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Ronald Reagan famously said: “[G]overnment’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
I think Reagan had the order wrong. From Bloomberg News:
Million-dollar homes in the U.S. are selling at double their historical average while middle-class property demand stumbles, showing that the housing recovery is mirroring America’s wealth divide.
Purchases costing $1 million or more rose 7.8 percent in March from a year earlier, according to data released last week by the National Association of Realtors. Transactions for $250,000 or less, which represent almost two-thirds of the market, plunged 12 percent in the period as house hunters found few available homes in that price range.
The article goes on to attribute the different fortunes of high-end real estate vs. the rest of the market to recent gains in the stock market, which has pushed up the wealth of asset owners. But that is only half an answer. Moving costs money, of course, as do the typical repairs required to put a house on the market. But the main cost is the difference between the purchase price of a new home and the sale price of the current home. People who qualify for a mortgage generally can move to a similar (or slightly larger) house without needing much wealth. And housing prices have rebounded over the past year, so underwater mortgages are less of a barrier than they used to be.
The article does, however, touch obliquely on some other causes:
The Federal Housing Administration, the biggest source of financing for first-time buyers, has raised the cost of borrowing and tightened underwriting to cope with losses on mortgages it insured before the crash. The number of FHA borrowers purchasing their first homes declined 38 percent last year from the 2010 peak.
In downtown Miami, many young professionals aren’t able to purchase in condo towers near their jobs because lenders require higher down payments in buildings where more than half of the units aren’t owner-occupied, said Bo Mastykaz, an agent at Redfin. Investors bought many of the condos that were built in the development boom of the last decade and are now renting them out to young people.
Even shoppers who look in the area’s suburbs mostly miss out on the best deals. Homeowners prefer to sell to cash buyers who then paint and upgrade carpets and resell at a significant markup, Mastykaz said.
Now, why would sellers prefer cash buyers? Why did FHA mortgages hit their peak in 2010, whereas overall mortgage origination peaked in 2007? If they “raised the cost of borrowing and tightened underwriting”, wouldn’t that have hit in 2007-08?
What the article studiously avoids considering is the effect of Dodd-Frank, which was passed in mid-2010. DF (Obamacare for the banking system) imposed a one-size-fits-all structure on the residential mortgage market — minimum down payments, minimum asset holdings for borrowers, closing costs paid in cash up front. Which makes it harder for many lower- and middle-income people to qualify for a loan. So it should not be a surprise that less-expensive homes will be harder to sell. And with upper-income borrowers able to qualify for loans or even pay cash, it should not be a surprise that more expensive homes are turning over more quickly than less expensive homes.
In other words: The housing market was moving, the government regulated it, and half of it stopped moving.
So inevitably, the part that keeps moving is being threatened with taxation. The New York Post reports on Mayor De Blasio’s latest:
Multiple sources tell The Post that the mayor is talking to people about how to increase the so-called “mansion tax” on homes selling for $1 million or more to help offset the cost of adding 200,000 affordable-housing units….
The state mansion tax already exists statewide and levies a 1 percent fee on residential property sold for at least $1 million. In the 2012-13 fiscal year, it generated a record-busting $259 million. While it covers the entire state, The tax hits hardest in Manhattan, where seven-figure prices are common even for modest-sized co-ops and condos.
[UK] Treasury officials have begun work on a mansion tax that could be levied as soon as next year, a Cabinet minister has disclosed.
Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, told The Telegraph that officials had done “a lot of work” on the best way to impose the charge. The preparatory work would mean that a Government elected next year might be able to introduce the charge soon after taking office.
Mr Alexander said there was growing political support for a tax on expensive houses, saying owners should pay more to help balance the books.
“There’s a consensus among the public that a modest additional levy on higher value properties is a fair and reasonable thing to do in the context of further deficit reduction,” he said. “It’s important that the burden is shared.”
Mr Alexander said the new tax would not be “punitive” and insisted that the Lib Dems remained in favour of wealth creation.
And so the war on property continues.
This example suggests a correction to Reagan’s ordering: If it moves, regulate it. If it keeps moving, tax it. And if it stops moving, subsidize it.
Issues of fairness aside, at some point progressive taxation will become economically counterproductive, as it always does. And then: How long before the government kicks in the subsidies for its favored constituencies?
[Image of Streisand estate via Wikimedia Commons.]