The Death of the Long Boom?

"There were, of course, many other factors that fueled real estate speculation -- unnaturally low interest rates, exotic mortgages, lax underwriting standards, etc. -- but lower capital gains taxes clearly reduced homeowners' incentive to stay put and increased the temptation to trade-up and flip properties."

Sara, you don't know wha tyou're talking about. If regular homeowners were flipping their houses to take advantage of capital gains tax advantages, they deserve the predicament they are in. Besides, if a homeowner sells his home within the first two years of ownership, the sell is not treated as a capital gains tax deduction, but as ordinary income. Also, two other restrictions, according to your own article: 1) you have to use the home as your primary residence and 2) you can't sell more than one home in the two year period. Any of those happen and its kaput to your capital gains deduction.

But let's say for instance that you are correct in your analysis. How is this exactly a bad thing for the end consumer? The consumer can purchase a home, sell it within the two year period, get another home, and repeat, making all of that money tax free. Isn't this what you want for the middle income folk, to be able to make money at a lower rate than the rich folks? Of course not, because Bush mucked up the entire system.

"Something similar to the S&L bailout and Chrysler bailout."

Yes, Steve, this is exactly what the industry needs. It seems there's a recurring theme here. If the government continuously bails out industry, industry won't learn its lesson and continue to engage in risky behavior. It seems the economists have a term for this type of behavior. Oh, yeah, it's called moral hazard. I may have been in diapers at the time when both were bailed out, but I know enough about economics and economic history to know that behavior won't change if the government continuously comes to the rescue of errant financial behavior.

Chris of AZ @ Feb 28, 2008 19:49:34 PM

Government is the problem

The government created the housing bubble by pumping too much credit into the economy which caused artifically low interest rates which in turn encouraged people to buy homes they couldn't afford or to speculate in the housing market. A recession may come now, but that would probably be a good thing at this point. The economy needs to slough off all the malinvestments. Once the purge is complete and the economy is back on solid ground it can begin moving forward again. However, we need to learn from this massive government error and take away the government's power to cause such an error. The Federal Reserve needs to go; no more endless inflationary printing of money to create artifically low interest rates. Peg money to durable goods and commodities (or at least have a policy of 0% inflation where the money supply is controled so that it increases at a 1:1 ratio against economic growth in goods and services). Do away with Fanny Mae and other government lending institutions that promote home ownership (malinvestment). Massive across the board spending cuts and tax cuts; kick that economic activity back to the people. These are the sorts of things that we need, not more big government which has failed, yet again, as it always does.

Pliny of MO @ Feb 25, 2008 16:09:13 PM

housing markets

Why is increasing taxes always the response? Someone explain why it is a good idea to take money from me and give it to you, after some drolt in DC gets a share of it.

How is another govt program going to make people smarter about buying a house?

A fool and his money are always separated. An ARM is never a good idea, when the boy from Wall Street(master of the universe, now begging for a bailout) gets to do the adjusting.

mike of TN @ Feb 24, 2008 08:56:54 AM

long boom

If you think a 20% decline in home values will not put this economy in a recession or possibly a depression you are a fool. The government needs to put in effect a 1 to 2 year program to stem the tide of foreclosures for people in primary residences. Something similar to the S&L bailout and Chrysler bailout. You were obviously in diapers when we had our last serious economic crisis.

steve gately of GA @ Feb 24, 2008 01:41:59 AM

long boom

If there is one tax where supply-side really shows its stuff it is with cap gains. Cut the cap gains rate and cap gains revenue goes up thanks to increased economic activity/higher asset prices ... I mean, the smartest budget cutting move Clinton made was cutting cap gains in 1997 which led to a flood of revenue ...

james pethokoukis of DC @ Feb 23, 2008 10:33:35 AM

How to play the real estate market ... and never pay taxes!

The lowering of capital gains taxes on owners who occupy their houses for at least a year -- and the near elimination of capital gains for those who stay two years or more -- has clearly encouraged the sort of trade-up mentality that helped fuel speculation in the housing market in the early years of the Bush administration. (In all fairness, the elimination of capital gains on two-year home ownership was enacted under Clinton, in 1997, while the lowering of the capital gains tax rate for property owned less than two years was George W. Bush's doing.)

Meanwhile, the recent liberalization of the so-called "1031 exchange" rule has essentially eliminated taxes for investors who want to trade one property for another, again fueling the flipping of properties.

There were, of course, many other factors that fueled real estate speculation -- unnaturally low interest rates, exotic mortgages, lax underwriting standards, etc. -- but lower capital gains taxes clearly reduced homeowners' incentive to stay put and increased the temptation to trade-up and flip properties. (If you want proof, check out this story from 2000: Making Home Sale Capital Gains Disappear - http://www.fool.com/taxes/2000/taxes000428.htm)

Of course, the utter lack of government oversight of the mortgage industry probably did more to screw things up than any of the stuff I've mentioned above. The Fed, in particular, stood by while Bush trumpted the virtues of home ownership -- even though it was clear early on that many, many people where getting into homes they wouldn't be able to afford over the long run.

The 1990s 'greed is good' mantra that began in Wall Street's financial firms echoed along Main Street's real estate offices in the 2000s.

In both cases, it ended badly for the average American.

Sara Bellum of TX @ Feb 22, 2008 18:50:44 PM

Capital gains?

Sara,

I'm not following how you think a lower capital gains tax makes it easier for investors to game the system. Can you explain that, please?

Kent G. Budge of NM @ Feb 22, 2008 17:18:43 PM

Interest Freeze

Hillary wants to freeze interest rates for 5 years. That is terrible news for those of us living on a fixed income who depend on our interest income to live off of. This would help one segment of society at the expense of another, mainly seniors. Home prices were too high as it was, it was time for a correction. Many of those who were caught up in this mess were flippers and speculators trying to profit from rising home prices. Why should the rest of us pay for their greed. Those of us who work hard for our money and don't over-extend ourselves or try to make a quick buck at the expense of others.

exclintonsupporter of CA @ Feb 22, 2008 16:39:45 PM