How To Fix The Housing Market

I'm pretty uncomfortable with the sum of money being given to the US banks as part of an economic recovery plan, because I haven't seen any proposals for the banks that outline what they'll do differently, better or more quickly this time around. If the Obama administration wants to inject liquidity into the housing market, it has to make the market function, which means ensuring there is a rebalancing of supply and demand. In areas hardest hit by the economic crunch, there's little supply at a reasonable price (because people are holding on to over-priced assets) and not enough demand (because there are too few buyers entering the market, due in part to holding on to those houses in losing positions).

Part of this stagnation is due to the IRS provision that precludes you from recognizing a loss on your primary residence. Quite simply, if the IRS would allow homeowners to deduct the loss on a primary residence up to (hypothetically) 50% of your taxable income, up to $100,000 year, for up to 5 years (a $500,000 loss could be written off over 5 years provided the homeowner has AGI of at least $200,000 in each of those years). The reduction in income taxes immediately creates disposable income at the local level, in individual's hands, where it can be invested in local goods and services. That's how you stimulate an economy; you get people to buy things they've been avoiding. It effectively creates additional buying power for people looking to trade houses (up, down or sideways), and above all, it encourages homeowners to price their houses at the market, to sell to new buyers at fair prices, and to re-invest themselves with the implied tax benefits of selling at a loss. This even fits the current trend in the mortgage market of pushing 5-year ARMs; consider taking each year's tax savings and making a balloon payment on the principal, forcing the mortgage to be re-evaluated or setting it up for a re-financing before the first major adjustment.

The best part: it doesn't depend on any outside forces or new business models; banks will originate mortages; real estate agents will drive buyers around; all of the infrastructure services that benefit from a robust housing market will get a local boost. Isn't that how government is supposed to help us?


What you're asking for is essentially to nationalize losses - by making them tax-deducible. There's something wrong with that, I can't help but feeling betrayed by the fact that so many people clamour for the idea of bailing out irresponsibility. There's as little guarantee that the value of your house will only ever go up as there is that your 401k will only ever go up.

Owning a house (or rather: paying off a mortgage) is part of your personal expenses. It's living costs just the same as you'd have if you'd paid rent. Are you asking for your rent to be tax-deducible as well ? What else - the cost for your car, the fuel you use, the clothes you wear or the daily lunch ? You're on 200k/y and ask to be allowed to live on benefits ?

I do not like the idea of my mortgage payments financing banker's lifestyles. But I'm pretty ok with the fact that the debt I took out now pays e.g. the widow's income through interest on her life's savings+investments, which she now all spends to cover her living, or pays the student grant for the gifted pupil through the university's fund. The time for me to spend will come once my debt is gone.
Taking on debt and being willing to service it, being willing to accept that negative equity is possible is capitalism's way of social responsibility. That's what keeps things going.

Leeching on the system is done in two ways:
a) by diverting returns from those providing the funds into your own pockets, via inappropriately high fees/commission/bonuses that don't price the risk of defaulting in,
b) by deliberately defaulting the loan, turning "virtual losses" (your negative equity) into real gains (by tax-deducing them).

Those that now say "I shouldn't have to realize my losses (even though I could)" are no better than those who took commission for value-that-never-was.

Spend-now-pay-later is all ok as long as you realize that it's _you_ that has the responsiblity to pay. Stand by it. It's "pay later" not "pay never". You took debt on, having less to spend yourself now so that others have more to spend now. Don't deprive them for your own gain.

Posted by FrankH. on February 15, 2009 at 11:49 PM EST #

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