Johnny Burke

Interesting piece from the Business Standard on how real estate stocks appreciated much more then real estate itself during the height of the market from Jan 2007 to Jan 2008 . In light of the past/current debacle we find ourselves in, it probably couldn’t hurt to pay more attention to this particular group of stocks to gain some kind of perspective and not get caught up in the frenzy often associated with market tops. I’m surprised that real estate futures traded at the Chicago Mercantile Exchange are not more popular these days as these instruments can hedge portfolio risk, lock in home equity and otherwise offer a speculator way to take advantage of price trends in today’s real estate market. For more info on real estate futures and options, please visit the CME page for real estate products here.

As if the last year was not tumultous enough. It’s Summer of 2009, with at least a few pundits who cover Wall Street hinting that the worst of the recession is over, stocks are off recent lows, so we have reason for optimism, right? After all, we have weathered most of the subprime debacle, at least for the time being. But what about the prime mortgages that are currently defaulting at a faster rate than the subprime loans did previously? Remember the 5-1 ARMs that were very popular just a few years ago? well, there is going to be another wave of resets/recasts which could last until 2012. You can read more here

Is this Option ARM-Ageddon? more defaults, means more foreclosures, which increases an already bloated housing inventory we currently have on the Westside of Los Angeles. How much more can this market bear?

Hi Everyone,

In the event that anyone missed this piece on the most excellent LA Land Blog, please read this if you live in California: The following is from the Los Angeles County Tax Assessor's website :

Please reblog this!!!!

Greetings Everyone

Things have been quite interesting as of late. The Stock Market closed at levels near the last bear market bottom of 2003 today, Gold in closing in on $1,000 per ounce and nervous investors are buying Bonds in droves in a "flight to quality" move. Can't say I blame them, can you? Also, most of us are trying to figure when/if the housing market will stabilize sometime in the future. I am not a fan of catching daggers, but with many investors buying bonds these days, there is a concern that this will push yeilds to an artificial low, or "overbought" levels. At some point, it would make sense for traders, especially contrarians, to start shorting bonds, or perhaps even taking a position in ETF's (Exchange Traded Funds) which will allow you to play just about any market (including Real Estate) up or down. This would seem to make a fairly good argument for intereste rates to eventually start to inch upward rather then go lower. Given the fact that consumer confidence is quite low, the news is awful, and the masses have taken to predicting everything is "going to hell in a hand basket" these days, does this not appear as a possible bottom? Even if housing values decrease from here, higher interest rates could still make your mortgage payment higher, right? My bet is: if the stock market starts to rally in the next few months, the "recovery" that all of us are hoping for will begin to manifest itself 6-9 months later. Questions? Observations?

U.S. tax break may have helped housing bubble

By Vikas Bajaj and David Leonhardt

"Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever - not ever."

- President Bill Clinton, at the 1996 Democratic National Convention

Ryan Wampler had never made much money selling his own homes.

Starting in 1999, however, he began to do very well. Three times in eight years, Wampler - himself a home builder and developer - sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.

And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.

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The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. "When you give that big an incentive for people to buy and sell homes," said Wampler, 44, a mild-mannered native of Phoenix who has two children, "they are going to buy and sell homes."

By itself, the change in the tax law did not cause the housing bubble in the United States, economists say. Several other factors - a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall - probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Vernon Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for "fueling the mother of all housing bubbles."

By favoring real estate, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. It helped change the national conversation about housing. Not only did real estate look like a can't-miss investment for much of the last decade, it was also a tax-free one.

Together with the other housing subsidies that had already been in the tax code - the mortgage-interest deduction chief among them - the law gave people a motive to buy more and more real estate. Lax lending standards and low interest rates then gave people the means to do so.

Referring to the special treatment for capital gains on homes, Charles Rossotti, the Internal Revenue Service commissioner from 1997 to 2002, said: "Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?"

The provision - part of a sprawling bill called the Taxpayer Relief Act of 1997 - exempted most home sales from capital-gains taxes. The first $500,000 in gains from any home sale was exempt from taxes for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first $250,000 was exempt.)

Wampler said he never sold a home simply because of the law's existence, but it played a role in his decisions and also became part of his stock pitch to potential customers who were considering buying the homes he was building in the desert. He would point out that the tax benefits would increase their returns on a house, relative to stocks.

"Why not put your money on the highest-yielding investment with the highest tax benefit?" he said recently.

During the boom years, he prospered. But today he owns 80 acres of land on the outskirts of Phoenix that he cannot sell. He owes $8 million to his banks, which may soon foreclose on his land.

"I am literally dying on the vine," he said.

The change in the tax law had its roots in a Chicago speech that Senator Bob Dole, Clinton's Republican opponent in the 1996 presidential election, gave on Aug. 5 of that year. Trailing Clinton in the polls, Dole came out for an enormous tax cut, including an across-the-board reduction in the capital-gains tax.