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Apparently not, according to the latest thoughts of Older Buffett. Getting bubbly.

Oh well, 43% on a highly leveraged investment.

Typical home costs quarter-million
Valley resale price jumps 43% in year; fewer can afford a house

Glen Creno
The Arizona Republic
Jul. 14, 2005 12:00 AM

The record-setting resale housing market in metropolitan Phoenix hit another milestone last month when the price of a typical home rose to nearly $250,000....


Thank goodness for those supply-side tax cuts. That Phoenix free money has to be down mostly to that genius. Eh?

And those "rising" tax revenues? Stay less than 2 years and you pay tax. I've seen dozens bought and sold just in this rather small Glendale, AZ development, that is less than two years old. $$$$

Think of all the GDP and tax revenues the free money that is circulating creates.

Gotta to be good for the economy and tax revenues especially if this can go on forever, or pretty close to forever, I figure. I see quite a few people who seem to think that is going to go on forever. Look at that tax revenue, they say. Wow. Heck, the Bush administration was bragging just yesterday that they will "beat by a penny". Some folks still buying that old Wall St. trick, apparently, at TMF. We beat by a penny. The excitement.

Anyway, Young Buffett passed up 43%--almost that 50% Golden Target!!--last year. Hey, value is value.



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I'm not sure I follow your argument. You're saying that lower taxes creates more wealth which drives up real estate prices which causes a bubble? In a lot of ways the whole massive growth of the US economy of the last 100+ years is due to reasonable taxes, relatively low regulation, free markets, etc. The hated president Bush only entered the picture recently. The wild unwashed masses have been getting richer and flaunting their money for generations.

When I look at the details of our economy, everything I observe tells me that it's pretty solid. If things work out ok and we don't see a Great Depression, it would be the 3rd time that's happened in my lifetime. The sky seemed to be falling in the 1970s and things turned up again. The sky seemed to be falling again in the late 1980s and again things turned out quite well. In 2002 I thought the sky was falling again, but everything I've been observing lately goes against that notion.

DeliLama

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>> When I look at the details of our economy, everything I observe tells me that it's pretty solid. If things work out ok and we don't see a Great Depression, it would be the 3rd time that's happened in my lifetime. The sky seemed to be falling in the 1970s and things turned up again. The sky seemed to be falling again in the late 1980s and again things turned out quite well. In 2002 I thought the sky was falling again, but everything I've been observing lately goes against that notion. <<

Which is why you should be greedy when people are fearful.

#29
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When I look at the details of our economy, everything I observe tells me that it's pretty solid. If things work out ok and we don't see a Great Depression, it would be the 3rd time that's happened in my lifetime. The sky seemed to be falling in the 1970s and things turned up again. The sky seemed to be falling again in the late 1980s and again things turned out quite well. In 2002 I thought the sky was falling again, but everything I've been observing lately goes against that notion.

What will it look like when the sky does fall? The inscription on the hypochondriac's tombstone: “See, I told you I was sick.”
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And those "rising" tax revenues? Stay less than 2 years and you pay tax. I've seen dozens bought and sold just in this rather small Glendale, AZ development, that is less than two years old. $$$$

Think of all the GDP and tax revenues the free money that is circulating creates.


Besides the post-1997 250k individual/500k joint principal residence exclusion, real estate investors have the option of employing Section 1031 "like-kind" exchanges to defer taxes. I wouldn't go hog wild in any tax revenue estimate.

As an aside, I am surprised so little discussion regarding exuberant real estate prices have focused on the effect of Section 1031 exchanges. Combined with the principal residence exclusion, these rules are discouraging marginal capital from leaving the real estate market.

The cherry on the top is the AMT, which punishes sellers of substantial assets benefiting from a long-term 15% tax rate by shifting them into a new, higher tax system.

ET
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I have no idea what this thread is supposed to be saying other than "Bush sucks."
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>> I have no idea what this thread is supposed to be saying other than "Bush sucks." <<

That's what we've come to expect from the OP on other boards as well. Seems to be his raison d'être.
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As an aside, I am surprised so little discussion regarding exuberant real estate prices have focused on the effect of Section 1031 exchanges. Combined with the principal residence exclusion, these rules are discouraging marginal capital from leaving the real estate market.

The cherry on the top is the AMT, which punishes sellers of substantial assets benefiting from a long-term 15% tax rate by shifting them into a new, higher tax system.

ET

Maybe one of the accountants on our board can answer this definitively, but I don't think the AMT applies to capital gains, at least long term capital gains, so a 15% federal cap gain rate for long term gains on real estate I still considered reasonable and sold 85% of all my real estate rentals during 2004 and 2005 from the Calif. nose-bleed prices. I decided I would rather sell too early than too late, suspecting a looming top-out of prices. Like many landlords,, I was tired of renters for awhile and so was not interested in any 1031 exchanges. I preferred to take sizeable gains, pay Uncle Sam a reasonable amount (plus 9% to state of Calif), and put the proceeds in a more liquid asset like stocks, particularly BRK.

Thus, paying a little tax can still be OK if it fits in a persons financial plan at a particular time. I believe in about 3 years or so, many of these people buying with no down payment, interest only etc. will show up on the foreclosure lists, and that will be the time to re-consider getting back into the real estate investment market for me. Bryce 102
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"What will it look like when the sky does fall?"

A third of the entire workforce out of work, a 25% drop in the average standard of living, widespread lack of liquidity for people and businesses, massive business failures, GDP slowdown of greater than 20%, etc.

In my opinion, we may or may not have some sort of partial financial meltdown within the next 10 years or so. If so, it would involve a serious drop in housing prices in selected areas, some big hedge fund disasters, widespread derivatives lockup, and stuff like that. But I don't think it would cause a "sky is falling" scenario, although it might seem like it at the time.

A strong economic system can make up for all sorts of flaws and problems.

DeliLama
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Would Young Buffett Buy Real Estate?

No, I would not.
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A third of the entire workforce out of work, a 25% drop in the average standard of living, widespread lack of liquidity for people and businesses, massive business failures, GDP slowdown of greater than 20%, etc.

In my opinion, we may or may not have some sort of partial financial meltdown within the next 10 years or so.


The Fed would have to become grossly incompetent for that to happen, like it was in the Great Depression. Of course, this is always possible, considering the Fed is still composed of people.
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Maybe one of the accountants on our board can answer this definitively, but I don't think the AMT applies to capital gains, at least long term capital gains, so a 15% federal cap gain rate for long term gains on real estate I still considered reasonable and sold 85% of all my real estate rentals during 2004 and 2005 from the Calif. nose-bleed prices.

This detour is getting far removed from Berkshire Hathaway, but here's a link about capital gains and AMT. Although LT cap gains are not taxed at higher rates under AMT, lots of LT cap gains can force you INTO the AMT system, where you will face a higher total tax bill. It's an indirect but very real form of higher marginal taxes.

http://www.fairmark.com/amt/ltcg.htm

ET
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Without seeing his response I would say that he would say NO.

Reasons.
1. Leverage

Buying an average piece of real estate for an investment is going to give you decent returns ONLY with a good deal of leverage.

2. Margin of safety

It is hard to buy real estate with a large margin of safety.

3. Small business Aspect

Most real estate investments have you and only you to run them, bookkeeping, legal, tax, management. You can hire advisors but you have to figure out what a good person in the field of tax, law etc. looks like.
Real estate investments look a LOT like small business (which most are). Thus, your running without economies of scale or specialized knowledge that investment in a corporation brings. You can work to get yourself to where you have this knowledge capital but the time required to do that makes it such that real estate may be the only area you can invest in. From this POV stocks/bonds are much better.

4. Value real estate is hard to find

There are a lot of people out there looking for value real estate. I personally would say there are TWO areas of value real estate. Fixers, and switchers.
Much of what falls into the value area is a fixer, you've got to fix a problem. If you can buy things with discounts greater than the cost to fix it you'll make money. Once again this requires a lot of knowledge and cheap sources of labor/materials.
Switchers, are where you take one type of real estate and convert it into something else. Turning apartments into condos is a good example of this.

Buffet didn't study real estate, so him playing in this area wouldn't make a ton of sense. His game is baseball and waiting for the fat pitch. In real estate he would be in the middle of the field with his uniform and bat looking like a fish out of water.

Real estate is something I've looked at investing in, and I've personally come back to stocks as being the game I want to play in. In the late 90's real estate and stocks DID together in a WONDERFUL way. REIT's could be bought for less than the value of their assets, I backed the truck up! Heck I looked at setting up a investment fund to buy big stakes in REIT's and try to ge them to sell of properties and give shareholders cash. Thats how I would see Buffet working with real estate.

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