By DAVID CURRY
If we are to believe the "experts," the economic condition we find ourselves in is a direct result of housing prices and foreclosures. The entire recession is being blamed on housing and foreclosures and financial woes stemming from bad loans. These facts are why the "experts" are declaring that since housing led us into this mess, housing must lead us out of it. Sounds nice, but it obviously isn’t that easy.
There’s a massive pork-laden bill of "change" being touted as stimulus that is supposed to take us one step closer to solving this financial and housing crisis. President Obama and his fellow experts have somehow lost sight of what they’ve already told us the problem is. The problem is with housing. We don’t need to build roads and re-sod the National Mall — we need to stem the tide of foreclosures, and more specifically we need to get the foreclosed (bank-owned or REO) properties off the open market so prices will stabilize.
In a national market where we may sell only 4.5 million residential housing units this year, we may have as many as 2.5 million homes in some sort of foreclosure process. That means a glut of inventory of the REO type, and that means lagging prices for all until that inventory is cleared from the open market. The problem isn’t a lack of stimulus from Washington, it’s the REO properties. In order to help fix the economy, the foreclosures need to be front and center in the process. How to do it?
We’ve already tried loan modification for consumers who are facing foreclosure. I never liked that option, and now that loan modification has proven completely futile in preventing foreclosures, let’s just get past that as being a viable option.
Remember, folks are getting foreclosed on for two primary reasons: Either they lost their job — in which case, buying them 60 days or reducing their rate by a percent isn’t going to make an ounce of difference — or they’ve just decided to let the bank take their upside-down home. It’s amazing how many people still think that loan modifications are the way out of this mess. They’re not, and all they’re doing is delaying our free-market recovery.
So once we get past loan modification as a means of stemming the foreclosure tide, let’s get straight to the foreclosed homes that now flood our markets with REOs and drive prices downward as banks cut bait and run.
First, you have to understand the REO process, and the condition of most REO homes. The process is daunting, unkind to consumers, and filled with procedural folly. The homes are generally run-down, can be stripped of appliances, curtains and copper piping, and are in general disrepair. Many were winterized improperly by the banks who own them, and there are mechanical issues just waiting to be discovered.
In short, these homes require capital by purchasers. To say nothing of tightened lending standards, these homes will require money to fix them up once a sale is complete. This is the situation, yet as a nation we’re looking to the first-time homebuyer to bail us out of this REO mess? Not a chance. First-time homebuyers generally lack the capital and desire needed to fix up the property, and are many times scared off by the process of an REO purchase. The answer isn’t in the first-time homebuyer, as NAR and Washington would like us to believe — which is why they offered that $7,500 first-time homebuyer credit (loan) last year. The answer lies with the real estate investor. Keep reading.
Every market, no matter how small, has a handful of serious real estate investors. These are guys and gals who own rental properties, who buy and sell for a living or for fun, and who just like playing with real estate and making money in the process. These people have the capital required to pull off an REO purchase and repair, and they have the knowledge to see how the investment can pay off. These are also the buyers that are for the most part sitting on the sidelines waiting for prices to become even more attractive. These are the buyers who can absorb much of the REO inventory in this country should they so desire. These buyers are the answer to our REO crisis. Yet the NAR and Washington don’t realize it. They’re throwing money at first-time homebuyers, trying to throw money at road projects, millions to save mice in California, and billions in bank bailouts, but they’re not offering incentives to the actual demographic that is willing to get their hands dirty and bail us out of this mess.
Here’s my proposal to fix this mess: Stop modifying loans for individuals. If they want to get foreclosed on, let the process begin, and let’s hurry it up so we don’t string this recovery out any longer than necessary. (My apologies to those who have lost their jobs, but please remember, I’m a Realtor, which means I basically lost my income but continue to work harder than ever, so I understand your plight.)
Force the banks that have been receiving TARP funds (and will receive more) to lend 75 percent of the money they’re receiving. Loans are readily available, but anyone who tells you they’re just as easy to get as they used to be needs to go out and get a loan themselves right now so they shut up and realize the lending world has changed.
Then the "piece de resistance" (a French phrase meaning "outstanding event"): tax credits and capital gains tax abolition. Investors who are purchasing these homes need motivation to do so, and the motivation is easily accomplished with a two-step plan.
First, offer a $15,000 federal income tax credit to any buyer who purchases an REO or short-sale property. Make the $15,000 good for the tax year that they purchased the home in, and apply it as you would a child tax credit — just take the amount off the taxpayer’s bottom line. That provides an immediate, significant piece of motivation that is realized during the year of the purchase.
Next, make the gain from the sale of such a purchase free from capital gains tax for a period of seven years from the date of purchase. That would apply to short-term and long-term capital gains, as well as sales completed in less than 12 months when the gain would be taxed as ordinary income.
Take the capital gain problem one step further, and reduce the overall capital gains tax rate from 15 percent to 8 percent. That would give the residential and commercial markets a shot in the arm. The incentive here is obvious: Let’s allow these investors to buy and sell these toxic homes, or rent them for a number of years and then sell them when the market improves, and let’s let them keep 100 percent of their profits. After all, they’re bailing us out of this mess, so let’s throw them a monetary bone. This sort of actual market stimulus wouldn’t require capital expenditures by the federal government, it would just result in less tax revenue, which means … gasp … they’d have to spend less money (it’s called conservatism).
If we could piece together these two bits of legislation, we could see a dramatic increase in REO sales, which would benefit housing prices, the overall economy, and in turn the financial markets. If a buyer buys an REO home for $100,000, he is giving business to his lender, insurance agent, utility companies and title company immediately. If he then spends $15,000 on improvements, he’s putting tradesmen back to work, buying materials, and stimulating the local economy. If he sells that home for $160,000, he’s paying a Realtor, a title company, the state, and hopefully, just hopefully, making $30,000 or so in 100 percent profit, which he’ll in turn spend on the tires that his truck has been needing.
See how this works? It’s called capitalism, and perhaps the federal government and President Obama ought to give it a try.
David Curry is a Realtor in Lake Geneva, Wis.
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