Inventory of Active listed single-family homes, condos, and TICs in San Francisco is up 29% over the past four weeks driven by both new and refreshed listings. Current inventory levels are down 23% on a year-over-year basis, up 27% as compared to 2006, and right in line (as in within one listing) with the average of the past four years for this time of year.
26% of active listings in San Francisco have undergone at least one price reduction while the percentage of active listings that are either already bank owned (66) or seeking a short sale (95) has fallen to 16% (the absolute number increased by 5%).
The standard SocketSite Listed Inventory footnote: Keep in mind that our listed inventory count does not include listings in any stage of contract (even those which are simply contingent) nor does it include listings for multi-family properties (unless the units are individually listed).
∙ SocketSite’s San Francisco Listed Housing Inventory: 1/04/10 [SocketSite]
The last half of 2008 and the first half of 2009 were a joke. Just a bunch of delusional people trying to list at bubble prices. That kept inventory preposterously high from a bunch of people with wishing prices. “I’ll sell you my car if you’ll pay $5M for it” isn’t really inventory. YOY numbers will be simply ridiculous.
You’ll note the last half of 2009 pretty much tracked 2006/2007 numbers, give or take. What I don’t understand is why the first few weeks of 2010 have jumped so far above the 2006/2007 numbers. I was expecting it to come in below those readings. It was tracking the last half of 2006 and then has jumped way above the first month of 2007? Maybe someone else can make sense of that?
I don’t think anyone guessed black!
This is surprising, because folks are so good at predicting everything else 🙂
good start so far…go sf!
i too was surprised by black. knowing this site, i thought it was definitely going to be red.
Could I posit a guess, Tipster? I think people are hoping for normal times, and a spring bounce. Therefore, some additional inventory that was held off the market during the depths of the Great Recession is beginning to come back on. We will see if this optimism is too early or not.
That’s purely a guess on my part, but I’ve heard from a few friends in the real estate sales and staging business that things are busy prepping properties for sale.
Interesting start to the year.
This will be the first year where we are not in a bubble or a panic. Should be interesting to track. My prediction is that prices, number of sales, and inventory for 2010 will be unchanged from 2009.
I try not to make too much of mid-winter housing data.
housing bulls could see this as a good sign however, since restricted supply tends to put upwards pressure on housing prices.
I myself am slightly surprised, I was thinking that 2010 would have levels similar to 2008 as people rushed to get their house on the market before the post-super bowl surge.
I’m not super surprised though, given all the governmental housing support going on right now. (low interest rates, FHA/Fannie/Freddie “modernizaiton” etc that we’ve talked about ad nauseum)
I knew that SS would never put red in there (it would make the bulls scowl and scream “bias”). I thought it would be yellow.
My favorite 25 houses are all still on the market, all combined $3.8M cheaper than 1.5 years ago, still dropping (as a portfolio) an average of $100,000/week, and update their open house calendars frequently so as to accommodate my lazy touring schedule on Sundays.
I did lose the color-choosing battle however (I chose magenta). I will say on that topic however, that I believe the methodology will be current year = bold black going forward, with colors reserved for history. So, in a year, I still call magenta for 2010.
I agree with curmudgeon, there is a bit more optimism out there. I do expect sales vol to pick up in spring (YoY) for smartly priced sub $1.2 mil properties. But this is contingent on a continued ‘economic recovery’ or at least not a pronounced downturn to the economy. Whatever transpires, it could have been much worse… And at least rents have flatlined for
not sure what to make of this, but i found a tax search service that lets me pull mortgage info. i searched for neg-am loans from 2005 to present and found 1,144 of them in the CITY of SF. that’s during a time when probably 30,000 residential properties changed hands in SF so it’s 3.8% of all sales had a neg-am loan (if notoriously inaccurate tax records can be believed).
Not sure what the actual number of 1023 means… Its hard to decipher the quality of the listings, and if the pricing is reasonable. For example, there is a noticeable lack of quality 2/2 housing for under $800k in South Beach/SOMA.
Will Obama’s proposed 25% reduction in the mortgage interest deduction cause more people to sell and fewer people to buy until prices fall further?
Stay tuned!!!
Obama is the worst thing that has happened to the US (and the housing market), since, well…G.W. Bush. Both are morons of the highest caliber.
Its amazing to me that whether you have a “D” or “R” only means from where you source your political contributions. Otherwise, its just a game of two-card monty. Different names, different affiliation, same big government politics (with little common sense). I doubt highly that either of those fools could even run a hot dog cart in the city.
Tipster you should provide a couple more facts with that rather scary sounding statement: the planned cap is only for couples who make over $500k a year (or single filers who make over $250k a year). While I imagine there are more than a few San Francisco homeowners in that category I don’t think there is enough of them to affect the prices in toto as you are implying. Median wages for most professional positions are nowhere near that (see http://www.payscale.com/research/US/City=San_Francisco/Salary).
^WRONG missionite!
$208,000 couples and above. I assume singles are about half that rate. This is a C-A-T-A-S-T-R-O-P-H-E.
http://www.usnews.com/money/blogs/the-home-front/2009/02/26/mortgage-interest-deduction-on-the-chopping-block.html.
That means the cost of ownership is about to go WAY up for anyone purchasing at $700K or above or singles purchasing at $350K or above.
The next leg DOWN is about to start. Whew boy, does it ever feel good not to have bought!
tipster, your article is from LAST February.
From this year:
MBA opposes the proposal to reduce itemized deductions, including the deduction of mortgage interest, for taxpayers reporting income above $250,000 (joint) $200,000 (single). This would have a negative impact on the housing market, particularly in high cost states like California and New York, as it would increase the cost of mortgages for many potential homeowners, especially those in high-cost states.
http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-president-obama-2011-federal-budget-plan-mortgage-bankers-association-commercial-mortgage-backed-securities-cmbs-residential-mortgage-1966.php
So anything over $650K takes a hit.
^ wishful thinking tippy. In 2-3 years you’ll regret not buying! But, it will give you a good excuse to continue maligning SFRE, while others benefit. Tsk. Tsk.
Removing/reducing the mortgage interest deduction is actually a great reform. It’s rather strange that the mortgage interest deduction stuck around in the 1986 tax code reforms when almost all other interest payments became non-deductible. My guess is that the housing lobby fought the good fight then, plus the U.S. government has historically subsidized the mortgage industry quite heavily.
Still, even if we determined that it was in our interest to subsidize the mortgage industry, it could be done in better ways. For example, allowing an interest deduction for up to $1M in principal seems a bit odd, when student loan interest has such significant limitations for deduction. It would make sense to me to phase out the mortgage interest deduction at much smaller principal levels (i.e. maybe $450K in principal, so that it’s helping mostly people who made below $150-180K or so).
Will housing prices drop if the deduction were phased out? Certainly. But again, that’s mostly a good thing.
Tipster,
Before calling me out as being “WRONG” you should double check and make sure you are RIGHT.
First of all I can’t find any mention of this in this years budget. Doesn’t mean it’s not there.
The proposed cap is a 28% maximum deduction rate, which if you are in the 33% tax bracket is a 5% reduction over what you used to get (not the 25% reduction you claimed!). So if you were in the 33% tax bracket and itemized $30k in interest payments (typical interest for a median priced SF home in the first year of ownership) this cap would cost you an extra $1500. If you are in the top tax bracket of 35% that’s an extra $2100 it will cost you. Now $1500 (or $2100 for that matter) isn’t nothing, but it’s not enough to move housing prices in any significant manner, at least not in this town. First of all, the effect of this cap will get smaller every year as your percentage of principal payments rises. Second of all, relative to what the mortgage and property tax cost you, this is equal to about a week and a half of those. It’s hard to imagine somebody making in excess of $250k a year sweating this out when trying to decide whether to buy or not.
Third of all, interest deductions cap out at $1M in mortgage anyways, so the impact is not going to be much more than $2-3k *total* even for the wealthiest households paying the maximum in mortgage interest allowable.
Now for the other part: the tax brackets (and in your later post the income thresholds) you are referring to are based on taxable income. Taxable income is what you have left after taking your deductions. See here for a clear explanation (just in case you don’t know the difference, as you don’t appear to know the difference): http://www.walletpop.com/taxes/article/calculating-taxable-income/92748
To give you just one example, my taxable income last year was about 15% of my gross income, and about 30% of my adjusted gross income.
So if your taxable income is $250k you made quite a bit more than that. I think $500k is a pretty fair bet on average for gross income if your taxable income is that high but I can’t find what a typical ratio is, still looking.
At any rate this isn’t going to have much impact on people buying homes for $650k, as those folks probably don’t have taxable incomes anywhere near $250k.
“At any rate this isn’t going to have much impact on people buying homes for $650k, as those folks probably don’t have taxable incomes anywhere near $250k.”
Maybe. But it would be good if they did. 🙂
$250K, with a traditional 28/36 ratio, means that $5833/mo max should be budgeted for principal, interest, taxes, and insurance.
But missionite — you can’t just think of it as $1500-2100 (or whatever the calculation comes out to). It’s $1500-2100, adjusted as principal, for 30 years, adjusted to present value. Btw, if interest rates were, say, 8% on a jumbo non-conforming $1M loan, that’s potentially $4K/year.
I’m curious as to how your taxable income is 15% of your gross and 30% of your AGI, but maybe I’m not thinking through it clearly.
Um, limits of this kind would typically apply to AGI, not taxable income. Taxable income is after the mortgage interest deduction, so no one looks to that for limits.
Singles with incomes of 200K get hit: they qualify for $650K or above, so that’s where the impacts will be felt. Maybe it’s 700K. Whatever. It’s a factor, and the banks will tighten lending standards to compensate for that and for the fact that your other deductions are going to be limited too. Less spending money means lower amounts every one will qualify for.
And going from 35% to 28% is 1/7th of the deduction. Prices will have to fall by 1/7th to compensate to make the payment the same as it was, or about 15%!!!! Furthermore, they are going to hit carried interest, making loans harder to get, and a slew of other items, making prices fall to about 20-25% just to compensate.
It’s a disaster. Anyone buying now will take a HUGE hit, and will wish they waited for prices to fall further before they bought!
“And going from 35% to 28% is 1/7th of the deduction. Prices will have to fall by 1/7th[sic] to compensate to make the payment the same as it was, or about 15%[sic]!!!!”
I don’t think that’s right, tipster. Prices would only need to fall by 1/5th of the lost deduction, not 1/5th total, all adjusted to present value.
Again, up to $4000-5600 lost tax savings for the first year, if you are have a $1M loan at 8% (which isn’t unusual, historically, for a non-conforming jumbo). That would be an $80,000 deduction:
28% = $22,400 taxes avoided
33% = $26,400 taxes avoided
35% = $28,000 taxes avoided
“Um, limits of this kind would typically apply to AGI, not taxable income. Taxable income is after the mortgage interest deduction, so no one looks to that for limits.”
Sure, but in your earlier post you were saying it was tax brackets. Tax brackets are based on taxable income.
Regardless someone with an AGI of $200k makes more than $200k. Period. Double Stop.
“And going from 35% to 28% is 1/7th of the deduction. Prices will have to fall by 1/7th to compensate to make the payment the same as it was, or about 15%!!!”
You are using some awful strange logic here. Do you really think buyers are going to be able to demand sellers need to reduce their $800k house down to $680k because of this policy?
I want what you are smoking.
The maximum possible effect of this policy if it made it into law (and that’s a big IF) would be about 75k spread out over 30 years ($1.1M mortage, 30 year fixed @ 5%, over $200k AGI for 30 years). And that’s before taking inflation into account. In 2010 dollars I bet it will be closer to 2/3 of that.
If that same millionaire (35% tax bracket) bought a home worth 650k the maximum effect would be less than half, around $33k, and again probably 2/3 of that if you factor in inflation.
But most people only own their homes for about five years. So the net effect on a home with a $1.1M mortgage will be around $20k at most over five years. That’s not enough to change anyone’s sense of value or pricing. And the effect on loan approval will be minimal as anyone with an AGI over $200k isn’t going to have a whole lot of trouble getting approved for anything in the $650-$1M range.
“It’s a disaster. Anyone buying now will take a HUGE hit, and will wish they waited for prices to fall further before they bought!”
I just bought a couple months ago and you haven’t come close to convincing me that I’ll be wishing I waited. Sorry.
BTW it didn’t make it into law last year, and probably won’t make it into law this year either. So its a moot point in all likelihood.
PS JimBob its current lending rates that matter with regards to an annual budget (it can change next year remember?). I was in B of A today and it looked like the current rates are right around 5%. A couple points will get you pretty deep into the 4’s.
So if your taxable income is $250k you made quite a bit more than that. I think $500k is a pretty fair bet on average for gross income if your taxable income is that high but I can’t find what a typical ratio is, still looking.
I need to get your tax attorney.
My AGI is around $200k, and I make nowhere near $500k.
please don’t forget the AMT folks. Sure, your primary mortgage is exempted up to a point, however AMT really kicks you as your income goes up especially if you have a lot of other deductions (as many californians do due to your high state income taxes).
I won’t forage into the tax debate more than to say that I highly doubt most people with an AGI of 200k make 500k/year.
Having just aggregated the tax carnage that 2009 hath wrought, I would like to echo ex SF-er’s comment.
I was out looking last weekend – three open houses on Sunday. At two, I heard of listings that had been withdrawn from the market because they couldn’t get offers at their desired price. The current owners seem to believe that the bubble has not yet burst.
With interest rates headed up (could be sooner, later, who knows), with the end of at least some of the most obvious federal subsidies to the RE industry, and with impending changes to the law, I can only think that time is on my side.
“In 2-3 years you’ll regret not buying! But, it will give you a good excuse to continue maligning SFRE, while others benefit.”
In all sincerity, I’d love to hear what is going to drive prices upwards? Are the high-paying jobs, or any of the lost jobs for that matter, coming back soon? The city is not getting any business friendlier and government fees/tolls/taxes are going up while services down – I really am searching hard for reasons to be optimistic about the local economy.
Taxes are going up and services are going down all over the country. Check out what Oregon just did.
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=15393573
San Francisco is in better financial shape than most places, so we are going to have to cut critical services less or raise taxes less.
Granted, this is a pretty grim prognosis.
The BoS is talking about cutting the payroll tax and replacing it with something else. Let’s wait and see what that something else is, but it might be a good idea.
Taxes are up and services are down because the economic activity on which the government usually bases taxes is down hard and isn’t coming back.
The same forces will put downward pressure on housing prices even if no change to the tax structure were imposed. The fact that the tax structure will now also put downward pressure on prices is just another nail in the coffin. Lower prices are pretty much guaranteed for the reasons NVJ outlined.
Here’s the whole article. I know everyone wants to go nuts without actually reading the articles, but this points out that it’s mostly ’06 – ’08 loans going south. SF had very few FHA loans in that period. East Bay may be a whole different animal.
http://www.washingtonpost.com/wp-dyn/content/article/2010/02/01/AR2010020103527.html
just to throw another log on the prediction fire …
FHA Defaults Foreshadow A Crush Of Foreclosures
http://www.huffingtonpost.com/2010/02/02/fha-defaults-foreclosure_n_445491.html
Condoshopper- I never said prices will go up 2-3 years from now. I just don’t think they will go down further from today’s levels (for SF). Of course buying now has some risk. Either the macro economy will recover or not in the next few years. Personally I know a few people priced out beforehand, who want to stay in SF for 5-10+ years, that are choosing to buy now. We’ll see if they were geniuses or not in 3-5 years!
“I never said prices will go up 2-3 years from now”
Then what were you implying when you said:
“In 2-3 years you’ll regret not buying!”
???
Pent up housing supply has hit an all time high this week. Currently, 1711 homes are in some state of foreclosure (NODs, NOTS, bank owned)in Ess Eff. Two weeks ago we were at 1699. Standard disclosure about noise in the data, you know the drill.
ex-SFer,
I’m clearly not a CPA and the only taxes I’m familiar with or privy to are my own. As stated previously, for 2008 my taxable income was about a third of my AGI, but I own a business and have a lot of factors that might make my situation abnormal. I have no way of knowing. Regardless I think we can all agree that if your AGI is $200k then you are making a fair amount more than $200k.
In terms of taxes last year was amazing for me, and this year looks even better. But I’m exactly the kind of business owner that the government is trying to help (hiring new employees, buying lots of machinery), so YMMV.
The bottom line is that Tipster’s original post (“Will Obama’s proposed 25% reduction in the mortgage interest deduction cause more people to sell…”) has been definitively proven as WRONG. The proposed plan did not make it into law last year, and hasn’t made it into law this year yet, is nowhere near 25% in terms of impact (more like 5-7% and only if you are in the top two tax brackets) and as I stated above, the maximum impact at current interest rates is limited to roughly 0.3% of the purchase price of the home per year, and in most cases will be less or non-existent. Even if passed I don’t see how it would be likely to have any effect on prices at all. There are simply too many variables that have a larger effect. Tipster’s post was misinformed scare mongering which was my point earlier.
Would agree with many of the people here that missionite is smoking crack on this one:
“So if your taxable income is $250k you made quite a bit more than that. I think $500k is a pretty fair bet on average for gross income if your taxable income is that high but I can’t find what a typical ratio is, still looking.”
Some people justify losing $3 on a failed business plan to save $1 in taxes…
Nonsense missionite. Your anaysis is too simplistic.
The after tax monthly payments will have to stay the same and if you cut the tax deductibility from 35% to 28%, that’s a significant hit. The hit extends to property tax too.
The limit will also apply to state taxes. That’s going to reduce people’s after tax spending.
People have been stretching to afford the payments on their first home. They take every last dime. If you take an extra $3K out of their yearly spending because their state tax deductions are limited, and another 5K in mortgage interest deductions they can no longer get each year, and another 1K in property tax deductions, they simply have that much less to spend on their monthly mortgage.
The money has to come from somewhere – lord knows raises are going to be insignificant this year. To knock $750 out of their annual income, to someone spending every last dime on their first house, that’s over a $150K hit to your hypothetical $1M home with a 5% mortgage, or they won’t be able to afford the mortgage payments.
If interest rates go up, that hits the price of the home even more. So where exactly was I (all caps) “WRONG”?
If the tax man takes more, something has to give. People buying their first homes are typically stretched: it’s coming out of the price of the home. I don’t see any other alternative. There isn’t any more money. Home prices rose to the natural limit, partly as a result of additional money people having due to low taxes. The taxes were low because we never actually paid for anything we bought. The bills are coming due. Pay up, homeowners, the party is OVER.
How many are on the market? The market has been picking up as of late. I’m not sure there will ever be enough to force a change. And NODs? Why are they relevant?
Can someone explain to me how the Arterra is selling 2/2 condo (granted its the 16th floor) for $1,285 per sq ft?
I know many on this site mention that the market will be heading to a sub-$500 per sq ft mark, to which I would reply then why are units still being sold for outrageous prices such as this (actually many units have recently sold for that mid/high $600 sq/ft price)
Note: The rest of their units are really expensive too!
Arterra cut their prices considerably and last I heard only had about 8 units out of 268 left to sell. What do you consider really expensive?
@OneEyedMan – what did the typical 2/2 sell for at the Arterra (I am not aware of the pricing), and how does the pricing compare to Blu. A reasonable new 2/2 should cost no more than $700k (or about $700 per sq/ft).
Arterra 2/2 were smaller than BLU – about 750 – 950 sf is my memory. I saw prices from high $500s to low $800s, with the exception of the penthouse units.
I’m not sure there will ever be enough to force a change.
Certainly not in the condo market. Speaking of which — 200 Townsend #25 (941 sq.ft.) was taken back by bank on January 14 for $641,483. Originally sold for $569k in December of 2003. All refies courtesy of World Savings Bank.
OK I’m not a CPA but I’m going to try and wade my way through this and figure out what the actual facts are because I am just the kind of person that finds this stuff fascinating. It takes a very boring person BTW. That’s me. Woot.
Now starting from the top, from everything I have read it seems like the $200k/$250k figure being bandied about is meant as a loose guideline, not as an actual threshold. In other words, the way the proposed law intends to work is directed at capping the deduction rate at 28%. The trigger for the next highest tax bracket (33%) is $171k (single) or $209k (married) in TAXABLE income. Yes, taxable. Because that’s how we figure out what bracket we are in, by taxable income.
Now note that taxable income is nearly always quite a bit smaller than Adjusted Gross Income, and AGI is usually quite a bit smaller than Gross Income. So when we talk about taxable income we are talking about a number that is much smaller than your actual income. What seems to be a subject of dispute here is what the spread is between these three figures (Gross, AGI, and Taxable).
I found a little information that gives us a clue as to the spread between AGI and taxable at least:
http://www.irs.gov/pub/irs-soi/09sprbulinhitax.pdf
Specifically page 8 outlines the distribution of tax levels (with corresponding graphs on page 19), and from what I can tell it appears that 80% can be estimated as a very rough median in terms of a ratio of taxable income to AGI. Unfortunately they don’t break out the distribution above 80%, but my guess is that most people stop right around there, with increasingly smaller amounts of people paying a smaller share of taxes relative to their income. So if you are a single person and had taxable income of 171k then your AGI has a decent chance of being between 213k and 265k. Likewise if you are a couple with taxable income of 209k then there is a pretty good chance your AGI is between 261k and $320k.
So that explains why they can say with a fair amount of confidence that it won’t affect people with an AGI less than $200k, or couples with an AGI less than $250k. It’s all there in the tables. God I love math.
Anyways, AGI is itself a number that is derived after a number of deductions. You got Health Savings Account deductions, business expenses (in some cases), certain moving expenses, one half of self employment tax, early savings withdrawal penalties, alimony, IRA deductions, etc. So that AGI number could be quite a bit smaller than your Gross Income. If you are a recently divorced musician in the army reserves who just moved to California and likes to put money away for retirement you are going to make a serious dent in your AGI.
Regardless it’s pretty clear that an AGI of $200k is not likely to equal gross income of $500k in all but relatively rare cases. So I admit that my guesstimate (which was pretty clearly labeled as a guesstimate by the inclusion of the caveat “I’m willing to bet…”) was wrong.
That being said, you still have to be doing very well before any of this affects you. If you are bringing in over $200k and you have no spouse or dependents you shouldn’t be hurting for money. And I just don’t see the effect of this as being anywhere near broad enough to have any measurable impact on housing prices.
J,
Through the magic of depreciation and deductions you can make a lot of money yet still legally declare a loss on your taxes. And if you start adding $5k tax credits per employee it really starts looking quite nice. That’s not a failed business plan, that’s a successful one. It doesn’t seem fair, but don’t hate the player, hate the game.
Tipster,
First of all, the proposed law didn’t pass last year, and I haven’t see any evidence it will pass this year. If it does have any chance at passing Congress will probably limit the cap to certain kinds of deductions, so your hyperventilating about property taxes and state taxes is premature and needless. Get back to me when there is a bill about to pass.
But limiting our discussion to a proposed mortgage interest deduction reduction (and oh how I love to write “deduction reduction”… it’s simply delicious!) I still have trouble making sense out of what you write. And I’m trying real hard.
How many people are spending “their last dime” on their first home which just happens to cost $1M? I would say the first time buyer pool in $1M+ properties is probably fairly shallow. And if it were their “last dime” doesn’t that strongly imply they wouldn’t be affected by the law anyways since they wouldn’t be in a high enough tax bracket? You might be able to find some examples on the extreme margins where someone got burned by something like this, but for it to have an effect on the market as a whole it needs to have a broad general effect that is deeply felt by large numbers of people, and I just don’t see any evidence for that.
I don’t follow your logic at all that taking $750 out of someone’s annual income is over a $150k hit. Can you explain this a little more clearly?
Interest rates going up would surely have an effect on housing prices, but that’s independent of this proposed law. Presumably you are suggesting that because the interest rate is higher then the impact of the reduced deduction will be higher as well. But that’s assuming the goverment doesn’t react to the higher interest rates and change the deduction policy again, perhaps in the other direction. And I think the interest rates themselves would have a far greater effect on housing pricing than a 5-7% change in the deduction for 1-2% of the American homebuyers who would be affected. It’s a little like saying a candle will be that much hotter if the Sun explodes. Yes the candle will be hotter, but it’s not the candle flame that is the source of the extra heat, its the fucking sun exploding.
You were WRONG (they were your caps BTW, I’m just borrowing them) when you said that mortgage interest deductions were going to be decreased by 25%. You even had me worried for a minute which is why I looked it up. You haven’t shown any evidence to support that statement, and I don’t even know where you came up with that 25% number. From what I can tell you simply made it up. So show some integrity and admit it.
OK, so hordes of first time buyers making over $250k a year ($20k a month) but who for some reason are struggling to afford a $3k/month mortgage are going to walk away from buying a house or renegotiate the price because of that extra burden of $175/month or so (remember you said it was houses in the $700k range that were going to be affected). Housing crisis!! Pricing collapse!! But don’t worry, I have the solution: one less dinner at Saison. Problem solved. Housing crisis averted.
Have you been to Saison? Damn good food.
The bottom line is that in the unlikely event this law would pass it would be a modest change that would affect a small amount of people. I think there are plenty of good reasons to be bearish about housing prices, but this definitely isn’t one of them.
That’s a big post. I’m married, together we make around $410,000/year, don’t own a house, rent, and most of our income is taxable. I ain’t buying the 1M-1.5M houses I was looking at for sure now due to this law speculation. Almost all of my 30-something friends are in the same situation. The NPV calculation on home ownership in real-SF just got much worse (if the law passes). If you own a house in the 1M-2M range, good luck making your required return on investment anytime in the next 10 years. No, I won’t be sorry in 2-3 years that I didn’t buy, I can do math.
I’m with TallGuy on this – although I’m fascinated at Missionite’s post.
My spouse and I together earn around $480K; we could pay in cash for up to 1.2 million (and might do so just to avoid dealing with slimy mortgage brokers). We currently rent and have been quite happy with this arrangement thus far.
What worries me isn’t the $750 or $1000 per month or whatever the tax consequences might be. It’s that there might be either a series of shifts in policy (higher interest rates, lower tax deductions) that would have the effect of forcing housing prices downward. We’ll gladly hold on to our rental until this situation sorts itself out.
Because I’d like to have the kitchen I’ve wanted for a long time, paint the walls and generally make a place my own, this is a real pain for me. I for one wish that the housing market would just sort itself out rather than making me as a buyer nervous that if I sink my cash into a dwelling, I could lose a big chunk of it in very short order.
Certainly not in the condo market. Speaking of which — 200 Townsend #25 (941 sq.ft.) was taken back by bank on January 14 for $641,483. Originally sold for $569k in December of 2003. All refies courtesy of World Savings Bank
Oh, in the condo market we all know about some change occurring.
Certainly not in the condo market. Speaking of which — 200 Townsend #25 (941 sq.ft.) was taken back by bank on January 14 for $641,483. Originally sold for $569k in December of 2003. All refies courtesy of World Savings Bank
Damn! I hadn’t noticed that yet. There is also someone trying to sell #34 for $669k. I think it’s been empty for 2-3 years now, but you could rent it for only $3,700/month!!! A deal either way!
Anyway, since I know these places actually rent for no more than $2,500/month, I would buy for around $450k. Wonder when #25 will get listed…
FYI – The ‘walk away’ crowd is growing, not shrinking. Expect these owners to continue to put tremendous downward pressure on prices for a long time to come.
http://www.nytimes.com/2010/02/03/business/03walk.html?hp
Awesome! SF is one of “America’s New Housing Crisis Capitals”
http://finance.yahoo.com/real-estate/article/108741/americas-new-housing-crisis-capitals.html?mod=realestate-buy
Man. The reporter called two or three people in Miami and Zona, for his own city he extended the Tishman Speyer Stuyvesant deal rotely as if it applies to average borrowers, didn’t look at the Treasury reports for the Obama loan mods progress, and generally scare mongered it up with a c-grade effort. Despite numerous conclusions that most people won’t walk away. I found it almost humorous and pretty typical. Again, any of you are welcome to look into the articles and or unpassed legislation you draw conclusions from more closely at any time. Nobody is stopping you.
The re-litter said: Get in now for $6,300,000,000.00 or be priced out forever.
http://www.observer.com/2010/real-estate/selling-stuy-town
“Despite numerous conclusions that most people won’t walk away.”
Of course most people won’t walk away. The point is that historically almost nobody walked away. Even if the percentage jumps to a tiny number, say 5%, that would have a huge impact. The growing trend may peter out, but there is nothing indicating that it would, and all indications are that the forces compelling the growing numbers to walk away continue to grow.
Re: The Forbes article,
“They’re not all places you might expect. Some, like Charlotte, N.C., and San Francisco, Calif., we last week identified as a smart place to think about buying since, according to our measures, buying for the long-term there had become attractive”
Wow. Scary. Translation: We have no idea what’s going on week to week. But we do need to cater to bears and Bulls alike, because we are Forbes.
They bring in the heavy later on:
“In San Francisco in June prices were down 4.5%. As of January they are down another 8.5% to $1,024,828. High-priced homes make up a huge chunk of the city’s housing market and many of these homes aren’t being bought, a decline in demand that pushes down prices. Part of the reason is that it’s harder now to obtain non-conforming, or “jumbo loans,” considered more risky and not backed by Fannie Mae or Freddie Mac.
“The price of homes in San Francisco is among the highest in country. A large percentage of those homes are people needing to take out jumbo loans, and not a lot of lenders are doing that,” says Sambucci. “It’s a tougher market at the top end because fewer of those mortgages are getting approved, so people needing to sell at the top end might not list their homes, because there are no buyers.”
Huh. No buyers you say, Scott Sambucci of Los Altos research? I’d say dozens of the higher priced properties shown on this site and elsewhere have been getting into contract and/or selling. So would most people who actually follow the specific market.
Big scary headlines. Big conclusions. Blah blah blah. Yawn.
I mean “San Francisco County
November 2009 year-over-year price change: -4.5% (median price: $1,094,129)
January 2010 year-over-year price change: -8.5% (median price: $1,024,828
”
Really? The median was 1.1M in November 2009?
No, it wasn’t. Great couple of articles. Psyche.
The growing trend may peter out, but there is nothing indicating that it would, and all indications are that the forces compelling the growing numbers to walk away continue to grow
Nothing, eh? Loan mods are picking up steam, not losing steam, and not only the disappointment of the “few” that the NYT article quickly dispatches and then moves on. I’ve become too busy to deal with broad statements referencing articles that got it wrong in the first place. Too busy scrambling to find properties for all those buyers who don’t exist.
TallGuy and Name Withheld,
I don’t see anything wrong with renting. There are a lot of valid reasons to keep renting. As a guy who put a ton of work into creating one of the most detailed rent vs. buy spreadsheets that I have seen (http://submedian.blogspot.com/ if you are curious) and who also built an iPhone app for the same (which I haven’t gotten around to releasing), I am more keenly aware than most of the fiscal advantages of renting.
But as an owner I am also keenly aware of the deep pleasure of owning. Frankly even though we are paying roughly double what we paid in rent, it seems like a bargain, and even if our home lost 30% of it’s value tomorrow I don’t think I would particularly care. In fact, I would probably be excited about having a lower property tax bill. I’m a bear on real estate so I fully expect our house to lose value over the next five years, and maybe even the next ten. I’m cool with it. We get to live there and make it into something that’s perfect for us. You would be surprised at how much psychological value that has. We are very happy.
But moving on to your posts, I want to first address name withheld:
You mention that you could buy a $1M home for cash. Setting the aside the wisdom of paying cash when interest rates can be had for under 5% you do realize that the proposed law would not affect you at all right (at least in respect to mortgage interest)? In order to claim a mortgage interest deduction you need to have a mortgage. And if you pay cash you won’t have a mortgage. So no deduction at all. Problem solved.
Secondly worrying about future policy shifts is silly. Future policy shifts could benefit you too. I wonder how many buyers are kicking themselves for buying the week before the $8k tax credit went into effect? Unless you have some special insight into an upcoming law, I think you are usually best served by focusing on what makes sense for your family in the here and now. And based on your post it does seem like you would be someone who would really appreciate owning. You just need to find a home you feel comfortable pulling the trigger on. It’s ok to lose money if you get deep happiness in return. No one ever talks about vacations being a bad investment, and that’s a 100% loss.
Tallguy,
Frankly I don’t believe you. You were looking at 1.5M homes, but now you are going to stop completely because there *might* be a law that costs you an extra $4k a year? So your dealbreaker is less then a tenth of one percent of your annual revenue? I hate to break it to you, but if your commitment level to buying a home was that low you weren’t very likely to wind up owning a home in SF anyways. Crisis or no crisis, it is still quite competitive out there for decent homes.
And yes a home is not much of an investment if the return you are seeking is financial. There are much better investments to be had, there is absolutely no question about it. But as I said to Name Withheld, not all returns are financial in nature.
You can roll around in your money, but no one ever died thinking they should have spent more time at the office.
“I don’t follow your logic at all that taking $750 out of someone’s annual income is over a $150k hit [on the price of the home they can afford]. Can you explain this a little more clearly?”
$150,000*6% interest per year/12 months per year = $750 per month.
So someone who was making $X and could afford a million dollar home by stretching, who is suddenly making $X-750 can now afford an $850K home.
The qualifying rules will change and what people can afford will change. Your argument that people buying new homes can stop eating out to save $750 per month is ridiculous. I had one friend who bought a new home who was reusing the paper bags in which he brought his lunch to work.
Even people who did not choose to make such a drastic change in lifestyle will probably make the same choice and refuse to pay $1M, paying $850K instead because they will make the same choice. And it would be a tough choice: prices will fall, about 15%.
Now add the effect of tax increases on carried interest to make the rates rise another 0.5% That’s about 10% more interest over a 6% loan, and so the price of the home has to fall by 10% to compensate for that.
You are right, it may not pass. If it doesn’t, Obama’s presidency is over – deficits will be higher than the American public will bear and they’ll run him out of office on a rail. I couldn’t tell you if it will pass, but he ran on the issue of making sure no one making under $200K would pay more taxes and he’s got an unacceptably high deficit. I wouldn’t rule it out. He already made it clear there would be no more homebuyer credit. I think he realizes he needs to take a harder stance or he’s finished.
You are right, it may not pass. If it doesn’t, Obama’s presidency is over – deficits will be higher than the American public will bear and they’ll run him out of office on a rail
Now it’s you think this. You think that. You’re right it might not.
All a whole lot different than your initial post, which was designed to rile people up.
Cut it out. You’re always the boy who cried wolf. What a drag your character is.
“All a whole lot different than your initial post, which was designed to rile people up.”
Yes, you’re right anonn (sarcasm, and here comes more). My initial post made it seem like a certainty. Judge for yourself:
“Will Obama’s proposed 25% reduction in the mortgage interest deduction cause more people to sell and fewer people to buy until prices fall further?
Stay tuned!!!
Posted by: tipster at February 1, 2010 3:41 PM
”
You’re sooo convincing anonn!
“I’d say dozens of the higher priced properties shown on this site and elsewhere have been getting into contract and/or selling. So would most people who actually follow the specific market.”
So the realtor who makes a living only if places sell says that his anecdotal observations differ from those of one who works with the hard data. Tell us what, anonn, why don’t you post the numbers for $1 million-plus Bernal sales in 2007, 2008, and 2009? Let’s see how higher-priced properties are selling compared to the recent past.
There may be “dozens” of higher-end places selling in SF, but there are way, way fewer than there used to be. That, of course, is the point of the Forbes article.
Thanks for the link, missionite. The AGI vs. gross data you gave fits more with what I would have guessed.
If you are a business owner, it’s more complicated because “gross” revenue isn’t the same as “gross” profit. People often mix that up when they are talking about taxes. It’s also a good reason that the argument that small business owners will be hurt by the $250K+ AGI tax increases doesn’t hold much water — most of the people who complain make $250K+ in revenue, not profit.
Tipster and Missionite, thank you for the interesting, informative, and spirited debate! I often visit SS for this type of intelligent banter. My husband and I were just discussing the other day what impact Obama’s proposed mortgage interest deduction would have on us(we’re planning to buy a house sometime this year or next – before son enters kindergarten). I am also a RE bear. I absolutely believe that a house is a terrible financial investment, but still want to buy for the same intangible benefits that Missionite describes. However, my mantra has changed from a naive and foolish: “I want to buy the nicest house we can stretch to buy” (3-4 yrs ago before I discovered SS and Patrick – thank god!) to now: “I want to spend as little money as possible on a modest house that I will still love because I NEVER want to be a debt slave.” So thank you Tipster, Missionite, ex-SFer, Satchel/LMRiM, et al for all your insight!
You’re welcome. You were devoid of enthusiasm and intent entirely to be sure. And of course, here’s something else. You are among the loudest voices who routinely discounts how much the tax deductions that may or may not go away are worth to homeowners right now in the first place. So which is it? Are they worth next to nothing in the grand scheme of things now? Or will they be a game changer once they potentially get altered? Because you can’t have it both ways.
Yes Jimbob that’s right. A lot of the squealing is by people who aren’t even close to being affected.
Tipster,
I am still waiting patiently for you to show some integrity and admit that you made up your “25%” figure out of whole cloth.
As for your most recent post, please show me the math on how anyone, ANYONE, would lose $9k a year with the deduction cap? The max I am able to acquire (given a standard loan at 5%) is about half that. So $375/month not $750.
Lenders don’t consider deductions at all when running debt to income ratios. They look at gross income not taxable. It’s your monthly cash flow they are worried about, not your annual tax bill. So that $375 isn’t going to factor into their DTI calculations.
Now you could argue a buyer might freak out over that extra $375, but let’s take a look at what that means.
Go here:
http://www.smartmoney.com/personal-finance/real-estate/how-much-house-can-you-afford-9680/
To get a loan for $1.1M you are going to need to show monthly income of $26450, or $317k a year.
(I’m assuming monthly taxes and insurance of $1500 and no other monthly debts so we have a clean apples to apples comparison).
Now the bank doesn’t give a crap about the change in deduction rates, because they are banking on you having roughly $18k/month in wiggle room after paying your mortgage. So they don’t even factor it in. If you got the cash flow, don’t have too much debt, and you can prove it, you are in.
It’s hard to imagine someone with $18k in post housing income deciding they couldn’t afford it because the government taxed them an extra $375/month. That’s 2% of their post housing income. If 2% of your post housing income makes that much a difference in your ability to pay then you are clearly heavily in debt, or spending way too much money, and the bank won’t lend you the money in the first place.
But let’s say lenders did factor it in. Would it translate into $150k less purchasing power?
Well plug it into the calculator and you see that $375 less monthly income translates into $19k less lending power. And even your worst case scenario of $750 less income translates into $39k less buying power. Not even close to the $150k you predicted. This, however, is not how the world works.
So the question I would put to you, is do you honestly believe that someone with $18k a month in disposable income is going to go be able to demand a 15% drop in housing prices because of a 2% drop in their post housing income (350 = 2% of $18k)?
Good luck with that.
“Are they worth next to nothing in the grand scheme of things now? Or will they be a game changer once they potentially get altered? Because you can’t have it both ways.”
Sure you can. The current tax benefits of homeownership are often overstated or exaggerated, sometimes out of ignorance but often in an attempt to deceive. Nevertheless, what benefits there are appear to be soon reduced.
You, anonn, are guilty of a false dichotomy.
I read this legislations as:
Tax deductions are coming so get in now while the gettin is good. In a few years when the legislation is inacted you will being paying less in interest anyway so it won’t hurt you as much as a new buyer.
Buy now or be mortgage deductioned out forever.
No, it’s a real one as Tipster was calling it a potential game changer. That doesn’t jibe with your response; you are going “realtor slam” about a separate issue, which is overstatement of benefits. So you seem to be saying that they’re not much. That doesn’t fit with potential game changer. That’s it tho. If you want to talk to me in the future pick a name. Also maybe make sense. What did I tell you about throwing around big nettyspeak words like false dichotomy?
No, “overstatement of benefits” is not the same as “they’re not much.” That type of argument is called a “strawman.” I have no idea what “nettyspeak” means — guess that just means something you don’t comprehend.
And in comes “strawman.” yay. pathetic. You’re beyond cliche.
Overstatement of benefits doesn’t jibe with the weight Tipster gave the eventuality. Therefore your defense is just you wantint to argue with me, yet again. OK A.T? (Assistant Tipster)? If you want to parse my language then embrace a name. A.T. is fitting. How does it grab you?
Wait, I don’t get the $4k delta only calculation? Maybe I can’t do math. Can someone explain why the before/after proposed regulation calculation is $4k for me, I’m too lazy. Lets use 1/2 million income, 10% down on a $1.5M house. No significant deductions or credits other than standard.
With that said, my as-is NPV calculations put my home project negative, and this proposed law only makes it worse. I suppose if its really only that insignificant this wouldn’t change the demand curve for housing much – so perhaps I agree there.
I do put little value on home ownership. I put tons on nights-at-Relais Chateaux and dinners at Cyrus. So, agree to your point there.
Gee, anonn, sorry I actually know the terms for all of your logic flaws and poor debating techniques. Sure, A.T. it is. But it stands for “Awe-inspiring Talent.”
“As for your most recent post, please show me the math on how anyone, ANYONE, would lose $9k a year with the deduction cap? The max I am able to acquire (given a standard loan at 5%) is about half that. So $375/month not $750.”
You are forgetting that state taxes and property taxes will also be subject to the cap.
That’s less money in pocket. If someone was stretching to get their first home, as most do, they are going to have that much less to spend.
My experience is that most people run the numbers when they buy a home. They work out an acceptable budget of expenses and then put the rest into house payments. Part of the expenses is taxes paid and those are going way up. Not just because of the mortgage deduction, but also because of the property tax deduction and the state tax deduction.
So what’s left over is smaller and that’s what typically gets spent on housing. Prices will have to fall. No way out of it.
AT, you have read a lot of internet BBS’s and you’ve adopted a very Internet way of being dismissive and evasive in your Internet arguing. That’s all have done. Considering you don’t really care about anything other than being contrary, I suppose it’s clever to get people like me who care about these subjects to talk to you from time to time too.
AT, as an exercise, perhaps you could train your finely tuned Internet arguing stylings on the series of logical stretches Tipster just used to try to get out of the corner Missionite put him in. Thanks in advance.
Not to change what is a very interesting topic, but did you guys notice that Blu, just lowered prices by about $35k, for the units they have on the MLS.
I’ve been saying the same thing all along, anonn. Apparently, you and missionite didn’t understand it.
“The after tax monthly payments will have to stay the same and if you cut the tax deductibility from 35% to 28%, that’s a significant hit. The hit extends to property tax too.
The limit will also apply to state taxes. That’s going to reduce people’s after tax spending.
People have been stretching to afford the payments on their first home. They take every last dime. If you take an extra $3K out of their yearly spending because their state tax deductions are limited, and another 5K in mortgage interest deductions they can no longer get each year, and another 1K in property tax deductions, they simply have that much less to spend on their monthly mortgage.
The money has to come from somewhere – lord knows raises are going to be insignificant this year. To knock $750 out of their annual income, to someone spending every last dime on their first house, that’s over a $150K hit to your hypothetical $1M home with a 5% mortgage, or they won’t be able to afford the mortgage payments.
Posted by: tipster at February 2, 2010 1:22 PM”
Can’t we explain such a proposed law simply as an increase in cost of home ownership for certain income bracket buyers – and likewise – a certain price range of houses? If so, shouldn’t we be thinking of this as a move up/down the demand curve (as opposed to a shift) – and therefore, those houses slightly cheaper than the aforementioned range should enjoy an increase in demand? That is, some richer folks will want to buy ever so slightly cheaper homes?
But ahhh you say, can someone with such income stand to live in an even crappier SF condo than they were already forced to consider? That is where I come in and say yes – forget it – just another reason to rent.
As such, I could argue an undulation in the demand curve occurs at exactly the point at which folks with so much money they don’t really care – but enough money they don’t want to slum it exists.
Or how about a totally different way to view this. My current break even 7-year appreciation is at %3.63/year. This might change to something ever so slightly higher if the law passes (that is indeed the question here right?). All that will do is cause me to hold out even longer before buying so I can at least pretend to get a 7-year %28+ appreciation on my house. Hold out = longer time for rebound. That’s all we’re saying here.
No. What you’ve been saying all along, as in, ever since I’ve taken notice of your posts on this website, is that r.e. tax deductions are really quite small in the grand scheme of things, and certainly not the big deal that realtors make them out to be. Yesterday you changed your tune. You started talking about how everyone who buys a house is uber-stretched, and amid numerous exaggerations (pointed out by others than myself)of the effect that may not even take place, asserted that they are part and parcel and very much of importance to buyers. Their hypothetical reduction could be another nail in the coffin basically. This despite that per your previous assertions, a small reduction of a small amount wouldn’t stand to mean a whole lot. The reason why is obvious. You grasp at every last straw you can ever find to talk the market down. Whether or not it makes you out to be a hypocrite isn’t even of secondary importance, it reads.
Tallguy,
It’s pretty simple really:
The proposed law caps the deduction rate at 28%.
The highest tax rate is 35%, so the maximum effect of the law is 7% (35% minus 28%).
You can only deduct the interest paid on mortgages up to 1.1M.
A 1.1M 30 yr fixed mortgage at 5% (and really you can easily do better than this right now – our mortgage is 4.75%) will generate interest payments of $54k in year 1, $51k in year 5, $45k in year 10 and so on until we get to year 30 where you only pay $1882 in interest.
So the first year is the worst.
$54,631.44 * 7% is $3824.20 the first year, or $318 a month.
As the amount of interest you pay declines every year, so does the impact of the law. The impact in year 30 is about $10/month.
The average impact over the entire 30 year loan is $200/month.
But that $3824.20 is the maximum amount you can possibly “lose” in any given year under any scenario. As you correctly state, the impact on the demand curve is not likely to be above the noise floor, particularly at these income levels.
NPV will be negative on a home. It’s not much of an investment anymore that’s for damn sure. And I can’t fault your taste in restaurants or hotels. So where you choose to spend your money is up to you, but based on your posts it sounds like you weren’t a motivated buyer to begin with. And from my experience if you aren’t a motivated buyer, you aren’t a buyer in San Francisco. You can sleepwalk your way into a home in most other cities, but not here.
Very good. Thank you for the by-the-numbers analysis; apologies for being lazy (and thank you for the buy-v-rent excel file).
So then agreed, this is somewhat moot, but simply increases my already entrenched-in-one-camp thought process (as you pointed out).
Perhaps I should just rent in SF and buy in Tahoe where my heart lies. Better yet, Incline village where I can live 50% of the year and change this whole situation…
I think the impact on SF real estate is somewhere between missionite’s nada and tipster’s catastrophe. Closer to missionite’s read. Using missionite’s numbers (and the 5% rate on a jumbo is not realistic), IF this change passed (a big IF) a buyer with a $1M mortgage, which is not rare in SF, will see just under $4000 in tax savings disappear. But he will also see tax savings from state taxes and charitable deductions reduced, say $6000 or $7000 less in the pocket post-tax overall each year. That is not chump change, even for someone earning $350k gross, which is a valid profile for someone taking on a $1M mortgage. Someone stretching to buy that $1.3M home with the $1M loan now just might think twice about it and decide he can only afford a $1.2M home and a $900k mortgage. Tipster overstated it in his original post, but it is real.
Hey, I totally forgot about my 2-night-less-a-year Auberge stay due to the state tax deduction reduction. I’m upgrading my ‘moot’ effect status to ‘meaningful’.
Tipster,
First of all, don’t even bother responding unless you can show some integrity and admit you were wrong to say the mortgage interest deduction would be reduced by 25%. I am still waiting for you to admit this. It’s really lame that you are unable to do so.
Second of all please read my posts and try to understand them before commenting.
“The after tax monthly payments will have to stay the same and if you cut the tax deductibility from 35% to 28%, that’s a significant hit. The hit extends to property tax too.”
The “significance” of that hit is highly relative. As I stated above, the maximum effect/worst case scenario of this in terms of the mortgage interest deduction is $318/month.
Most observers think the bill, if it is passed at all -which is highly unlikely- would be limited to certain kinds of deductions, so your fear of across the board deduction caps appears unjustified.
But let’s game it out anyways: Property tax on a 1.375M house would be $15k a year. So you can add another $90/month or so for the impact of the bill on your ability to deduct property taxes.
I find it really hard to believe this would apply to state taxes when the budget makes it clear they are talking about charitable contributions. And state taxes are harder to predict as everyone has different scenarios, but let’s assume someone was paying 9.3% on 100% of the aforementioned $312k in income (which is the bare minimum you need to qualify for a $1.1M mortgage). This effect of this proposed bill comes out to another $169/month.
So all told (mortgage, property taxes, state taxes) we are now up to $577/month, or $7k a year.
There are condos on SS every day with higher HOA fees!
So now instead of $18,000 a month in disposable income they will only have $17,423 a month in disposable income after paying their mortgage and property tax, assuming they are budgeting for the difference. So you have gone from 2% of their disposable income to 3%. Keep in mind this is the worst case scenario for the highest bracket earners. The horror! I can hear housing prices tumbling as we speak!
My guess is that you have never purchased a home in SF. And you don’t have a sense of what money feels like at these levels. Here’s a clue: if you like to eat dinners at Cyrus, and spend nights at Relais Chateaux then you aren’t afraid of spending $1200+ in a single evening. And you aren’t likely to change your mind about a house purchase over a couple hundred bucks.
Tallguy:
LOL at Auberge. The sacrifice is almost unbearable, huh?
Once, again, I pointed out the correct calculation ages ago — you take all 30 years worth of adjustments and adjust to present value to determine the deduction from housing price. The answer is non-zero, but certainly less than what tipster is suggesting:
But missionite — you can’t just think of it as $1500-2100 (or whatever the calculation comes out to). It’s $1500-2100, adjusted as principal, for 30 years, adjusted to present value. Btw, if interest rates were, say, 8% on a jumbo non-conforming $1M loan, that’s potentially $4K/year.
Posted by: JimBobJones at February 1, 2010 5:20 PM
“Using missionite’s numbers (and the 5% rate on a jumbo is not realistic)”
Rates change nearly hourly, but I found 5.133 for a $1.1M loan on bankrate.com about five minutes ago.
“Someone stretching to buy that $1.3M home with the $1M loan now just might think twice about it and decide he can only afford a $1.2M home and a $900k mortgage.”
The thing is that banks don’t really let you stretch anymore, at least not in the sense you are talking about. Most of the time these days you need 20% down, and a solid DTI ratio. If you have both of those you shouldn’t really be stretching to pay your mortgage unless you are doing something wrong. Could this have some marginal effect? Of course it could. But there are much bigger factors affecting purchasing decisions (interest rates, the economy, housing market in general etc.). It’s like blowing on a feather in the middle of a hurricane. It has some effect, but it’s damn hard to measure over the howling winds. I don’t think it’s going to convince large groups of people to not buy, or even look for a home that’s $100k cheaper. And if you don’t have large groups of people doing it you aren’t going to have any price movement because of it.
And that’s what I have been pointing out all along. Whatever effect this proposed law could potentially have would be marginal and barely noticeable if at all.
“I found 5.133 for a $1.1M loan on bankrate.com about five minutes ago”
C’mon missionite, from “Capstone Direct Inc.”? Good luck getting that loan! Your point is valid. Don’t oversell it with faulty assumptions.
“Once, again, I pointed out the correct calculation ages ago — you take all 30 years worth of adjustments and adjust to present value to determine the deduction from housing price. The answer is non-zero, but certainly less than what tipster is suggesting”
This would be right if we knew for a fact the law was going to be in place for 30 years. But we don’t. So if the law was repealed a year later the seller would feel ripped off since they discounted 30 years of taxes that don’t exist.
So the correct calculation is whatever number the buyer and seller can agree on, which is a number that in my estimation won’t be high enough to clear the noise floor of other factors the buyer and seller will be considering during their negotiations.
Did anybody notice any sort of uptick in prices in SF the day after the $8k taxpayer credit went into effect? I sure didn’t.
“Did anybody notice any sort of uptick in prices in SF the day after the $8k taxpayer credit went into effect? I sure didn’t.”
No, but if one were to analyze things, one may have noticed the slightly fewer days those properties sat on the market or the closer they sold to list price. But this is a consequence of the property market being illiquid and a small sample size, not bad math. In the aggregate over time, it should be what I said.
“C’mon missionite, from “Capstone Direct Inc.”? Good luck getting that loan! Your point is valid. Don’t oversell it with faulty assumptions.”
Bank Of America is 5.62% today. 5% might be slightly low. I just did 4.75 back in October so that was my basis. It’s another $40/month to bring it up to 5.6.
I’m still holding solid at more than moot but less than significant effect.
And I’m still waiting for tipster to acknowledge his mistake.
Not a mistake.
Your discounting the present value of 30 years of reductions including the last year when people pay almost no interest is laughable. People buying homes fix a budget for the next three years, and buy the home that fits the budget. They don’t run the numbers for 30 years, do a net present value of year 30 and then purchase accordingly. If they did, they’d run out of cash.
The only thing you’ve proven is how likely this is to pass. Someone making $150K – doesn’t care. Someone 20 years into their mortgage and making 300K – doesn’t care. Most of the country wants deficits to be reduced – if they hit the high wage earners, no one is going to shed a tear.
And your concept that every couple earning $250K is dining out on organic free range caviar is also just so unhooked from reality as to be hillarious. They are watching every cent.
According to you, another $150K is nothing, a drop in the bucket. If that’s the case, why isn’t every home being sold for asking. Why should the buyer waste time negotiating when there are vacations to be had? My reality is quite different from yours.
The reduction is going from 35% to 28%. 7/35= 20%. I was wrong, it isn’t 25% as I thought when I read the first articles, it’s 20%. Still a hefty number in my book.
Missionite. All this math is pretty neat. Thanks for putting all this effort. But I feel like we’re in 2005 again.
If only we could be sure that homes prices would go on appreciating at a 4+% clip over the next 30 years.
That’s the rationale there. Demographics causes home scarcity which causes rising prices. Because home prices are bound to go up over the next 5, 10, 30 years, then the price you negotiate today is not that important over the long run. This means you can pay 10% or 15% more than people paid last year and that will amount to not much in 5+ years. This in turn causes a 10-15% increase in prices, which attracts even more “can’t go wrong” people. This is a self-fulfilling prophecy that we saw at work during the 1995-2007 period. We all know where that went…
The BIG problem there is that these reasonable ~4%/Year have been massively pre-consumed. We’re overpriced because we had so many years at 10%+/year. Prices tripled in SF in 12 years (1995-2007), whereas these tame 4% would have produced a 60% increase during the same period of time. To correct this, we need either a massive decrease (currently contained by huge cash influx to ~20% and it looks like it’s not going much further) or a long stagnation.
To get prices to triple with a 4% annual increase, it takes 28 years. Say the 20% drop from 2007-2009 saved us 5 years. We’re left with 23 years of appreciation. If we start in 1995 this means we’re 8 years away from catching up with the 4% typical increase.
Tipster,
This is what you said:
“Will Obama’s proposed 25% reduction in the mortgage interest deduction cause more people to sell…”
This is the fact:
“The reduction is going from 35% to 28%.”
This is what you need to say.
“I was wrong”
Instead this is what you said:
“The reduction is going from 35% to 28%. 7/35= 20%. I was wrong, it isn’t 25% as I thought when I read the first articles, it’s 20%.”
OK, now I can at long last follow your logic. And it’s still wrong, even if you had not made your self admitted mistake. There are a couple reasons it’s wrong. First of all, it’s a cap, not an across the board reduction. So while it is a 7 percentage point reduction if you are in the 35% tax bracket, it’s only a 5 percentage point reduction if you are in the 33% tax bracket, and there is no reduction at all if you are in any of the other four brackets. Your statement strongly implies a global change to mortgage interest deductions, and the truth is that the proposed change is far more narrow than that. This is what I pointed out originally. It’s scare mongering, and isn’t accurate.
The second reason it’s wrong is that you are deliberately misleading the reader by introducing a new denominator without clearly saying so (the denominator in your case is now the 35% tax bracket instead of taxable income). Clearly you have chosen the 35% tax bracket to be the new denominator because it is so much more dramatic sounding to say 20% than to say 0-7%. This gives a reader the impression that a much bigger change has occurred than has happened in reality (which was what I thought when I read your post, and as a new homeowner was somewhat alarmed leading to my investigations above).
Using your logic a store could take an item that normally sells for $1.00, sell it at a discounted price of $.98 the next day, and then sell it for $.97 the next day and say they were discounting their discounted prices by 50%. It would be irritating to go all the way to the store and discover prices have only dropped 3%, don’t you think?
They could then drop their prices to .96 the next day and announce they have discounted their discounted prices 100%!
So this is misleading. It’s more kosher when we are talking about percentages to keep the denominator the same throughout the conversation. That way everybody knows what you are talking about. Or better yet, just say it was 35% and it’s now 28%. Of course it is acceptable to introduce new denominators when necessary, but it is important to be clear when you are doing so. In this case the original denominator was taxable income. The change in percentage points for a small minority will be 7%. For some it will be 5%. And for the vast majority it will be 0%.
Oh and I love how you open with “Not a mistake” and then in the same post admit “I was wrong”. So, uh… o..k…
“And your concept that every couple earning $250K is dining out on organic free range caviar is also just so unhooked from reality as to be hillarious. They are watching every cent.”
This sounds like a conversation you need to have with TallGuy who says he is doing exactly what you say he isn’t doing. I’m just pointing out that the proposed change is not large enough to have much effect on home purchasing decisions at those income levels. Maybe you know some millionaires recycling paper bags. That’s great. I don’t doubt it. But a couple guys you know aren’t going to move housing prices downward to any significant degree, and that was your original thesis.
And I still don’t see how you get to $150k.
Oh and I watch real estate almost pathologically, and I can tell you that houses are selling for over-asking all the damn time. Like the one I bought a couple months ago for example. My reality is based on, well, reality. Your reality, as you indicated you have not purchased a home, is based on conjecture. Get back to me when you have purchased a home.
Here’s what didn’t happen during our purchase negotiations:
1. An extended conversation about our tax liabilities/benefits and what effect that should have on the purchase price.
Here’s what did happen during our purchase negotiations:
1. An extended conversation about other offers that had been received and whether ours was the highest (it wasn’t – but we had better credit and could offer a shorter close).
2. A much shorter discussion about the fact the home did not appraise and how that difference was going to be rectified (we split it with the seller)
3. A really short discussion about some minor items that needed to be fixed (we lost that battle).
That is reality, in that it really happened somewhere besides your mind.
Simple Math,
I don’t see the correlation between what you are talking about and what we are talking about.
I don’t think anyone here has suggested houses will increase 4%, and I don’t recall discussing appreciation (or depreciation) on this thread at all.
Missionite, I applaud your efforts to correct Tipsters bad/misleading math. It’s become so common I’ve given up even reading his posts, but I’m glad somebody is correcting him, because there are probably people that read his drivel and take it as fact. He’s always very careful to have some semblance of reality in his math, even though it results in completely nonsensical conclusions, which always result in home prices crashing. Hmm, odd.
“And for the vast majority it will be 0%”
Not the vast majority of people purchasing homes in SF.
As for numerator and denominator issues, I always said that the deduction would fall by 25% (which has now been corrected to 20%). The deduction. It falls. By 20%. I’m not sure how much more plain that can be.
Tipster,
“Not the vast majority of people purchasing homes in SF.”
This is easily refutable. The current median is right around $800k http://www.rereport.com/sf/ron/
The gross income required to buy a home for $800k is about $170k/year. Taxable income on that gross income is likely to be around $136k, which if you are a married couple actually doesn’t even meet the threshold for 28% let alone the 33% required to feel any effect from this bill. Even if you were single AND taxed on 100% of gross income you wouldn’t reach the threshold for 33%.
You don’t start hitting the 33% threshold until the home gets north of $1M, and that’s well above the median for San Francisco.
Show me some reliable data that suggests even 40% of people buying homes in SF are in the 33 or 35% tax bracket and I’ll change my mind, but your anecdotal and cherry picked evidence is not persuasive.
“The deduction. It falls. By 20%. I’m not sure how much more plain that can be.”
Yes you are quite plainly misleading. Because even using your misleading choice in denominators the deduction only falls by 14% if you are in the 33% tax bracket, and it falls by 0% if you are in the 28% tax bracket and it falls by 0% if you are in the 25% tax bracket. And there are SF home buyers in all of those brackets. Look I’m a real estate bear, and I think there a lot of ways to make a pretty credible case that real estate isn’t a very attractive investment over the next decade or so, but cherry picking your numbers and highlighting the biggest numbers that are actually affecting the least amount of people is not a credible way to advance that narrative.
tipster, I think the problem is that you’re overstating the consequences, oddly, JUST LIKE the people who overstate the tax benefits of buying a house.
“The deduction. It falls. By 20%.”
Interest is between, let’s say, 4% and 7%. The deduction itself is between 10% and 35% of interest. And the change in the deduction is between 0% and 20%. You have to multiply all those things together, as applicable, to figure out the true effect.
What the mortgage interest deduction serves as, normally, is a subsidy in the interest rate paid on a mortgage. Certainly the proposed provision you’re talking about creates slightly less of a subsidy for a small percentage of the population, and housing prices will adjust in the aggregate over time to this change in subsidies. But I really don’t see how the change in subsidy is as high as you seem to think it is.
You’re talking about at best a 7% change on the overall mortgage rate, which means a 7% change on IO loans and less than a 7% change on traditional 30-year fixed. That’s not insignificant, but it’s not as catastrophic as you’ve been saying either. If we suddenly went back to Reagan-era top marginal rates of 28%, the same thing would happen. It’s just that some people get a 5% or 7% better subsidy now.
OK, you guys have convinced me, the effect is not as great as I initially thought.
First, a final incorrect point:
The deduction itself is between 10% and 35% of interest. And the change in the deduction is between 0% and 20%. You have to multiply all those things together, as applicable, to figure out the true effect.
No, you don’t have to multiply anything together to get the effect in the *deduction*. If you are getting a 35% deduction and it drops to 28%, the deduction itself falls by 20%. The cost of the mortgage may fall by a lesser percentage, but that wasn’t what I was talking about.
However, the fact is that the qualifying income for the median in SF currently hits right around the 33% tax bracket, and so it’s only going to be homes purchased above the median that will get hit. The upper end will suffer this, but the lower end will not and even homes a bit above the median will not get hit by much.
So it’s save to say that the median will probably not change by much, the low end won’t see this at all, and the upper end will in fact see a hit. Probably the biggest effects will be in the $900K-$1.5M, where people take out mortgages. Above that, the effects will start to wane again as fewer people take out mortgages, and one thing you guys forgot to mention, which is that the deductibility of the mortgage becomes less of a factor because it is capped at $1.1M and so the mortgage deduction becomes less of a factor in buying. (Note that I am intellectually honest in that I brought up a point that no one else has. My point was to inform, not mislead).
So in the $900K-1.5M range, this is going to be a significant problem, a minor problem from 1.5M-3M, and above that not much of a problem at all. Below 900K, there will be some effects from above, so it hits everything, but probably by a relatively small amount, something on the order of 5% or so.
missionite, I was commenting on the spreadsheet, not the hair-splitting contest you had with Tipster.
The rationale that buying is better than renting becomes evident only if potential appreciation is taken into consideration, or if the purchase price is low (2 things that often correlate).