LET’S JUMP-START THE MORIBUND REAL ESTATE MARKET
HERE’S HOW | By Matt Williams
March 2009
Matthew W. Williams BLOG featured on propertyfiresale.com
Destin, Florida
matt@propertyfiresale.com
The $8,000 tax credit for home buyers included in the stimulus plan is a well-meaning attempt to stimulate demand for the moribund housing market, but it just isn't enough. I have an alternate plan for stimulating demand, which will actually work. It will also help jump-start the economy, complement the government’s $787 billion stimulus plan and help stabilize the banks.
Here’s what I suggest: a tax deduction on down payments and relief from any capital gains taxes on real estate purchased within the next 12 months and held for a minimum of three years.
Don’t get me wrong. As a real estate agent, I can hardly complain about the stimulus package provision for stimulating housing demand, a tax credit that amounts to of 10% of the purchase price of a new home, up to a maximum of $8,000. But look. The government last year offered first-time homebuyers a $7500 tax credit, and it didn’t work. Isn’t this just more of the same?
I’m not going to beat around the bush. The real problem in the real estate market is property that requires so-called jumbo loans. That’s any loan over $417,000. And in many areas of the country, that’s barely the median price of a home. But the $8,000 tax credit included in the stimulus package doesn’t add much incentive to this most problematic of markets.
So let’s consider the first prong of my plan: a tax deduction on any down payment on purchases made within twelve months. Take a homebuyer in the 30 percent tax bracket that purchases a $300,000 home. A 20% down payment translates into an $18,000 tax savings; 40% down, $36,000. If the house costs $400,000, the same buyer would get a tax savings of $24,000 with 20% down and $48,000 with 40% down.
For higher priced homes, of course, this gets, well, interesting. The purchaser of a $700,000 home who puts 20% down would enjoy $49,000 in tax savings. And the purchaser of a $1 million home in the 35% tax bracket that puts down 40% would get a whopping $140,000 in tax savings.
What, doesn’t seem fair, you say?
Let’s be clear. In terms of jobs, there is no more important industry than real estate. When a house is sold, it involves an entire food chain of American workers—a real estate agent, a home inspector, an appraiser, a banker, a painter, a courier (USPS, FedEx, UPS), a person who sells flat-screen TVs, another who sells dishwashers, yet another who sells solar panels. The list goes on and on and on. There are people who work for the companies that manufacture these goods, and still others who work for the companies that sell them, like Best Buy, JC Penney, or Sears.
To put it another way: Even the purchase of relatively high-priced real estate affects people at the lower ends of the income spectrum.
Consider a 55-60 year old painter I know that drives a 25-year-old rusted van that barely runs. He’s been in business here for 20 years. During the housing boom, he probably painted 3 houses out of every ten houses that I sold. But he hasn’t had a paint job in a year. I guarantee you: If a few homes around here sell, he’d be back to work—and spending money.
Without belaboring the point, this would happen nationwide. Jobs, jobs, jobs—and more jobs.
Keep in mind, too, that identifying the beneficiaries of this plan by income level isn’t as straightforward as you might think. I have a friend in Kentucky who wants to sell his $700,000 home there and move to Florida, where he wants to purchase a $250,000 condo. So while we generally assume that buyers of lower-priced real estate cannot afford higher down payments (and it may be true in many cases), the real estate market is far more fluid than that.
So how much does this cost the taxpayer? Let’s assume that this one-time deduction, coupled with the capital gains exemption I will discuss in a moment, stimulates $800 billion in new home sales within the next twelve months. If the average homebuyer makes a 20% down payment, that’s $48 billion in foregone tax revenues.
The point is this: Higher down payments translate into less risk for the banks. That’s because the entire amount of their loan on a particular house is a lower percentage of the home’s total value. This, in turn, increases the stability of the banks. Higher down payments also stabilize the real estate market, where foreclosure becomes a less appealing option for owners who end up walking away from their own equity under such circumstances.
In other words, we all win.
The other part of my stimulus plan is an exemption from capital gains tax on real estate purchased in the next 12 months, provided it is held a minimum of three years. Only individuals and families could take advantage of this once-in-a-lifetime exclusion, which could be a major estate-planning tool. Each taxpayer would be limited to taking the exclusion on just one property.
Why a capital gains exemption? Because this is where the rubber meets the road. I’ve discussed this idea with potential buyers who’ve been sitting on the sidelines as they wait for the real estate market to bottom out. All of them—bar none—say they would jump into the market because they feel their downside would be protected and they are thus willing to take the plunge even if the market drops further.
In the meantime, since these buyers are willing to jump into the treacherous waters of an uncertain real estate market with perhaps the most important investment of their lives, demand will be stimulated. Finally! The real estate market will no longer be stuck, the economy would get its jumpstart, and we’d all be on our way back to work.
Very truly yours,
Matt Williams
 Email this page to a friend.
Blog Archive:
|
