Saturday, October 29, 2011
There was a big story yesterday, but most of the blogosphere, caught up in shaping the narrative around the Occupy activists, ignored it. Too bad, because it is much more important.
The Census Bureau reported that American mobility -- the condition of people moving around this vast and beautiful land of ours in search of new opportunity -- has stopped like a car door slamming, and is at its lowest level since World War II. The reason given is that Americans are "locked in place," confined by houses they cannot sell -- or will not sell because they do not want to recognize losses that they have already incurred -- and young people are living with their parents.
Any reasonably large employer knows how bad this has become -- we are no longer really a national labor market, because so many otherwise excellent recruits cannot afford to relocate because they cannot sell their houses. The new American immobility is not only bad for our restless national spirit, it is terrible for GDP, and it needs to be fixed.
Separately, Mitt Romney drew rare praise from the Wall Street Journal for speaking the truth about housing and foreclosures.
Campaigning last week in Nevada, the epicenter of the housing bust, Mr. Romney was asked by the Las Vegas Review-Journal editorial board what he would do about housing and foreclosures. His reply:
"One is, don't try and stop the foreclosure process. Let it run its course and hit the bottom. Allow investors to buy homes, put renters in them, fix the homes up. Let it turn around and come back up. The Obama Administration has slow-walked the foreclosure processes that have long existed, and as a result we still have a foreclosure overhang."
Romney is right -- the country will not really recover until housing transactions start to clear at something akin to a natural price. This is easier said than done for many reasons. Many homeowners heard some number for their house's value back in 2006 and thought of their equity as savings, and now feel they have to hang on until they recover their paper profits. Others bought at those levels and will lose most or all of their down payment when they sell. Still others could sell if they could reduce the outstanding debt, but it is no longer a simple matter to negotiate with one's mortgagee.
There is, however, a solution that might increase the velocity in the American housing market, restore the geographic mobility that is arguably our greatest cultural patrimony, and appeal to both Democrats and Republicans.
The Official TigerHawk housing proposal is this: Allow housing losses realized between 2011 and 2015 to be deductible against ordinary income with no limits (or some really high limit) in any tax year through 2021. What about sellers who cannot use the tax deduction (perhaps because it overwhelms their income, or they are part of the 47%)? Allow them to sell those losses, for cash, to individuals, to partnerships of individuals (the pooling of purchasers would create a more efficient market for the losses), and any corporation that hires and relocates the seller.
So, for example, if Joe Doakes, who used to earn $120,000 a year and is now unemployed and therefore earning nothing, bought his house for $800,000 in 2006 and sells it in 2011 for $550,000, his loss is the greater of $250,000 or (if the mortgage exceeds the proceeds) the sum of his down payment and any deficiency he pays the mortgagee. Under the Official TigerHawk proposal, Joe would be able to sell his (say) $250,000 loss to some affluent fellow (or, more likely, a pool of affluent fellows). If Richie Rich pays income taxes at, say, a state and federal marginal rate of 40%, Richie is probably willing to pay 35% -- or around $87,000 -- for Joe's loss. That gets Richie a 14% virtually risk-free return if he uses that loss in the next year, which is a pretty investment in any market. Indeed, if other alternatives suck enough and there is enough demand from One Percenters, prices paid for losses might rise to within a couple of points of the typical marginal rate.
Of course, Joe still eats a loss, as he should, but he gets cash now to help with buying his new (and presumably much cheaper) house across the country where he can actually get a job.
The further advantage of this idea is that it moves money around without the need for a single additional federal bureaucrat. Existing IRS form designers could come up with a fairly straightforward "1099-M" that Richie (or the partnership that he has an interest in) would issue to Joe, thereby tracking both the deduction and the payment.
Of course, liberals will hate this idea because it is a "tax cut for the rich" instead of a subsidy that can be handed out to specific voters by Democrats. That may mean that it needs to be paired with tax increases on the "rich" as part of a broader deficit deal. While that would irritate Republicans, the structural beauty of the scheme is that tax rate increases on the One Percenters would increase the value of the tax deduction, and therefore the cash paid to Joe, who really needs it, all while it eases the blow of the tax increase.
Finally, unlike the tax shelters of old, it does not subsidize economically stupid new construction and therefore does not sew the seeds of the next bubble and crash. Rather, it spreads (and, yes, partially socializes) the losses of the current crash organically, without any need for fraught decisions from banks, politicians, or federal agencies.
Release the hounds in the comments, and pass the post along if you like the idea.
I'm just trying to understand the full implications of your proposal...if I understand your example correctly, would "Joe" be able to declare his "paper loss" of the value of his home over a number of years, if indeed the loss is greater than any one year of his taxable income?
This may work, but to me, (a non-expert with taxes) it sounds fairly complicated. I thought that all the proposals by candidates and the Congressional super-committee were to eliminate these sort of "tax loopholes," especially your attempt to create a "market" for these real estate losses...
A couple of thoughts: why 2011-2015--why not start the period in 2008? Of course the line does need to be drawn somewhere, and the date range kept reasonably short.
Why not broaden--or create a similar--the tax loss market to include realized stock losses? Lots of $3k/yr loss streams still floating around whose present value will have cash up front value for individuals. This market may be better run from 2008-2010. Also limit it to individuals; organizations need not apply.
Two downsides to both proposals: they complexify an already Byzantine tax system (just try and get your two-line amendment through Congress), and they'll create bailout precedents for future Economic Unpleasantnesses.
On the timing, I suppose the point would be to deal with houses that have not yet sold down to the "new normal." If the loss has already been realized, then the sale has occurred and it is not a problem, or at least not the same problem.
I would not apply the same rationale to the stock market, simply because the stock market has liquidity. The point of my proposal is to generate liquidity, which in housing probably requires some socialization of losses.
And, of course, we are socializing a huge chunk of the losses anyway, through the bailouts of Fannie and Freddie and the implicit subsidy to the TBTF banks. But neither of these "solutions" is actually increasing liquidity in the housing market.
Part of the reason why migrancy is down is because there are so many rules making it hard for American migrant laborers to survive-- in WA, for example, they basically made picker's cabins illegal. Coupled with illegal immigrants driving prices down and it's a no-go. (As recently as when my mom was in college, doing part-time labor in the agricultural sector, most of her co-workers were American migrant laborers.)
of course, we are socializing a huge chunk of the losses anyway, through the bailouts....
I have a real problem with the logic of using a series of mistakes to justify anything.
I'm also not convinced that your tax loss market socializes anything--it looks more like just creating a niche in a free market for another derivative instrument.
Other than these quibbles, I'm starting to like the idea. Other than the precedent it sets. But if the follow-on tax loss derivatives are allowed to move in a free market, also, maybe the precedent isn't so ugly.
I'm confused. It was my understanding if you have a 300k mortgage and short-sell the house for 200k, the *bank* suffers the 100k loss, and you are soaked for tax purposes as if you received 100k in income. (thereby making the short-sale suck even worse for the homeowner)
...if you have a 300k mortgage and short-sell the house for 200k, the *bank* suffers the 100k loss....
It occurs to me that, were the OTHHP to become law, the tax loss market would make it easier for the bank to hold out for at least a significant portion of those $100k (perhaps approaching 35% in TH's example) since that short part of the sale becomes part of the loss that's being sold.
This proposal is a parody, isn't it? Like we need yet another ham-handed government intervention into the housing market. One with absolutely awful optics: Tax cuts for the 1% based on how much misery they can buy.
While praised in the WSJ, Romney's statement "let it hit bottom" is already being used in attack ads against him. Previews of coming attractions if Mitt gets the nomination. Mitt is especially vulnerable as a Republican. He's not a dumb guy. He'll see this as a teachable moment: To get elected, he has to not say what he really thinks. It's dysfunctional.
Anon Attorney here. I agree with Ignoramus--this is parody, right??
TH, you never tire of bank bailouts at taxpayer expense, do you? Damn.
How about instead we pass a National Non-Recourse Mortgage Act eliminating recourse mortgage debt. The banking system blew this bubble, let them absorb the losses from the inevitable collapse.
It's the debt, stupid!
When the tech bubble crashed it was equity. Most of the losses were on paper. Some folks cashed out -- which is why Mark Cuban now owns a championship basketball team -- but most rode the wave up, and then down. Easy come, easy go.
But with housing it's different. We inflated the value of US housing stock over the course of generations, with a Barney Frank climax in 2004 to 2008. As always, YMMV may vary with local conditions.
A lot of people took hard money out when they sold, and left behind a buyer with debt. The money that came out was almost always nearly 100% funded with debt. This isn't just a subprime problem. We had a big transfer of wealth to those who sold residences in the run-up. Real dollars. We also had a similar effect for anyone that ran up their home equity lines.
Most people who take out a mortgage on a primary residence expect to pay for it with future earnings. But if the earnings aren't there?
A good chunk of our mortgage debt can't -- and won't -- get repaid. That's true of a lot of other debt too. We're just playing extend and pretend.
So who eats the loss? MBS investors will eat a lot of it. You'd be surprised who owns MBS -- a lot of pension funds, etc. But don't forget that the USA has already recently made an implied guaranty of Fannie and Freddie an express guaranty. So we've already socialized a lot of the potential loss.
If these losses happen, then we've put it on the taxpayer. The Young will bear the brunt of it.
The Young won't bear this equally. If you're young and rich, in most scenarios you'll stay rich. But forget earning your way to prosperity with W-2 income. We're about to kill off a generation of would be strivers.
Now add student loan debt on top.
Try as I do, I still can't figure out the global debt multipliers and machinations that are going on.
It's the debt, stupid!
I agree with the comments, but it's the CDS's not the debt that is the actual issue.
The pension funds and mutual funds are the nominal reason for the government intervention, but those could have been backstopped easily. And, it could have been done a lot cheaper. At this point the government owns most of the garbage anyway. TARP was used to payoff the CDS's during the initial round, and AIG was the conduit. Hence, they were "too big to fail". (NOTE: TARP was paid back through a variety of other means - the Fed, Freddie, Fannie, Treasury swaps, etc.)
The problem is that when the MBS's fail the CDS's kick-in. The naked CDS's were written with the knowledge that they would never be needed, and due to leveraging, the average cash reserve is 4-5% of the MBS value. The fees generated through them were pure profit. If the impossible were to become possible, it would be catastrophic, and one would have "abandoned free-market principles to save the free-market."
The naked CDS's for US residential mortgages is at least $30 Trillion, but it is probably much higher. (The numbers are hard to find.) The institutions that issued these naked CDS's would collapse, and since they donate a lot of cash to politicians, they get a lot of sympathy for their plight. It also does not help that the players move back and forth between the institutes and government.
This is not a conspiracy theory. This is all in the public domain. Some of it is difficult to find, but it is out there. The numbers may not be exact, but the magnitude is correct. This is an oversimplification, but it would take multiple posts to detail. For reference, look at what is actually happening with Greece. (Fitch says 50% Haircuts would Constitute Default; No Official Ruling from ISDA Yet; Wrong Decision Could Kill CDS Market; How Will Setup be Resolved?)
The numbers are staggering. The last estimate I saw was that the worldwide CDS/Derivative market was about $600 Trillion. That may have been a worst case, but half is still $300 Trillion. For the US, the estimate is $50-80 Trillion, and it is still staggering. Most of these instruments are off the books in various "vehicles", and it is legal. This is not Corporate Financing, and it only bears a resemblance to it. Since the CDS/Derivative markets are opaque and unfamiliar, most people have little idea of how they work, and I suspect that this is "a feature not a bug". But, what do I know.
"For the Snark was a Boojum, you see."
Sigh, y'all are so harsh.
The way I see it, we are going to spread all these losses on to "ordinary" Americans in any case. If bondholders will suffer, then pension funds take a hit. If we jam homeowners in the first instance, they take a hit but then somebody will come along to give them a break (see, e.g., the existing bailout which exempts homeowners who renegotiate mortgages or short-sale a house from cancellation of indebtedness income, which nobody here or anywhere else is complaining about). So the way I figure it, loss spreading mechanisms that are *fast* are better than those that are slow. Mechanisms that are organic, in the sense that market-like systems allocate the losses, are better than mechanisms that involve bureaucrats or politicians making choices that entrench them in power. So that is one argument in favor of my plan, if you buy the basic idea that these losses are going to land *everywhere* in any case.
Beyond that, there are very few people, even on the right, who argue that we should exempt cancellation of indebtedness income for homeowners who are under water. I have not heard a single Republican candidate denounce that particular bailout. Well, my version is really just an extension of that.
Finally, my working assumption is that the "rich" are going to face steep tax increases regardless. I am one of them, so this does not make me at all happy, but I do not see how it can be avoided. This proposal would make those increases go down more easily, because it would be possible to "buy down" one's taxes by buying losses on homes. *That*, in turn, will increase the velocity in home transactions, which will have all sorts of positive repercussions for the economy.
Anon Attorney here.
TH, I think I have a plan that represents a more equitable quid-pro-quo between government, underwater borrowers stuck in their homes, and the banking system that played a pivotal role in sticking them there.
Borrowers need to get out of their properties with their credit records intact so they can relocate and continue to function in a credit-driven world.(This is a major problem with your plan.)
Investors in mortgage backed securities (does anyone other than the Fed actually hold this garbage anymore??) need to minimize their losses.
Society has an interest in managing the decline of the housing market after the credit bubble burst and in allowing people to move to pursue jobs/education/etc.
Why don't we grant a "Put" that allows each tax unit to force a government-backed entity (FMHA, HUD, etc) to purchase one single family residence from them for an amount that retires the outstanding debt on the property, perhaps less any costs associated with restoring the property to a salable condition just to smack around those people who have trashed their homes.
The reclaimed properties would be auctioned off to investors with none of the stupid restrictions that HUD has in place for its auctions.
I think this type of program would be vastly more efficient and equitable than your proposal.
...American mobility -- the condition of people moving around this vast and beautiful land of ours in search of new opportunity -- has stopped like a car door slamming, and is at its lowest level since World War II. The reason given is that Americans are "locked in place," confined by houses they cannot sell -- or will not sell because they do not want to recognize losses that they have already incurred...
Not a problem here. Having pretty much been a lifelong resident of Silicon Valley, housing prices took off before my paycheck reached a level that would enable me to buy some sort of home (at reasonable prices, of course). Then those prices just shot up into the stratosphere, and I came to the conclusion that participating in the California real estate orgy was not something I was interested in doing.
As it turns out, not buying was the wise choice; I am free to leave at any time, which I will do readily if a suitable offer from a prospective employer in another part of the country is received...