Did you hear that sound today on Capitol Hill?

By
Real Estate Broker/Owner

Did you hear that sound today on Capitol Hill?

It was the sound of Congress flushing another $350 billion of tax payer money down the toilet.

The Senate approved Bush's request of Obama's request for the second tranche of $350 billion of TARP money to be made available for the Treasury's disposal.

And it appears as though the vote and approval could not have come at a better time for both Citigroup and Bank of America whose stock has been decimated in recent days.  They will likely be the first banks to receive additional capital injections, Bank of America for the second time in three months and Citigroup for the third time in three months.

The problem I have with TARP is that it has become a "prop" from which the government will be unable to detach itself from anytime in the near future.  It's kind of like a comedian that needs a bag of tricks in order to be funny, if you take away the bag of tricks you no longer have a comedian.  

Well, in the absence of TARP, it appears that we longer have a banking system, the banks are going to lose billions of dollars on loan defaults because of a housing depression and economic recession all the while they are not making new loans so they don't have new revenue to support themselves, it's a really an ugly combination, kind of like a Yankee fan in Fenway Park in October, nothing good is going to happen and somebody may just get hurt.  Admittedly, from what I have been reading, not only are banks reluctant to extend credit, but some consumers and businesses are also hesitant to take on new loans, the door swings both ways, neither of which is good. 

Using TARP money to stabilzie the banking system in the absence of a true housing stimulus is a lot like taking a shower before you go to the gym in the morning, it just doesn't make any sense (There's another analogy that I wanted to use here, but common sense prevailed). 

So rather than continuing to give banks billions of dollars so that they can digest their losses and stay afloat while every American around them is drowning, why not approach the banking system from another angle?

Why don't we stimulate demand for real estate by providing a tax incentive for Americans to invest in, well, America, and at the same time bring some price stability to the housing market?  This would accomplish four things.

1.)  If home prices stop falling, the banks are going to have fewer foreclosures.  This is a fact.  If the banks have fewer foreclosures, the banks are going to need less tax payer money to offset their losses.

2.)  If we stimulate investment demand for real estate from people that have good credit and plenty of capital (something that a lot of first-time homebuyers don't have), the banks will in turn provide these people with loans.  These loans will be a new source of revenue for banks, something they desperately need right now.  Lending volume is down 55% from 2007.  

3.)  Americans will receive a tax benefit for investing in real estate and as a result they will have more disposable income, income they can then spend because they will be paying less in taxes.

4.)  If home prices stop falling and banks stop needing to be resuscitated by TARP money, every American will be more confident and more likely to spend and invest. 

The cost?  Approximately $23 billion for an additional 1 million homes to be sold within the next year using an accelerated depreciation model.  And considering the first $350 billion of TARP money had zero stimulative effect, it seems like this may be money well invested in the American people. 

 

 

 

 

Comments (54)

Mark MacKenzie
Phoenix, AZ

Dean:  Not sure if Tuesday things are going to change much based on what I have seen of his economic stimulus proposal. :)

Laura:  I agree with you completely, nobody trusts banks anymore, which is all the more reason why we should stop giving them tax payer money.

George:  For whatever reason, it seems that as the deeper we get into this crisis, the more people are forgetting how we got here - the housing market.

Rama:  I agree with you that the situation is going to get worse before it gets better, it can't not based on mortgage resets, rising unemployment, and the lack of a real housing stimulus.

Christopher:   Thanks for the comment.  Washington is broken in more ways than one.  

Lane:  I don't think doing nothing or allowing the free market to run its course is the most viable option based on the systemic risk that is involved with that type of economic leverage.

Sonja:  You are correct, we are indeed on that path.  I'm not sure how exactly it happened but we have gone from free markets to a nationalized banking system in about 120 days.

Jan 17, 2009 09:35 AM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

Mark, the problem is that if the bottom isn't percieved as real, NO amount of money is going to "fix" the problem.  It will just drive the government's debt spiral further into oblivion...

Jan 17, 2009 01:51 PM
Esko Kiuru
Bethesda, MD

Mark,

The big financial institutions have obviously great influence over in Washington as they keep getting more gift money to try to stay afloat. It appears the same mistakes are repeated time and again. A shame.

Jan 17, 2009 02:28 PM
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Mark- First of all I never believed that bailing out the banks would solve any problems. The free market was not permitted to play the course which it needed to do. The more government injects and interferes the longer it takes to get out of the mess. Failure is a part of life and entitlement is not.

Prices have to come down in real estate because they were over inflated. Now I will speak for Florida in general right now. Prices of homes have to be within reach for middle income borrowers and teachers and firemen, police officers, etc. Our prices here are not yet at that point. Economics teaches us these lessons. When the average person is priced out of the market the prices will begin to fall. You can not sustain a real estate market with overinflated prices such as what we experienced here.

Arizon faced a similar problem but Florida by far was the most inflated the fastest. We had prices going up on new development $500 per hour! Not per day, not per week, but per hour on some new home projects. The bidding wars were furious with resales and no one even did appraisals! You could flip a home for $20 grand more in less than 30 days.

So artificially stabilizing the real estate market will not work either. Katerina

Jan 17, 2009 02:35 PM
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl.

Comedians works for me, But after Tuesday miracles can happen. We have a Democratic President and congress that can vote for whatever they want and the republicans cannot ever even filibuster. So if the want to give a million dollars to you or me they can. With a stroke of a pen they can sell Texas to Mexico and they isn't anything that can be done. So I want the printers to run non stop till there is so much money we all can wall paper our house with dollar bills.

Jan 17, 2009 03:24 PM
Mark MacKenzie
Phoenix, AZ

Lane:  What is the benefit to the broader economy and millions of Americans by allowing property values to fall further?  I don't understand why this is a compelling argument.   Housing affordability is already at an all time high.  There are two certainties that we are dealing with.

1.)  The government is going to spend trillions of dollars trying to "stimulate" the economy in the name of gross spending and bailouts.  This is already happening.

2.)  None of this is going to have much of an impact on the broader economy until the housing market gains some traction.

If government is going to spend money, and it is, I would prefer that it actually has a positive and stimulative effect.

Jan 17, 2009 03:30 PM
Mark MacKenzie
Phoenix, AZ

Katerina:  I am not sure if the housing affordability argument still holds any currency considering how far home values have come down across the country in particular in FL, AZ, NV, and CA.

Nationally speaking, housing affordability is near an all time high and that was in November, before rates plunged to historic lows.  In other words, not since 1973 have more people in America been able to afford a home today based on home prices, incomes, and mortgage rates.  

Additionally in 2007, according to the Census Bureau, 71.8% of Floridians owned a home, well above the national average of 68.1%, which is well above the historic homeownership rate of 64%.

Now whether or not if somebody wants to buy a home today is up for debate, but I don't see affordability to be a road block when you look at it from a historical perspective.

I would also contend that as home values fall further in the name of "housing affordability", just as many people are going to lose their home to foreclosure as will buy their first home - in other words there is no net positive effect on the housing market.  We are already seeing this which is why the month's supply of housing at 11.2 is the highest on record despite housing affordability also being the highest since 1973.

 

Jan 17, 2009 03:43 PM
Tony Sena
Shelter Realty, Inc - Henderson, NV
Broker/Property Manager

It's just irritating that we keep giving money to these banks so they can keep buying up smaller or distressed banks which ultimately is going to make less competition for them in the years to come and we as consumers are going to pay for it.  With less competition means higher fees!

Stop bailing out the banks, homeowners are losing their homes, businesses or shutting down or filing bankruptcy so why not let the banks run their course?

Jan 17, 2009 04:25 PM
Regina P. Brown
MBA Broker Consultants - Carlsbad, CA
M.B.A., Broker, Instructor

And where exactly is this $$ coming from?  They don't have it, we don't have it, so it's a charade.  A song and dance act.  A phantom.  Fake.

Maybe our kids will work hard to create this money for us?  But I doubt it...

Join my NEW group for professionals who work from their home office at http://activerain.com/groups/virtualoffice

Regina P. Brown

Jan 17, 2009 04:35 PM
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Mark- The calculation is based on how much the debt ratio is. In Palm Beach County it is still at 42%. That is still a tad bit too high to qualify for a comfortable mortgage. Broward County is at 45% and Miami Dade is over 48%! They have a ways to go down still. The ideal debt to income ratio is 28% to 32%.

Florida Economists project that the prices really need to be at 2003 prices in order to see a stabilization in the market.

This part of the market does not affect where we personally live and work. We have some niche markets that are plummeting that we take a lot of listings but our main niche is the luxury market and in our area this has been not been affected. We will see how the Madoff thing affects our money here. Katerina

Jan 17, 2009 05:27 PM
Short Sales Buyers
ShortSalesBuyers.com - Fullerton, CA

You're missing the boat... it's not a RE/bank market problem... the BIGGEST BUBBLE is the secondary market.  OTC derivatives... these are the toxic paper.  This market has no regulation what so every... even warren buffet stated him self he didn't understand it... know wonder these snakes where able to con sooooo many people to buy these toxic derivites... and not to mention the idiots who insured these paper... they say you have 1 quadrillion dollar in that market... know wonder 700 billion didn't do squat....

Jan 17, 2009 08:54 PM
Mark MacKenzie
Phoenix, AZ

Katerina:  I don't doubt for a second that home values are likely to return to 2003 levels, in fact, nationally speaking we may already be there.  In 2003 the median home value was $180,200, in November of 2008 it was $181,300 (source: NAR).  Yet despite this decline, home values are set to continue to plummet based on the growing supply and demand imbalance.

I still think the underlying problem with home values continuing their decline is that more people are going to be negatively impacted from it than are going to benefit.  In the United States according to the Census Bureau there are approximately 130 million housing units, yet typically less than 1 million people will buy a home for the first time each year based on household creation.  And so as homes become "more affordable" and lose value, for every buyer that buys their first home, 130 others homes will have less equity.  This is not an equitable or economic relationship.

The biggest "danger", which is a precondition for default, facing the housing market and subsequently the economy is negative equity.  The economy is drowning and the housing market depression is a root cause.  Allowing home values to continue their downward spiral only exacerbates that problem.  

Jan 17, 2009 11:41 PM
Mark MacKenzie
Phoenix, AZ

Jeff:  I agree with you and Buffett for that matter that these thing are "weapons of mass destruction" and it is all the more reason why stabilizing the housing market and ultimately the banks should be a top priority.

If banks fail, so does this multi-trillion dollar market.

My point with this post is that there is another way to help stabilize the banks other than TARP and that is to stabilize the housing market by increasing demand for investment real estate and providing good loans to banks so that they continue to get new capital while at the same time providing a back stop to home values and foreclosures.

Without a housing stimulus plan we will continue to see rising inventory (foreclosures) and declining home sales, both of which will drive down home values even further leading to additional foreclosures and bank losses and failures.

 

Jan 17, 2009 11:55 PM
Chris Oliver
Century 21, Preferred Properties - Reynolds Plantation, GA

The free market WAS allowed to play the course. And while it was playing, the invisible hand was picking our pockets so huge bonus' could go to what turned out to be utter theives. The free market is a great and wonderful thing but with no regulation simple human greed brings ruin for all. This is the S & L mess of the 80's x10 and far worse with securitization. It is all so interconnected and the greedy ones have moved on to something else.

Jan 18, 2009 12:27 AM
Short Sales Buyers
ShortSalesBuyers.com - Fullerton, CA

Mark - I totally agree with you on increasing demand for investment RE.  I wasn't reading it correctly.  I was actually half-asleep (it was like 3 am PST) lol. 

Let me ask you this.... What's your take on the seasoning issue?  My buddies and I always say... that is currently the biggest hurdle for investors and when they remove it, the homes will move that much quicker.

Jan 18, 2009 03:27 AM
Mark MacKenzie
Phoenix, AZ

Chris:  Free markets are a lot like free lunches, somebody always pays for it.  Banks have had a field day under the umbrella of "free markets" and now Americans are paying for their lunch.

Wall St. executives have taken home millions over the past years in what appears more and more like the biggest ponzi scheme of them all - all in the name of free markets.

 

 

 

Jan 18, 2009 03:35 AM
Mark MacKenzie
Phoenix, AZ

Jeff:  Really good question and there are two things that I think need to be considered.

First, there are an awful lot of foreclosed homes that need to be fixed up in order to be sold.  One of the ways to do this is to remove seasoning requirements which would stimulate this process.  This in and of itself, in my opinion though, doesn't provide a long term solution to the housing depression.

Second, one of the reasons I am an advocate for using depreciation as an incentive to invest in real estate is because it provides a LONG TERM solution to the supply and demand imbalance.  I think it is critical to provide an Americans with an ongoing tax incentive (depreciation) to continue to hold property for investment purposes, not just buy and sell.  

Currently, the Tax Reform Act of 1986, which reformed the tax code as it pertains to investment real estate, is obsolete as it has not been adjusted for the 22 years it has been on the books.  In other words, there are very few tax incentives available for most Americans to make an investment in real estate as their income exceeds what the IRS allows for passive losses.

It is going to take population growth and household formation several years to absorb the excess supply of homes, by adding incentives for people to make long term investments in real estate we can have a meaningful impact on supply and demand and subsequently shorten the housing recovery period.

Jan 18, 2009 03:57 AM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

Mark, why should home values be different than stock market values?  Stocks generally go up... but right now, why shouldn't the government be stepping in to protect the retirements of millions of Americans? 

The point is that it is a slippery slope.  People that picked solid stocks are being damaged because there is an overall downward pressure on the market.  Real estate is no different. 

Honda is suffering staggering declines in sales.  Toyota is losing money.  The American makes are in trouble... why then shouldn't the US government step in to stabilize their markets?  Not just support for the companies, but the markets themselves. 

The problem is that there is a slippery slope when the money starts to flow...  We can see that in the lines forming in corporate America to get their federal bail-out money.

Jan 18, 2009 03:32 PM
Mark MacKenzie
Phoenix, AZ

Lane - thanks for the dialogue.

First, I think we agree on this, there is a fundamental difference between an economic stimulus and a bailout.  What I am proposing is rewarding investment (something the government is already doing with businesses with accelerated depreciation), not failed companies or decisions.  You can't invest or depreciate a car or a vacation, or even stocks.  And while you could lower capital gains tax rates, I don't think that would directly impact the real estate market, I think we need a more immediate yet sustained incentive like depreciation.

Second, the argument that I make is that none of these other industries, Wall St., or the broader economy is going to get any traction until the housing market stabilizes.  In other words, spend as much money as you want on all of these other industries, it is not going to have any meaningful and sustained effect if millions of Americans are losing their home and nearly ten million are scared to spend because they owe more than their home is worth.  You may disagree with this, but I think that history has shown us otherwise, there is a correlation between housing and economic downturns, and this housing depression is a doozy. 

So long as banks are losing billions in real estate write downs, and consumer confidence and spending have evaporated as a result of home values plummeting, the economy will continue to contract.  The housing market is the lever, the point of maximum impact, that can stimulate the broader economy.  There are a lot of moving parts associated with real estate, home equity, consumer confidence, the mortgage securitization market, jobs (both building and selling), and even property tax revenues for municipalities

On a side note, I think the government is stepping in to protect the retirement of millions of Americans, it just so happens they have been late to act (no big surprise there) and they fumbled the ball when they let Lehman Brothers fail on September 15; that is what accelerated the decline and that is why they are not going to let another big company fail, including the autos.

Investment is a good thing for America, and I can't think of a better time than now to take a long hard look at how we can get more Americans to shed their fear right now and invest other than by accelerating depreciation for all Americans, not just businesses.

 

  

 

Jan 18, 2009 11:22 PM
Short Sales Buyers
ShortSalesBuyers.com - Fullerton, CA

Tax reform act... I'm going to look into that... probably will pick up your book.  Any discounts? =)

Jan 19, 2009 06:48 AM