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Ajh, Interesting… Zoovisitor obviously reads this website, since my lengthy post was copied word for word.
I don’t know whether I should be flattered or annoyed.
The peak of retirement will likely come between 2020 and 2025. However, it is the departure for nursing homes and the great beyond that will make the boomers net sellers of real estate.
Net housing formations will go flat for a bout 15 years as the boomers die off. I expect the period 2025 to 2040 to be the weakest real estate since the great depression. I have not yet tried to estimate how severe the price pressure will be because it it so far into the future -- so much can change.
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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 subsidyâ€).
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