It’s different this time…

[SD Realtor]

I would agree with the side that the prices will revert to the mean. I don’t know what that will be but we will all find out. Powayseller and I were talking a bit about this today, that we all should keep the conversation within a local context. That is, each mean will vary for each persons neighborhood. Overall the mean may be a 50% slump over the next 3 years but it is doubtful that beachfront property will slump 50% right? Similarly it is highly probable that other developments will slump over that number. These could be spots that appreciated much faster then other spots, be it condos in UTC to many of our favorite high end Carmel Valley subdivisions. It is all speculative.

So personally I do believe the slump will be big and it will hurt bigtime.

*****

Other thoughts…. I am not an expert on Prop 13 but as I see it, one of the remarkable failures of prop 13 is that it allows for tremendous tax advantages for commercial and corporate owned properties. I think that the intention of providing relief for individual consumers has worked very well. However, there is TREMENDOUS lost revenue on commercially owned property that has not changed hands for a long time.

Someone can correct me on that…

*****

Yes if prop 13 were repealed I think it would add a SUBSTANTIAL depreciation factor to the market. As an owner of a few rentals my choice would be to sell them or to pass the hike off in a rent increase.

Several people I know who live on fixed incomes would also be hit in an very substantial manner.

I think there is a way to fix prop 13 so that it would work as it really was intended to work.

*****

[PerryChase]

Politically, there’s no way to fix Prop 13. The whole tax structure in CA and USA needs fixing but there are too many special interests involved.

The ideal would be to have a progressive tax structure with protection for the disadvantaged.

[no_such_reality]

The Buffet Dilemma

Again, a policy like Prop 13’s impact is only felt decades later…

Warren Buffet owns home in Laguna Beach, he bought it back in the day, like 25-30 years ago. Appraised tax value under prop 13 was limited to like $200K, (bought at like $100K or something) currently worth $4,000,000. His neighbors place was taxed at $5,000,000. Hence, Warren paid something like $2264 in property tax and his neighbors tax bill was something like $50,000.

But that isn’t the real problem with Prop 13. The real problem is that property taxes are no longer the domain of the local community, instead going to the general fund to be re-doled out at a statewide level. Hence, property taxes are no longer a local issue, property taxes no longer make the local community better or worse.

[equalizer]

If Prop 13 limited tax increases, then wouldnt the state go broke, or were the added taxed not needed. If they werent needed, then why not change the tax rate instead of playing favorites with people. So if the tax rate were 1.1% and housing prices went up 20%, then next year the rate would drop to 1% for all. There was inflation outside of housing and thus state costs were higher. I’m just rambling here so I’m sure I’m missed something huge.
If prop taxes were the reason seniors lost their houses, then why did Prop 13 apply to rental as well. Could it be that politicos had rental property or were bribed by CAR? NOooooh way.

[powayseller]

Daniel, great post. I am just now reading it all.

Every asset bubble in history reverted to its mean. The mean would be the continuation of the pre-spike trendline. Let’s look at the NASDAQ, since you brought up that example.
The investors that I follow (Bill Fleckenstein, Barry Ritholtz at The Big Picture, Mr. Yamamoto, Zeal) say that stock market is still overvalued. The NASDAQ bubble certainly corrected. Look at this chart. It rose steadily for many years to reached a value of around 2000 in mid-1998, shot up to a high of 5046 on 3/9/2000, and then reverted back to its pre-spike value in mid-2001, and hasn’t budged since. It last closed at 2085. While I only lost $2K in tech stocks, I heard people telling me they lost hundreds of thousands, or even half of their retirement money. They have not earned it back.

[powayseller]

bmarum – this is how we should be evaluating home valuations: as a multiple of rents. Leamer says in the article “San Diego’s current P/E is nearly 30, compared with a 1989 high of 23.4.” This model makes homes 21% overvalued. But with many homes already down 10-15%, I wonder how accurate this model can be for forecasting. If true, the San Elijo Hills homes have pretty much bottomed out already.

The problem may have to do with Leamer’s time of data gathering. The table shows the P/E ratio of San Diego was 29.7 in 2001, and the latest figure is “nearly 30”. It is difficult to believe that during the period of the highest runup, the years 2001 – 2005, the ratio went from 29.7 to 30. Something is definitely wrong there.

The P/E is the median home price/annual rent for 2BR apt

Using the other article you posted, this would give us, based on June 2006 data for San Diego County
$ 585,000 /$1442*12 = 33.8

Using today’s numbers, the home price/apt rent model would bring homes down 30%. (33.8 x .7 = 23.66)

For greater accuracy at estimating SFH prices, I would look at the historic rate of SFH rentals, not apartment rentals in my equation. I read on this forum that 4plexowner looked for properties priced a 8-12 times annual rent. We are much higher than that now. Anyone care to do that analysis? Many of us are renters. It should be easy to do.

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