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First: Bull$hitter, you rule.
Second: My opinion is that the very low interest rates of the past years had more to do with inflating the housing bubble than the tax incentives for investing in RE. And I tend to doubt that the FED was TRYING to create an asset bubble, they were mainly trying to stave off a recession. That being said, it seems the Government likely has a vested interest in incenting the masses to take on a large mortgage debt burden. Kind of ties them to the land in a modern form of serfdom and ensures they work hard each day to pay off that debt and do their part for the economy. And the whole time they're slaving to pay off that debt they get to pay interest to the banks as a form of wealth transfer from the lower classes to the upper classes. But it sure as Hell beats living in Somalia or Iraq now don't it!!
@San Francisco RENTER,
My opinion is that the very low interest rates of the past years had more to do with inflating the housing bubble than the tax incentives for investing in RE.
Though it's had to isolate/quantify how much of an impact any one policy decision has on a system as complex as the RE market, I agree the ultra-low interest rates were probably a bigger factor. I do think the 1997 tax changes took time to work into the buyer's psyche (and were pretty much ignored especially during the Dot.com era) and were a contributing factor, though.
The main point I'm trying to get across here is you have these RE insiders who have steadfastly maintained that there was no bubble, prices are supported by fundamentals, blah-blah, and now terrified that the government might remove their tax security blanket. These are the same types pretending to be in favor of "free enterprise" and "deregulation", as long as that doesn't mean taking away THEIR taxpayer-subsidized goodies.
And I tend to doubt that the FED was TRYING to create an asset bubble, they were mainly trying to stave off a recession.
I agree with this as well, but create one they did. ;-)
If I had to break it down by percentages, I'd guess the 'Top Bubble Causes' table would look something like this:
40% ultra-low interest rates/massive M3 Fed money creation
30% GSEs/MBS risk underwriting
20% RE-targeted tax incentives
10% herd mentality/greed factor (once the ball got rolling)
At the rate we're going here, Patrick may have to close this blog down for the holidays.
ZZZZZZZZZZZZZZZZZZ....
Peter P
@
2005 Dec 5, 11:34am
At the rate we’re going here, Patrick may have to close this blog down for the holidays.
Do not worry. I am back. Let's blow some thread bubbles!
Hey, Peter P --welcome back!
Now all we need is for Jack & Surfer-X to return and we're off the the races. :-)
Peter P
@
2005 Dec 5, 11:41am
40% ultra-low interest rates/massive M3 Fed money creation
30% GSEs/MBS risk underwriting
20% RE-targeted tax incentives
10% herd mentality/greed factor (once the ball got rolling)
That 10% herd mentality creates a feedback loop though... In the end, psychology is 95% responsible.
The “free market†is lovely when the Government subsidizes you. But when market forces bite you in the ass you come begging at the Government’s door for bailouts.
Bingo! this is what I see as the ultimate hypocrisy in the 'pro-business/anti-regulation' camp.
Hey, anyone else having trouble getting to Ben Jone's site tonight?: http://thehousingbubble2.blogspot.com/
Google blog site (blogspot.com) is down. I was trying to read that mini-msft blog, but couldn't for the whole day. Only the front page of blogspot.com is up.
Is having the government pick winners & losers really a “free market†or “pro-business†philosophy?
No.
Are you a “Big Government Libertarian�
Yes. If only to contain the talking nazi monkey menace.
Cheers,
prat
Looks like Bens blog was deleted. I get a blogger page with "not found" attached.
oops, my mistake.... I forgot to put "the" in front of housingbubble2.
San Francisco Renter says:
That being said, it seems the Government likely has a vested interest in incenting the masses to take on a large mortgage debt burden. Kind of ties them to the land in a modern form of serfdom and ensures they work hard each day to pay off that debt and do their part for the economy. And the whole time they’re slaving to pay off that debt they get to pay interest to the banks as a form of wealth transfer from the lower classes to the upper classes.
*Excellent* conspiracy theory! I love it.
I'd like to add that the only thing that's missing to complete the screwage of the middle class is making the bubble burst.
Who's going to buy foreclosure properties on the cheap? It's going to be the "smart money" guys who've been collecting vulture capital for a while now.
@joey,
I love how the first guy they quote is from Freddie Mac, who tries to spin it as a temporary Hurricane Katrina/Wilma thing.
Who posted this longest thread topic in the history of thread topics? The disembodied head?
Peter P, welcome back! We missed you. The blog was fading fast.
Oh, and HARM, I guess you might be the thread poster? Sorry, I get confused and picture disembodied heads when there is no name signed to the thread. Weird hang-up, I know.
Oooh, look I'm all chatty tonight. Two whole posts. Not a single valuable contribution. My work here is done.
Harm,
You've really nailed it here! This is the core structural cause on which the entire bubble is built. Originally designed as a way for empty nesters to downsize w/o being penalized it spun out of control to the complete debacle we are now confronting. Because this had the "hearth and home" appeal it was thought that Americans would not hesitate to do extensive home improvements w/o fear of incurring a huge tax bill when they ultimately sold. Enter greed. Now "ultimately" translates into 2 years and one day for tax free money! Can't wait 2 years? The formula was pretty simple and universal. Just do yet another re-fi, spend cash on anything you can take to your next house (to hell with improvements) then write off the points and additional interest! In times past most of us dreaded April 15th. Seems like lately people can't wait to get their turbo tax, then file electronically and have their returns, yes their returns, direct deposited into their checking accounts. What's not to like?! Who needs to save or invest in the stock market when you can spend your way into prosperity?
I read "Take this house and shove it", interesting. However, the article accepts as gospel the dogma of "renting bad, I must buy to get ahead." I mean they give examples of all these people leaving Long Island NY and the Bay Area because they "can't afford to buy a house." But the thing is, median income levels in both of those areas are still higher than they are in most of the rest of the country and rent is relatively cheap, especially when compared against that high median income. So why are people afraid to live and rent in these high housing cost areas, earn the high income, sock away that money, and get ahead? Unfortunately, I think most people lack investing knowlege and are still gun-shy from the tech bubble NASDAQ crash. It's too bad. Housing is just the "it" asset class these days, have to move away because I can't afford a house. Oh cry me a river...
I don't think the original poster was trying to insult Libertarians in general(although I'd be happy to), I think he was just trying to point out the dichotomy that a lot of business bigwigs seem to exhibit these days: being pro free market when it benefits them, and begging to the Government for help when the free market starts to work against them (usually as a result of their own faulty business decisions).
A1337 & Sriram,
This was my post, and I was definitely NOT trying to insult Libertarians with it. The term "Big Government Libertarian" is an obvious oxymoron (true Libertarians are against big government) and it was meant to be ironic. San Francisco RENTER said it best:
I don’t think the original poster was trying to insult Libertarians in general... I think he was just trying to point out the dichotomy that a lot of business bigwigs seem to exhibit these days: being pro free market when it benefits them, and begging to the Government for help when the free market starts to work against them (usually as a result of their own faulty business decisions).
He nailed what I was trying to do here.
Personally, I like Libertarians and have even considered joining the party myself. They come very close to my own political philosophy on a variety of issues.
Once again, "Big Government Libertarian" is meant to be IRONIC.
There is really no such thing --only hypocritical business leaders who want "less regulation" when it suits them, but demand big taxpayer bailouts after they ruin their businesses, thanks to their own greed and stupidity.
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I've noticed that lately there have been a lot of big industry players raising Cain over proposals to limit or even eliminate the mortgage interest deduction (http://tinyurl.com/bht2q). These are the same “pro-business” industry blowhards who typically lobby with all their might against the evils of government “regulation” (which usually translates as “consumer protections” or “eliminating my favorite sacred-cow tax subsidy”).
I have a few questions for these people:
Consider the incentives government currently provides for individual homeowners: the 1997 tax law greatly increased the RE capital gains exemption ($250K single/$500K married: http://tinyurl.com/bsfzd). This exemption was even extended to second (investment) properties, for reasons we can only “speculate” about (*smile*). Add to this the already existing generous mortgage interest tax deduction and the popular “1031” tax shelter. Result? A tax incentives system rigged heavily in favor of RE “investing” over saving or investing in any other asset class –stocks, bonds, commodities, etc.
If this weren't lopsided enough, taxpayers are also partly subsidizing risk for banks and mortgage companies. By selling their conforming loans to the GSEs and selling non-conforming (sub-prime) loans to private MBS issuers & REITS, the lender can simply walk away from default risk with profits in hand and go make more bad loans. (Btw, the GSE conforming loan cap was just raised another 16%: http://tinyurl.com/azd48.) Chickens will no doubt come home to roost for investors in private MBS paper at some point, but GSE-issued MBS paper has the implied full faith and backing of the U.S. taxpayer. This (assumed) low risk has translated into extremely low risk premiums by investors, and incredibly loose-to-nonexistent lending standards. To this day, the GSEs, which still purchase some 50% of the nation's residential mortgages for MBS resale, remain privately owned for-profit companies with exclusive government monopoly charters, along with implied taxpayer guarantees and access to unlimited Treasury capital. And let's not forget that the Fed kept their funds rate negative in real (inflation-adjusted) terms for two years, which no doubt “helped” many home values go parabolic over the past few years.
Whatever you subsidize, you get more of –right? Now the taxpayer is heavily subsidizing both sides of the RE market: supply and demand. Predictable end result: historically low risk premiums (low rates on mortgages & MBSs) in a time of historically high default risk, sky-high prices and overextended borrowers. See PMI Group's breakdown of default risk by city at WSJ.com: http://tinyurl.com/dd6ps.
Is having the government pick winners & losers really a “free market” or “pro-business” philosophy? Are you a “Big Government Libertarian”?
Discuss, enjoy...
HARM
#housing