $500K in tax free appreciation if they invest in a condo today ... sure, but will they see ANY appreciation?
I believe the real driver is speculation: both flippers / investors (who are probably acting rationally) and homebuyers using excessive leverage due to "exotic" financing.
Best Regards!
This is a supurb post and thread.
Remember now that I pay considerable attention to world stock markets and I am increasingly impressed that the year is building in fine stock in almost every major market. We have a broad based stock rally, and real estate in the form of REITs is yet again a leading sector. I have no conclusion, but the breath of the market should be considered impressive given the economic worries internationally.
Is anyone selling any Tax Myth homes? I would be happy to take care of your Mythical proceeds. Its charitable, I would be making sure that that mythical money, just in case it is real, didnt remain in circulation! We wouldnt want it showing up in home price appreciation! I would buy bonds err wait, I mean open a new Quiznos somewhere.
100 (100, 80)
200 (200, 144)
300 (400, 259)
400 (800, 466)
500 (1,600, 839)
What is the better deal: 1) To have a $48K immediate increase in debt plus payments of $4K more per year or 2) to have a future tax liability of $70K? For most situations the answer is #2, so the Tax Relief Act of '97 isn't motivating people to buy and sell similar properties.
Come on, there are never just two options! CR you gotta think big! Go large!
3) $680,000 in debt with exotic instruments and $170,000 down on Property B; $100,000 down with $500,000 in exotic debt on rental property C; 2005 CLK 320C $399 a month; clothing, cell phone and computer made in china - cost: almost free; Rinse and Repeat.
If your choosing to invest in either the stock market or buying a bigger house, then the 0% cap gains drives that decision making.
If you expect 7% returns on stock at 15% cap gains, then you only have to 5.95% return on your home. So, if your thinking is to eventually retire to something smaller, then pre 1997, if you expected 7% returns on stock at 28% cap gains, then you would have to expect the same on your home, since you weren't planning to roll it all up into the final purchase. Obviously, that's more beneficial for housing than stocks and the 1997 definitely made investing in stocks more attractive.
Surprise, I've decided to take the contrarian position.
it's not 15% long term cap gains. it's !5% plus you state tax. in cal, that could be 25%. in fl., and a hand full of other states, it would stay at 15%.
after exepenses, for all practical purposes, there is no year over year speculative money to be made in san diego. from may, 2004, to may, 2005, the average house value has only increased 7.5%. once realtor's commissions, closing costs and holding costs are tallied, the investment yields a neg return.
Wonderful comment, Observer. You might find the following interesting:
SF Chronicle, 6/26/05:
"Traditionally, interest-only loans and option ARMs were niche products sold to higher income borrowers who wanted to increase their tax deduction (by making their entire payment interest-only)or redirect the money they would have devoted to principal into other investments.
But recently, these loans have been pitched as an affordable product to people who are stretching to buy any house, or a bigger house."
Notice the conflation of "interest only" and "option ARM." Like those "traditional" high-end borrowers ever subjected themselves to negative amortization in order to buy blue chips.
And here's Washington Mutual's website this morning:
"Consider a Option ARM:
--To minimize your house payment to pay off other debt.
--To control how much tax-deductible interest you pay monthly.
--To maximize your buying power.
--If your income tends to fluctuate.
--If you are confident that your income will rise over the years."
Now, tell me what the purpose of the phrase "tax-deductible" is other than pure mystification? You don't get to choose the amount of interest due; you get to choose to pay less than the amount due, which results in negative amortization. The less interest you pay in a calendar year, the lower your tax deduction. The only thing a short payment does for you is increase current cash flow in exchange for higher payments later, unless you wish to argue that paying future interest on capitalized interest at a higher rate of interest is good for you because you'll have a bigger tax deduction right at the point that your income conveniently rises as you are confident it will.
Mortgage lenders know damn well that you can hook a whole lot of people into a crummy deal by making them think they're "controlling" their taxes, or that they're making the same "savvy" moves as their financial betters. Perhaps "tax meme" is a better phrase than "tax myth."
Tanta and others:
The tax thing is often very much an emotional, deep psychological force.
I have been very pleased that a number of financial writers especially on the net are increasingly stressing, "paying taxes is a good thing, it means you've made money" and "don;t let tax considerations drive your investments." It is an appeal to reason and numbers.
But people resent taxes, those on payrolls have never paid them directly so suddenly seeing them as part of transactions is shocking. An entire industry has sprung up playing the meme of save taxes. Real estae agents and bankers are dishonest with the savings on home loans, they'll do the first years interest, but not include standard deduction. Thus I've encountered people paying $1,200 or so a month saying it's actually 900 and somthing.
The math isn't done. And finally the right has aggressively pursued the concept that taxation is robbery and that it is immoral to pay and it must be minimized. "They" are taking "our" money.
observer: When the tax revenue goes to frivolous wars and related pork, it is robbery. Albeit in a different sense than the right-wingers' who are concerned about social spending.
Which is not to say I consider attempts at tax avoidance a prudent (primary) driver of financial decisions.
Readers have probably moved on as am late in commenting.
The deduction on selling out = only one part of the taxes equation.
For one, that's all money not put in R&D
and technological development ...
alternative energy technologies.
kThey're all dreaming...
They party is over.
People riding around in expensive foreign made care...and we're going to pick up the the real tab for their medical insurance costs while buying foreign made? Same for all their spoiled guppies partying and going to univs-- in programs we do not need as a country? No, No, No way!
Do all these house wealthy idiots (and who are scheming to pass on to their soft,spoiled offspring-- all while ruining the country due to their real estate machinations that they all schemed on to hemorrhage this country) really think we are going to pay for the Medicare? All the dummies pumped through these univs and their 20 yrs. behind tuitions and overpaid staffs esp. in CA...and looted retirements by all the govt. employees)?
No, no, no way!
AND: while they all partied and gorged on entertainments and foreign made goods... and schemes for massive tax reductions ...while they paid some other kid a couple grand a month and other insults (less than $110k while on any war front & $110k in oil stocks & $100k in motel stocks[which all the yuppies and guppies are using] and more in insurance benefits to those losing limb or life in foreign deserts to protect their soft, spoiled butts...
Sehr guten site. Alles arbeitet deutlich(klar), schon eben storungsfrei. Wer machte? Vielleicht vom Weg?
If they say "well yes". ask them what it is! LOL - coupon discount propecia and Besides this type of merriment (Watson carisoprodol) but yeah c'mon. tell one of the 8 writers to get up off their ass and write a review. or end the blog. . prevacid naprapac 375
If they say "well yes". ask them what it is! LOL - coupon discount propecia and Besides this type of merriment (Watson carisoprodol) but yeah c'mon. tell one of the 8 writers to get up off their ass and write a review. or end the blog. . prevacid naprapac 375
oh i agree - I invite you to join our lightworker group in flowing Pure Unconditional Love to the mass consciousness of humanity and to Gaia. the consciousness of planet Earth.