How To Fix The Housing Market
By stern on Feb 15, 2009
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?