As we wrote in February:
Purchased for $2,000,000 in June of 2004, 2203 Broderick in the heart of Pacific Heights returned to the market with a remodeled bath in October of 2008 asking $2,395,000. Reduced to $2,195,000 in November, and now asking $1,975,000 as of nine days ago.
A sale at asking would represent zero appreciation over the past four and one-half years. But do avoid the temptation to see that as “prices in Pacific Heights have been holding steady since 2004” versus having risen and are now falling since.
Temptation avoided as the single-family 2203 Broderick (with expansion potential) closed escrow on 5/12/2009 with a reported contract price of $1,750,000. That’s 12.5% under its sale price in 2004 (which was well below “peak” and didn’t include the remodeled bath).
∙ Apples To Apples (If You Ignore The New Bath): 2203 Broderick [SocketSite]
Let’s work the post mortem on the numbers.
Assuming 7% total transactions costs (about 1% on the way in, and a low 6% aggregate of commission, possible credits, selling costs and transfer taxes on the way out), it’s an apporox $375K capital loss. Add $15K for the remodelled bathroom, and we’re up to $390K.
Make the further very reasonable assumption that the effective after tax monthly average of mortgage, property tax ($2K per month alone), insurance and maintenance was at least $2K more per month than renting an even nicer place (it would certainly have ben even more, but let’s be charitable). That’s an additional $120K of value siphoned into the ether over the 5 year holding period.
All told, at least a $600K negative change in net worth from what it otherwise would have been (assuming the money saved was just put in cash – in reality, financial returns from a balanced portfolio would not have been bad since 2004 and likely would have been fairly positive). Even for me, that $600K is a pretty material amount.
For instance, you could buy 2 Nissan GT-Rs (his and hers), 2 large SUVs (his and hers), 5 kilo bars of gold (at today’s prices), a fully funded college 529 for 1 kid sufficient to pay present tuition at Harvard for 4 years (2004 nominal tuition), 5 custom bicycles, and a brand new top of the line Collings MF-V Deluxe mandolin. And probably rented a nicer place (certainly a larger one).
BTW, prop shark shows a downpayment of $500K put down in the first loss position and it did what it was supposed to do: it was lost first.
LOL, lmrim.
So turns out even eddy was a little too bullish! Let’s hear that mea culpa.
1) This is not the “real sf”
2) Pride of ownership
3) At least they didn’t throw their money away on rent
Spencer wrote:
> At least they didn’t throw their money
> away on rent…
Ever since I sold my home in 2003 and started renting my parents have been giving me a hard time for “throwing my money away on rent”…
They have cut back on giving me a hard time over the past year, but will probably never come out and tell me “renting was a good idea”…
And maybe the owners have a net worth north of $5 mil. They lost $600k and can live with that. Their neighbor, say also worth $5 mil, was smart and rented a similiar pad- a trader. But apparently not an über-trader, who lost $600k with bad trades. End result? Same-same.
And will either family argue about downgrading their lifestyle, say skip staying in big sur’s post ranch for a days inn in monterey? Or fund johny’s post college flashpacker trip to Thailand? Same-same.
I am wondering if some high end property prices are affected by the perception that Proposition 1A will go down and there is a fair chance that to get out of its budget mess California will instead significantly raise taxes on high income earners. It might not affect the fanciest properties, but it might affect properties like this one.
Proposition 1A will go down and there is a fair chance that to get out of its budget mess California will instead significantly raise taxes on high income earners
Perhaps there is some of that. But frankly, I’d be more worried about a change in property tax regime at some point in the future, which could really affect pricing across the board.
Income is fairly mobile, and it is easy to kill the golden goose, so there has to be some sensitivity to too high CA income taxes (especially as the Obamites are going to smash high income earners with Fed taxes). Financial asset wealth taxes (like Florida’s old “intangibles” tax) are risky too because, again, people are mobile. (Florida repealed its intangibles tax a few years ago.)
Property is immovable, by definition. Sure, there is always going to be some sensitivity by the bigwigs to what is often a huge store of wealth for them, too, but when push comes to shove I bet they come after prop 13 and at least weaken it.
45yoh-
Your point is fair that $600K is probably a small % loss to the net worth of the sellers of this property on a relative basis. And it won’t make much of a dent in their lifestyles. At the least, $500K in the first loss position is a psychologic blow to their future risk appetite.
Lmrin might even argue that this market loss will permit the smarter allocation of capital and is what economic downturns are supposed to effect.
To Lmrin analytic point, it still remains a considerable destruction of capital relative the average wealth even in the SF area.
“And maybe the owners have a net worth north of $5 mil. ”
Start trying to sell in October of 2008 asking $2,395,000. Reduced to $2,195,000 in November, again reduced to $1,975,000 in February.
Decide to give away to a deserving, less fortunate family 5/12/2009 with a reported contract price of $1,750,000.
🙂
I wish there was a way to bet on that LMRiM since I’d love to take some of your money. Prop 13 was passed by the voters so the only people that can change it are the voters. The voters are not going to repeal Prop 13 and that is how any changes would be spun by the Howard Jarvis group or commercial propertty owners, change = repeal. So you can keep pointing out how unfair Prop 13 is and how it needs to be changed but it ain’t ever gonna happen.
God bless people who put their own money in a first loss position.
They are patriots and heros and the taxpayers appreciate their selfless sacrifice.
LMRiM…
I agree that changing the property tax structure will impact pricing across the board. I am from the NYC/Tri-state area where salaries are high and, if anything, Wall Street people are the big earners. Housing, overall is lower there because of property tax.
I know plenty of people who are paying 7% property tax on a $500k home. Those numbers really make a $500k Bay Area home look cheap.
In the end, they have good public schools, libraries and more for that money…
If we assume appreciation from 6/04 sale date to mid-2007 peak at just half the median increase during that period, you get a “peak value” of about $2.3 million. Sale price reflects a 24% decline from that pretty conservative “peak” estimate. This is just one marker, but it is pretty consistent with the broader measures.
On the point about tax increases for high earners, I don’t see it. There simply are not enough “high earners” in California to make a dent in the budget mess unless you raise the rate far, far beyond what could ever find political support. Broad increases in sales taxes and various fees are far more likely imho. And the propositions going down in flames is a strong signal that any tax increase will be difficult in this nasty economic environment.
Actually…property tax where I come from tends to be in the 4-7.5% range. Areas that have lower tax normally have more expensive homes and visa versa. My friend is a realtor there and she told me that mortgage approvals always take property tax into consideration. You are given a monetary range the bank is willing to loan you based on different local property tax structures. A person with good credit in one area may qualify for a $300k home but in the town next door, he may qualify for a$500k home….
^ 7% in property taxes!?!? RU freakin’ kidding me? How is that possible? (i thought Texas prop taxes sucked ass at 3%) 7% is like a mortgage.
I wish there was a way to bet on that LMRiM since I’d love to take some of your money. Prop 13 was passed by the voters so the only people that can change it are the voters. The voters are not going to repeal Prop 13 and that is how any changes would be spun by the Howard Jarvis group or commercial propertty owners, change = repeal. So you can keep pointing out how unfair Prop 13 is and how it needs to be changed but it ain’t ever gonna happen.
Unless the citizens vote for a Constitutional Convention to rewrite the whole thing. I see the likelihood of this actually happening increasing significantly after the props get destroyed today.
Article from the Economist on this possibility:
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=13649050
7% in property taxes!?!? RU freakin’ kidding me? How is that possible? (i thought Texas prop taxes sucked ass at 3%)
The money has to come from somewhere. My folks live in TX and always talk about how cheap the taxes are, because there’s no income tax. Well, they don’t realize they’re paying for it with property tax…
Biggest real estate downturn in my lifetime and all I get is a crummy 24% discount on a flawed house.
LMRiM wrote:
> I bet they come after prop 13 and at
> least weaken it.
It will be interesting to see how long prop. 13 stays in place for commercial property. I am surprised it has lasted this long and I think it will take another vote of the people to change it (since our elected officials are bought and paid for by big corporations that own a lot of real estate with low prop. 13 taxes).
I am not a fan of Prop 13 but, I do not see how it can be overturned without hurting the millions of Californians who have purchased homes in the recent past. Prop 13 sold out its future generation. And, that furture generation is in the present.
In the northeast, when people hit retirement, often their home becomes too expensive to keep. They downsize, often moving into retirement communities–it is not painful, it is just a way of life there. This frees up real estate. It is a known fact that one of the reasons that real estate is tight here is that there is no reason for retirees to downsize. They are paying nominal property tax for the times.
To change property tax structure to make it look like the northeast would mean:
1. Mass droves of retirees would need to sell their homes, bringing down prices.
2. More recent buyers would be hit with taxes that are way too high–making home ownership more unaffordable
3. Home buyers would qualify for smaller loans, thus bringing home prices down…
No matter what, higher property taxes will destroy home valuations…
California sold its future out when they passed Prop 13. How to fix it? I don’t know if there is an answer…
$1.75 seems like an OK deal here given the current state of the market. I much rather prefer the home on Sac that just sold for ~$2M; and the Vallejo SFH was cheaper, bigger but in a slightly less desirable location. Maybe the “floor” is dropping. This is dangerously close to being a bet-winner for SFH sale below $1.5m side bet on SS. Ironically, the SFH I referred to in the prior thread fell out of contract, but has recently gone back into contract. That home was listed at $1.9m and was pretty bad. In terms of a comp, I’d rather have this Broderick place so i’m curious to see what it closes for, or if it closes. 2586 Clay is the property for anyone interested.
Prop 13 wouldn’t just be “repealed” – that’s not the way it goes. About the “people” voting for it so it couldn’t be changed, well, the people are really sheeple and they will do what they are steered into doing by the powers that be.
Imagine the landscape 2 or 3 years from now, after all sorts of demagoguing about how the “schools are suffering” and “public safety” is suffering (in reality, what will be suffering are the public employee unions, if by suffering you mean they are not getting their guaranteed 3% annual pay raises, and guaranteed gold-plated pensions), the economy still mired in an in-and-out recession like Japan.
Perhaps in the overall context of a constitutional convention (as Brutus suggests) or as a separate ballot proposition that is supported heavily by the unions, it’s proposed that: 1) no prop 13 protections on second homes, or on commercial properties (including rentals), and 2) once the value of the house reaches 200% of CA’s median house price, then the protection is gradually phased out somehow (many possible ways this could be accomplished). Something like that might sound pretty good to a population that has been “softened up” by the gooberment apologists who always claim they need more revenue for services “the people want”. Think of how well the Obamites’ arguments that 95% of the people are going to see a tax decrease or no change played (one of the largest lies ever told in a campaign)? That’s all you’d really need imo.
BTW, pumpkin patch – I’m from NYC as well, and you’re right about property taxes there. 7%, though, is very high except in suburbs that are not nice with low house values (many towns in Suffolk, LI, for instance, bad NJ suburbs – NJ has a higher structure anyway, some parts of southern Westchester like South Yonkers, etc.) However, in the nicest NY suburbs like Rye, Mamaroneck, Scarsdale, etc., prop taxes are often in the 3% range, which is enough to ensure that the house that costs $900K there (like my brother’s in Mamaroneck – prop tax of $16K) is roughly equivalent in relative neighborhood and quality to a $1.5-2.0M place in Burlingame or Mill Valley.
On the point about tax increases for high earners, I don’t see it. There simply are not enough “high earners” in California to make a dent in the budget mess unless you raise the rate far, far beyond what could ever find political support.
You are right that because of the relatively small number of “high earners”, their rate would have to go drastically up to make a difference. But most voters would escape the tax hike and therefore would be indifferent to it.
Pumpkin Patch,
Texas is one of a very few states, where jobs are being added and there is a budget surplus!!! People do not want to be taxed for their hard work. Income taxes make no sense. With property taxes, you are paying for services where you live or own property, which makes way more sense. It would be better for the government to stick their residents with an itemized tax bill. That way you would know how your money is being wasted. I think that I am going to grad school for a degree in public policy, b/c the idiots running our great city and state are driving me nuts.
Hey, what is the best way to get into politics, besides having tons of money and/or political family? What about for the average hard-working joe? Haha, probably no way for me.
Pumpkin, coercing the elderly to get out of their houses might not lead to utopia.
Pumpkin Patch, that is a pretty pessimistic perspective on Prop13. Couldn’t a phased out program over, say 20 to 30 years do the trick, with increased incentives and programs to allow people to keep their low prop tax. I could think of multiple ways to resolve this issue, but it’s not a quick fix.
If you addeed a “tax cut for 95%” of Californians, the last presidential election indicates the tax restructuring would be very popular.
Mwah, hah hah! More than 12 percent UNDER it’s 2004 price!?! That $100 is as good as won! Conifer, you may as well just send the check to the charity I posted, so you can get the tax deduction this year!
As for the $600K not meaning anything to a high net worth individual, I can assure you it’s meaningful, but at some point you realize that if you don’t take a $600K loss this year, in a market decline as rapid as this one is, next year it will be $1M, so smart people get out while they can, even if it means taking a loss.
There are many ways CA could tweak prop 13 (and it’s cohorts) — there’s “no way :)” it will be repealled.
Slightly offtopic, but I bet “tax free” Roth IRA’s will be similarly modified in the (distant) future too, depending on how much money is on the table.
Talk about a black swan not modeled in all those comparison charts used to make that decision!
To tipster’s point, let me tell you that a $600K net worth hit is painful even to someone with a net worth over $5M, especially if that hit consists largely of money (like this downpayment) that actually existed at some point in all its after tax glory in your own two hands.
The fact that these sellers “walked the market down” over 6 months with baby price reductions before coming to grips with the loss tells me it wasn’t trivial. Long years of experience trading have taught me that once you’ve made the decision to get out of a position, you hit the bid immediately and don’t look back. When it’s not a lot of money to you, I’d think that’s instinctual.
Eddy…please explain to me how it is possible to phase out Prop 13, even over a 20-30 year time frame without hurting recent homebuyers?
You cannot phase out this prop without hurting people. I just don’t see it happening.
The big winners are the people who bought prior to the Prop passing.
LMIM: YES! Property tax is, for the most part, regressive. The less lovely communities tend to have have higher taxes and the most wealthiest communities tend to have the lowest taxes. (You guess right, NJ). BUT and this is the big BUT: Middle-class homes tend to be caught in the middle. My friend, the NJ realtor, used the $300k and $500k example for a reason. You can pay $21k in property taxes in a very nice, understated community (with good schools, services–think San Anselmo) on a $300k home OR you can pay $20k on a $500k home in a very chic community (think Tiberon). And, yes, the towns can be that close to each other.
BTW, you can look up the name of former owner of this house on propertyshark.com. Punch that name into google and click the first link, to Wikipedia (that’s how famous she is). The first few lines in the Wikipedia article probably explains why she sold.
High net worth? Yes. Did she *need* to sell? No. Welcome to 2003 everybody!
2004 went by so fast, didn’t it?
nyet. tipster. if these people held on to this, they would only have a paper loss. unlike your prognosis, IMO they will make the equity loss back in a few years (remember, no transaction costs for holding.)
so if their other other ‘neighbor’, also worth $5 mil, doesn’t rent, owns equivalent type home, holds on, within 5 years all will be fine.
and for the record,i never said the loss was not significant; only (1) that there are many ways to loose that kinda money with other assets as well (which $5 mil households inevitably have) and (2) that it still will not effect their lifestyle.
anybody else going to vote today? 1A-1E: nyet. 1F: yes!
This is more or less in line with the data from Case-Shiller. But that, in itself is a surprise, as this really is a solid “real SF” neighborhood.
Will take it at face-value that this is a legitimate apple and that there was no funny business going on. That being the case, this is a bad news comp for SF home owners.
Still, why is this one the odd ball out?
anybody else going to vote today? 1A-1E: nyet. 1F: yes!
So what is the plan? A California budget that grows ever larger and no new taxes?
You guys have it backwards. A repeal of Prop 13 would help recent home buyers because it would instantly drop home prices across the board, lowering recent buyers’ assessments. Meanwhile the old farts across the street will have their assessments increase by a factor of ten.
Repealing Prop 13 helps recent buyers and clobbers past buyers.
I’m sure you’re right, pumpkin patch. NJ is a total mess in terms of property taxes (I’ve got a good friend who bought a place in Princeton 8 years ago and he’s always complaining about prop taxes) – my experience is mostly limited to the suburbs to the north (Westchester) and east (Nassau and Suffolk).
There, property taxes on assessed values are usually in the 2-4% range (lower in the “nicer” nabes, higher in the lower house price nabes). Interestingly, there are all sorts of goo goo attempts to “help” the elderly there too (sort of “baby” prop 13), and many have figured out how to scam it. Many suburban residents are part of the NYC disapora from the 70s and 80s, and many are kids of parents who held onto their rent controlled apartments. In many of the towns, taxes are 30-50% less if an “elderly” person is the taxpayer (qualifications and availability vary by town). So, what people do is record life estates for their elderly parents on the deeds (lender consent is not required because it is not a true sale), present the deeds to the authorities, and get their discounts. Sometimes the elderly parents do actually live there, subletting their rent controlled apartments (in the Bronx, say) at market rates, and sometimes not. That’s the deal with gooberment distortions: smart people always find a way to exploit the systems. You’re not going to change that ever.
I used to think Californians were naive – watching them stop on their bikes for red lights looked pretty strange to someone from NYC. But after moving up here, we’ve met a new crowd who have shown us an entirely different side of California and I’m happy to report that the underground economy appears to be large and doing well! Same games and scams I saw growing up – perhaps not so sophisticated as NYC Metro, but it does give me hope for the Bay Area 😉
(Sorta)NewBuyer- I don’t know how you can call this an odd ball out. There aren’t very many homes selling in the $2m+ moving right now. This might just be the first of many more to come…
Given tipster’s info (looked it up)…this person had no reason to be in San Francisco, anymore. She was getting out. I am sure she is not the only one trying to sell a $2m+ home for this reason…and, for her, it probably is just a paper loss of money…she could have lost it on Wall St instead…
“brand new top of the line Collings MF-V Deluxe mandolin”
As a mandolin player you killed me with this line. My goodness.
please explain to me how it is possible to phase out Prop 13, even over a 20-30 year time frame without hurting recent homebuyers?
Maybe I’m naive but a phased-in approach that started assessing marginal increases on existing properties with a plan to true-up taxes to a norm over a 30 year period should be gentle enough to not immediately kill recent buyers, and as homes begin to resale/trade over a 30 year period you would expect there to be some sort of smoothing effect? If you staggered the plan to have no impact for at least 5 years then you would expect there to be some prospective market adjustment getting priced into properties. It’s sort of like the 100 year property leases in London — no one expect to own a home for 100 years and so the discount gets priced into “lease” term of the home; which is really a purchase. OK, so maybe that isn’t the exact scenario here, but markets tend to be efficient.
Perhaps a more similar issue might be the change in cap gains laws in 1997 that enabled home owners to simply pocket the capital gains ($250k single, 500k couple) on real estate. FWIW, I feel that 5/7/1997 will go down in history as the beginning of the bubble as this made real estate a speculative investment. Prior to this, you had to plow those gains back in to real estate to avoid cap gain taxes. Anyway, this change in law was awesome for anyone that “currently owned real estate” at that time since you technically got an immediate pop in equity value. If this law was to be changed / repealed entirely (FYI- there are already modifications to this law enacted this year and I expect that this ‘benefit’ will be eroded over the next few years as well) and phased in over a 5 year period you would see some people sell immediately to lock in the cap gain; and some people might escalate their sales sooner as well. The market (aka: owners/sellers/buyers) would adjust accordingly.
missionite – re: mandolins
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=300315197196
If that goes anywhere under $7K that’s an absolute steal.
Sorry for the OT, everyone.
Jeffrey: You are likely correct that a repeal of Prop 13 would help recent buyers insofar as their taxes may be reduced on a reassessment. But that argument ignores the fact that those recent buyers will also be *harmed* by that very drop in their property values. For instance, they may become well underwater on their mortgages.
That said, I support a FULL REPEAL of Prop 13. I don’t think we are anywhere close to having such a thing happen. I think more likely is that it will be modified not to include commercial property. With regard to residential real estate, the “granny will lose her home” argument, while flawed and ridiculous, is too convincing for voters, unfortunately.
NJ-The “Granny will lose her home” argument is not flawed. It is just the saddest piece of the Prop 13 madness. Do you know how many times I have checked comps to find out that the owners or just sold owners were paying under $2k for property taxes on a home valued or sold for well over $2m (and, sometimes well over $3m)?
If property taxes were not frozen, granny would have possibly sold her home long ago. And, if she and others in her generation sold when they needed to, there would have been more homes on the market–helping prices stay a little lower for the next generation.
And, if property taxes weren’t so darn low (thanks to prop 13) it would limited the buying power of the next home owner–once again, keeping prices lower.
Freezing property taxes for the lucky Californians who owned prior to Prop 13 AND keeping the rate low for any new homebuyer, put a ton of money into all the homeowner’s pockets–much of that money that would not be in their pockets today without the Prop 13 passage.
Repealing Prop 13 hurts people–it will immediately devalue homes in this state.
And, I am a renter staying on the sidelines. It would be to my benefit to repeal Prop 13.
Freezing property taxes for the lucky Californians who owned prior to Prop 13 AND keeping the rate low for any new homebuyer, put a ton of money into all the homeowner’s pockets
Not all of their pockets. The poor suckers who bought in the 2000s in CA are going to be “round tripped”. Gains they thought they had are going to disappear, and for those who bought after about 2004, well….
I don’t think current buyers are getting any sort of a deal as a result of prop 13. $15K/year taxes on a $1.2M CA house that would cost $600K (w/$15K taxes) in a comparable suburb in NYC for instance is really no benefit imo. Sure, the 2% maximum increase per year “insurance value” of prop 13 would have some value if values were not going to do down not up over the next 5 years or so. Maybe over a 20 year horizon there’s some net present benefit to the original purchaser buying today, but maybe not even then….
Prop 13 isn’t going to be repealed. Not politically possible.
My idea would be to keep it as is, BUT there should be TWO tax bills, the one you’d get if you bought the home today and the one you are getting under prop 13. Every year, accrue the difference.
When the house is sold, the accrued difference is owed, but only to the difference in the value of the house from when it was purchased and the taxes were last topped up. That is to say that if you lose money on the house, you don’t owe the taxes.
This, way, the argument that grandma is going to lose here house is nullified, but the state still gets the taxes. And people who have huge windfalls will pay the most.
Of course, you could also eliminate the capital gains exclusions, but the real estate industry would never go for that. The elimination of capital gains adds value to the house, which goes into the realtor’s pockets.
LMRIM- Agreed. I didn’t mean to say today’s new homebuyer. That was me being too quick with the keys. I meant to say homebuyers soon after the Prop 13 passage…
My thought is that anyone who bought in recent years is screwed. Repealing this horrid proposition would just exacerbates the pain…
tipster: you could accrue property taxes in exactly that way before we had Prop 13. The “little old lady” argument in favor of 13 was always total bullshit.
Why not just eliminate property taxes altogether and replace them with a HUGE transfer tax? It would be 1.3% of the market value of the house for each year that you own it, which would accrue, year after year, and then perhaps the state could charge you interest on the “loan” (maybe 8% interest/yr?).
Can’t see any problem with that appoach …
Do you know how many times I have checked comps to find out that the owners or just sold owners were paying under $2k for property taxes on a home valued or sold for well over $2m (and, sometimes well over $3m)?
Propertyshark has a really useful plot/heatmap of Property Taxes for San Francisco. It shows clearly who is paying a lot (recent home buyers) and who is paying pennies (Pre-Prop13). Very useful!
Eddy…
That map, as someone who wants to own a home, is SICKENING!!!!!!! This is UNFAIR!!!!!!!
Eddy…
Just to add to the immediate last post (1:15), you can see what neighborhoods were recently gentrified or were just so hot that old owners sold out…
lmrim
Please elaborate on the underground economy. More sophisticated than NT? How? The box containing the tv somehow gets switched with one containing rocks??
At least with respect to this home, the new owner will be paying LESS in property tax than the old one!
And if the recent owners get into trouble with their mortgages at a faster pace than the people who bought long ago, city property tax revenues could actually start declining!
Another issue with Prop 13 that needs to be adjusted is the fact that parents can pass property to their kids without a re-assessment. I can understand old folks being protected, but not so sure that benefit should pass down thru the generations.
A couple of numbers for the archives. Current Pac Heights foreclosures (NODs, NOTS, bank owned) stand at 15. Total homes for sale are 94. There is a NOD for $1.9million just down the street from this home.
That map, as someone who wants to own a home, is SICKENING!!!!!!! This is UNFAIR!!!!!!!
I know. Makes you really hate Prop 13.
EBG, what is the address for the $1.9 NOD?
“city property tax revenues could actually start declining”
This is happening in a number of towns in California. It could happen in SF, but even during this dramatic price decline the state still gets to continue raising the taxes on the old-timers by 2% a year, limiting the impact of tax losses on lower “apple” resales.
2% on $1500 is complete nonsense as this person’s neighbor is coughing up $25,000 a year for a same value home…
This is amiss…I don’t want to kick granny out of her home…but, something needs to be done.
And, my family isn’t here to get the benefits of this stickin’ tax code. Do you realize the wealth it brought to my parent’s generation in this state–my gosh. They didn’t work for the wealth. They spent one second in the voting booth to create this wealth–they took money from their children’s generation’s pockets.
PP — just wait 30 years until the older generation finally dies. Then you can rally the troops to vote Prop. 13 into the dustbin of history. You’ve got my vote already!!
pumpkin patch: “This is amiss…I don’t want to kick granny out of her home…but, something needs to be done.”
Unlike you, I *do* want to kick granny out of her home. If she can’t afford the taxes (that is, as they should be, without the benefit of Prop 13), then she should not be living there. And if the high property taxes are really pushing her out, then her house has presumably appreciated to the point where, if she does sell, she will turn a handsome profit. She can then move to a cheaper house (perhaps buying in cash) or simply rent for the rest of her life. I fail to see why this would be such a catastrophe.
As for every other scenario in which there is no owner-occupied granny living in the house, those are far more egregious examples of why Prop 13 is completely unfair and wrong.
Jimmy: “PP — just wait 30 years until the older generation finally dies. Then you can rally the troops to vote Prop. 13 into the dustbin of history. You’ve got my vote already!!”
I disagree with you. As long as Prop 13 stands (at least in our lifetimes), there will likely be a large group of voters who are reaping its benefits. It may be no easier then to repeal the law as it is today.
EBG, what is the address for the $1.9 NOD?
Its not like I have a RealtyTrac subscription. Gotta do things the hard way… triangulating… Zillow… square footage match… PropertyShark… owner name… NOD verification on SF Recorders site… We have a winner: 2113 Broderick. Looks like the property has an annual “running of the liens”. Avoided foreclosure in 2006.
repeal prop 13 for commercial property so that landlords pay the taxes on the market price of the property and pass the increases on to the renters. This way you modify/tweek both prop 13 and rent control, and help fix the budget problem while making everyone share the pain since cutting the budget does not seem to be an option in California.
When the older generation dies they will pass the benefits of prop. 13 down to their inheriting children. If anything, this will cement support for it rather than erode it.
In my experience, it’s exasperatingly difficult to have a rational discussion about prop. 13. Conversation quickly morphs into a “but look at the situation before prop. 13” rut, thereby ignoring the fact that there may be other solutions to the problem prop 13 was trying to solve, that it has produced enormous inequities, or that reform of its more egregious consequences is possible without gutting it.
Bottom line, I’m not exactly holding my breath that it will change any time soon.
I disagree with you. As long as Prop 13 stands (at least in our lifetimes), there will likely be a large group of voters who are reaping its benefits. It may be no easier then to repeal the law as it is today.
That’s why I say look for the “income test” or “median price” test at some point in the future (it could take a year, could be 5 years, a lot depends on how this unfolds). I think prop 13 reform could pass if it’s proposed that it be repealed only for 1) non owner-occupied; 2) only for those earning over $300K per year; or 3) only for properties that are over 200% of the median (or some other statistical measure that basically kicks out only the over 1 or 2 standard deviation above group – depending on how greedy the politicos are); or some combination like that that exists in the future dreams of greedy politicians. I don’t think they are going to be able to squeeze much more income tax out of people unless they get less progressive (which of course they will through fees and use/excise taxes, but it won’t be enough).
Once you create a distortion like prop 13 that pits one cohort against another (legacy owners versus new entrants), it’s only a small intellectual step towards pitting different wealth/income levels against each other. It’s also good politics when you have a population in the process of surrendering to its ruling class (basically throwing in the towel and saying that nongovernmental institutions can’t solve their societal issues).
The unions are going to get desperate for cash. These pensions are going to sink the state, because there is no way financial assets are going to return anything near what is required, especially when you have Calpers clowns running the show, secure in the knowledge that by law the taxpayer must make up the losses. Something’s gotta give, and I bet the property tax regime ultimately gets rearranged.
I think a slow erosion is the way to go. Start with commercial properties, move on down to apartments and non-owner-occupied houses, etc. until all that’s left are, literally, grannies (over 65) and disabled folks whose propety taxes are fixed until they pass on. Also, no more inheriting the prop. 13 valuation — that’s just bizarre.
But does anyone think that income taxes will decrease even 1/100th of a percent as a result of the presumed property tax windfall that a prop. 13 repeal would generate?
repeal prop 13 for commercial property so that landlords pay the taxes on the market price of the property and pass the increases on to the renters.
Rent control – which is the same thing as saying an artificial price control that prevents the market from clearing – only exists in a few limited areas of California. In general, rents are at market. If landlords could raise the rents, they would, and pocket the differnce.
I think that repealing prop 13 would just smash the landlords everywhere there isn’t rent control, and cause them to dump their assets, lowering prices to where the cost of the property + the new fully costed tax base makes economic sense in view of the market rents. Over time, perhaps rents would rise a bit as landlording becomes a less attractive proposition for a portion of the landlord universe that has enjoyed an implicit prop 13 subsidy up to now.
Thanks for the tip on 2113. Interesting back story on the prior owner who seems to have passed. I can’t tell from PS where the $1.9m loan came from on this NOD?
In other news… A Washington St home in Prime PH just sold for ~481psf
I don’t think they are going to be able to squeeze much more income tax out of people unless they get less progressive
The California state overall tax burden is already pretty regressive, since we get so much of our taxes from sales tax. It is hard to imagine it will get even more regressive.
http://www.cbp.org/pdfs/2008/0804_pp_taxes.pdf
Why are you aspiring home buyers complaining about prop 13? Once you get on the home ownership bandwagon, won’t you want to keep this benefit?
And regarding prop 13 and SF specifically- get rid of rent control and then we can talk about prop 13. For my personal situation, I llluuuvvv prop 13. I’m paying about $3000/year/property for units worth $500-700k each. Primarily because I brought the as unimproved POS’s and once improved their value shot up substancially. Assessors office is made up of a bunch of retards and still haven’t reassessed anything (they go by DBI permits, which I always minimize the scope of work and cost). So be nice to the old ladies with the 30 year homes!
Lmrim- re: your comments on Cali/gov/distortions. I’m glad you’re beginning to see the light. Perhaps you voted today too. Only about 40 people bothered to do so at my polling station. I’m sure all those measures will fail, except the last one (might ad well punish the legislatures while we’re at it!).
So trust me, with a f*cked budget exasperated by the pending economic crunch, the disparity between rich and poor in Cali will certainly grow over the next 3-5 years. And you betcha the forces that be will create some über-kooky, social engineering solutions! I really think CA is going to slowly start resembling SF and Santa Monica in regards to socio-economic policy. But don’t worry, the work arounds and loopholes are going to create tremendous opportunities. Think manhattan. How many NYers have profited from decades of social engineering policy there?
Hey, you guys are in agreement with the SF Bay Guardian.
http://www.sfbg.com/entry.php?entry_id=8542&volume_id=398&issue_id=431&volume_num=43&issue_num=33
Pretty funny.
I think you meant exacerbated, not exasperated.
But we get the idea.
NVJ- yup the bay guardian is so extreme in it’s left wing bias that the policies it advocates often provide for tons of profiteering opportunities (I.e. rent control).
Spelling police: same difference (in this case!). But yeah, my iPod autocorrects and sometimes I miss ’em.
It is a nice looking property. The pricing beeing back to 2004 or earlier seems the be the trend in our market also. It think we are at early 2004 in Bergen County New Jersey. I know houses that I built and sold in 2004 are worth just a little more than I sold them for. I think if we can get by with these prices holding, it could of been worse. Many areas are in much worse shape. Las Vegas, I have been told is back to 90’s prices in many segments.
this home is a perfect case for “they over paid” argument.
in 2004 8 other homes sold within a 1/2 mile radius of this home +/- $500k of it’s ’04 sales price during a +/- 3 month period.
Not surprisingly average and median come in right around $2 million. However, average SqFt size is 3,000 or 1/3 larger than this home. Most of the lots were also larger than this one’s 2,000 SqFt lot. And it was originally a 2bed 1bath on one level. They built 2 dark garage/yard level bedrooms and a bath to get to 3/2 and 2000 SqFt. A legit 2000 SqFt 3bed 2bath is much more valuable.
my guess is the Listing agent priced it a touch below what she thought it would sell for… the market was hot and my search showed an average 8% over asking. So a $1.8 sale would have made sense then.
I next ran a +/- $500k search to it’s list price of $1.685 and found 8 sales. Avg price per SqFt of $773, avg SqFt of 2185, avg sales price $1.625 median of $1.686
The bottom line, this Buyer probably out bid the competition by $200,000.
Yes, yes, I know… this was a comp for other future buyers and is a legit comp back then. But to say the market has dropped 24% because of this one home is fools gold.
as for $600k capital loss…. so when you sell all those expensive cars of yours LMRiM are you going to post your capital lost for having owned them? I think you need to take out the difference in ownership cost vs. rent cost if you’re being fair. I otherwise agree with the 7% transactional costs and $250k in cash… but $200k which was lost the day she bought it.
“this home is a perfect case for “they over paid” argument.”
More like “they over paid but didn’t throw their money away on rent” argument.
🙂
One thing to keep in mind when discussing either Prop 13 or rent control, is that these are spread-based survivorship subsidies.
In other words, both renters and owners have tenure which decays exponentially, so your “payoff” has to be weighted accordingly. I know the anecdotes fly fast and furious, but you are talking about an exponentially decaying group of “winners”, and so you really need to value this in terms of expected payouts, not the maximum possible payout.
At the same time, the value of the payout is based on future appreciation over a spread. For renters, your subsidy grows by the difference of the wage rate and 1/2 of bay area CPI (bay area CPI has historically been higher than national CPI and higher than the wage growth rate for lower incomes). For owners, your payoff is proportional to the difference of price appreciation and 2%.
Putting all of this together, you need bullish assessments on future spreads in order to get a sizeable subsidy. For example, assuming perpetual house appreciation of 4% and wage growth of 1% + bay area CPI, then the subsides amount to 54%*(House value) and 17%*(rent) for owners and renters.
However, that is a sum of all future payments — the big payments for owners come in years 30+ — so you need to discount them. Assuming a 3.5% discount rate, the value of the subsidy is 6% for renters and 17% for owners. However, a strong case can be made that the real discount rate should be the cost of funds, or the mortgage rate, at which point the present value is small.
Back to our original example, the landlords would still be getting 17% less every month, but to the renters, they are only willing to “bid up” the price by 6%, so a net subsidy of 11% remains.
In the same way, the state would be receiving 54% less in revenue than without the subsidy, but the owners are only willing to bid up the property by 17%, so a net subsidy remains.This is the interesting thing about survivor-based asset subsidies.
Finally, the effect of the subsidy on the market is heavily dependent on perceptions of appreciation, so particularly with house prices, this can cause big swings in the premium that people are willing to pay. For renters, you are discounting an infinite stream of wage increases. For owners, you are discounting an infinite stream of house price increases, each of which is a discount of wage increases. So, there is much room for error.
Interesting analysis Robert. But ultimately, the premium placed on prop 13 future savings is secondary (or semi visible) in most peoples housing purchase considerations, and consequently gets baked into the primary equation. (i.e. If people believed that CA RE will stay flat for the next 20 years, you’d have price drops because it would be an unappealing asset, nevermind that prop 13 would serve you zero benefit!)
Additionally, prop 13 is forward moving. Once you jump on the bandwagon (buy a home in Cali) you have it, and the next person will too, and so on. It’s only when you attempt to end it, where a tangible disruption in housing values perhaps could be ferreted out and attributed to prop 13’s demise.
(FYI- I think you meant 60% of bay area CPI- that was for rent control yearly rent increase? It’s 60% CPI.)
Hangemhi (who after telling us the owner overpaid) wrote:
> so when you sell all those expensive cars of yours
> LMRiM are you going to post your capital lost for
> having owned them?
I don’t remember reading what kind of car that LMRiM drives, but I’m happy to say that I bought both my Range Rover and C4 Cabrio used for less than 50% of what they cost new. I like both of them and plan to keep them for a long time and while I expect both of them to drop in value when I sell them to buy new daily drivers I’m hoping that the continued appreciation of my ’68 Lotus Formula Ford and ’61 Chris Craft mitigates the loss…
P.S. my last daily drivers (that I bought in 1995 and 1996 and sold in 2005 and 2006 when I bought my current daily drivers) were a ’91 M5 and a ’89 Range Rover Classic. I paid $18K for the M5 and sold it for $16K and I paid $12K for RR and sold it for $6K…
Oh, yes — 60%. Of course, I was trying to discuss the prop 13/rent control contributions to valuation. There are many other factors as well, but all of them boil down to the same set of three: the discount rate, income growth rate, and mortgage bond rate. Issues such as tax shelters and rent control serve to complicate matters, and add a lot of volatility onto an already volatile asset class. It’s really fascinating trying to analyze these where these things are going.
No doubt, many people just pay whatever they can afford, but if you think about it, these factors are precisely the ones that determine what you can afford.
as for $600k capital loss…. so when you sell all those expensive cars of yours LMRiM are you going to post your capital lost for having owned them? I think you need to take out the difference in ownership cost vs. rent cost if you’re being fair. I otherwise agree with the 7% transactional costs and $250k in cash… but $200k which was lost the day she bought it.
Lots of ideas in there, hangemhi, but let me try to break them down.
The $600Kish loss – lol, in reading through my first post I see I made a simple math error – it should be around $510K. There, that makes it all better 🙂 So, you can knock off one of the Nissan GT-Rs and one of the kilo gold bars.
The (now corrected) $510K loss is not pure capital loss, as shown below:
2009 sales price ($1.75M) – 6% all in selling expense – $15K bathroom remodel cost (assumed) = $1.63M net proceeds.
2004 purchase price ($2M) + 1% (assumed) entry transaction costs (low, obviously) = $2.02M cost.
$2.02M – $1.63M = $0.39M capital loss.
I assumed that the rental cost of a nicer place would have cost on average at least $2K/mo less than the net carrying cost on this place, again a very reasonable assumption and low (keeping in mind that only 2/3rd of the mortgage was deductible here, and high income earners face phaseouts that reduce effective deductions, etc.). Over the 5 year holding period, that’s an additional $120K total wafted into the ether.
Total of capital loss + the additional $120K of cost over rent means that at least $510K went poof! And of course I didn’t even ascribe any opportunity cost to the $500K that sat in this place as dead equity until it was time to fulfill its destiny as a sacrifice to the bubble gods. Although the stock market has been rough in 2007-2008, many people overlook the fact that the period 2004 through 2007 was an extraordinary period of returns for many asset classes, and many are still way above 2004 levels (sovereign debt of the majors, foreign currency denominated debt/equity in many countries, gold, etc.). Even diversified US stocks haven’t done that poorly since June 2004 – down about 18% gross, but only about 8% after dividends. Certainly better than downpayments in Pac Heights!!
So, it really doesn’t matter whether I figured the depreciation on the SUVs and (now only one) supercar. (On the other side, I didn’t include the future value of the college savings plan, or that the 5 gold bars would have just about doubled in value since 2004, so 9 or 10 kilos could have been purchased back then.) The point is that my whole alternative $510K portfolio could go to zero and that would just be equal to the losses sustained here.
Today, in perfect hindsight, the purchaser should be indifferent as between these two scenarios: renting a slightly nicer SFR than 2203 Broderick fr five years and setting five thousand, one hundred one-hundred dollar bills on fire; or buying 2203 Broderick. Of course, I’d argue that given the obviousness of the bubble in 2004, this should have been obvious even prospectively in foresight. And I’d rather rent a nice SFR, be tooling around in a GT-R, two SUVs, playing a Collings mando, looking at 4 kilo bars of gold AND having a fully funded college 529 than watching the pile of 5,100 Benjamins burning up, but I guess that’s why I don’t get the “pride of ownership” thing 🙂
So why are condos in outer richmond still selling at 2006 prices within a few months?
There needs to be a posting by the blog with regards to monetary inflation at some point.
Are houses still the “basket catcher” for inflation they used to be?
my point about “I think you need to take out the difference in ownership cost vs. rent cost if you’re being fair” was in reference to your mention of recently buying a luxury car in some other thread’s comments.
many, many people ascribe a high value to owning over renting…. you obviously think that’s foolish…. but some even see renting as beneath them (we will see if that mind set changes given the national bubble, but i bet it stays relatively in tack – I bet Ms. 2203 Broderick buys her next place too).
So if “pride of ownership” is “foolish” and should be counted as losses, then so should any expenditure on luxury items – including eating out, buying luxury cars, luxury vacations. Aren’t they all losses – certainly they are since you could have invested that money in “sovereign debt of the majors”. no???
my guess is that this seller doesn’t reqret not renting, doesn’t regret buying this home…. but does regret going so far over what she had to have known were the “comps” in 2004.
hence my original point…. this one qualifies for the “over paid” argument which explains why this had 24% depreciation in a market where most are on here arguing that we’re down to 2004 prices – and that would mean flat for this home which obviously didn’t happen
hangemhi wrote:
> my guess is that this seller doesn’t
> reqret not renting
EVERYONE that comes out behind regrets renting…
“Today, in perfect hindsight, the purchaser should be indifferent as between these two scenarios”
or, if they did not need to sell, they would have a paper loss, and made up for it several years from now. i betcha most people in that position (who do not need to sell) would rather have a temporary paper loss, and pride of ownership. i mean really, how many non transient ‘wealthy’ people conscientiously prefer to rent long term? very few, i’m guessing 2-5% of total.
pride of ownership = intangible value to many people (rich and middle class alike, btw.) perhaps because it’s effectively embedded in our collective consciousness as a semblence of stability, a foundation in a community, a sense of place…and marketed to perfection by an army of realtors, especially in flash markets like prime SF!
a similiar value/concept for discressionary spending exists, as hangemhi pointed out. i mean, what’s the marginal value of eating top ramen and kraft mac ‘n cheese twice a week, as opposed to a nice sushi lunch? as long as you can afford it, it’s a discressionary spend/value equation unique to the individual (and as dictated by societal norms/marketing apparatus.) i.e. lots of wealthy folks have ‘adopted’ a taste for fine sushi, leaving the mac ‘n cheese behind…unless effectively marketed to provide another value dynamic such as gourmet mac ‘n cheese (where you pay to play for the ironic experience of paying $20 bucks in a hip, comfort food restaurant.) i believe the kraft version is availabel for 99 cents on sale at safeway.
I love how hipster keeps repeating the paper loss mantra, as if wishing will make it so. perhaps the seller decided there are only further drops to come?
but when push comes to shove I bet they come after prop 13 and at least weaken it.
Which warms the cockles of this Georgist’s heart
it still remains a considerable destruction of capital relative the average wealth even in the SF area.
Transfer of capital, from the 2004 buyer to the 2004 seller.
Are houses still the “basket catcher” for inflation they used to be?
Houses — land actually — only capture after-tax *wage* inflation, not price inflation, quite the opposite in fact. Say the Obamaists enacted a $500 per capita per month mandatory medicate contribution — can you guess what would happen to rents and land values?
why I don’t get the “pride of ownership” thing 🙂
pride of ownership == license to pocket location value / ground rent increases
There’s no such thing as a paper loss, a paper loss is a very real loss, and pretending otherwise is wrongheaded. Isn’t this on page 3 of some “Investing for Dummies” book?
Can we get the votes together to start a proposition to end the proposition system altogether?
IMO both 45yo and hangemhi are on the right track in that they are starting to view shelter as consumption.
People will only be able to consume as much shelter as they can afford.
Unlike the dynamic that played out in the dotcom bubble, and subsequently in the credit fueled real estate bubble, your net worth will go up or down depending on how much shelter you consume or not consume and not always go up the more you consume.
The thing that I have had on my mind recently, and that I hope some on here will comment on, is how the mandarins in Washington have managed to calm everyone down. They haven’t really done anything, and in fact didn’t even have anything they could have done, but the panic has kinda subsided even in the face of some massive unanswered questions.
Hangemhi must be channeling the ghost of fluj as their mastery of logic is so similar. So home prices haven’t fallen, they just never went up! Those who paid anything higher than today’s prices in the last several years simply “overpaid.” And yet, in the same breath, he concedes that “this was a comp for other future buyers and is a legit comp back then.” So it was a legitimate comp overpayment.
Hangemhi must be channeling the ghost of fluj as their mastery of logic is so similar. So home prices haven’t fallen, they just never went up! Those who paid anything higher than today’s prices in the last several years simply “overpaid.” And yet, in the same breath, he concedes that “this was a comp for other future buyers and is a legit comp back then.” So it was a legitimate comp overpayment.
Nonsense paraphrase from a one-note malcontent = not as interesting to me as it used to be. Sorry to take away one of your toys.
i am trying really hard to wrap my mind around the argument that the seller is not regretting the decision to buy despite a 600k loss in a short time period because the notion that buying was a superior decision despite losing so much money.
i am trying really hard to wrap my mind around the argument that the seller is not regretting the decision to buy despite a 600k loss in a short time period because the notion that buying was a superior decision despite losing so much money.
I didn’t bother googling the owner of this house. however, I’ll answer this question using math that many regular people use when determining if a house purchase was a good idea.
I’d guess most owners wouldn’t look at this property and think “I lost $510,000”.
instead, they’d look at this house and state:
Purchase price and selling price was: ($2,000,000 minus $1,750,000)
thus, I lost $250,000 on this house.
Then they’d say:
well, I lived there for five years, which is 60 months. $250,000 divided by 60 is $4166/mo.
thus, I spent $4166/month to live in this house.
not bad if you look at it this way. Clearly, they’ve ignored lots of holding costs and all that… but i see this all the time in my daily life.
I don’t know who this owner is, and they are likely more financially literate than my example. but I see this ALL the time with regular people in my daily life, who simply forget to take purchasing/selling costs, holding costs, and opportunity costs into their calculations.
many of us make this mistake in our lives!
IMO both 45yo and hangemhi are on the right track in that they are starting to view shelter as consumption.
I agree. this is a healthier attitude than housing as investment.
although I’m not sure I agree when 45yo hipster said this:
if these people held on to this, they would only have a paper loss. unlike your prognosis, IMO they will make the equity loss back in a few years (remember, no transaction costs for holding.)
so if their other other ‘neighbor’, also worth $5 mil, doesn’t rent, owns equivalent type home, holds on, within 5 years all will be fine
not sure I agree with the 5 years part. I might agree if he said 5-20 years especially since we’re talking nominal (not real) returns.
it remains to be seen how severe this RE downturn is. RE valuations could possibly take a prolonged period of time to recover (maybe even decades), especially since our govt continues down the pseudo-Japanese path of zombie banking.
(clearly the US is not Japan, there are differences. But SF is not as special as Tokyo is, and Tokyo had severe prolonged RE losses, and the US Govt zombified our banks like the Japanese did)
all in real terms of course. nominal terms is anybody’s guess since many foresee significant inflation in the medium term (several years out)
So why are condos in outer richmond still selling at 2006 prices within a few months?
Patience grasshopper. There are 21 homes in some state of foreclosure (NOD, NOTS, bank owned) to 29 currently for sale. There’s plenty of pent up supply out there.
Ex-SFer,
In the era they held it, that house likely costs well more than $4166 a month to rent.
In the era they held it, that house likely costs well more than $4166 a month to rent.
yes I know. my example wasn’t showing how much they actually paid per month. It only showed how some people might do the math in a faulty way. The $4166 figure ONLY represents the money that they lost on the house
it does NOT include
-sales commissions or other associated sales charges
-any renovations/remodeling
-any upkeep
-THE MONTHLY MORTGAGE PAYMENTS! (PITI minus tax deductions)
-opportunity cost (I usually personally use the rate of Treasuries that are of same duration as the home loan, a VERY conservative measure, since Treasuries are risk free).
Let’s UNDERestimate principal/interest/tax for a second.
5% IO loan of $1.5M= $6250/mo
plus 1.2% for tax on $2M=$2000/mo
that’s $8250/month.
take a 35% tax deduction
that leaves $5362/month.
thus, this person paid a MINIMUM of $5362/month in PITI payments AFTER tax and AFTER deductions but NOT including insurance
and you add in the $4166/mo capital loss from above, they paid:
$9528/month minimum.
(which still does not include insurance, commission on the sale, other sales charges, remodeling/renovation charges, upkeep, opportunity cost of the $500k downpayment, etc)
there is no way this place would ever rent for $9500/mo.
my last post simply showed how people can have a massive capital loss and remain blissfully unaware!
In the era they held it, that house likely costs well more than $4166 a month to rent.
No doubt that’s true, but it doesn’t really address ex SF-er’s point. When it was all said and done, the owner of 2203 Broderick spent well in excess of $4166/mo to “rent” it from the banksters.
How much more? Well, we can’t say for certain because we don’t know the entire financial picture of the owner, but we could make some reasonable estimates.
$1.5M mortgage (2 loans) in those years would not have carried a less than 5% blended average cost of interest (if one was a neg-am, the interest would have just capitalized and in effect be payable on sale), so that would be a minimum of $6250/mo. Only 2/3rd would be deductible ($1M max deductible on acquisition debt), so after likely phaseouts for high earners (we know her position) this would have been at least $4500 net/mo real dollars.
Taxes averaged about $24K per year, or $2K/mo. After tax effects (again, those phaseouts) you’re looking at roughly $1.3K/mo.
Insurance? Maintenance and upkeep of the structure? Who knows, but let’s say another $1K/mo on average over 5 years. It’s a $2M house (or, it was a $2M house) and would a total of 0.60% of purchase price per year strike anyone as excessive for the aggregate of insurance and maintenance cost?
Then, to the above figures, you add the $390K pure capital loss (estimated low imo) (see my above posts for the details), which equals $6,600/mo over the holding period. (Note – not the $510K loss I identified above, because that included the estimated cost of onwership above the rental equivalent cost.)
All told, the former owner spent approximately $12,500/mo to live in that tiny place, and it was likely significantly higher. I hope they enjoyed it!
(I purposely left out any imputed opportunity cost on the $500K put down in the first loss position. IMO it wasn’t too difficult to earn at least 5% on average over 2004-2009 in a diversified financial asset portfolio, but it seems many people had difficulty.)
Yeah, well, I don’t know about “no way.” I am certain some houses in that neighborhood rented for ~10K a month and upward in that era. This one was probably a little undersized to command that sort of figure. Then again June 2004 and on? It’s not out of the question.
I don’t want to parse your numbers. I’ll take your word for it. But you brought up the notion of individual perspective on loss. They very well could have had friends in the neighborhood renting for 10K and upward.
At no point in time would this place have commanded anything near $10K a month as a rental. $5-6K per month tops.
anonn:
there is no way on God’s Green Earth this would have rented for $10k/mo.
look at hangehmi’s deconstruction of the place in his/her post above, where s/he details all of its shortcomings.
$10k rent gets you a prize place, even in SF, even during 2004 bubble land.
At no point in time would this place have commanded anything near $10K a month as a rental. $5-6K per month tops.
I’ve seen similar, in lesser areas, and worse rental markets, go for more.
Paul Hwang could have gotten 10K per month for this, easy.
Probably $70K per month, with the right insurance company.
“my last post simply showed how people can have a massive capital loss and remain blissfully unaware!”
True, and I took anonn’s response to reference the buyer’s perception rather than the reality. So if a buyer thinks the property only cost $4200/mo despite the reality being double that amount, they will still perceive buying in this market as being the right decision. Even if it wasn’t.
Some businesses take advantage of this psychology. Maybe you can land a $100 family special to visit Disneyland and that looks like a great deal. But then when you figure in the costs of buying overpriced food, it isn’t such a good deal anymore. But that $100 figure is what is remembered and the good deal.
If realizing the real cost is hard for people to do, quantifying the liability of risk exposure is even harder. I can’t tell you how many times I’ve been offered a “once in a lifetime great deal” that required me to absorb most or all of the risk of the venture while sharing a much lower “fair” share of the potential profit. No thanks. If you want me to take a disproportionate risk then I want the lion’s share of the profits.
I’ve seen similar, in lesser areas, and worse rental markets, go for more.
possibly. but you must recognize that those would be FAR above-market transactions. even you cannot honestly say that $9500/month was ever anywhere near market rate for a place like this.
a 3/2 with 2 of the bedrooms subterranean (If I understand hangehmi correctly) and an awkward layout for $10k/mo?
you might have seen a lesser building in a lesser nabe in a lesser rental market fetch more than $10k, but I have my misgivings on that and then chalk it up to the fact that there’s always ONE person who is the proverbial “black swan”
as they say: a bucketfull of cash and a boxful of stupid.
Oh yeah. This house has issues. Remember we were talking about people’s perceptions of loss/rationalizations tho.