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Housing And The IRS (August 27, 2007)

Posted in Housing, Taxation on August 27, 2007 by e-commentary.org

Taking the first of what may be a dozen steps to address the housing collapse cannot be done until the extent of the addiction is admitted. Looking up and around and conceding the truth might create panic. The monthly mortgage payments must be made this month, and next month, and next month, and next month, and next month, and next month, and next month, . . . . . . . . . . . . and then they are adjusted upwards and must be paid the next month, and next month, and next month, and next month, and next month, and next month . . . . . . . . and yet there is little money to make the payments. There are no easy solutions.

The Internal Revenue Code should be amended to eliminate the tax on debt forgiveness. Few taxpayers realize that a debt forgiven either by the action of the creditor or a foreclosure or the like is still considered taxable income by the IRS. The New York Times recently ran an article discussing the tax provision and its consequences for taxpayers who have lost their homes. Individuals either must file bankruptcy at the right time or prove insolvency. Eliminating the tax would perforce reduce tax revenue, although the provision is not taxing what most individuals generally and reasonably regard as income.

Pursuant to section 121 of the Internal Revenue Code, if a taxpayer lived in a “principal residence” for two out of the five year period before it is sold, the taxpayer can exclude up to $500,000 of gain if married and filing a joint return or up to $250,000 of gain if filing a separate tax return. There should be some consideration to changing the residency requirement to five out of the ten year period before the residence is sold.

The mortgage interest deduction is the last major tax relief for the middle class. The interest deduction for other consumer purchases was eliminated years ago. Taxpayers simply refinanced their homes, used the funds for consumer purchases and took one obese mortgage interest deduction. (See the e-ssay dated February 7, 2005 entitled “The Microeconomics of Suburban Subsistence”). The deduction phases out at higher income levels. Revisiting and fine tuning the deduction seems prudent.

These suggestions are not adequate. There are no easy solutions.

Bumper sticker of the week:

It will get worse

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The Dow Jones (the Murdoch ?) Hits 14 K In A Hollow Economy (July 23, 2007)

Posted in Debt/Deficits, Economics, Housing on July 23, 2007 by e-commentary.org

The Dow Jones Industrial Average (the Murdoch Average?) exceeded 14,000 last week. At some time it will retreat because it has to retreat. Why is it so high? First, there are a small number of individuals who have too much money and few productive outlets. That money has no ready home now that the last domestic American industry–the real estate industrial complex–has run its course. However, no one, Republican or Democrat, will get elected by arguing that too much money is in private hands and not enough in government hands to pay for the common weal and reduce purposefully the nearly 9 Trillion dollar Debt. Government borrowing is “crowding out” funds for private sector projects.

In addition, the rampant easy credit has fueled a hollow and unsustainable expansion. The economy since 2002 was driven and is being driven by spending that mortgages the future of the country and its citizens. Too many Americans view their residence as an asset. A residence may be an asset if there is some equity, yet it is not a productive asset. Too many Americans view their residence as an ATM (automatic teller machine). The “wealth effect” experienced by homeowners who see their home prices rise is giving way to a more realistic “poverty effect.” The purchasers with “sub-prime loans” drove up the price of all homes and made everyone feel wealthy and thus more inclined to spend. When some of these purchasers are unable to pay and foreclosures result, the price of all homes will decline. Even homeowners without dubious mortgages are negatively impacted if they have used their homes as an ATM to purchase other consumer goods. When the value of a home declines below the remaining arrears on a mortgage, some homeowners may question how long they are willing to sustain the hemorrhaging. [See the e-ssay dated February 7, 2005 entitled “The Microeconomics of Suburban Subsistence”].

The myopic emphasis in business on the next quarter is not surprising. Bonuses are paid for results in the short term not for long run performance. Although some businesses are reporting profits, the consumer spending that is driving the economy cannot continue. Many companies are selling to foreign consumers with more disposable income which admittedly diversifies the sources of revenue and offsets the decline in spending in America. Americans are in debt their tonsils. They do not save. Soon there will be few funds available to borrow and few Americans willing and able to loan them.

Bumper sticker of the week:

It is only a matter of time

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When the Bubbles Burst (December 4, 2006)

Posted in Economics, Housing, Taxation on December 4, 2006 by e-commentary.org

When the technology bubble burst in March, 2000:

     1.     Individual investors who had invested post-tax or pre-tax (SEP; IRA; 401(k), etc.) funds often were left with marginal or worthless investments;
     2.     The invested funds were transferred to those individuals, usually Americans, who were clever or tenacious enough to sponsor an ipo (“initial public offering” of stock) and offer their “blue sky” ideas to the public;
     3.     They spent some of the money on yachts, polo saddles and large vacation homes and likely on other productive investments that spurred economic growth;
     4.     A few of the ideas endured, gained traction and contribute to growth and productivity today;
     5.     The taxes on the economic expansion resulted in more bountiful federal and state treasuries for a time;
     6.     The investors who lost money soldiered on and consciously or unknowingly delayed some purchases and/or other investments and deferred their retirements by a few years; and
     7.     Life went on.

Direct tax impact: The federal and state governments taxed the earnings each year and added substantially to their coffers. The decline after March, 2000 negatively impacted federal and state revenue. The local governments typically do not tax earnings; a few may have benefited from revenue sharing provided by the state. Some taxpayers are able to take capital losses of up to $3000 a year on their federal returns which impacts somewhat on federal tax revenue.

As the real estate bubble deflates and bursts today:

     1.     The last domestic American industry (the real estate industrial complex) which was jump-started by the Fed (Federal Reserve) in 2001 ran its course by 2006 [See the e-ssay dated April 25, 2005];
     2.     Many houseoccupiers are saddled with investments they are not be able to afford particularly those who purchased at the peak with interest-only or adjustable rate mortgages (ARMs) and those who used the houses as an ATM (automatic teller machine) to finance other purchases [See the e-ssay dated February 7, 2005];
     3.     The size of the average house may be too large for the typical family, unless the house is occupied by two or three generations of a family [See the e-ssay dated April 24, 2006];
     4.     The house likely is not as energy-efficient as economically possible and desirable which is impacting and will impact the economy/environment for decades [See the e-ssays dated May 8 and June 19, 2006];
     5.     The structures are in the nature of durable consumer goods not productive investments that provide jobs and growth;
     6.     The financiers, both domestic and foreign, likely will confront many foreclosures and suffer substantial uninsured losses;
     7.     The resulting dislocations and forced moves will weaken families and undermine community ties and involvement (PTAs, Little Leagues, etc.);
     8.     The Bankruptcy Code is now a more expensive and inaccessible safety valve [See the e-ssays dated March 21, 2005 and October 16, 2006];
     9.     Consumer spending remains the double-edged sword because it drives current economic growth but also increases personal debt owed to foreign nations [See the e-ssay dated January 17, 2005];
     10.     The taxes on the appreciation in the value of real property filled local and some state treasuries while negatively impacting federal tax revenue slightly;
     11.     The federal deficit and debt are growing exponentially while the unfavorable trade deficit continues to expand;
     12.     There is no other major domestic industry to stimulate; and
     13.     Life will go on, because it goes on; however, it will go on very differently.

Direct tax impact: The federal government does not tax real property, but it does allow homeowners to write-off local and state property taxes which may cost the federal government as much as 20 billion dollars a year. State governments typically do not tax real property. Local governments typically tax real property and received a tremendous influx of funds from the inventory of more expensive real property within their jurisdictions. However, as the value of the houses declines, the local tax revenue will decline.

The “Marketplace” radio program produced by American Public Media and available on National Public Radio presented a program “Local budgets rise and fall with housing” on November 29. The program notes that the public desires roads without pot holes and safe streets without additional tax increases. “This dilemma is motivating some like [Scott] Peterson [with the National Association of State Budget Officers] to look at how governments are funded: cities and counties mostly count on property taxes. States, on the other hand, tend to rely on sales and income taxes. And it was just a couple years ago that states battled horrible budget crises as those revenues plummeted after 9/11. Peterson believes it shouldn’t be boom for one and bust for another. So he’s taking a tax proposal to Indiana’s state legislature that would allow local governments to also charge sales or income taxes if they cut back on property taxes. The state, in turn, would get a share of cities’ property taxes. These are big new ideas.”

Bumper stickers of the week:

If it can’t go on forever, it won’t.

If it sounds too good to be true, it is.

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Cargo Containers to Cottages (June 19, 2006)

Posted in Housing on June 19, 2006 by e-commentary.org

Cargo containers are flooding the country. China sends goods in the cargo containers which are then abandoned in America because the cost of returning them unladen with cargo is too expensive. The cargo containers should be designed and manufactured in China so that they can be converted into homes upon arrival in the United States. The resulting homes would look like trailers and be derided as such. The resulting communities might look like steel Levittowns. However, as the years passed and each house was personalized, Levittown developed its own identity and community pride. Cargotown may also develop the same charm and pride.

(The idea is admittedly a stretch. Yet something must be done with the containers.)

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The Housing Anti-Terrorist Act 0f 2006 (HAT Act) (May 8, 2006)

Posted in Foreign Policy, Housing on May 8, 2006 by e-commentary.org

The housing stock for the next half century is under construction today. Americans are building Taj Mahals they will not be able to own or heat or cool. Today’s McMansions are typically constructed with 2 inch by 4 inch wood studs rather than 2 inch by 6 inch wood studs. A 2 by 4 house is insulated with R-11 insulation whereas a 2 by 6 house is insulated with much warmer R-19 insulation. The higher the R value, the greater the insulation value. In addition, a 2 by 6 house with a generous nailing pattern is more likely to resist earthquakes which are predicted to surface in unexpected places in the near future.

The country is acquiring much of its energy from unfriendly regimes. We as a country must reduce the funding of our enemies. Proper house construction practices should be part of the war on terrorism. The market should be the starting point of every economic debate. The market is failing. Government involvement, the ending point of every economic debate, is necessary. In the past, housing construction companies were local enterprises. National companies such as Pulte Homes and Tull Brothers are among the larger builders. They should be enlisted in this campaign. One builder may be reluctant to take the lead because there is an added cost with benefits that may not be immediately apparent to the consumer. All of the builders may be willing to follow one set practice. This single simple practice would produce tremendous positive long term consequences for the country.

[Next consideration – Converting cargo containers into cottages]

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McMansions and the (Extended) Family of Tomorrow (April 24, 2006)

Posted in Economics, Housing, Society on April 24, 2006 by e-commentary.org

McMansions are littering the landscape. Monoliths that consume space and resources. Some McStructures are not even finished on the inside because the goal is to loom large when viewed from the outside. “Potemkin Estates.” The larger structures demand increasingly expensive hvac systems (heating ventilation and air conditioning systems).

Kids are returning home, with and without jobs, and flopping in their former bedroom or on the couch in the basement. They are “failing to launch.” The kids can’t afford a home even if they can find a job. Some parents charge rent or require contributions for food and utilities. This relationship may develop into a permanent and positive lifestyle. Extended families may pool their talents and grow old together in one mega-structure. One sibling may be a single parent; the others can help raise the kids/grandkids. One sibling may go and come at unusual times to juggle two part-time jobs in the craven new economy. There will be no retirement, no social security, and no long-term health care, so the kids will be expected to take care of their parents in this assisted-living situation. The home theater room will be remodeled into another bedroom. Situation comedies (tragedies?) on the tv relocated to its traditional home in the den will chronicle the exploits of the new mega-nuclear family. The McMansion could bring families together in unexpected ways.

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“A Man’s Home Is His Gated Community” (April 10, 2006)

Posted in Housing, Law, Society, Supreme Court on April 10, 2006 by e-commentary.org

“A man’s home is his castle.” This maxim reflects a fundamental social and economic compact in Anglo-American law. All of us agree to treat each other’s home as if it were a castle which frees each of us to do something more productive than to defend one’s home 24/7/365. A land of fortified castles is far less efficient and creative than a land of homes and businesses respected by all of us.

The recent Supreme Court case of Georgia v. Randolph, 547 U.S. ___ (2006), threatened to depart in a small way from this cornerstone of the Constitution. The Court addressed whether the police can search a home without a warrant when one occupant gives consent but another objects. The wife allowed the police to enter and search the home despite the objection of her husband who co-inhabited the residence. Other prior cases had allowed the police to enter if consent was given by the one inhabitant who was present. By a 5 to 3 decision, the Supreme Court rejected the search as unreasonable under the Fourth Amendment and invalid as to him. A man’s and a woman’s home is their castle not just his or her castle.

Some of those who are concerned about crime seek to expand the “castle doctrine,” a corollary to the “castle rule” that allows a person to use force including deadly force to protect oneself and others from attack. There is a countervailing “duty to retreat” under some circumstances. The “castle doctrine” has been expanding in recent years to allow one to pursue a possible assailant. The legislatures and courts must balance these concerns with care.

Gated communities are expanding in many regions of the Republic. The communities represent a rejection of the “castle compact” and a return to castles with gates and guards rather than draw bridges and moats. The denizens have their own private McFortress within the larger compound. They send their kids to private schools in equally guarded enclaves detached from the public. Their shelters shelter them from ordinary activities. The reaction is not entirely surprising in the face of criminal activity. However, the moated communities are changing the landscape and lifestyle of America.

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Greenspan’s Legacy – Apres moi, Le Meltdown (January 30, 2006)

Posted in Bernanke, Economics, Federal Reserve, Greenspan, Housing on January 30, 2006 by e-commentary.org

In March, 2000, the economy began the well-publicized high tech slide. Manufacturing and services continued to flee the country. Technology was a transitional industry, but the best minds were disproportionately and increasingly foreign; too many of the goods and services could be and are being manufactured and provided overseas. As one bubble burst, however, another one was being blown. Only one remaining domestic industry existed that could also be subsidized effectively – the real estate industrial complex. The Fed provided the steroids. Interest rates (the Federal Funds Rate) were precipitously reduced which significantly undermined the retirement income for those retirees (born before 1935) who relied on interest income to support them during their golden years; sacrifices have to be made.

American land, American land owners, American (and Canadian) timber, American (and Hispanic) labor, American builders, American real estate agents, American appraisers, American surveyors, American bankers, and American candle stick makers all profited handsomely. The land perforce cannot be moved offshore, the houses cannot be built overseas economically, and most of the players, with a few exceptions, cannot be outsourced. Between 2001 and 2005, the construction trades and the financial and real estate service sectors provided seventy percent of the economic growth in America. Yet the largest share of the real money to construct the house of cards was foreign-born. Americans don’t own their homes today; foreigners own their homes and rent them to Americans. The Fed should have issued stronger warnings and recommended Congressional action to supervise the spew of credit; in the face of inevitable inaction, the Fed should have corked the champagne in the summer of 2003 by bumping up the interest rates. [See the April 25, 2005 e-ssay entitled “Our Friend the Fed.”] As the market peaked in the summer of 2005, however, increasingly marginal economic candidates were seduced by intoxicating no-money-down/interest only/adjustable rate mortgages to enter a hyper-inflated market. The homes were ATM’s which provided the consumer spending that drove the economy for four profligate years. [See the February 7, 2005 e-ssay entitled “The Microeconomics of Suburban Subsistence.”] The “wealth effect” engendered by the growing equity in homes encouraged more spending on credit. The homes are now occupied by “renters” who are consuming a growing percentage of their income just to service the interest payments. The savings rate predictably went down in 2005 for the first time since 1933. Something is in the cards; the house of cards will collapse by Christmas. It could not go on forever; as many have observed, what cannot go on forever will not go on forever. The last viable domestic industry has now run its course with devastating consequences. And now the country is left with vast numbers of McMansions that will soon cost too much to heat.

Ben Bernanke may be Bush’s most promising appointment. However, he will inherit a mess beyond repair or management. There is no industry in America left to subsidize. With consumers and the country up to their tonsils in debt, consumer spending is and will be inadequate to drive the economy. Foreigners will quietly reduce their purchases of t-bills and demand more return for their remaining investment in dollars. The growing demand for oil is occurring at a time when the supply may be interrupted by some unstable or unfriendly regimes. Rising oil prices will drive up the producer and the consumer price indexes. Not raising interest rates will allow inflation to soar. Raising interest rates to check inflation will stall the collapsing economy. The Fed is likely to raise interest rates to 5.0 percent to check inflation even though the economy is entering a period of “stagflation.”

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Our Friend the Fed (April 25, 2005)

Posted in Federal Reserve, Gold Standard, Greenspan, Housing on April 25, 2005 by e-commentary.org

(Part one of a two part series; part two appeared on February 7.)

(The Fed meets on May 3)

Montesquieu, a French guy who is sort of a founding grandfather, developed this notion to create three separate but interconnected branches of government – the executive, the legislative and the judicial. His intellectual kids, the founding fathers, were keen on the ideas. However, there was considerable disagreement and no agreement regarding the fourth branch of government – the economic. (Shortly after the big gathering in ’87, the boys gathered again in ’91 and sagely addressed the concerns of the Fourth Estate in special interest legislation known as Amendment Uno.)

Later, in 1913, under the administration of someone who now would be known as a tax and spend liberal, a measure was passed to take a little money from all of us and another bill was passed to determine how much money we got to play with to begin with. The Internal Revenue Act of 1913 (as amended) has gotten traction, although the 16^th Amendment is not a household concept. The activities and agendas of the scheming group of bankers who constitute the fraternity known as the Federal Reserve have never been adequately incorporated into our constitutional democracy.

The bankers establish monetary policy. This is where most people turn to the racing form. Monetary policy determines everything. Put the racing form down and listen. However, there is no constitutional blue print to guide the bankers. Some of their tools are goals; some of their goals are tools. The fellows who work with the Fed have not made news because they prudently stay out of the news. They say it is okay to be rich, but it is not okay to be famous or infamous. Few of them get involved with showgirls, at least not publicly, or wear collars that are not button-down, at least not publicly. However, their actions make the news and determine the news.

What they do determines what we get to do. The economy was slumping some time ago. The jobs were going overseas and the stock market was going down the drain. Many people who own houses (and vote) found that others coveted their houses. Housing prices for existing stock went up. The homeowners’ stocks had gone down, but they felt good that their housing stock had gone up. The Fed flooded the economy with money by setting a low Federal Funds Rate and left us all, yup, awash in money. There were also more people who needed and/or desired a house or a bigger house or an even bigger house, so more were built. Low interest rates were a way of salvaging the American economy. The homes were built on American soil, driving up the price of American soil owned almost entirely by Americans. The homes were built with products made largely in America or Canada (wood, synthetic wood products). The homes were built here in America by Americans, albeit a few who are categorized as “illegals” even though they are building America. The one thing that Americans can do well here in America (and foreigners cannot do here in America) salvaged the economy. And left us with a lot of big homes.

At what cost? Low interest rates exacted a cost. Many members of the Greatest Generation (they were) cobbled together a very comfortable retirement from 1) their employers who at one time actually provided adequate defined-benefit plans, 2) their government that at that time provided adequate social security benefits, and 3) themselves via interest payments from savings or bonds or other fixed-income investments. The Great Triumvirate sustained them. In a pinch, these good people retired comfortably by selling the home they purchased in 1953 and spent their last years bass fishing at the cabin. The mortgage interest deduction rewarded them during their productive years; the $250,000 exemption from income on the sale of a personal residence protected the usufructs of their efforts and good fortune. It was a good time in a good country.

What about all of those individuals who relied primarily on interest payments to finance their retirement? Prudent personal financial planning and the insistence of the actuarial tables dictated that these seniors get out or stay out of risky investments as they got older and instead invest in regular interest-generating fixed income instruments. However, they got little for their money and their efforts in recent years. If they were fortunate enough to pay off their house and later sell it and if they could also could rely on 1) and/or 2) above, they could live comfortably in the smaller house. Seniors without 1) and/or 2) above may strain to live modestly.

However, why not set the Federal Funds Rate at ten percent instead of one percent? The old folks would receive more interest, although there may be restrictive pressure on growth. Those who demand a return to the gold standard seek a standard, although the metal does not set standards.

The Fed had been allowed to operate under a loose alliance without congressional oversight (or with congressional oversight?). For decades, the Fed addressed monetary policy and avoided fiscal policy. The Fed’s current helmsman has been opining on fiscal policy of late. Admiral Alan “Enron Award for Distinguished Public Service” Greenspan is adrift. The Fed is the most significant player setting the course and speed for the economic ship of state. There is no constitutional rudder to guide them. The statutory helm is loose. Incorporating the Fed into our constitutional scheme of democratic government is one of the challenges today.

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The Microeconomics of Suburban Subsistence (February 7, 2005)

Posted in Economics, Housing on February 7, 2005 by e-commentary.org

[Thirty-six (36) Senators voted to reject the nomination of the legal architect of torture; there is hope.]

Seven years ago at the age of 30 the prospect of paying off a 30 year mortgage was incomprehensible, so they did not comprehend it. She liked it, the kids liked it, the dogs liked it. $150,000 was a lot of pizza and beer but with a few sacrifices not much more than the monthly rental payments. Empty photocopy paper boxes still served well as end tables. Seven years have passed; seven summers, with the length of seven long winters. They are finally retiring some of the interest obligation and will retire the mortgage before they retire at age 65. They don’t expect to be able to retire until the house is paid for.

The news states that the value of the place has gone up and interest rates have come down. $250,000, for the bungalow? But the equity was just sitting there. A friend who is a broker provides a broker’s opinion of value (BOV) for $275,000; the friendly bank provides the money. They are now seven years older paying more on the place for another 30-year sentence. 67 isn’t all that old.

For what? Some of the money pays off credit card debt which is not what the homebuilding industry intended when they constructed the mortgage interest deduction. The couple’s decision is rational to the extent that the interest payments for the mortgage are deductible, whereas the interest payments for the credit card debt for his beer and her shoes are not. Someone once observed that one should never ever ever ever ever ever ever finance something for longer than its useful life. His beer has a useful life of one night and her shoes have a useful life of a fortnight. They do not even sell replacement shoestrings for women’s shoes. Those living on a shoestring budget discover that credit cards are the crack cocaine of the middle class. An over-leveraged mortgage is its Methadone. Methadone cures one addiction and creates another.

The news states that his company is downsizing. Everyone hates his job except when he does not have one; how he loved the job he hated. Life was never “easy come, easy go,” but “hard come, easy go” worked while he worked. They say there may be some rehires in two months, but they are two paychecks away from bankruptcy. If they skip the mortgage payment for a month or two, they can buy more time. The foreclosure process takes three months anyway. Another credit card solicitation arrived with today’s bills. The problem and the recent solution are delivered in the same box. The finance company won’t repossess three-year old furniture with negligible salvage value; caller id allows them to continue ducking the calls from the collection agency. He had the better health care plan; she opted for the better retirement plan with her company. It worked so well when it worked. Little Egbert is not well. Loss of a job, an illness not covered by health insurance, and divorce are the three horses of the suburban apocalypse. The Surgeon General has determined that unemployment can lead to illness. Unemployment and illness tax a marriage. Taxes and money issues really tax a marriage. All three horses are chomping at the bit.

The news states that the company is taking an extended overseas vacation. Housing prices drop 30 percent in the community. The estate is now worth $175,000 on a good day. Why continue paying off a $275,000 note on a $175,000 house? The adjustable-rate mortgage (“arm”) sounded good at the time, but with rising interest rates it now has them in a headlock. An “arm” could be a shorthand word for “costs an arm and a leg.” And the rising interest rates drive up the actual cost of a $175,000 house to the few otherwise curious buyers. Why not return the keys and rent a place? Last year’s thought that the equity in the house might be part of the overall retirement plan is quaint and distant.

Home ownership is one of life’s joys. Home ownership is part of “the pursuit of happiness” even if the roof, the faucet and the foundation leak. This piece is intended to be analytical rather than judgmental. Who is at fault and what to do is another concern. Our friends in Suburbia are under “economic house arrest.” Visiting them in six months may not be pretty.

Ontogeny tends to recapitulate phylogeny, they say. These economic decisions are also the core of the current business plan guiding the Republican government.

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