Mark MacKenzie

A couple of days ago I had made a post about comparing our current economic and housing crises to Japan's "lost decade" during the 1990s and through the early 2000s.

Japan's lost decade was characterized by assets bubbles, both in the equity markets and the real estate market, government bailouts, and systemic liquidity concerns. Does this sound familiar? The result was a stalled economy that saw an average of only 1% growth in real GDP for over ten years.

There is an article written on actionforex.com by Wachovia Corporation that includes some fantastic graphs that I wanted to post on my blog because I believe they have relevance in predicting the future of our economy.

The graph below shows real GPD for Japan. As you can see, from approximately 1992 to 2003, they experienced very weak economic growth. This by itself may not be alarming. Countries go through economic downturns.

But what catches my attention is that during this same period of time, the discount rate in Japan has been below 1% for over a decade.

This is the point that I have been talking about for over a year. The problem that our economy and housing market is confronting is not an interest rate or monetary policy problem. We can keep the funds rate and discount rate at or below 1% for the next five years and it is not going to solve this crisis.

It is going to be fiscal policy, or more specifically tax policies that will need to be enacted in order to jump start our economy. Clearly, we would rather have low borrowing rates than higher ones. Just as we would rather have 6% mortgage rates than 8% mortgage rates. I don't dispute this. But interest rates alone are not going to be enough to change the course of the economy. Which is why I wanted to provide this data about Japan.

NAR has been a strong supporter of making home loans more affordable by increasing the conforming loan limit and advocating for lower mortgage rates.

But they are missing the point. Lower mortgage rates won't give somebody a down payment that doesn't have one.

Lower mortgages rates won't help somebody to refinance or sell a home that is worth less than what they own on it.

And lower mortgage rates won't necessariliy increase homeownership rates that are still near historic highs. In fact the only time that homeownership has been higher was during the subprime era of the early and mid 2000's.

This is not about mortgages rates, discount rates, or Federal funds rates.

This is about fiscal policy. A fiscal policy that will stimulate new investment demand for real estate so that we can absorb the excess supply of housing and bring price stability back to the housing market. Any fiscal policy that is not aimed at this goal will result in wasted spending; as we have witnessed over the past several weeks.

So for nearly a year I have been talking about reforming the Tax Reform Act of 1986 as it pertains to investment real estate and passive loss and income limitations.

Several months ago I wrote an op/ed article that was featured in REALTOR Magazine.

A couple of months ago I launched a couple of web sites detailing my proposal and this reform.

Just recently I wrote and published my new book, "It's The Housing Market, Stupid!" which will be out in bookstores by the middle of the month.

And for the past month I have been blogging on Active Rain about the economy and the housing market and what should be done to bring stability to them.

All of which has lead me to starting a new group on Active Rain about reforming the Tax Reform Act of 1986.

Here is the link: http://activerain.com/groups/tra1986

Really what this reform movement boils down to is the fact that IRS rules as they pertain to investment real estate are outdated (22 years old) and ineffective when it comes to stimulating investment demand for real estate - which it was designed to do.

The actual "benefit" of the reform that I am proposing is that it will stimulate new investment demand for real estate = more home sales.

Regardless of whether you work with individuals that have or want to invest in real estate, if you want the housing market to get some traction, this proposal would help the real estate industry.

The systemic problem is that there are simply too many home for sale. Until this excess supply is absorbed, we are going to be in a declining market.

If you are interested in learning more about my proposal click on this link and join the group: :)

http://activerain.com/groups/tra1986

In the event that you want to send a flower to someone you love - give us a call, we offer both USPS and UPS for delivery methods. :)

After Congress had kissed (there is another word I should use here) away $150 billion on stimulus checks, $700 billion on Wall St., $115 billion and counting on AIG, and passed an impotent Housing and Economic Recovery Bill in July - now they are talking about yet ANOTHER stimuls plan?

They simply don't get it.

You don't write people a check for fogging up a mirror, having a faint pulse, or being in a certain tax bracket - whatever tax bracket that is. You give Americans a tax incentive to do what you want them to do in order to stimulate the economy and housing market. In this case, it would be an incentive to invest in real estate so that we can get the excess supply of homes off the market and bring price stability to the housing sector.

The $700 billion bailout is a great example, you give banks money with no pre-conditions for them to do anything specific with it.

Why are we going to write more checks to the American people, with money that the government doesn't have, and simply "hope" that they will do something positive and constructive with it that will stimulate the economy? Didn't we already try this in May? It didn't work then, and it won't work now.

The IRS is the perfect example of how a stimulus plan should work (did I just say that?). The IRS allows business owners and real estate investors to depreciate the investments that they have made. They want Americans to make these investments, otherwise they wouldn't give them a tax incentive to do so.

Why, during a recession, does common sense tax and fiscal strategies get thrown out the window?

Pretty simple stuff; if the government wants you to do something, they will give you a tax incentive. If they don't want you to do something, they will tax you. But show me where giving somebody money for no reason has resulted in economic growth? The American people don't want handouts, they want to own a home and have a job that they can support their family with. They don't want sympathy or welfare.

To me, what we want is for Americans to invest in America, invest in our housing market. This will help every American that owns a home because it will stop price declines. This is turn will help out Fannie and Freddie (now owned by the government) and every bank and investment bank on Wall St. that owns mortgage backed securities.

How is a $1,000 stimulus check really going to help somebody when their $30,000 of home equity has evaporated?

How is this money going to help them refinance or sell their home if they can no longer afford their home?

How is it going to help them find a job?

If the government can actually jump start the stalled housing market, they will fix the economy.

Any actions that the government takes short of this is throwing good money after bad. See; AIG and Stimulus Plan I.

www.ItsTheHousingMarketStupid.com

An article by Les Christie on CNNMoney.com reveals that approximately 7.5 million homeowners are in a negative equity position according to a report by First American CoreLogic.

And this report is actually optimistic.

The article goes on to say that Moody's.com estimates the number is actually closer to 12 million homeowners.

The problem with this phenomenon is that this decline in home values is leading to foreclosures. And it is leading to foreclosures because homeowners are unable to refinance their adjustable rate mortgage or sell their home if and when they need to. And as more of these homes go into foreclosure, it continues to put additional downward price pressure on other homeowners. It is a negative cycle that is proving very difficult to break.

It's not real difficult to find out how this negative equity phenomenon has happened. In 2006, according to NAR, there were 6.478 million homes sales. In 2007 there were 5.652 million homes sales. In total there have been 12.13 million home sales in 2006 and 2007. Since this time, home values have declined.

Here is where we get into trouble, in 2006, according to NAR, the median home value was $221,900. In August of 2008 it was $203,100. This is a decline of 8.5%, which in my opinion is fairly conservative. Robert Shiller has some additional data that shows that the decline in home values has been even more dramatic.

But let's say that the NAR numbers are correct and that property values have only declined 8.5% since 2006, you still need to account for the fact that a lot of these home owners didn't put money down. Additionally, there are costs assocaited with refinancing and selling that need to be accounted for. Usually when you go to sell a home you can plan on it costing you 8% if you include the commission and the closing costs. So while property values may have only declined 8.5%, it is going to take another 8% to sell the property. So homeowners, on average, are really in the hole 16.5%. Unless the majority of these new homeowners put down 20%, we are going to have a problem.

And the problem is likely get worse as we are going to be navigating a slowing economy and job losses.

Additionally, the drove of ARM resets will continue to pop through 2011 and 2012.

The fundamental problem is that there are simply too many homes for sale. Until this excess supply is absorbed, the government can throw all of the money they want at the problem, it won't solve it.

www.ItsTheHousingMarketStupid.com