The Committee to Reinflate the Bubble
The real-estate lobby wants another boom — but what about the bust?
As it goes about its political business, the real-estate lobby is not snooty about the company it keeps. Republican, Democrat, Left or Right — tic the preferred policy boxes and not much else matters. You can even be the sort of person who, in private life, would be the real-estate industry’s worst nightmare: Consider Laura Richardson. In the course of four years, she managed to find herself in default on eight separate occasions for mortgages covering three different houses in California, real estate’s Armageddon. In one case, she took out a nothing-down mortgage and cashed out by taking $15,000 up front from the seller to cover closing costs but ignored her payments, letting the house slide first into disrepair and then into foreclosure. But the real-estate industry didn’t blacklist her. They sent her to Congress. Even better, they sent her to Vegas to participate in the swearing-in of a new NAR president. “I might be one of the newest members of Congress,” she told those gathered for the inauguration, “but I am not a new member of the realtor party.”
The law of unintended consequences meets suspension of reality…
The Taxpayer Relief Act of 1997 might well have been called the House Flippers’ Enabling Act, and it put a lot of money into the pockets of a lot of realtors: The law exempts most home sellers from paying capital-gains taxes on houses, without requiring them to invest the profits in new houses. It created what might be called a literal tax shelter: an investment you could live in while escaping the 20 percent tax on capital gains. When the dot-com bubble burst, the lure of tax-free real assets attracted a lot of investors looking to ride out market turbulence in the comfort of their new, highly leveraged homes. Republicans love a capital-gains tax cut, and they should, but creating special tax breaks for particular investments inevitably will warp the market. Predictably, capital gushed out of dot-bomb and into the housing bubble.
The result was the sort of thing that should offend every conservative’s inner Puritan: Buyers stopped calculating whether they could afford the house, and instead calculated whether they could afford the mortgage. The more daring buyers took out interest-only mortgages, placing a counterintuitive bet that buying a house they couldn’t afford would make them rich enough to afford it. That bet was hedged up by what is probably the most popular item in the U.S. tax code: the mortgage-interest deduction.
Fed a steady diet of hot air by Greenspan and his merry band of Bubble-makers
For years, real-estate developers funneled money through nonprofits to provide down-payment grants to FHA borrowers who couldn’t even put together the 3 to 3.5 percent down payment required at the time. Classified as “gifts” for tax and legal purposes, these payments were described as “a scam” by the IRS, and Congress banned the practice in 2008, with critics saying it weakened lending practices and encouraged appraisal fraud. A bill to rescind the ban already has been introduced by Texas Democrat Al Green. Seller-funded down-payment assistance remains prohibited, but the real-estate lobby strongly supports bringing it back, and there is support in Congress for doing so.
So what’s the next step for the Committee to Reinflate the Bubble? As keynote speaker at its annual conference this year, the NAR has invited Alan Greenspan, the godfather of the bubble.
At the local level, cities such as Fort Worth, Texas, are using federal money to cover down payments for buyers of foreclosed houses in politically targeted ZIP codes. These programs are not aimed at helping the poor become homeowners, but the opposite: keeping prices high. In Utah, where housing prices are slightly lower than the national average, taxpayer-funded grants are used as an incentive for homebuyers with no upward limit on the price of the house, and the state has spent millions subsidizing the purchase of houses costing up to $700,000. The real-estate lobby fought hard to make sure that the stimulus bill would pour money into programs like this, and the grants can be combined with the new $8,000 federal tax rebate for first-time homebuyers, also part of the stimulus. The government will pay you good money to buy a house. What other lobby gets those results?
Lawerence Welk ain’t got nuthin’ on Easy Al Greenspan.
“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.” -William Seidman, 1993