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Reagan Had It Backwards
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.
Lest you think this is merely De Blasio’s folly, he is following in the footsteps of the IMF and, notably, the UK:
[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.]
Published in General
It always amazes me the lengths to which people will go to shoot themselves in the foot. Too bad they shoot everyone else while trying.
I maybe wrong but I don’t think Reagan was calling for that. I think he was explaining the Left’s strategy.
My initial reaction to this line was, “Wow, over a third of Americans can afford a 2500-sq-ft home or better?” Then I remembered that I’m accustomed to some of the best housing markets in the nation. When comparing New England or the Pacific states to Texas or Alabama, the general rule is “half the home for twice the price.”
And that makes me doubt the veracity of statistics like this. A hard number like $250,000 might seem like an objective measure, but it isn’t in regard to the relative subjects of wealth and real estate. From what I’ve heard, $250,000 might buy you a closet in Manhattan.
In any case, nice analysis.
No, I didn’t mean to suggest he was calling for it. I understand Reagan to have been describing the way government typically operates.
That is not factually correct. There is far too much product out there at that price point and that’s why the market is soft. A simple case of supply and demand.
Young people complain about not being able to afford a house. What ever happened to getting a job, working hard, and saving up for a down-payment? Young people believe themselves entitled to a nice place, right now, with little down. So if they do buy, their equity in their house is very low, and subject to becoming “underwater” if the market dips even a little. Time for an attitude adjustment.
And, Liz, the “no houses in the 250K range”, that is absolutely the case in Seattle. The median house price in Seattle is north of $350K, and even two-bedroom, one-bath bungalows cost $350K.
Certainly, but I hear the same complaints about SF, NYC, Greenwich, CT and Port Royal, Naples. I’d love to reside in Malibu, for instance, but one has options to live elsewhere.
While I completely agree that saving up for a down payment is the right thing to do, when standards say that you need 10%, 15%, or 20% down for a buy, that’s $25,000, $37,500, and $50,000, respectively, for a $250K home. That’s just to land the mortgage. That does not include closing costs which are essentially sunk costs since you get zero out of them, other than the privilege of owning the home. My $146K condo had $5,500 closing costs 2 years ago. I will pay off the personal loan I took to fund the closing costs in June.
In other words, there’s a lot of up-front capital required to close on a mortgage. With median household incomes spiraling down consistently since 2007, unemployment and underemployment not making it any easier, and housing prices in many markets re-bounding or staying at their bubble rates, then it’s a recipe for reduced ownership.
Anthony Sanders has been all over this; worth a look:
http://confoundedinterest.wordpress.com/2014/05/01/phil-halls-rejecting-a-diet-of-lies-or-when-did-the-housing-bubble-start/
I don’t know where the fault lies, but I favor regulation if the alternative is lenders making mortgage loans to obviously unqualified buyers and immediately reselling them- often with implicit or explicit federal guarantees. That’s what enabled the housing bubble.
I live in an economically depressed area. It was depressed in 2006 and it’s depressed now. But it did not experience the terrible dislocations of the housing bubble because there was very little no-money-down, no-income verification lending. The local banks tended to lend based on ability to repay and keep the loans in their own portfolio.
An extra tax on big houses is despicable class warfare. As it is, anybody with a million dollar house here would pay around $40,000 annually in property taxes, seems like enough.
But, that was the result of regulation. You see, expecting a 20% down payment is a racist method for keeping minorities from buying houses. The initial law (Fair Housing Act, I think?) was passed during the Carter administration. During the Clinton Administration the AG (Janet Reno) threatened banks and lenders with the law, so that was what opened up the whole no-money-down-no-income-verification fiasco. Bush 43’s Administration and Republican Congressmen kept trying to correct the situation, but were shot down by Democrats, like Barney Frank, over and over.
The natural inclination of every banker I’ve known has always been to play it safe and not lose money. Of course, I’ve never known a banker named Jon Corzine.
There are more and more ads on the radio here in Houston for seminars on house flipping – that is, the purchase of houses as quick investments and not as homes. Are we headed for another bubble?
Perhaps, although the stocks are more of a bubble being supported by current Fed policy. We are certainly hitting new highs on highest price paid or a home right now.
The Community Reinvestment Act passed during the Carter administration but heavily enforced during the Clinton years with threats of fines and then the ultimate carrot- the Feds will back up your loans. It amazes me that nobody remembers this.
Thanks, E. I was too lazy to look it up.
I think we’re about to see CRA v2.0. Enforcers of Dodd-Frank are now using “disparate impact” as the guiding principle for evaluating whether mortgage lenders are discriminating. So just as DF makes it harder for banks to lend to African Americans (who, in the aggregate, have lower incomes, lower wealth, and poorer credit histories), the government is threatening to penalize those same lenders for not extending credit to African Americans.
People with money are parking a good chunk of it in real estate. I do not mean only really rich people but boomers, who have a good chunk, and will most likely not be as able to generate it again (they did build it), and are going to protect it as much as possible until (?) things turn around.
With the addition that many of these people lost huge chunks in 2009 and haven’t regained it all. They are not going to forget this lesson. Economists can talk a blue streak and the market can climb but the trust is gone. I know many, like my husband and I, who have ideas and capital for new small businesses but it’s too much trouble right now and are waiting to sell major assets because of the penalties. Many of us are waiting to see how the 2014 elections come out- even many on the Left.
Or 2016, even.
Definitely, but if Republicans keep the House and take the Senate they can (in theory : ) neutralize the prez. They will not even have to do much to make things quite a bit better although we are all hoping for much more, of course. If this happens I predict an immediate positive reaction in all markets. We’ll see if it can be maintained.
I am not so upbeat on the outlook, but the one thing I guarantee is: if things improve due to a Republican Congress, Obama will take the credit, just as Clinton did..