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Fix Real Estate, the Economy will Follow
The election is getting close. Both candidates are offering enticements in an attempt to out give the other and secure your vote. Too bad, none of the proposals presented actually address the issues going forward with respect to real estate. They only acknowledge what previously transpired, no solutions for ongoing future prosperity.
The problem used to be the rising cost of gasoline. As we fill our tank and drive 70mph down the freeway, that issue is in the rear view mirror. The number one issue these days is:
How do we solve the continuing problem of declining real estate markets and stabilize home prices?
Real estate being a tangible asset touches many people’s lives. People just get it. They may not understand why the stock market dropped 700 points today, but they can drive through the neighborhood visiting open houses and get a good idea of the value of their home.
Bring Tax Incentives Back
Someone should tell me why you have to pay a capital gains tax on the sale of your home if your are fortunate enough to exceed the $250,000 and $500,000 limits, but if you bought when the market was high and sold at a loss, you are not allowed a deduction? Uncle Sam just grins and says “tough luck”.
To fix the American economy, we have to address the issues at home first. Yes I mean our homes. Our leaders can continue to throw money at Wall St., and prop up the next failing institution, but until they address AnyStreet, USA the problems will persist. If it were up to me, I would immediately implement the following:
- Bring Back Accelerated Depreciation – this was taken away from real estate investors with the Tax Reform Act of 1986 which increased the number of years a residential property could be depreciated from 15 to 27.5.
- End Depreciation Recapture – when an income property is sold, the depreciation that was taken in every tax year has to be added back as income to the sale of the property. Modifying or ending these two provisions would encourage individual investors to acquire property. The other issue we have with Pasadena real estate is prices are still relatively high enough to discourage investment unless you have a 40 to 50% down payment. Addressing the depreciation issue will encourage many would be investors by making it more financially feasible to own rental property.
- Allow Homeowner’s to declare a loss on a principal residence by offsetting other income.
- Access to retirement accounts – as we watch more of our retirement funds evaporate in the stock market, why shouldn’t we be allowed to have access to our money for investment in other vehicles? Senator Obama has now proposed access up to $10,000, which is far short of addressing the real problem. Senator McCain’s program struck me as lackluster as well.
You have to provide people with an opportunity to make a difference. Government will not pull our economy out of the tank, individuals and businesses will. Well intentioned government programs only serve to tie our hands behind our back. Conventional does not work anymore. Its time we had meaningful incentives to get our economy back on track.
Tags: ca pasadena, economic environment, economic issues, income rates, policy issues
October 16th, 2008 at 11:26 pm
I’ll give you another one you didn’t mention. You can’t take losses on real estate if you earn over $150K. But according to SEC rules you can’t invest in many ral estate “private placements” unless you are an “acredited investor” that earns over $250K a year. It doesn’t leave many people who can actually take the losses other than very small investors.
The give a tax benefit with one hand and take it away with the other.
October 17th, 2008 at 10:20 am
I’m not convinced the proper goal is to “stabilize homes prices”. Home prices are much too expensive by historical standards any number of metrics; price per square foot, price relative to household income. Especially in Pasadena. The only way to truly stabilize home prices while not violating the past ratios of housing to income is to raise income. Otherwise, home prices have to go down.
Your other proposals, while sounding quite fair in comparison to other investment vehicles as far as tax treatment goes, is arguably a different debate. Part of the reason we got into this economic mess was that we had *too much* investment in housing. Increasing incentives for people to invest in housing is not the right approach.
Of course, it is only fair that I propose my solution, and that is to allow home prices to drop. Yes, it will be painful for the minority of people who recently bought homes since 2002, and everyone else will feel the economic impact of those peoples’ collective misfortunes on consumer spending. But that level of spending and activity was never sustainable, and we have to come to the realization that we have to adjust our businesses and spending priorities that reality.
Lower home prices are not all bad news! It also improves worker mobility. It helps Pasadena businesses attract workers who can actually afford lower cost housing, which in term stimulates the economy. A healthy economy is one where workers are not stretched to pay so much of their household income on housing, like they are now. Lower housing prices will hurt a few people in the short term, but it will help everyone else longer term, and that’s *real* economic recovery that will last. So let home prices drop. It’s the real economic reform we need, and it’s happening already.
October 17th, 2008 at 5:17 pm
I appreciate your comments, but will have to respectfully disagree. Falling home prices do not make for sound economic policy, no more than falling stock market’s. I do agree that home prices and affordability compared to incomes did get way out of line. That being said, California has some of the highest home prices in the nation, and I would disagree that falling home prices create economic incentives and new jobs.
Creating economic incentives should be addressed with state government in a pro business, anti tax policy, neither of which is something the State of California subscribes to.
Many industries are dependent upon the economy created by a strong housing market and until the decline begins to stabilize, our economy will head into recession.
October 23rd, 2008 at 1:36 pm
There’s something to be said about the old business adage: change or die. Businesses have not always been dependent on unrealistic housing appreciation, although unfortunately they have grown accustomed to it. Businesses will evolve to new market dynamics. As a realtor, of course in your opinion falling home prices are bad economic policy. Whereas witnessing such a mass scale destruction of wealth is not necessarily good, the wealth gained was never based on sound economic principles to begin with.
Lending standards will likely make a full correction to sound economic principles. Propping up unrealistic housing prices just will not mix with this, considering the LA County median income won’t support the prices we have here, especially in cities like Pasadena.
I don’t think any of these tax incentives will be big enough to make any real difference. Whether anyone likes it or not, we are in the midst of a massive correction and nothing the government can do will stabilize it or avert a recession (assuming you don’t believe we are in one regardless of what the NBER has not said). California alone is already at 7.7% unemployment, and the jobs picture only looks worse with or without housing aid. Not to mention the how many hundreds of billions in lost liquidity in the market due to all the bankruptcies and write-downs.
I’d say fasten your seatbelts, the ride down will be big… but in the end I believe we’ll be in a much more financial healthy and stable position.
October 30th, 2008 at 12:32 am
“Many industries are dependent upon the economy created by a strong housing market and until the decline begins to stabilize, our economy will head into recession.”
What do you consider a strong housing market? If home prices continue to drop or even stabalize, more buyers can afford to enter the market and purchase a home which will stimulate other businesses that rely on homes being sold. I know in Vegas, home prices increased so fast, many people were priced out of the market and some purchased homes knowingly they couldn’t afford the mortgage but they felt they had no choice. We needed this price correction, it’s just unfortunate that it has caused a recession and so many people to lose their homes and dreams!
October 30th, 2008 at 11:21 am
Tony,
I would draw a parallel with the stock market where people are seeing their retirement wealth evaporate just as many have in the housing market. Prices are very low, yet people have not bought back in due to …uncertainty. So many people had home equity loans and now find themselves upside down. People priced out of housing markets has and always will be a fact of life. I would love to live in Malibu with an ocean view, however I find myself priced out of the market.
There should be incentives for people to purchase and invest in real estate. Incentives that at one time were available.
November 22nd, 2009 at 10:53 pm
I’ve been active in taxes for longer then I care to acknowledge, both on the individual side (all my working life!!) and from a legal viewpoint since passing the bar and following tax law. I’ve provided a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes perfect sense. Please carry on the good work – the more individuals know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.