Prop 60 requires we purchase in early ’08

[cliff-hanger]

First a quick thank you to Rich and the vastly knowledgeable contributors on this site, and many of the linked sites as well. I’ve been tuning in for well over a year now but this is my first post. Although I am fairly good friends with a local RE broker, and I’ve bought and sold a few residential properties over the years, I have learned so much here and I am grateful to say the least.

ME: In SD since ’65. PQ Park Village h/o ’86. Married, two kids. Moved up in Park Village in ’89. Sold in ’06 and downsized to a 3/2 rental we had purchased in ’00 near Carmel Valley Rd / Black Mtn Rd intersection.

So now to the point… I’m hoping to get a better perspective on the prospect of buying a home where my wife and I will retire and live long term. We are presently looking in 4S, Torrey Highlands, and Scripps Ranch, primarily because we know these areas and have been happy with the family lifestyle here, but we may be open to other SD areas too now that the kids have moved on to college. We are not keen on mello roos since we already paid it for 18 years in Park Village, but we are looking at homes built in 01-03, which do have lower mello roos and fees than the newer homes or builders inventory in these areas.

Due to the provisions of prop 60 (one-time reappraisal exclusion) we would need to close on the purchase by June ’08 in order to fall within the two year time limit following our sale in June ’06. In view of this, we are thinking that we will need to have a few serious possibilities lined up and make an offer in the Jan-Mar time-frame (your thoughts…? especially on the timing since this is critical). The purchase price limit under prop 60 will be 110% of the price from the sale in ’06; this falls in the range of 850-875k and we are looking for a nice 4+/3+ home in that range. We will have about 50% down and ficos 775-825. Due to cash flow issues (i.e., college tuition 60k/yr for the next couple years) we will then need to sell our current home and apply the proceeds… payoff the new mortgage.

Of course if this was all happening back in ’04, I probably would never have thought to broadly seek such advice, but with the current market conditions and outlook, the down side risk over the next few years seems clear. Your thoughts on weighing this risk vs. the potential benefit of buying in early ’08 and carrying over the tax basis from the sale of our home in ’06 would be greatly appreciated. Comments/questions/suggestions all welcome.

[Bugs]

The way I see it, your assessment basis from a 1989 sale in 2006 would have increased about 25% or so above the purchase price. What’s at issue here is the difference in property taxes between your current assessment and whatever your new assessment would be on a 2001-2003 home in northern SD in 06/2008.

Given the price ranges involved, I’d be surprised if it was more than about $5,000/year.

So the question here is really whether you think it’s likley that the pricing in those areas will recede enough after 06/2008 to justify foregoing the advantage of buying by then.

For the sake of argument let’s say that you were buying a home in 4S that at its peak would have sold for $850k. Let’s say that by 06/2008 the pricing drops to $700k. If you think it likely that this home would stabilize at $600k or more you could conclude that it’s better to pay the $700k because of the break in your property tax bill. Bird-in-the-hand type of thing.

However, if you think that the market declines still have a couple years to go after 06/2008, it might make some sense to forego the property tax break. Don’t forget that renting will still be cheaper than buying after 06/2008 and you’ll still have some funds available for other investing while you wait. Play that well and your $5,000/year savings in property taxes – if that – could turn out to be peanuts.

It all comes down to what your opinions are about how long this downtrend will last and how far these prices will retreat.

[Bugs]

The way I see it, your assessment basis from a 1989 sale in 2006 would have increased about 25% or so above the purchase price. What’s at issue here is the difference in property taxes between your current assessment and whatever your new assessment would be on a 2001-2003 home in northern SD in 06/2008.

Given the price ranges involved, I’d be surprised if it was more than about $5,000/year.

So the question here is really whether you think it’s likley that the pricing in those areas will recede enough after 06/2008 to justify foregoing the advantage of buying by then.

For the sake of argument let’s say that you were buying a home in 4S that at its peak would have sold for $850k. Let’s say that by 06/2008 the pricing drops to $700k. If you think it likely that this home would stabilize at $600k or more you could conclude that it’s better to pay the $700k because of the break in your property tax bill. Bird-in-the-hand type of thing.

However, if you think that the market declines still have a couple years to go after 06/2008, it might make some sense to forego the property tax break. Don’t forget that renting will still be cheaper than buying after 06/2008 and you’ll still have some funds available for other investing while you wait. Play that well and your $5,000/year savings in property taxes – if that – could turn out to be peanuts.

It all comes down to what your opinions are about how long this downtrend will last and how far these prices will retreat.

[Bugs]

The way I see it, your assessment basis from a 1989 sale in 2006 would have increased about 25% or so above the purchase price. What’s at issue here is the difference in property taxes between your current assessment and whatever your new assessment would be on a 2001-2003 home in northern SD in 06/2008.

Given the price ranges involved, I’d be surprised if it was more than about $5,000/year.

So the question here is really whether you think it’s likley that the pricing in those areas will recede enough after 06/2008 to justify foregoing the advantage of buying by then.

For the sake of argument let’s say that you were buying a home in 4S that at its peak would have sold for $850k. Let’s say that by 06/2008 the pricing drops to $700k. If you think it likely that this home would stabilize at $600k or more you could conclude that it’s better to pay the $700k because of the break in your property tax bill. Bird-in-the-hand type of thing.

However, if you think that the market declines still have a couple years to go after 06/2008, it might make some sense to forego the property tax break. Don’t forget that renting will still be cheaper than buying after 06/2008 and you’ll still have some funds available for other investing while you wait. Play that well and your $5,000/year savings in property taxes – if that – could turn out to be peanuts.

It all comes down to what your opinions are about how long this downtrend will last and how far these prices will retreat.

[Ex-SD]

What Bugs said. Ditto!

[Ex-SD]

What Bugs said. Ditto!

[Ex-SD]

What Bugs said. Ditto!

[SD Realtor]

Bugs covered it all to well… as usual…

What you guys may want to do is simply chart out the data. Make an assumption on saving X$ a year in property taxes verses what yout think the depreciation (annual) will be for properties in the target market that you want to buy in. Also don’t forget to factor in your savings on renting verses buying. That is non trivial as is the interest you make on those savings.

The wild card here will be the assumed interest on your mortgage. That will be a factor you will need to play with to play out a few different scenarios.

I know it seems kind of daunting to do at first but really after you start it up, it is not.

Like Bugs said, the biggest question is how far down you think prices will go in the target market you are looking to buy in.

SD Realtor

[SD Realtor]

Bugs covered it all to well… as usual…

What you guys may want to do is simply chart out the data. Make an assumption on saving X$ a year in property taxes verses what yout think the depreciation (annual) will be for properties in the target market that you want to buy in. Also don’t forget to factor in your savings on renting verses buying. That is non trivial as is the interest you make on those savings.

The wild card here will be the assumed interest on your mortgage. That will be a factor you will need to play with to play out a few different scenarios.

I know it seems kind of daunting to do at first but really after you start it up, it is not.

Like Bugs said, the biggest question is how far down you think prices will go in the target market you are looking to buy in.

SD Realtor

[SD Realtor]

Bugs covered it all to well… as usual…

What you guys may want to do is simply chart out the data. Make an assumption on saving X$ a year in property taxes verses what yout think the depreciation (annual) will be for properties in the target market that you want to buy in. Also don’t forget to factor in your savings on renting verses buying. That is non trivial as is the interest you make on those savings.

The wild card here will be the assumed interest on your mortgage. That will be a factor you will need to play with to play out a few different scenarios.

I know it seems kind of daunting to do at first but really after you start it up, it is not.

Like Bugs said, the biggest question is how far down you think prices will go in the target market you are looking to buy in.

SD Realtor

[cliff-hanger]

Bugs / SDR,

Thanks for the succinct analysis that does seem to sum it up. Yes, it seems the biggest question is the most difficult one… I’ll definitely work on running some numbers based on your suggestions but the one thing I didn’t mention is that my wife seems fairly intent on locking in a deal before our Prop 60 two-year limit. I have to admit that under prop 60, selling near the peak and buying after a significant 18-mo. downturn does have a somewhat rosy appearance. Again, the big question is whether in this case it would have a silver lining…

I’m reading the tea leaves here and elsewhere and trying to figure out who is making the best and most realistic predictions about further price declines. I can tell you that I won’t know for certain until I can see it in the rear view mirror. From what I consider more trustworthy sources, I’m generally understanding that a bottom in this cycle probably won’t materialize until ’09-’10, but the question is how far would it go down in the neighborhood we choose. In some ways, the decision appears easier because we will be there long term and (acts of God aside) I do have a long term faith in SD RE. I remember riding through the early nineties when the downturn nearly wiped out my 30% down payment made in Nov ’89, but then… we weren’t selling. I think the areas we’re looking at are currently not falling further due mainly to the economy still holding up and the inventories there being limited to a relatively low number of must sell properties. However, it’s clear that rents and incomes are still out of whack with SD prices, and of course there is the question of how deep the wayward credit market effect will go.

So, if we assumed that our analysis would at best be based on a fair amount uncertainty, and possibly even falls into the realm of a 50/50 bet, I would be quite interested to hear which way you all would lean.

Thanks much for your insight and input.

[cliff-hanger]

Bugs / SDR,

Thanks for the succinct analysis that does seem to sum it up. Yes, it seems the biggest question is the most difficult one… I’ll definitely work on running some numbers based on your suggestions but the one thing I didn’t mention is that my wife seems fairly intent on locking in a deal before our Prop 60 two-year limit. I have to admit that under prop 60, selling near the peak and buying after a significant 18-mo. downturn does have a somewhat rosy appearance. Again, the big question is whether in this case it would have a silver lining…

I’m reading the tea leaves here and elsewhere and trying to figure out who is making the best and most realistic predictions about further price declines. I can tell you that I won’t know for certain until I can see it in the rear view mirror. From what I consider more trustworthy sources, I’m generally understanding that a bottom in this cycle probably won’t materialize until ’09-’10, but the question is how far would it go down in the neighborhood we choose. In some ways, the decision appears easier because we will be there long term and (acts of God aside) I do have a long term faith in SD RE. I remember riding through the early nineties when the downturn nearly wiped out my 30% down payment made in Nov ’89, but then… we weren’t selling. I think the areas we’re looking at are currently not falling further due mainly to the economy still holding up and the inventories there being limited to a relatively low number of must sell properties. However, it’s clear that rents and incomes are still out of whack with SD prices, and of course there is the question of how deep the wayward credit market effect will go.

So, if we assumed that our analysis would at best be based on a fair amount uncertainty, and possibly even falls into the realm of a 50/50 bet, I would be quite interested to hear which way you all would lean.

Thanks much for your insight and input.

[cliff-hanger]

Bugs / SDR,

Thanks for the succinct analysis that does seem to sum it up. Yes, it seems the biggest question is the most difficult one… I’ll definitely work on running some numbers based on your suggestions but the one thing I didn’t mention is that my wife seems fairly intent on locking in a deal before our Prop 60 two-year limit. I have to admit that under prop 60, selling near the peak and buying after a significant 18-mo. downturn does have a somewhat rosy appearance. Again, the big question is whether in this case it would have a silver lining…

I’m reading the tea leaves here and elsewhere and trying to figure out who is making the best and most realistic predictions about further price declines. I can tell you that I won’t know for certain until I can see it in the rear view mirror. From what I consider more trustworthy sources, I’m generally understanding that a bottom in this cycle probably won’t materialize until ’09-’10, but the question is how far would it go down in the neighborhood we choose. In some ways, the decision appears easier because we will be there long term and (acts of God aside) I do have a long term faith in SD RE. I remember riding through the early nineties when the downturn nearly wiped out my 30% down payment made in Nov ’89, but then… we weren’t selling. I think the areas we’re looking at are currently not falling further due mainly to the economy still holding up and the inventories there being limited to a relatively low number of must sell properties. However, it’s clear that rents and incomes are still out of whack with SD prices, and of course there is the question of how deep the wayward credit market effect will go.

So, if we assumed that our analysis would at best be based on a fair amount uncertainty, and possibly even falls into the realm of a 50/50 bet, I would be quite interested to hear which way you all would lean.

Thanks much for your insight and input.

[SD Realtor]

Ahhh Cliff that is the golden question is it not? My personal read (which is simply an opinion) is that things will stretch out longer then that. Left to its own devices I think the market would fall quicker and normalize quicker. Wildcards include a potential recession and in my opinion the bigger wildcard will be how we deal with the economics of a falling dollar. Sometime in the future the piper will be paid and interest rates will go up and if they go to where they need to go, that could have a much more whopping on the market then what we have seen in the past 2 years.

Also I think what you said is particularly true about your target market. It is supported in a heavy manner by working class people with strong jobs and 6 figure incomes. I do believe it will depreciate but where the bottom is nobody knows. Many will speculate it is another 30%, 50% perhaps more. I am not in the camp of a 50% depreciation but over several years I could see an aggregate of 30%, maybe a bit more or less…

This is probably the most discussed topic on this website, how far down will desireable areas go. You already know that correct?

Also if you are planning on buying, and it is for the long term of retirement then you can look at it two ways… One, that regardless of the price, if you are secure you can make the payment, then you are good regardless of the roller coastering of the market. Conversely, you can say, well, if I am buying for retirement, what is the rush? Why not sit tight another 2 or 3 years, and potentially save alot of money. Family harmony is important as well but I get beat down by the bears whenver I mention that so I will not harp on it…

Like you said, in the rearview mirror a few years from now you will know the answer. All you can do in the meantime is run numbers and see what they will look like so that whatever you do, you will not run into an unexpected event.

I know… I wrote alot but didn’t say much.

SD Realtor

[SD Realtor]

Ahhh Cliff that is the golden question is it not? My personal read (which is simply an opinion) is that things will stretch out longer then that. Left to its own devices I think the market would fall quicker and normalize quicker. Wildcards include a potential recession and in my opinion the bigger wildcard will be how we deal with the economics of a falling dollar. Sometime in the future the piper will be paid and interest rates will go up and if they go to where they need to go, that could have a much more whopping on the market then what we have seen in the past 2 years.

Also I think what you said is particularly true about your target market. It is supported in a heavy manner by working class people with strong jobs and 6 figure incomes. I do believe it will depreciate but where the bottom is nobody knows. Many will speculate it is another 30%, 50% perhaps more. I am not in the camp of a 50% depreciation but over several years I could see an aggregate of 30%, maybe a bit more or less…

This is probably the most discussed topic on this website, how far down will desireable areas go. You already know that correct?

Also if you are planning on buying, and it is for the long term of retirement then you can look at it two ways… One, that regardless of the price, if you are secure you can make the payment, then you are good regardless of the roller coastering of the market. Conversely, you can say, well, if I am buying for retirement, what is the rush? Why not sit tight another 2 or 3 years, and potentially save alot of money. Family harmony is important as well but I get beat down by the bears whenver I mention that so I will not harp on it…

Like you said, in the rearview mirror a few years from now you will know the answer. All you can do in the meantime is run numbers and see what they will look like so that whatever you do, you will not run into an unexpected event.

I know… I wrote alot but didn’t say much.

SD Realtor

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