Report: Home-builders lobby -- again -- for tax breaks for buyers

A quickie from the Wall Street Journal today: "Home builders, including Stuart Miller, chief executive of Lennar Corp., are lobbying for a $15,000 to $20,000 tax credit to spur demand, saying the $7,500 credit passed by Congress in July has failed to jump-start sales."

That sentence comes from a broader story about the housing market. The story, running under the headline, "No Quick Fix for Housing Prices," reports the bailout package doesn't directly address the weak housing market, and airs various ideas about how the government might refinance mortgages or otherwise provide support to the market.

More:

But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein. He proposes that the federal government offer low-interest loans to replace 20% of homeowners' mortgages.

Two cents: As measured relative to income, housing in California is too expensive at the moment. And income, in the aggregate, is probably flat to falling at the moment. So the idea that government might try to support housing demand raises two questions: Is the government capable of defying economic gravity and arresting the slide in housing prices? And, should the government try?

Faithful readers of this blog are probably tired of hearing my thoughts, but I will repeat them for the newbies: Government policy that supports housing at unaffordable price levels in California is wrong-headed. When that policy is endorsed by Democrats who claim to support "affordable housing," it is also dishonest.  The housing market is trying to give the state more affordable housing, and politicians are trying to stop it.

Your thoughts? Comments?

--Peter Viles

Photo credit: Bloomberg News

Comments

[perks]

So: 1) Let prices fall to unaffordable levels, or 2) Prop prices up with so-called tax credits so that homes remain unaffordable. Seems the only one that Option 2 helps is the builders who would get to keep living in denial. No thanks.

[Mike P.]

Right on Peter! That Harvard economist is an idiot.

[William E. Jones]

The homebuilding industry, and individual homeowners and home buyers, already benefit enormously from favorable tax treatment, subsidies, and other "incentives." In fact, homebuilding is a heavily "incentivized" industry.

Homebuilders can sell land at a huge loss now and charge that loss against profits made in the good years, thereby getting money back from the government. Individual homeowners, of course, can deduct interest on a mortgage and property taxes from their income. The sale of a home at a profit also receives favorable tax treatment.

In spite of all these benefits, home prices are declining. Yet the homebuilders want even MORE incentives.

What next...will oil companies plead for govt. subsidies so that they will not suffer declines in profit as oil prices decline?

[150 multiple choice questions]

My brother went to Harvard and what I realized was it's mostly the geeks, loners and hated from high school who end up geeks, loners and hated but with a sense of entitlement. It would be interesting to see a study of the number of Harvard grads with a connection to creating this financial disaster. Start with the ones that worked at Freddie and Fannie which I bet number more than 50.

As for Martin Feldstein, he's certainly some combination of four things.

1. Tenured
2. Financed in some way by the housing industry
3. Wrong
4. An idiot.

I would love to see these "experts" show some examples of when propping up asset prices has worked except for the very short term.

They clearly need a basic math test at Harvard (and in Washington DC) because even the economists don't understand that 1+1=2. It doesn't equal 8 because you borrowed 6 hoping you never have to pay it back. And Marty, the solution to too much credit is not more credit.

[E]

I don't want no Gubment tax credit.

I don't want no funky loan.

I just want to pay a fair price.

For the place I'll call my HOME.

[Giacomo]

And McCain opens up tonight's debate by repeating his brain-dead proposal to dump a huge part of 700B bailout directly to foreclosure-risk householders. The reason the rest of us should support this giveaway? If there's a foreclosure on your street, it reduces your home's value.

Uh, okay...hang on, I'm looking to buy a house! How does artificially inflating home values help me? Aarrgh, my head's going to explode -- HE'S the CONSERVATIVE candidate?

[MyLessThanPrimeBeef]

It's indeed a sad day in America to see the once mighty Harvard has become...subprime.

A local 3rd grader has a brighter idea than the best Harvard has to offer - she suggests that the government buy up very house (which the sweet kid has correctly identified as the real root cause of the current problme) in America, instead of banks. Nationalize all the houses!

Furthermore, she also suggests that we nationalize all toys in America because rich kids should not have more fun than poor kids whose parents can not afford them, thus proving further that 1) you can't trust anyone over 9 years old and 2) the more time you spend at Harvard, the smaller your brain gets.

[syscom3]

Peter, you seem to have more economic "smarts" than the multitudes of so called geniuses with MBA's from the Ivy League schools.

[Krista Railey]

I never get tired of hearing common sense. Your article brings to mind the comments of Maxine Waters in 2006 in support of H.R. 5121:

http://www.house.gov/list/speech/
ca35_waters/FS060725_hr5121.html

Excerpt:

"In the 35th Congressional District in California that I serve, 2,064 loans were insured by FHA in 2001, but only 74 loans were made in 2005. Similarly, FHA programs have been seriously curtailed in just about every region of the country, resulting in fewer and fewer home purchases supported by FHA programs. H.R. 5121 will increase FHA home limits. In many areas of the country, the existing FHA loan limits are lower than the cost of new construction or the median home price. In other areas, FHA had been priced out of the market. As indicated in the committee report that we filed with this legislation, in 1999, FHA insured 127,000 loans in California, while a mere 5,000 loans were insured by FHA in 2005, representing less than 5 percent of the 1999 level. Because FHA business diminished dramatically during this period, in my view, American homeownership did not expand as much as possible. The FHA loan limit of $362,790 in Los Angeles, California indicated that FHA was essentially no longer relevant in that housing market."

The disturbing part of her statement is that she equates the problem as being that the FHA loan limits were not high enough and completely failed to recognize that prices had passed by all but the wealthy. Because buyers earning the median family income could not afford to purchase at such astronomical price levels, it was legitimate buyers that were no longer relevant to the market and had nothing to do with FHA.

Now Representatives Maxine Waters (D-CA), Al Green (D-TX), and Gary Miller (R-CA) want to further aberrate the FHA program by forcing FHA to allow seller-funded down payment grants. Seller-funded down payment grants were prohibited by H.R. 3221 (the Housing and Economic Recovery Act of 2008) that was signed by the President on 7/30/2008. On 7/31/2008, H.R. 6694 which proposes to preserve seller-funded down payment grants was introduced in the House of Representatives. The announcement of the proposed legislation was made by none other than Ameridream who is one of the top seller funded down payment assistance providers.

The seller-funded down payment providers along with their supporters are attempting to replace the subprime 100% financing programs with FHA and seller-funded down payment grants. These programs threaten economic stability because they inflate sales prices while promoting irresponsible homeownership. Unfortunately, the House of Representatives is breaching their duty to the taxpayers by selling out to big business, lobbyists, and trade groups.

Even more unfortunate is that main stream media appears to support housing inflation, and it is writers such as yourself that provide a service to readers by writing the truth.

[Todd in WeHo]

"Government policy that supports housing at unaffordable price levels in California is wrong-headed." Enough said.

[CompaJD]

Did you say HARVARD??? I know P.E. teachers teaching grammer schools who know more than these fools. Can you say, overrated education?

[Cal]

Redfin lays off 20% of its employees:

http://blog.redfin.com/blog/2008/10/
a_very_tough_day.html

[Laker]

"says Harvard University economist Martin Feldstein. He proposes that the federal government offer low-interest loans to replace 20% of homeowners' mortgages...."

This Feldstein is a paid puppet by the home builders and/or the Realtors. I don't believe that he is so stupid to say that stuff.

I agree that the democrats idea and push for "affordable housing" is a lie. They are getting paid by the NAHB and NAR and not before long by GSE contributions to push an agenda that is the opposite of what they are saying. Any one who wants affordable housing needs to scream NOW that housing is NOT affordable, and until prices adjust to level that matches the income of the people, housing is NOT affordable.
There should not be any asset that the government needs to control its price. SURE NOT HOUSING. Can someone explain to Maxine waters that some people are simply not meant to be home owners. THERE IS ANOTHER OPTION. RENT. And she is claiming that FHA became irrelevant in California. Yet she say that in --- "in 1999, FHA insured 127,000 loans in California, while a mere 5,000 loans were insured by FHA in 2005, "
Conclusion is, that in 1999 housing in California WAS affordable. In 2005 housing in California was NOT affordable.
Lastly, Government does not have the capability to control the price of any asset, sure not the most expensive asset for most of the people. There is simply not enough money to do that.

[Westside Renter]

Amen Peter!

[l.a.guy]

Artificially propping up the housing market is no different than suggesting we should shut down the stock market whenever the DOW dips below 11,000 because we don't want people's 401K's adversely affected. I'm amazed politicians and economists (who should know better) can't admit this.

[Doug in Toronto]

This is what happens in the province of Ontario (from http://www.rev.gov.on.ca/english/bulletins/ltt/
1_2008.html):
Land transfer tax applies to all conveyances of land in Ontario. First-time homebuyers may be eligible for a refund of all or part of the tax payable.

For agreements of purchase and sale entered into before December 14, 2007, the refund only applies on the purchase of a newly constructed home.
For agreements of purchase and sale entered into after December 13, 2007, the refund applies to all homes, whether newly constructed or resale.

The amount of the refund claimed will, if granted, offset the land transfer tax payable. The maximum amount refundable is $2,000.

Examples:

Cost of Home Tax Payable Tax Refund Net Tax Payable
$100,000 $725 $725 $0
$200,000 $1,725 $1,725 $0
$300,000 $2,975 $2,000 $975

This seems reasonable. $15-20K is way too much.

[Sam]

right on Peter. I am all the way with you.

[Steve]

Peter, you are right sadly home ownership to totally subsidized, buy that is the way it has been for the last 100 years and will be for the next 100 years, it is ingrained in our system. Even now, we are broke and with $700 billion the home owner wins and the renter gets screwed. In my opinion, owning a home is critical for a financial future and if you cannot afford one in California, then move. Home ownership is more important then your job, because the job is going to be eliminated no matter what, the house is still there..

[sheila]

... and when the republicans say they are trying to "help homeowners stay in their homes," they are lying because they are really just trying to prop up the PYRAMID SCHEME their cronies on wall street and in the building industry have built at enormous cost to homeowners and renters alike.

why else would ALL the bailout money go to banks' bottom lines with none of it tethered to making it available to borrowers? why else would mcpain insist on paying FULL FACE VALUE for bad mortgages which generated enormous profits to brokers and lenders, then turn around, hack 40% off and force the taxpayer to eat the difference as an immediate loss? so the banks make ALL the money and the taxpayers eat their dust. sounds like "trickle down theory" as usual.

think about it. when the credit card industry recently re-wrote the bankruptcy laws, they basically turned their super-high-interest non-collateralized debt into super-high-interest collateralized debt by refusing to allow debtors to get out from under it. why aren't the (republican) mercenaries who supported that crippling legislation now forcing banks to eat their own losses over a longer term? why aren't they requiring the credit card companies to back off on their aggressive policies which are destroying peoples' lives, in exchange for a bailout? because they hate the middle class, and are only in office to serve big bankers.

i'll take a well-intentioned, if misguided, policy over a corrupt, mercenary corporate sellout any day.

[Fifth Generation]

The idea goes that intervention stops the price decline in housing. That will keep "wealth" in the hands of the present crop of "house sitters". With the economic downturn in general keeping house prices artificially high compared to income will produce a "freeze" since the pool of buyers is small and have a reduce purchasing power. In short keeping houses at a high price will not stimulate anything since the properties will not be able to be sold.

[iabb]

If anything even remotely close to this idea finds its way to a Congressional vote, the voters need to stand up again like they did a few weeks ago in protesting the (first version of the) bailout package and fight this one all the way.

[JenniferK]

Stuart Miller, President of Lennar, is one of the most brilliant homebuilders I have ever seen operate. He is constantly positioning his company to survive. Neither Lennar nor any other publicly traded homebuilder can survive, economically, unless means are created to make it easy for people to buy new homes. The Congressional prohibition on downpayment assistance programs in conjunction with FHA financing has really put the nail in the coffin, in terms of most home building companies. This latest proposal, for a $20,000 per house subsidy, is another way to skin the cat, and in fact creates a greater subsidy, by about $8,000, than the old "gift of a downpayment from a charity" mechanism produced.

Ignoring Southern California and the Bay Area for a moment, it is 100% true that as long as there is farm land, scrub land or desert land, the people in the business of building new homes will want to build new homes. In so doing, they diminish the market value for "used" houses in the same market areas. Why in the world would someone pay the same price for a 5 year old house in Fresno as one would pay for a new house in Fresno?

Except in markets where vacant land is very scarce, all over the country history has shown that used home values depreciate when there is new homebuilding nearby. On a national basis, right now there is a vast oversupply of "used" houses available for purchase. That oversupply is driving down the market values of all "used" houses.

The only way the values of used homes will stablilize in markets with abundant vacant land is for there to be little or no new homebuilding for the next several years.

That is a very tough concept for people employed in the home building business, at all levels, to embrace.

I have read mortgage lending websites which contain posts claiming that part of the Treasury's plan to stabilize home values is to keep the new homebuilders effectively shut down. I do not know whether it is true, but weighing the harm to the homebuilding industry against the benefit to the economy as a whole, the policy makes sense.

The policy also makes sense in outlying areas of Southern California, like the Antelope Valley, Riverside County and San Bernardino County where new homebuilding was most common and where the largest supply of vacant homes for sale are located.

Of course, there would be severe constitutional problems if the Federal government enforced that policy directly, so it must do so through mortgage lending policies.

[E]

Some not very bright person said...

"Home ownership is more important then your job, because the job is going to be eliminated no matter what, the house is still there.."

...........................................

Problem is...when your job is "eliminated", your mortgage isn't.

Yes...the house is still there. Too bad you don't get to live in it however.

[Laker]

Cal, great top about Redfin eliminating 20% of its people.
I feel sorry for them, as i think their are one of the best sites out there that provide great service, data, and help in buying or selling a house.
What is amazing is this line:
"....But the past few weeks have seen a major reversal. As the stock market wiped out prospective down-payments, tours and offers dropped 30%. Transactions that were done came undone. October will still be pretty good, then we’re headed for a big dip."

WOW....Peter, get ready for your weekly housing tracker updates....We will all forget the $1000 drop per week...
I really believe we are heading down to $250,000 for the median in about 6 months.

[RM]

Be patient folks, the day may be fast approaching were housing, stocks and almost every asset will get cheaper. Unfortunately too many will be unemployed to be able to take advantage of it, while others even if employed wont be able borrow the money from banks as they struggle to save themselves and tighten up on credit. Governments around the world are now trying to flood the system with capital but nothing seems to be working. What lies ahead is any one's guess but things sure aren't looking good...seems a recession is already pretty much a done deal.

By the way it is my belief that the government's plan was to inflate our economy because the next crisis that lies just ahead is going to make this crisis seem like child's play. The so called entitlement era coming up where millions of people will be no longer working but receiving some sort of benefit, especially those who work for the government, will place a huge toll on our tax base that it will not be able to afford, not by a long shot. So if the money can't be raised through taxation then it will have to be again "borrowed" or printed, but the amounts will be huge. By the way this situation is happening within the next decade...almost there.