RE: [Pen-l] another one for David S.

["David B. Shemano" <dshemano@xxxxxxxxxx>]

Exactly.  See -- I don't make this stuff up.  I would add that in California we have Proposition 13, which effectively limits property taxes to 1% of the value and limits annual increases to 2% until sold.  Huge incentive to real estate ownership.

In an earlier post, Doug Henwood had distinguished autos from homes because "homes are supposed to appreciate."  Why?  Why should a home intrinsically be an appreciating asset?  It is essentially a depreciating consumption good, like autos, clothes, home entertainment systems.  We think of homes as an appreciating asset only because we live in a regulatory environment that increases the demand for home ownership (e.g. tax subsidies), while limiting the supply (e.g., zoning, density requirements, poor public schools, etc.), which creates a scarcity that creates occasional buying frenzies.

David Shemano

--- Original Message---
 To: Pen-l <pen-l@xxxxxxxxxxxxxxxxxx>
 From: "Jim Devine" <jdevine03@xxxxxxxxx>
 Sent:  4/18/2008  7:58AM
 Subject: [Pen-l] another one for David S.

>> Commentary April 17, 2008, 12:01AM EST
>> Housing: Time to Halt Taxpayer Subsidies
>> 
>> Even with the housing market declining, it's bad policy to give homes
>> preferential tax treatment over stocks and other investments
>> 
>> by Chris Farrell
>> 
>> Homeownership has long been a vibrant part of achieving the American
>> Dream. But these days owning a home is more like starring in a horror
>> flick, perhaps called Nightmare on Main Street. The numbers are
>> frightening. Home prices are falling nationwide, and the foreclosure
>> rate is at record levels. The delinquency rate for subprime adjustable
>> rate mortgages is an astonishing 20%, and the Federal Reserve's home
>> equity measure is at its lowest level in 60 years. Indeed, Moody's
>> Economy.com estimates that more than 10% of the nation's homeowners
>> were "upside down" on their mortgages by the end of March. In other
>> words, the value of their mortgage is greater than what their home is
>> worth.
>> 
>> It's a safe bet with both the housing market and the economy
>> deteriorating that more federal money (as well as state funds) will go
>> toward supporting housing this year. But once the downward trajectory
>> moderates, the government should learn from recent experience and take
>> a radical stance: Forget propping up housing. Instead, eliminate
>> taxpayer subsidies for housing. Yes, you read that right.
>> 
>> The Bubble: No Coincidence
>> 
>> There's no question the U.S. tax code is full of special tax
>> provisions that favor housing. Among the biggest breaks are the
>> mortgage interest deduction, the deduction for state and local real
>> estate taxes, and the capital gains exclusion for homes. (The first
>> $250,000 in profit is exempted from capital gains taxes for individual
>> filers, and $500,000 profit for couples.) The federal tax code funnels
>> more than $100 billion annually into the housing sector, estimates the
>> Tax Foundation in Washington D.C.
>> 
>> This figure doesn't include the mammoth subsidized institutions that
>> support the housing and mortgage markets. This includes Government
>> Sponsored Enterprises like Fannie Mae (FNM) and Freddie Mac (FRE) , to
>> name only two of the best known players. The Congressional Budget
>> Office estimated that in 2003 the benefit of the explicit and implicit
>> ties to the federal government for GSE such as Fannie Mae and Freddie
>> Mac amounted to a federal subsidy of more than $23 billion, according
>> to economists William G. Gale, Jonathan Gruber, and Seth
>> Stephens-Davidowitz in their 2007 paper, Encouraging Homeownership
>> Through the Tax Code.
>> 
>> Yet in a modern, dynamic high-tech economy, why should homes get
>> preferable tax treatment over stocks and other investments? The tax
>> gap in treatment is significant. Take capital gains. Say you'd
>> invested in a basket of high-tech stocks three years ago and now you
>> sell the portfolio for a $500,000 profit. Well, you'll pay a 15%
>> capital gains tax rate on the gain, writing a $75,000 check to Uncle
>> Sam. But you and your husband also sell the home you bought three
>> years ago for a $500,000 profit. Guess what? The Internal Revenue
>> Service gets nothing.
>> 
>> By the way, the tax break for capital gains on housing was signed into
>> law in 1997. Is it a coincidence that home prices soared 79% in the
>> time between the first quarter of 1997 and the first quarter of 2005,
>> with home prices not just going up but rising at an increasingly rapid
>> rate, as calculated by Peter Bernstein, a long-time advisor to
>> institutional investors and author of Against the Gods: The Remarkable
>> 
>> Story of Risk. It's doubtful.
>> 
>> Lessons of the Past Decade
>> 
>> What's more, the mortgage interest deduction is simply bad tax policy.
>> It's sold as a middle-class subsidy, but since the value of the
>> deduction goes up with the size of the mortgage, the biggest break is
>> enjoyed by the highest-income households. For instance, the
>> President's 2005 Advisory Panel on Federal Tax Reform calculated that
>> individuals making more than $200,000 a year received more than eight
>> times the benefit of those earning between $50,000 and $75,000 a year.
>> 
>> These days, no one can doubt that a home is an investment. It's an
>> asset class, like stocks and bonds. Indeed, one reason why housing
>> prices hit such stratospheric heights was the potent combination of
>> owners treating homes as an investment, and the capital markets
>> shoveling huge sums of money into real estate through such innovations
>> as collateralized debt obligations (CDOs). For awhile, the net effect
>> was to increase the liquidity of real estate "investments," supporting
>> an unprecedented degree of speculation.
>> 
>> The tax code shouldn't bias investment money to favor one kind of
>> investment over another?certainly not in an intensely competitive
>> global economy. Let the economic fundamentals dictate where investors
>> place their financial bets on the future rather than the tax-writing
>> prejudices (and campaign contribution solicitations) of Congress and
>> the White House.
>> 
>> The History of Subsidies
>> 
>> To be sure, calling for the end of housing subsidies is at best
>> reminiscent of tilting at windmills. After all, governments have long
>> favored housing. The world's first subsidy for single-family homes may
>> have been under Constantine I in the capital city of Constantinople,
>> speculates David Smith, founder and head of the Affordable Housing
>> Institute in Boston. The subsidy was a perpetual grant of a ration of
>> bread?the panes aedium. It was given to anyone that built a home in
>> the city, and the panes aedium was passed along to the new homeowners
>> at sale. "Strikingly, the panes aedium was not just a first-time home
>> buyer incentive, but an ongoing property asset, in much the same way
>> as real estate tax abatements or exemptions are intrinsic property
>> rights in the modern," writes Smith.
>> 
>> That said, the lesson of the past decade is that too much investment
>> money goes to real estate in modern America. At a time when companies
>> from China, India, South Korea, Brazil and other emerging markets are
>> competing with American firms for markets and profits, it's time to
>> stop the madness.
>> 
>> Farrell is contributing economics editor for BusinessWeek. You can
>> also hear him on American Public Media's nationally syndicated finance
>> program, Marketplace Money, as well as on public radio's business
>> program Marketplace. His Sound Money column appears on
>> BusinessWeek.com.
>> --
>> Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
>> way and let people talk.) -- Karl, paraphrasing Dante.
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>> 


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