PEN-L message, RE: [Pen-l] another one for David S.

Economist Dean Baker, who has been writing about the rise and demise of the

U.S.

housing bubble for the past six years, has tracked the over-supply of new homes relative to buyers' demand. That trend of excess inventory mirrored the historic rise in American home prices, as I recall from reading DB.

Date: Fri, 18 Apr 2008 09:28:17 -0700

From: "David B. Shemano" <dshemano@xxxxxxxxxx>

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

To: Progressive Economics <pen-l@xxxxxxxxxxxxxxxxxx>

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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.

--- 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

>> preferential tax treatment over stocks and other investments

>> Homeownership has long been a vibrant part of achieving the American

>> Dream. But these days owning a home is more like starring in a

>> 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

>> 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

>> It's a safe bet with both the housing market and the economy

>> deteriorating that more federal money (as well as state funds) will

>> toward supporting housing this year. But once the downward

>> moderates, the government should learn from recent experience and

>> 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

>> filers, and $500,000 profit for couples.) The federal tax code

>> more than $100 billion annually into the housing sector, estimates

>> 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) ,

>> name only two of the best known players. The Congressional Budget

>> Office estimated that in 2003 the benefit of the explicit and

>> ties to the federal government for GSE such as Fannie Mae and

>> Mac amounted to a federal subsidy of more than $23 billion,

>> 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

>> 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

>> with home prices not just going up but rising at an increasingly

>> rate, as calculated by Peter Bernstein, a long-time advisor to

>> institutional investors and author of Against the Gods: The

>> Story of Risk. It's doubtful.

>> Lessons of the Past Decade

>> What's more, the mortgage interest deduction is simply bad tax

>> 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

>> enjoyed by the highest-income households. For instance, the

>> President's 2005 Advisory Panel on Federal Tax Reform calculated

>> individuals making more than $200,000 a year received more than

>> times the benefit of those earning between $50,000 and $75,000 a

>> 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

>> as collateralized debt obligations (CDOs). For awhile, the net

>> was to increase the liquidity of real estate "investments,"

>> 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

>> place their financial bets on the future rather than the tax-writing

>> prejudices (and campaign contribution solicitations) of Congress and

>> 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

>> favored housing. The world's first subsidy for single-family homes

>> 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

>> 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

>> at sale. "Strikingly, the panes aedium was not just a first-time

>> 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

>> from China, India, South Korea, Brazil and other emerging markets

>> 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

>> 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