I have mentioned my misgivings with the Case-Shiller 20 City Real Estate Index before, but everyone now hangs on it monthly and I have had to get on board too.
I have also mentioned that I am a real estate agent in New Jersey with access to the MLS data here, and a keen follower of the trends in local markets.
Case-Shiller was reported on Tuesday this week for the latest month (May). The news was all positive, confirming a four-month improving trend. The index rose one-half of one percent from the April reading, the first rise since 2006. Prices were higher in 13 of the 20 cities surveyed. The year-on-year statistic was 17.1% lower, but that is the first reading better than -18% in several months.
I don't believe anyone wants to forecast a big uptick in prices -- a V-shaped recovery -- but a lot of people are making the bold call that the residential market is at a bottom. For anyone who may have caught the bottom, congratulations! You know the hardest thing to do is to time a market bottom so precisely.
Lately I notice a lot more inventory "under contract". The Case-Shiller data sent me to the MLS to do my usual selling rate to inventory analysis and find out whether macro data confirm anecdotal experience. Do they ever. What I found is that the months of inventory in the local markets I follow has absolutely crashed. In the spring, we were at 10-11 months to clear the active standing inventory. Currently it is more like 5-7 months. Five month's inventory is comparable to the sellers market of a few years back. Wow!
Is there any reason to think the more active market is a blip rather than a trend? I can think of two. One is the action of the $8000 first time home buyer credit, which expires at the end of November and will not be extended. If you want to capture this, you're running out if time. The other is the regular action of the calendar -- every year sales pick up in the spring and close in the summer so that children can be situated in their new school districts for autumn. So let's keep an eye on this to see whether it has legs or causes disappointment later on.
Showing posts with label Housing. Show all posts
Showing posts with label Housing. Show all posts
Friday, July 31, 2009
Tuesday, June 16, 2009
Dispatches from the Front Line of the Real Estate Wars
In March, I contributed a piece called "The Coming Real Estate Recovery By The Numbers". I have also written extensively on various plans for real estate recovery policy, my own and other people's, and got some excellent feedback from people in the academic and policy establishment. But in general, the phone has not not stopped ringing. As Chris Mayer of Columbia told me, there is a loss of momentum for all real estate plans.
I can't just sit around writing, as I am among other things a real estate practitioner, a licensed salesperson in the state of New Jersey. Most of my work has been investment and commercial in the urban areas near New York City , but I do residential, I go out of my local market, and have trusted contacts all over the east coast and in California.
At the moment I am working with a couple who have two young children and want to buy in one of the elite towns with a top-rated school system. They have very particular requirements with respect to price, condition, proximity to public transportation, and several other factors. Even in a buyer's market, these limitations make the search challenging.
The action of several recent weekends and the treatment of various offers makes me believe that conditions are moving away from buyers having it all their own way.
On one miserable cold and wet Saturday morning, we found ourselves queuing up to see a new listing that had come on the market at the extreme low end of the price. The wife was hopeful. "It must be a wonderful opportunity at such a low price, and with so many people come to see it." Inside, what a let-down it was. Dirty, small, poor condition. Garbage, even at the price, and disgraceful really to market a house complete with dirt and cobwebs.
And yet the couple who viewed it before us stood across the street in the rain after finally letting us go in, with the husband gazing longingly at it all goo-goo as if it were Megan Fox in her birthday suit instead of a knock-down. The house went under contract immediately, probably to them. If they got any competition for it, no doubt they paid more than asking.
My clients did not compete for the dirty house. On the next one they saw, they did compete and aggressively so, through not one but two rounds of "best and final" offers. This house had the following good points: clean and tastefully decorated living room, dining room, and three good-sized bedrooms, all with good re-done hardwood floors. And it had the following bad points: lousy bathrooms, lousy kitchen, central air on its last legs, and washing machine separated from dryer by 25 feet of dirty unfinished basement. On balance I rated this house just OK, nothing special, and yet if the listing agents are to be believed (agents lie -- I make no judgments on these particular agents) there were a dozen offers. However many offers there were, my clients' full-price offer with 20% down and no house sale contingency was not successful.
If that sounds more like sellers' market conditions, so too did the response of sellers through their agent to my clients' next offer. This time they bid on a house they liked at 95% of asking price. The sellers countered at 99.6% of their asking price, essentially throwing my clients' offer back in their faces with little consideration. Moreover they told us haughtily not to come back without meeting a number of onerous conditions that are not customary in this market.
Guess what? We did not extend ourselves to meet those conditions, and we did not go back to them. My clients found something else instead and had their full-price offer accepted.
A few days later the haughty agent called, and was more than a little miffed that we had done exactly as she told us to do.
The general point is this. At current rates, the inventory in this town will take 10.3 months to clear compared to over 11 months around the county; however, there are micro-markets within the town that are much hotter than that and the behavior of buyers and sellers has to adjust accordingly.
There are other factors to note. One, the $8,000 first-time homebuyer tax credit is going away soon if nothing is done, and the direction of policy-making in DC suggests nothing will be done. That provides impetus in this segment of the market, at least. Two, rising mortgage interest rates can also get buyers off the fence -- if they have been hanging in for lower rates and instead see them going the wrong way, they may be pushed to act for fear their inaction will cost even more later.
I can't just sit around writing, as I am among other things a real estate practitioner, a licensed salesperson in the state of New Jersey. Most of my work has been investment and commercial in the urban areas near New York City , but I do residential, I go out of my local market, and have trusted contacts all over the east coast and in California.
At the moment I am working with a couple who have two young children and want to buy in one of the elite towns with a top-rated school system. They have very particular requirements with respect to price, condition, proximity to public transportation, and several other factors. Even in a buyer's market, these limitations make the search challenging.
The action of several recent weekends and the treatment of various offers makes me believe that conditions are moving away from buyers having it all their own way.
On one miserable cold and wet Saturday morning, we found ourselves queuing up to see a new listing that had come on the market at the extreme low end of the price. The wife was hopeful. "It must be a wonderful opportunity at such a low price, and with so many people come to see it." Inside, what a let-down it was. Dirty, small, poor condition. Garbage, even at the price, and disgraceful really to market a house complete with dirt and cobwebs.
And yet the couple who viewed it before us stood across the street in the rain after finally letting us go in, with the husband gazing longingly at it all goo-goo as if it were Megan Fox in her birthday suit instead of a knock-down. The house went under contract immediately, probably to them. If they got any competition for it, no doubt they paid more than asking.
My clients did not compete for the dirty house. On the next one they saw, they did compete and aggressively so, through not one but two rounds of "best and final" offers. This house had the following good points: clean and tastefully decorated living room, dining room, and three good-sized bedrooms, all with good re-done hardwood floors. And it had the following bad points: lousy bathrooms, lousy kitchen, central air on its last legs, and washing machine separated from dryer by 25 feet of dirty unfinished basement. On balance I rated this house just OK, nothing special, and yet if the listing agents are to be believed (agents lie -- I make no judgments on these particular agents) there were a dozen offers. However many offers there were, my clients' full-price offer with 20% down and no house sale contingency was not successful.
If that sounds more like sellers' market conditions, so too did the response of sellers through their agent to my clients' next offer. This time they bid on a house they liked at 95% of asking price. The sellers countered at 99.6% of their asking price, essentially throwing my clients' offer back in their faces with little consideration. Moreover they told us haughtily not to come back without meeting a number of onerous conditions that are not customary in this market.
Guess what? We did not extend ourselves to meet those conditions, and we did not go back to them. My clients found something else instead and had their full-price offer accepted.
A few days later the haughty agent called, and was more than a little miffed that we had done exactly as she told us to do.
The general point is this. At current rates, the inventory in this town will take 10.3 months to clear compared to over 11 months around the county; however, there are micro-markets within the town that are much hotter than that and the behavior of buyers and sellers has to adjust accordingly.
There are other factors to note. One, the $8,000 first-time homebuyer tax credit is going away soon if nothing is done, and the direction of policy-making in DC suggests nothing will be done. That provides impetus in this segment of the market, at least. Two, rising mortgage interest rates can also get buyers off the fence -- if they have been hanging in for lower rates and instead see them going the wrong way, they may be pushed to act for fear their inaction will cost even more later.
Tuesday, March 17, 2009
The Coming Real Estate Recovery -- By The Numbers
I have been analyzing real estate and construction since 1991. I can’t even say that our current real estate collapse is unprecedented, because to me it’s not – I went through the Asian Financial Crisis, and this is like that. As a matter of fact, the Hongkong real estate slump of 1994-95 was pretty serious even before the Big One two years later. And Japan's real estate collapse has been both huge and enduring.
But I well remember my first AFC trip to the region. I had been correctly bearish in 1997 and I was analyzing from afar, unwilling to allow myself to make the trip in case my natural sympathy with people should overcome my brutally harsh analysis. So instead of my usual five-times-a-year Asia trips, I took no trips in 1997. Finally in the first quarter of 1998 I was sure things were as bad as they were going to get, and I did not have to worry about personal contagion any longer. I flew into Seoul, and was driven immediately in a black car to the Bank of Korea. Along the way I saw the debris from anti-government demonstrations and grafitti saying “IMF = I AM F¿¢KED”. The last two hundred yards of the way to the BOK, the car went slowly enough for me to see the sad, sunken faces looking with deep suspicion at a foreigner in a limo on his way to the central bank.
From Seoul I flew to Singapore on a Singapore Airlines wide-body aircraft with exactly three passengers on it, just me and a honeymooning couple.
In Bangkok, I visited the offices of one of the big commercial real estate brokers, where the Englishman in charge appeared a broken man. We looked out over the vast city with its forest of cranes all idle for the first time in memory. “No one will build another class A building in Bangkok for fifteen years,” he said.
But he was wrong. Capital did re-form in the real estate markets, and things were humming again inside of three years.
That’s good, and I expect we can look forward to some similar unexpectedly rapid recovery. But enough talk already. What do the data say we can expect here? Let’s dig into the housing market data.
For a long time I have resisted the popular Case-Shiller 20-City Housing Index, for many reasons. I think Shiller’s nutty professor act is off-putting, as is the false precision in the reports, the short history, and my sense that it is hard to index lumpy and illiquid stuff like houses. But everyone now uses it, so I have to relent.
I refer to short history -- Professors Case and Shiller only reach back to 1987, which misses the booms and busts of the seventies and early eighties. I can’t deal with that, so here’s what I did. I took their data, and lined them up with Census data going back to 1959, data that HUD also reports. I did some regressions and other hand-waving trend analysis to try to extend the Case-Shiller Index back in time.
Hey, if hand-waving is good enough for the Treasury Secretary, it’s good enough for me.
I got GDP, PCE Housing, and 10-year Note Yield data (the latter my mortgage interest rate proxy) from my good friend Fred at the St. Louis Federal Reserve Bank, and lined that up with the housing index stuff reported by the good professors and massaged by me.
Six recessions have been observed since 1959. Twenty quarters (five years) after trough recessionary conditions, the average increase in the price index has been 46.3%, the median increase 55.2%, the maximum 79.8% and the minimum -0.3%.
Eight interest rate spikes over the same period have seen the average price increase 30.0% twenty quarters later, or 34.5% on a median basis. The maximum increase was 75.9% and the minimum -22.3% (i.e. a more than 20% drop, in the period in which we now find ourselves).
There have been only five episodes of declining prices, of which this is by far the worst. Twenty quarters after the midpoint of these episodes, prices are 18.8% higher (average), 17.1% (median), 75.7% higher at best and down 28.3% at worst. But leaving out the current episode, which I suppose is not finished, the figures are respectively 46.3%, 55.2%, 79.8%, and -0.3%.
Food for thought.
But I well remember my first AFC trip to the region. I had been correctly bearish in 1997 and I was analyzing from afar, unwilling to allow myself to make the trip in case my natural sympathy with people should overcome my brutally harsh analysis. So instead of my usual five-times-a-year Asia trips, I took no trips in 1997. Finally in the first quarter of 1998 I was sure things were as bad as they were going to get, and I did not have to worry about personal contagion any longer. I flew into Seoul, and was driven immediately in a black car to the Bank of Korea. Along the way I saw the debris from anti-government demonstrations and grafitti saying “IMF = I AM F¿¢KED”. The last two hundred yards of the way to the BOK, the car went slowly enough for me to see the sad, sunken faces looking with deep suspicion at a foreigner in a limo on his way to the central bank.
From Seoul I flew to Singapore on a Singapore Airlines wide-body aircraft with exactly three passengers on it, just me and a honeymooning couple.
In Bangkok, I visited the offices of one of the big commercial real estate brokers, where the Englishman in charge appeared a broken man. We looked out over the vast city with its forest of cranes all idle for the first time in memory. “No one will build another class A building in Bangkok for fifteen years,” he said.
But he was wrong. Capital did re-form in the real estate markets, and things were humming again inside of three years.
That’s good, and I expect we can look forward to some similar unexpectedly rapid recovery. But enough talk already. What do the data say we can expect here? Let’s dig into the housing market data.
For a long time I have resisted the popular Case-Shiller 20-City Housing Index, for many reasons. I think Shiller’s nutty professor act is off-putting, as is the false precision in the reports, the short history, and my sense that it is hard to index lumpy and illiquid stuff like houses. But everyone now uses it, so I have to relent.
I refer to short history -- Professors Case and Shiller only reach back to 1987, which misses the booms and busts of the seventies and early eighties. I can’t deal with that, so here’s what I did. I took their data, and lined them up with Census data going back to 1959, data that HUD also reports. I did some regressions and other hand-waving trend analysis to try to extend the Case-Shiller Index back in time.
Hey, if hand-waving is good enough for the Treasury Secretary, it’s good enough for me.
I got GDP, PCE Housing, and 10-year Note Yield data (the latter my mortgage interest rate proxy) from my good friend Fred at the St. Louis Federal Reserve Bank, and lined that up with the housing index stuff reported by the good professors and massaged by me.
Six recessions have been observed since 1959. Twenty quarters (five years) after trough recessionary conditions, the average increase in the price index has been 46.3%, the median increase 55.2%, the maximum 79.8% and the minimum -0.3%.
Eight interest rate spikes over the same period have seen the average price increase 30.0% twenty quarters later, or 34.5% on a median basis. The maximum increase was 75.9% and the minimum -22.3% (i.e. a more than 20% drop, in the period in which we now find ourselves).
There have been only five episodes of declining prices, of which this is by far the worst. Twenty quarters after the midpoint of these episodes, prices are 18.8% higher (average), 17.1% (median), 75.7% higher at best and down 28.3% at worst. But leaving out the current episode, which I suppose is not finished, the figures are respectively 46.3%, 55.2%, 79.8%, and -0.3%.
Food for thought.
Tuesday, February 24, 2009
While waiting for the Prez's speech, let's talk defaults!
There is time to dispose of a piece of received wisdom that is abroad in the land, and totally wrong.
Jamie Dimon (that's "Die-mon" not "Dee-mon", Mr. Congressman) of JP Morgan had the opportunity to hit this out of the park the other day when someone asked him about whether borrowers who are underwater on their loans might as well just walk away. Predictably enough, he said no, a mortgage is a contract and when you make a contract you should fulfill its terms.
True, and a large part of the moral truth. But not the whole truth, as there is a practical truth as well, for those who are not bound by moral scruple, who ask not "What's right?", but "What's in this for me?" The practical truth is that walking away has dire consequences that people have to weigh together with other considerations.
If you walk away, and the lender forecloses, it will destroy your credit for eight or ten years. If things improve and you want to buy a house again, or you need a car, a credit card, a student loan for your kids, you will be hard pressed to get one with a foreclosure in your recent past.
Moreover when the sheriff auctions your foreclosed house on the courthouse steps, there could well be a deficiency judgment against you for the difference between the hammer price and the amount on which you have defaulted. That deficiency judgment could follow you around for twenty years, during which the court can garnish your wages, withhold your tax refunds, and sell whatever assets you have that they can attach.
A ten- to twenty-year sentence? It is not worth it. You are far better off, and your lender is far better off, working it out than mailing the keys back to the lender and running off.
OK, now the President.
Jamie Dimon (that's "Die-mon" not "Dee-mon", Mr. Congressman) of JP Morgan had the opportunity to hit this out of the park the other day when someone asked him about whether borrowers who are underwater on their loans might as well just walk away. Predictably enough, he said no, a mortgage is a contract and when you make a contract you should fulfill its terms.
True, and a large part of the moral truth. But not the whole truth, as there is a practical truth as well, for those who are not bound by moral scruple, who ask not "What's right?", but "What's in this for me?" The practical truth is that walking away has dire consequences that people have to weigh together with other considerations.
If you walk away, and the lender forecloses, it will destroy your credit for eight or ten years. If things improve and you want to buy a house again, or you need a car, a credit card, a student loan for your kids, you will be hard pressed to get one with a foreclosure in your recent past.
Moreover when the sheriff auctions your foreclosed house on the courthouse steps, there could well be a deficiency judgment against you for the difference between the hammer price and the amount on which you have defaulted. That deficiency judgment could follow you around for twenty years, during which the court can garnish your wages, withhold your tax refunds, and sell whatever assets you have that they can attach.
A ten- to twenty-year sentence? It is not worth it. You are far better off, and your lender is far better off, working it out than mailing the keys back to the lender and running off.
OK, now the President.
The Household Initiative Plan is posted at Household Initiative Plan Blog
Monday, February 23, 2009
Confiscation of Retirement Assets?
There is a lively discussion under way at the Legal Insurrection blog with a post "The Revolt of the Kulaks Has Begun." In the comments it is suggested that the administration will come after tax-advantaged savings assets of American retirement savers.
This is dynamite. It is hard to believe the administration would overreach this way, but congressional Democrats exposed them to the charge by taking advice from Teresa Ghilarducci, a critic of the retirement savings system at the New School. In effect she suggests confiscating private accounts and supplying guaranteed government accounts in their place.
Promoting my Household Initiative Plan or something like it is one way to make the administration tell us what it really has in mind for private retirement accounts.
I have been making free-market proposals to liberalize the current rules for the 46 million IRAs, SEPs, SIMPLE and Keogh retirement accounts and permit them to invest in real estate without the heavy restrictions which pertain to them now. Retirement-minded people who are in good shape, not behind on their bills, and not struggling, could benefit from this opportunity to use retirement savings to take advantage of low real estate prices in popular retirement areas.
If you believe that the money people have contributed to their retirement accounts belongs to them, then it should be their free choice to do with as they think best, to take advantage of such opportunities as they perceive, or to bail themselves out of the trouble they are in. And if the administration thinks differently, then it would have to knock down proposals like my HIP.
Let's speak more generally about the restrictions and penalties that apply to these accounts. They are making a terrible situation even worse by restricting liquidity. Many people are being severely penalized for tapping their retirement accounts in order to try to save their homes and credit scores. Others who are behind on their mortgages and other bills, thereby damaging their credit, are nevertheless unwilling to incur the penalties they would pay to access their money in these accounts to get current on their bills. This is just madness. For the duration of the crisis, let's free things up, and let people access their own money in these accounts to work themselves out of trouble without penalties.
This is dynamite. It is hard to believe the administration would overreach this way, but congressional Democrats exposed them to the charge by taking advice from Teresa Ghilarducci, a critic of the retirement savings system at the New School. In effect she suggests confiscating private accounts and supplying guaranteed government accounts in their place.
Promoting my Household Initiative Plan or something like it is one way to make the administration tell us what it really has in mind for private retirement accounts.
I have been making free-market proposals to liberalize the current rules for the 46 million IRAs, SEPs, SIMPLE and Keogh retirement accounts and permit them to invest in real estate without the heavy restrictions which pertain to them now. Retirement-minded people who are in good shape, not behind on their bills, and not struggling, could benefit from this opportunity to use retirement savings to take advantage of low real estate prices in popular retirement areas.
If you believe that the money people have contributed to their retirement accounts belongs to them, then it should be their free choice to do with as they think best, to take advantage of such opportunities as they perceive, or to bail themselves out of the trouble they are in. And if the administration thinks differently, then it would have to knock down proposals like my HIP.
Let's speak more generally about the restrictions and penalties that apply to these accounts. They are making a terrible situation even worse by restricting liquidity. Many people are being severely penalized for tapping their retirement accounts in order to try to save their homes and credit scores. Others who are behind on their mortgages and other bills, thereby damaging their credit, are nevertheless unwilling to incur the penalties they would pay to access their money in these accounts to get current on their bills. This is just madness. For the duration of the crisis, let's free things up, and let people access their own money in these accounts to work themselves out of trouble without penalties.
The Household Initiative Plan is posted at Household Initiative Plan Blog
Saturday, February 21, 2009
Household Initiative Plan to Rescue Real Estate
Here's a new plan for America's housing problem called the Household Initiative Plan. It’s called that because of all the plans out there it is the only one that asks little of the Treasury, Federal Reserve, or other government agencies besides non-interference in what millions of responsible householders could do for themselves on their own initiative.
My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.
While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.
At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.
At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.
Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.
If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.
The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.
The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?
D.H. Smith, Mt. Freedom NJ, 2/16/2009
Cross-posted at Household Initiative Plan Blog
Glad to get your feedback at "the.grayling at gmail dot com"
My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.
While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.
At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.
At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.
Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.
If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.
The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.
The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?
D.H. Smith, Mt. Freedom NJ, 2/16/2009
Cross-posted at Household Initiative Plan Blog
Glad to get your feedback at "the.grayling at gmail dot com"
Notes on the HIP
1. The careful reading and valuable insights of Harriet Baldwin, Charles Burns, Timothy Gildner, Cameron Adams, Swee Hsien Tsung and Terry Zou are gratefully acknowledged.
2. Other plans to fix the housing market focus variously on one or more parts of the problem: they aim to shore up the capital of banks, re-constitute the mortgage markets with private or government investment, re-work loan terms to mitigate foreclosures and keep people in their houses, clear the market oversupply of houses, and stop the spiral of house price declines. No single plan acts upon all of parts of the problem. Most act upon more than just one part. No useful plan acts upon only one.
3. The following are the key points of the well-known real estate plans, no doubt digested to the point that their originators would not recognize them:
4. Most of the well-known real estate plans have their good points, but the one thing none of them do is allow the American people a free choice to apply their own existing resources in the service of their own economic interests.
2. Other plans to fix the housing market focus variously on one or more parts of the problem: they aim to shore up the capital of banks, re-constitute the mortgage markets with private or government investment, re-work loan terms to mitigate foreclosures and keep people in their houses, clear the market oversupply of houses, and stop the spiral of house price declines. No single plan acts upon all of parts of the problem. Most act upon more than just one part. No useful plan acts upon only one.
3. The following are the key points of the well-known real estate plans, no doubt digested to the point that their originators would not recognize them:
a) The Zingales Plan (Luigi Zingales, of the University of Chicago) -- A decline in an index of local property prices triggers a government-mandated reduction of principal balance on securitized mortgages; lenders thus crammed-down may recapture some of future price appreciation in underlying assets.
b) The Columbia Plan (Glenn Hubbard and Chris Mayer, Columbia Business School) -- Calls for nationalized institutions Fannie Mae and Freddie Mac to provide home loans to new and existing borrowers with positive equity on such terms as would be available were markets working normally e.g 4.75% for 30 year loans.
c) The Feldstein Plan (Martin Feldstein, Harvard) --Proposes “mortgage-replacement” loans from the treasury at low cost (e.g. 2%) for all mortgage holders, up to 20% of their outstanding mortgage debt, to reduce their cost of debt service. These loans are full recourse, in first place ahead of mortgage, and aim to reduce the incentive for owners to abandon their properties.
d) The Immigration Plan suggests allowing an increased flow of immigrants to take up the excess housing stock.
e) The National Association of Realtors Plan: Expand and extend the home purchase tax credit, increase conforming loan limits, use TARP funds for mortgage interest buy-downs, and keep banks out of Realtors’ traditional business.
f) The National Association of Home Builders Plan: Extend tax credits of 10% of purchase price up to $22k to all new home buyers, and use TARP funds to buy down interest on conforming mortgages.
g) The Fix Housing First Plan (Sen. Johnny Isakson, Republican of Georgia, et. al.) -- Extend tax credits as per the NAHB plan, applicable to 2008 income tax, and make them monetizable, so that buyers can apply them at closing.
h) The Stimulus Plan as signed on 2/17/09 -- Expanded a program of $8000 tax credit for first-time homebuyers, repayment not required.
4. Most of the well-known real estate plans have their good points, but the one thing none of them do is allow the American people a free choice to apply their own existing resources in the service of their own economic interests.
Still More Reaction to the HIP
I got a valuable contribution from my best college friend. He writes:
Dave,
. . . First, the biggest problem is selling the idea. It sounds good, but who in the government is going to buy it? Democrats don't trust that people are smart enough to be able to handle their own retirement accounts - isn't that the purpose of Social Security? The cushion that an IRA, et. al., offers is still a piece that is supposedly handled by people that have some idea as to what they're doing - not Joe Bag O'Donuts next door. Republicans don't think that people with small investments are worth supporting in this measure, as they get their support from those money managers who are handling all the IRAs. You're going to take away their revenue stream.
Second, it seems that more people have problems with their existing mortgages. Emptying out their IRAs will have already occurred in some cases, in an attempt to stave off that foreclosure. Others will have to figure out how to draw out that IRA to buy fresh real estate while still being upside down on their existing mortgage. How do you handling buying a $300k home, with your $250k IRA when you already owe $250k on a house now valued at $200k? Insert whatever relevant numbers you want here, the problem is still the same.
Third, how do you convince people that investing in real estate is a good idea. [My city] ranks third among emptying cities. There's a glut of available real estate, and the prices continue to drop, but even those people with money are refusing to part with it - at least not for tickets that pricey. It's the same reason car sales have dropped. You can survive in a house with drafty windows and too small rooms, while you wait for the recovery. You can milk another 20 thousand miles out of that car, squirreling away the finally-relieved car payments, rather than upgrade, just to make sure that HP doesn't decide to downsize your department.
All that being said, I do think that your idea seems worthwhile. The problem has always been what the Dutch discovered hundreds of years ago - it's all just a bunch of tulips. Speculation leads to false value leads to soaring investment, finally to gossamer worth. When you discover all it ever was is a flower, then it all falls down on itself. Real estate has a quantifiable value. While it may not always be monetary, it is always concrete in its being. (Picture bad pun here.)
Hope that helps.
I replied as follows:
Hey there, I really appreciate you looking at it and giving me this well-considered feedback.
I'm a strong free market guy, so my best hope of sponsorship is not in either of the parties as you say, but in think tanks like Cato, Hudson, AEI. If they get behind something like it, the Republicans may pick it up in their role as opposition.
There is nothing for Republicans from Wall Street anymore, and no risk in attacking the franchise of the investment companies, banks and financial advisors.
You allude to a major problem that bothers me too: the fact that people are struggling when they have money that could help them, or are being subjected to penalties when they go into that money. I think it would be best to get rid of these penalties for the duration of the crisis. (Or forever.)
The candidates for buying condos in Florida and Phoenix are not the people who are upside down in their principal residence. They are the ones who could take $75k out of their accounts and finance $25-50k . . . in other words, buyers who would buy with a low loan-to-value ratio, if not a zero LTV.
I would be the last guy to try to convince anybody that they should do this or that with their money. Some people would make this choice freely if it were open to them. I sure would. That said, I believe the loss of confidence in financial assets will last for many years, while there is some baseline real-life demand for real estate. As you say, it is concrete and you can live in it.
If governments gets things wrong now and print money to paper over the cracks in the system, we will get to where you need bushel baskets of dollar bills to buy a Big Mac. The gold price is telling you there is real concern about this outcome. Real estate prices are indexed for inflation, but financial asset prices generally are not.
Dave,
. . . First, the biggest problem is selling the idea. It sounds good, but who in the government is going to buy it? Democrats don't trust that people are smart enough to be able to handle their own retirement accounts - isn't that the purpose of Social Security? The cushion that an IRA, et. al., offers is still a piece that is supposedly handled by people that have some idea as to what they're doing - not Joe Bag O'Donuts next door. Republicans don't think that people with small investments are worth supporting in this measure, as they get their support from those money managers who are handling all the IRAs. You're going to take away their revenue stream.
Second, it seems that more people have problems with their existing mortgages. Emptying out their IRAs will have already occurred in some cases, in an attempt to stave off that foreclosure. Others will have to figure out how to draw out that IRA to buy fresh real estate while still being upside down on their existing mortgage. How do you handling buying a $300k home, with your $250k IRA when you already owe $250k on a house now valued at $200k? Insert whatever relevant numbers you want here, the problem is still the same.
Third, how do you convince people that investing in real estate is a good idea. [My city] ranks third among emptying cities. There's a glut of available real estate, and the prices continue to drop, but even those people with money are refusing to part with it - at least not for tickets that pricey. It's the same reason car sales have dropped. You can survive in a house with drafty windows and too small rooms, while you wait for the recovery. You can milk another 20 thousand miles out of that car, squirreling away the finally-relieved car payments, rather than upgrade, just to make sure that HP doesn't decide to downsize your department.
All that being said, I do think that your idea seems worthwhile. The problem has always been what the Dutch discovered hundreds of years ago - it's all just a bunch of tulips. Speculation leads to false value leads to soaring investment, finally to gossamer worth. When you discover all it ever was is a flower, then it all falls down on itself. Real estate has a quantifiable value. While it may not always be monetary, it is always concrete in its being. (Picture bad pun here.)
Hope that helps.
I replied as follows:
Hey there, I really appreciate you looking at it and giving me this well-considered feedback.
I'm a strong free market guy, so my best hope of sponsorship is not in either of the parties as you say, but in think tanks like Cato, Hudson, AEI. If they get behind something like it, the Republicans may pick it up in their role as opposition.
There is nothing for Republicans from Wall Street anymore, and no risk in attacking the franchise of the investment companies, banks and financial advisors.
You allude to a major problem that bothers me too: the fact that people are struggling when they have money that could help them, or are being subjected to penalties when they go into that money. I think it would be best to get rid of these penalties for the duration of the crisis. (Or forever.)
The candidates for buying condos in Florida and Phoenix are not the people who are upside down in their principal residence. They are the ones who could take $75k out of their accounts and finance $25-50k . . . in other words, buyers who would buy with a low loan-to-value ratio, if not a zero LTV.
I would be the last guy to try to convince anybody that they should do this or that with their money. Some people would make this choice freely if it were open to them. I sure would. That said, I believe the loss of confidence in financial assets will last for many years, while there is some baseline real-life demand for real estate. As you say, it is concrete and you can live in it.
If governments gets things wrong now and print money to paper over the cracks in the system, we will get to where you need bushel baskets of dollar bills to buy a Big Mac. The gold price is telling you there is real concern about this outcome. Real estate prices are indexed for inflation, but financial asset prices generally are not.
Thursday, February 19, 2009
Federal Open Mouth Policy is a Big Sell
The first time I realized that the Federal Open Mouth Policy is a Big Sell was over a year ago, when Fed Chief Ben Bernanke made some innocuous remarks about financial conditions that at that point did not yet rise to the level of panic. The stock market sold off hard.
Bear Stearns rescue -- short term relief, after which market sold off hard.
The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.
Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.
TARP, TALF . . . barf.
George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.
The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.
The Inauguration Address went over like a lead balloon. Big, big sell.
But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.
The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.
The finger was on the sell button, but we held back on pressing it.
It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.
The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.
So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.
Or maybe they will wait till later in the day. It's early yet.
While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.
UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.
MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.
Bear Stearns rescue -- short term relief, after which market sold off hard.
The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.
Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.
TARP, TALF . . . barf.
George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.
The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.
The Inauguration Address went over like a lead balloon. Big, big sell.
But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.
The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.
The finger was on the sell button, but we held back on pressing it.
It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.
The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.
So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.
Or maybe they will wait till later in the day. It's early yet.
While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.
UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.
MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.
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