Short Housing
- Thread starter topguntrader
- Start date
I live in so cal (Corona) and was talking to a guy last night about the local real estate market. We were discussing how much longer the run up was going to last. I thought he would say 1-2 years at best but he made the prediction of eight more years. Prices, he told me, won't flatten out until Corona = Orange County. Cracked, I think you mentioned a house that runs $275,000 in Corona is over $450,000 where you live. Told me he has bought 6 homes in Corona in the past year and got his parents, his sister and his cousin each to buy another one. These are properties that they are paying $230,000 to $250,000 for which were selling for about $80,000 less a few years ago. They are all going to rent them out for $1,700 + per month which will give them a positive cash flow on top of the annual 15-20% price appreciation. I asked him how he was going to cover all these mortgage payments if people don't pay their rent or if the property values fall. He said for every house he rents out he has another 5 people waiting for it and that property values aren't going to fall because there is too much demand.
I'll admit its easy to get caught up in all this hype. But if this isn't the sign of a top I don't know what is.
I'll admit its easy to get caught up in all this hype. But if this isn't the sign of a top I don't know what is.
Matt - I admit ignorance on the S/L crisis, but a guy who knows a lot about it claims the tax shelter schemes of the early 80's played a major role.
As I understand it, at the time the depreciation rates were much higher on real property, and over a shorter time period. This was coupled with very high maximum tax rates and the difference in rates between ordinary income and capital gains.
The idea was to get financially ignorant people with lots of taxable income (doctors, actors, etc.) -- form partnerships and buy depreciable property and take the depreciation against ordinary income. At 10% they could buy a million dollar building and take 100k depreciation a year, reducing the doctor's AGI by that much.
Few years later sell it to the greater fool, and the difference between the depreciated building basis and the sale price was taxed at capital gains rates - so you not only defer the tax for the ownership time, but you convert the tax and make the spread between capital gain and ordinary income rates, which was much higher then. This also drives the prices up artificially, because a more expensive building just means more depreciation and more tax deferral - there was an incentive to pay more. And there's general speculation by the public adding to price appreciation, like today.
Then comes Congress with the TRA of 86 - changed the depreciation amounts and periods, hobby loss rule, and recapture provisions to kill these shelters -- all of a sudden the schemes don't work anymore. Add into that that a lot of the financing was no-recourse (lender can only look to the property) -- without the shelter demand market prices collapsed, and you have a bunch of properties worth a whole lot less than the outstanding mortgage.
If the mortgage is no-recourse, what does the owner do? - walk away from the property and let the lender figure it out....
(until congress shifts the burden to John Q. Taxpayer, who has to come in and bail out the industry!)
As I understand it, at the time the depreciation rates were much higher on real property, and over a shorter time period. This was coupled with very high maximum tax rates and the difference in rates between ordinary income and capital gains.
The idea was to get financially ignorant people with lots of taxable income (doctors, actors, etc.) -- form partnerships and buy depreciable property and take the depreciation against ordinary income. At 10% they could buy a million dollar building and take 100k depreciation a year, reducing the doctor's AGI by that much.
Few years later sell it to the greater fool, and the difference between the depreciated building basis and the sale price was taxed at capital gains rates - so you not only defer the tax for the ownership time, but you convert the tax and make the spread between capital gain and ordinary income rates, which was much higher then. This also drives the prices up artificially, because a more expensive building just means more depreciation and more tax deferral - there was an incentive to pay more. And there's general speculation by the public adding to price appreciation, like today.
Then comes Congress with the TRA of 86 - changed the depreciation amounts and periods, hobby loss rule, and recapture provisions to kill these shelters -- all of a sudden the schemes don't work anymore. Add into that that a lot of the financing was no-recourse (lender can only look to the property) -- without the shelter demand market prices collapsed, and you have a bunch of properties worth a whole lot less than the outstanding mortgage.
If the mortgage is no-recourse, what does the owner do? - walk away from the property and let the lender figure it out....
(until congress shifts the burden to John Q. Taxpayer, who has to come in and bail out the industry!)
Corona will never = Orange County, especially south county.
Maybe it will get to par with the Anaheim areas or sections of Placentia or Brea but it is too far away from the tech center in Irvine and other south county businesses. I'll pay a premium to NOT spend an hour or two on the freeways getting to and from work everyday (if I worked for anyone ever again...
) It's all about location.
It's 10-15 degrees cooler here, less smog, drive to work shorter, it all adds up. People pay for that convenience.
I don't see how 8 years could come to fruition. Stranger things have happened. The great thing is that those same people paying 1700-1900/month could buy the darn places if they wanted.
Did you get PM reply?
Later,
Cracked
Maybe it will get to par with the Anaheim areas or sections of Placentia or Brea but it is too far away from the tech center in Irvine and other south county businesses. I'll pay a premium to NOT spend an hour or two on the freeways getting to and from work everyday (if I worked for anyone ever again...
) It's all about location.It's 10-15 degrees cooler here, less smog, drive to work shorter, it all adds up. People pay for that convenience.
I don't see how 8 years could come to fruition. Stranger things have happened. The great thing is that those same people paying 1700-1900/month could buy the darn places if they wanted.
Did you get PM reply?
Later,
Cracked
Yes, everything you said is true. I guess in a since it's a chicken and egg problem. What you're referring to is the motive behind those who were taking out these loans, who are certainly 50% of the blame.
My point is about those who are giving out the loans (both then and now) are equally to blame. In the 80's no one would be refused money because of FDIC insurance. There wasn't proper oversight and a total lack of accountability on the part of the Savings and Loans (as well as the federal regulators).
The thing is that I don't see any difference between then and now. In both instances there was or will be a substantial drop in the value of the assets (supposing we are in a housing bubble). In the 80's S&L's would give out money for just about any commercial property venture (because it was bound to make money). As evidenced by Chas, the banks are willing to make 100% loans on residential property (that to me is a total lack of accountability).
Once the bust occurs, people will just walk away from the houses in the same way that people walked away from commercial property in the 80's. Sure your credit gets trashed for a few years, but time makes everyone forget (hell, the government's going to pay for it anyway).
My point is about those who are giving out the loans (both then and now) are equally to blame. In the 80's no one would be refused money because of FDIC insurance. There wasn't proper oversight and a total lack of accountability on the part of the Savings and Loans (as well as the federal regulators).
The thing is that I don't see any difference between then and now. In both instances there was or will be a substantial drop in the value of the assets (supposing we are in a housing bubble). In the 80's S&L's would give out money for just about any commercial property venture (because it was bound to make money). As evidenced by Chas, the banks are willing to make 100% loans on residential property (that to me is a total lack of accountability).
Once the bust occurs, people will just walk away from the houses in the same way that people walked away from commercial property in the 80's. Sure your credit gets trashed for a few years, but time makes everyone forget (hell, the government's going to pay for it anyway).
I sent you another PM. When you have a chance please look it over.
I agree with you. The Corona area will never be Orange County due to the reasons you listed. I guess the guy I talked to assumed that if average prices in Corona get to >$400,000 then average prices in Orange County will be >$700,000 then to find an afforadable house one would have to move to Indio!
Reminds me of when I used to work at Rockwell in 1989, right at the top of the last housing runup. I remember my boss showing me an article from the Orange County Register predicting that by 2005 the average home in Orange County was going to be $1,000,000 so I had better buy a house ever I was ever going to be able to afford one.
Seem like the same kind of thinking is going on now?
I agree with you. The Corona area will never be Orange County due to the reasons you listed. I guess the guy I talked to assumed that if average prices in Corona get to >$400,000 then average prices in Orange County will be >$700,000 then to find an afforadable house one would have to move to Indio!
Reminds me of when I used to work at Rockwell in 1989, right at the top of the last housing runup. I remember my boss showing me an article from the Orange County Register predicting that by 2005 the average home in Orange County was going to be $1,000,000 so I had better buy a house ever I was ever going to be able to afford one.
Seem like the same kind of thinking is going on now?
Sent you a another reply.
I could see housing getting to 400K in corona, especially the larger places, lots.
2005-6 might be the bottom of the next cycle, IMO. Of course that all predicated on whether the entire world doesn't explode between now and then....... all this hostility.....
Check out the PM and let me know.....
Later,
Cracked
I could see housing getting to 400K in corona, especially the larger places, lots.
2005-6 might be the bottom of the next cycle, IMO. Of course that all predicated on whether the entire world doesn't explode between now and then.......
all this hostility.....Check out the PM and let me know.....
Later,
Cracked
cracked, I understand what you are saying here. But I think that there can be real value or lack of it as well. Not just subjective like your examples.
For instance....two homes can be across the street from one another. One is in one school district, and one in another. Suppose one is in a very good school district, with high taxes. Obviously if the schools are not an issue (no children), the other house is a better value if they are priced comparably. But if the house in the poorer quality school district would require sending children to private school (not an urealistic concept), than almost any difference in price between the two houses becomes insignificant. As do the taxes. I mean you could conceivable have 4 kids and have to send them each to private school for 12 or 13 years each. This could easily cost a million dollars. So it becomes a matter of great value, or no value depending on each individual. This is not perceived value, but real measurable intrinsic value. I am sure there are other ways real value can be different for different people, but this just seemed an easy example.
PS: the name of this thread is "short housing"...has anyone come up with a real way to do it? Or to hedge against a downturn as a homeowner?
Thanks,
RS (the real estate dummy....glad I CAN trade securities)