Why Don't Renters Receive A Tax Deduction In Kind?

Following the wildly successfully Open House Weekend in Southern California and Orange County, I was taking inventory of all the cash being thrown around by our federal government ($8000 federal tax credit) and the now de facto bankrupt state of California ($10,000 tax credit over 3 years) and I asked myself a silly question:

Why are any American taxpayers supporting or subsidizing this approach?

I think the answer is that as human beings, beliefs inform our actions. If you believe that the national and/or state economy will only turnaround by re-invigorating and re-inflating a collapsed asset bubble like real estate instead of subsidizing local jobs and new industries, then you will no doubt support such real estate tax subsidies. If you only get paid when a home is sold (due to the lure of such tax subsidies), then you'll also no doubt lobby support for such subsidies to continue.

My question is why can't renters receive similar tax benefits and subsidies?

Is it because Realtors don't get paid a commission when a renter extends his lease contract?

I can't think of any reasons why renters should receive fewer benefits on the national and state tax front. Or conversely, I can't think of why renters should suffer more under the current federal and California state tax codes.

Renters also have tight household budgets. They have work obligations. They pay federal and state incomes taxes. Many also have families, as well as short- and long-term financial goals that they strive to meet. Renters also volunteer and serve local communities. It might also surprise people to know that renters also happen to vote. The President of the United States, members of the US Congress, the Governor of California and the entire state legislature in Sacramento would be wise to remember this last point.

The suggestion I keep hearing is that renters don't pay property taxes, and therefore are equivalent in some way to a second-class citizen on par with extortionists and tax evaders. It is argued that renters sidestep responsibilities to the greater good and the community at large. By not paying property taxes directly, renters don't help to fund local schools and keep cities and towns "nice" and "safe". Because they do pay property taxes directly, homeowners (most of them actually homedebtors) meanwhile are to be commended and rewarded by both state and federal government (and thus by taxpayers everywhere) in the form of tax breaks and loopholes.

Is this fair taxation?

I consider it unfair and I would continue to believe so even as a homeowner (homedebtor) myself someday.

Maybe I'm old-fashioned, but I prefer to pay my own way. I don't like freeloaders. And I dislike the idea of anyone portraying me as such just because I didn't buy a $700K single family home when I first moved here five years ago.

The property tax argument is also ridiculous. Any landlord who is a landowner (or landdebtor) who pays property taxes himself, but fails to apply or distribute such costs to his tenants via the monthly rent charge might be a nice person, but he'd also be considered a financial imbecile, or both. Renters do pay property taxes. It's embedded in the rent they pay.

So I just don't get it. As a renter, I'm already accustomed to paying my fair share of income taxes both state and federal. But why are home debtors afforded greater protections under the United States federal and state tax codes?

Can someone explain to me why this is? How is this arrangement fair and equitable, and more importantly, what convinces people that these $8000 and $10,000 tax break arrangements are money well spent, benefiting the greater good to such an extent that no other options or subsidies be considered?

Seriously, I'd really like to know an answer or two.

California is $42 Billion in the Hole

California Realtors might want to rethink that "great schools around the corner" bit within their age-old home sales pitch. By now the whole nation knows that the state of California is fucking broke. You know, for being the 9th largest economy in the world, California's education system is already national disgrace. And this 2009 budget deficit is not going to improve things in this regard. There are no quick fixes. Any resolution will be a painful, drawn-out process because we Americans are seemingly incapable of making difficult decisions.

California must cut jobs and must cut services, or raise income, gas and property taxes to unbearable levels that nobody can afford to make a decent living here. Even without the current budget crisis, California real estate values outgrew incomes at ridiculous rates between 2001 and 2007. Realtors, mortgage brokers and their self-congratulating enablers on Wall Street all applauded the intoxicating run up.

But now here we are.

Any sale today is likely linked to a foreclosure or the threat of a foreclosure. Counties in California will struggle to earn the same property tax remittances they did in years past. Schools will suffer even further. Home prices may continue to fall dramatically in 2009 as Alt-A loans reset. The national and global economic downturn and fear of job loss will continue to restrict discretionary spending. The recent US bailout will require the printing of money. Unless interest rates are soon raised, inflation will roar across the nation. There is also every reason to believe that oil prices will begin a steady incline once again because the economies of China and India have returned to the bar. And they're fucking thirsty. And finally let me just conclude by asking this question:

Where will the riots begin?

Oh California. You really thought you could have your $700,000 single family home, a HELOC from hell, granite countertops, a new fountain swimming pool, and a new white mustang for your Oprah-watching Mrs., didn't you!? Didn't you!?

Sinner!

A Weekend With The Realtors

I visited some open houses (5 single family homes) over the past weekend in Lake Forest, California.

Many of the homes I viewed were completely and utterly outside my realm of affordability - which pretty much sums up all single family homes for sale in Lake Forest today, despite numerous foreclosures and a certain degree of home price corrections as a result. But hey, I thought it would be interesting to view a few of the local homes that were for sale in the nose-bleed pricing stratosphere ($700 - $900K) and also find out what some of the realtors or maybe some homedebtors had to say.



Here are a couple of observations (since a realtor was present inside each home during the open house). There were no homedebtors present from what I could tell.:


-All 5 homes were single family's in Lake Forest with 4 bedrooms and 2.5 baths or more. All had been on the market for 1 month or more. All had been subjected to price reductions of varying degrees.

-4 of the 5 realtors mentioned "increased local sales activity in Lake Forest" and "all-time low prices for the area" for single family homes. One agent used the phrase "there are some great bargains out there".

- 4 of 5 realtors mentioned that "now is a great time to buy". 2 said that phrase exactly to me. When I asked why they thought it was a good time to buy, they cited the historic high appreciation of home values here, good schools of Saddleback School District, access to local convenience stores, no mello roos in Lake Forest, and the recent price declines.

One realtor told me an interesting story suggesting that in Orange County the trend is that "we always have 5 years of an up market and 3 years of a down market".

- One realtor promised that the home he was selling for $899,000 today (marked down from $900K) would be worth $1.4 million in another 4 years.

- 3 of the 5 realtors expressed their opinion that the "the market has bottomed out" or probably has bottomed out.

- 2 of the 5 realtors said the market would bottom out this summer. One then back-pedaled and said "it'll bottom out by around September 15 at least.....but don't hold me to it."



- At one of the open houses, the realtor mentioned to me that he would cut his sales commission by one-third of a percent (but that he would have to clear it with his partner first). That owuld be 0.33%. Given the sale price of the home ($799K), this would be about $2,600 in potential commission savings for the buyer.

- One realtor acknowledged my entrance into the home but decided to continue a loud and boisterous converation with another client about her failure to convince her lender to "make a deal" about the new rate on her condo ARM loan. He then proceeded to explain to her what a short sale was and that he had a visitor and would need to call her back later.

When the above realtor got off the phone, he introduced himself and then told me about his clients' problem (did not mention her name), an elderly woman who can't afford the "new payments" on her condo. The realtor proceeded to say that he didn't understand why lenders don't work a solution out with their customers on these ARM loans. Then he decided to ridicule his client referring to her by saying "some people are just stupid".

- One beautiful 4 bed single family home I visited was for sale for $899,000 in a lovely Lake Forest cul de sac. Really terrific home. Was previously placed on the market for $915,000. Even though I stated to the realtor that I was just perusing and not serious about buying right now, the realtor said he was very sure he could talk the owners down to $879,000 but that the sellers would not go below $840,000!

I thought to myself, holy shit, the sellers may be screwed as it is with the fucked up housing situation of OC, but the realtor they've decided to hire is feeling footloose and fancy free about leaving plenty of cash on the table. If there is a case to be made for people to pay realtors an hourly wage instead of a flat % off the sales price, this realtor was poster material.

I left the last home really hungry and thinking about stopping by a local Pollo Loco restaurant for some lunch.

I then decided no. What I really needed was to take another shower.

2 Bed, 2 Bath Aliso Viejo Condo Awaits You. Just $430,000!

Aliso Viejo is a lovely Orange County community positioned south of Lake Forest and north of Mission Viejo, California.

16 Alicante
1,496 square feet in size ($287/sq foot)
2 bedrooms
2 bath
2 car garage
Price: $430,000
Last Buy Price: April 1993, $125,000

Assuming you can scrounge up $86,000 for the 20% down payment, you can finance the remaining $344,000 with a fixed rate 30 year mortgage. Monthly mortgage payment at a 6.13% mortgage rate from the local bank and presto: A monthly mortage payment of just $2,091.29. That was easy!

But wait a second. What do we see just down the road nearby?
Another 2 bedroom, 2 bath condo, slightly smaller in size, for $390,000!
A $40,000 difference!

87 Pamplona
1,213 square feet in size ($322.00/sq foot - WTF?)
2 bedrooms
2 bath
2 car garage
Price: $390,000 as of Feb 18 (holy crap!)
Original Buy Price: November 2006, $421,172 (holy crap again!)
Days on Market: 137 days (yikes!)

And dammit if both condos don't have brand new gas stoves!

Aarrrrghhh! Runaway!

Come on people! Let's get with the program, shall we!
The temporarily increased loan limits are starting to make no sense at all if people keep dropping their pants on price!

OC Realtors Said It Would Never Happen. Yet It's Happening Right Now.

L.A. Times is reporting that Orange County, San Diego County and LA County collectively showing a 17% price decline between January 2007 and January 2008. Only Las Vegas and Miami are worse.

The C.A.R. reported an increase in the rate of home sales in February by 10% over the previous month,but this still constitutes a 29% decline from February 2007 sales.

And then OC schools started to deteriorate

Call me crazy, but our illustrious Governator, Herr Arnold Schwarzeneggar, will be hard pressed to improve California's already abyssmal state elementary education ranking from 46th in the nation by laying off more teachers around the state. But that's exactly what must take place. And Orange County California is not immune as Fermin Leal, Eric Carpenter and Scott Martindale of the Orange County Register report today. The California State Budget is broken. Now elected officials wish to break state education to put the budget back in the black.

As many as 1,590 teachers in Orange County might get the axe.

Classroom sizes will now increase, student-to-teacher ratios will be higher than ever before, and "non-essential" programs like art and physical education may even be cut. Some schools are even trying to axed the school nurse.

What does the Orange County Superintendent of Education, Mr. William Habermehl, have to say about these new budgeting measures?:

"These could be the most devastating cuts our schools have ever seen," "I don't know how some of our school districts will be able to survive this and provide the same quality of education."

Districts in facing the most layoffs and cuts:

Santa Ana Unified

Anaheim City

Cypress

Saddleback Valley Unified

Saddleback Valley Unified?

Why that's Lake Forest, California's main school district!

What effect will these developments have on the housing market in Lake Forest, CA? Look, I don't know how many times I've heard from or read homesellers and realtors pumping up the value of OC schools. And they've been right to do so. Most OC school districts are just superior to the rest in the state. But given the budget cuts and layoffs planned in 2008, California's and OC's education ranking is facing almost certain decline. The only question is whether California might still manage to finish ahead of Louisiana, Alabama and Mississippi?

So declining quality of OC school districts might undermine the sales pitch of area realtors or homesellers when trying to justify the already ludicrous $550,000 plus single family home prices.

"The weather is 75 degrees and sunny almost every day, you're close to the mountains, the ocean and there's so much to do. Plus, the area schools are outstand.........Oh! Wait a minute. Back up. Scratch that bit about the local schools......"

The other interesting factor to watch in the coming years may be a decline in property tax revenues retrieved by the county. High foreclosures, combined with home prices not priced to market fundamentals, plus declining home sales, may equal fewer payers of property tax, which may equal Orange County Treasury trying hard not to look like Vallejo, California.

The facade is starting to crumble away, Orange County.

Now as far as OC jobs, let's hope few people are either in the mortgage industry or in the education market......