Tax Break May Have Helped Cause Housing Bubble

[Pale Blue Dot]

Source: New York Times

Ryan J. Wampler had never made much money selling his own homes.

Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.

And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.

The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”

By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Read more: http://www.nytimes.com/2008/12/19/business/19tax.html?_r=1&partner=rss&emc=rss

[ixion]

1. oh NOEZ!! It's the Clenis!! this is HUGH!1! I'm series!11!

:rofl:

:sarcasm:

[Pale Blue Dot]

2. Did you read the article?

Care to make a cogent argument for why it's inaccurate?

[ixion]

5. the allusion to how this law somehow started the housing bubble

is what I find ludicrous. The housing bubble was engineered by Greenspan as a band-aid for the dot com bubble burst. In general, I find that the article avoids the true cause of the housing bubble, and seeks to promote the idea that it was Clinton who started the fire, rather than Bush. I mean, if we want to trace back causes, we can go back to St. Ray-Gun, or even Nixon.

So, in general, I don't see this as news.

[dkf]

9. So you deny that tax policy influences decision making?

Lame.

[liberal N proud]

3. They had to find a way to put all this on the Clintons

They had to!

[Pale Blue Dot]

4. But is the article wrong?

And how so?

I have a feeling that if this exact same article was published with the name "Bush" instead of "Clinton" then no one on DU would be defending this tax break.

[liberal N proud]

6. IS IT?

These people can twist anything to tell the story they want told. They are all fiction writers, not reporters.

[Pale Blue Dot]

7. So you can point out where the fiction is, right?

Right?

[pipoman]

8. I strongly believe

that the housing bubble was the fault of both parties nearly equally.

By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

With this being the #1 reason. Dems under Clinton lobbied and won a lowering of lending standards, Pugs under Bush lobbied and won bank deregulation. The result of both of these actions combined is what has driven the housing bubble.

An example which I have used on DU before is an illustration of how these two policies effected the bubble.

I didn't realize this was going on until a year or so ago while watching HGTV. They have a show which tracks first time home buyers through the process of shopping, contracting, and closing on their first home. I watched several episodes and each time it was the same story. Young couple (or single) were shopping $400k homes and going shopping in their new car. At closing they would sign up for an 80% (of appraised value) first mortgage, 20% second mortgage, interest only for the first 5 years, amortized on 40 years. The buyer would walk away with the keys to the house and enough cash to buy a new house full of furniture and appliances.

Rewind 25 years. In the 1980's there were requirements on banks and mortgages. I was selling real estate at the time. The best mortgages were 80% of purchase price (not inflated appraised value). If a person was absolutely stellar from a credit standpoint they might be able to get a 90% mortgage. The 20% (or 10%) had to be earned income. It could not be borrowed or gifted. If the person could not demonstrate in detail how the money was obtained the money had to be in their account for an entire year before it could be used for the down payment. 30 years was the longest amortization available. The buyer could not exceed 35% of their income in long term debt including auto loans and credit cards. The 35% included the house payment (principle, interest, taxes, and insurance), there was no such thing as an interest only mortgage.

The combination of bank deregulation and lowering the requirements for qualification took us to where we find ourselves.

The result of these things was suddenly these people who had mediocre jobs were buying these big new homes. This is the cause of the housing bubble. These people who wanted to buy a $400k house in the 1980's would have to save up $80k in cash...impossible for most. So in the 1980's first time home buyers would buy a starter home with a down payment they could, with diligence, viably save up. They would buy an $80k house, after saving up $16k. They would live there for 5 or 10 years then sell that house collecting their equity and the appreciation on the house which would give them a larger down payment for a more expensive house. This process was crucial for capping new construction, maintaining a reasonable real estate market, kept a broad enough gap between new and used, and keeping young people who notoriously have eyes bigger than their wallet in check.

These buyers were in over their head immediately and could scarcely afford the interest only payments. Then the principal would kick in and default would kick in too in higher percentages than any other time in history. In the process they were running up huge consumer debt often just for non durable necessities. Then the buyers began to dry up and the inflated cost of homes began to deflate and the banks were on the hook for the losses.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=4537143#4537393

[Pale Blue Dot]

10. Agreed. nt

[melm00se]

11. there are

many factors that influence the the ebb and flow of the economy and both tax and monetary policy have significant roles in the economy.

the fact is that the tax break proposed by Clinton IS a piece of the puzzle and it's not just the NYT with that opinion.

Among the other pieces of the puzzle were:

- influx of money from the dot com bust (looking for a new high return haven)
- the change in lending standards (the basis for this can be debated until the cows come home)
- the above change in the tax laws
- the consumer/mass consumption mentality

All of these shifted the perception of your home as your final financial bastion to be protected at all costs to your home as an investment no different than stocks, bonds and the like. That is a fatal mindset and we are reaping the end results.

[subsuelo]

12. Propaganda rags like the NYT will never get to the root causes anyway

This is more of the same fluff they throw at their readers to keep them from serious investigation

[Phoebe Loosinhouse]

13. There is some truth to this, I believe.

The tax break is that you live for 2 consecutive years out of five in your principle residence, you can sell it and keep the profit with no capital gains up to 500K.

That did bring people into the real estate market who purposefully bought and rehabbed houses while living in them for the approved 3 year period and then turned around and sold them. This increased the amount of investor involvement in the market until at one point somewhere between 20-25% of all transactions were investor related.

This is one of the greatest tax breaks ever given to the lower and middle classes who have much if not all of their lifetime assets tied up in their property. It also helped people who actually did buy houses as principle residences and through no fault of their own had to sell within a short time frame due to job transfer, etc.

In an up market, it will naturally bring in speculators. In a down market, it's not too relevant because there's little profit anyway. I think if any revision of this rule is needed, stretching the term out to five consecutive years would weed out almost all speculators

[Gregorian]

14. It absolutely opened the door for a frenzy of real estate activity.

The moment I heard about the capital gains exemption rule I sold my property. And I haven't stopped selling since then. On average I have sold my home every three years. Not only because of the rule. BUt, had it not been for that, I would not have done so.


It may have contributed in a way to peripheral changes in the market. With this increased activity there was much greater incentive for realtors, appraisers, loan agents to make the best of it.

But we're not in financial trouble because of that increase in activity. Most likely just the opposite. I was appalled by the artificially high values of properties. If I may use the word artificial. Because given the number of people who want homes is the driving force behind that.



Also, I saw people playing irresponsibly by refinancing and using that money to buy yet more real estate. I suppose that's just another way of stating that loan institutions had gone wild.

[unblock]

15. it is indeed an amazingly stupid tax break, from a policy standpoint.

live in the same house for 20 years and you get ONE tax break.

move through 4 houses during the same 20 years and you get FOUR tax breaks.


where's the public policy motivation in giving people a huge incentive to move every few years?

i'm sure there are some people out there who swap houses with their neighbors every few years just for this. it's ridiculous.


NOW, having said that, MOVING from one house to another does not cause prices to rise. so while it causes a whole lot more ACTIVITY that doesn't mean it made prices go up. adding equally to both supply and demand doesn't mean huge price increases. usually it's a wash.

what it DID do was make investors take money out of other things (like investing in domestic manufacturing companies) and put it into real estate.

[Gregorian]

16. When the market dropped a few years back, investors flooded the real estate market.

I know because I was trying to buy land. All of a sudden it was gone.

The amount of cash that flowed into local governments must have been huge. All of those $10k per year property taxes people are paying. The amount of cash that went towards all of the new homes. I mean just hardware stores alone. Plywood, roofing, concrete. Just amazing. And for me, disgusting.

Once again, this is population driven. I always fall back on that. This is what is driving all of these issues. But how dare I even mention it.

And during all of it, I wondered just how much carbon emissions were increasing.

And on top of that, here I now have my dream property, and what WAS rural is no longer. $%!@.

[Trillo]

17. Ugh.

Mr. Wampler is obviously free to make his own decisions, but I can only wonder why anyone would want to move that many times? I know I don't. Moving is traumatic.

I reckon our economic system of intentional scarcity drives many to do extremely bizarre things chasing after the green-paper God.

[4_TN_TITANS]

18. I take it this writer's check is in the mail

from the Bush Dept of Propaganda. How many decades is it going to take before they stop trying to pin everything on Clinton. Sheesh....