You forgot one very important aspect of the rise in housing prices; corporate purchases. Outfits like Blackstone, Black Rock, Vanguard, State Street and Invitation Homes, among others, are responsible for 25% of all home purchases. That's 25% more demand than was normal before the Tax Reform Act of 2017. Why?
Corporate homebuyers, or corporate slumlords if you will, are permitted to depreciate homes over 27 1/2 years, or 3.6% per year. In addition, they can depreciate flooring, appliances, window treatments and a host of other things on an accelerated basis over three years. They can also write off maintenance costs, inspections, and repairs. Basically, in addition to rent, corporate homeowners get a built in IRS subsidized profit of at least 4% every year that individual homeowners do not benefit from. (It should be noted that the home depreciation reduces the amount of the capital gain when the property is eventually sold.) Corporate homeowners also routinely use the properties as collateral to borrow against and buy more homes for rental. Of course, as interest rates increase, this tactic becomes more expensive.
The TCJA passed in 2017 also allowed individuals to create S-Corps that would capture these depreciation expenses on homes that they rent so while corporate homeowners benefit in a much bigger way, the TCJA also added demand to the home market from wealthier asset holders. Median home prices jumped 39% between Q2 2020 and Q4 2022 because of low interest rates and corporate homeownership. Invitation Homes stock price doubled but has come back with the rise of interest rates. (It is still higher by 60% since 2020.)
FXHedge has rightfully cited the benefits of lower interest rates to spur home demand but unfortunately, the tax laws in place will also increase demand from corporations so that any benefit realized from a lower interest rates will be lost in the amplified price of homes. Of course, as FXHedge stated in another article, higher long term interest rates are probably the norm for the foreseeable future as it appears that the Fed only has control over short term rates. For young couples and first time home buyers just starting out, the American Dream is vanishing.
Since houses rarely depreciate, Congress should increase the depreciation period to 100 years (or make corporate homeownership solely subject to capital gains), eliminate accelerated depreciation on tenant improvements, and bring back the American Dream!
"Reducing government borrowing will reduce the demand for borrowed money, and that will bring down the price, which is the interest rate—it’s Econ 101. Therefore, if Congress wants to help the housing market, they must spend—and borrow—less money."
We know this is never going to happen as both parties are wed to the kick the can down the road until the economy collapses under the weight of their spend, spend, spend insanity.
Furthermore, let the market set the interest rates. We act as though the Fed has some magic wand to determine what interest rate is the best for the very complex American economy. The Fed never has a clue. With that said, it is time for interest rates to be higher anyway. Zombie companies kept alive with cheap interest rates will die and allow that capital to be used for better uses. Higher interest rates rewards savers versus the usual, backward view of rewarding debtors. Remember when passbook savings used to pay 5.25% and the economy didn't collapse?
I'm late to the party with my comment. Anyway, the government will not reduce spending and borrowing until a failed Treasury auction forces them to do so. What the government CAN do now is sell ALL Federal land including the Federal highway system, engage in sale-leaseback transactions for all Federal buildings and national parks, sell the US Postal Service, and Amtrak, outsource TSA, the Passport Office, the Patent Office and air traffic control, and abolish the US Marshals Service and the Bureau of Alcohol, Tobacco and Firearms.
All proceeds from the sale of Federal assets and other savings will be applied to the national debt. The proceeds raised will be massive (80% of Nevada is owned by the Federal government, which begs the question - is Nevada even a state at this point?) My rough estimate is that not only can the entire national debt be paid off, but a very large "national dividend" can be paid to every taxpaying individual - i.e., a nice down payment on a house.
You forgot one very important aspect of the rise in housing prices; corporate purchases. Outfits like Blackstone, Black Rock, Vanguard, State Street and Invitation Homes, among others, are responsible for 25% of all home purchases. That's 25% more demand than was normal before the Tax Reform Act of 2017. Why?
Corporate homebuyers, or corporate slumlords if you will, are permitted to depreciate homes over 27 1/2 years, or 3.6% per year. In addition, they can depreciate flooring, appliances, window treatments and a host of other things on an accelerated basis over three years. They can also write off maintenance costs, inspections, and repairs. Basically, in addition to rent, corporate homeowners get a built in IRS subsidized profit of at least 4% every year that individual homeowners do not benefit from. (It should be noted that the home depreciation reduces the amount of the capital gain when the property is eventually sold.) Corporate homeowners also routinely use the properties as collateral to borrow against and buy more homes for rental. Of course, as interest rates increase, this tactic becomes more expensive.
You can read more about it @ https://rennerc.substack.com/p/bring-back-the-american-dream.
The TCJA passed in 2017 also allowed individuals to create S-Corps that would capture these depreciation expenses on homes that they rent so while corporate homeowners benefit in a much bigger way, the TCJA also added demand to the home market from wealthier asset holders. Median home prices jumped 39% between Q2 2020 and Q4 2022 because of low interest rates and corporate homeownership. Invitation Homes stock price doubled but has come back with the rise of interest rates. (It is still higher by 60% since 2020.)
FXHedge has rightfully cited the benefits of lower interest rates to spur home demand but unfortunately, the tax laws in place will also increase demand from corporations so that any benefit realized from a lower interest rates will be lost in the amplified price of homes. Of course, as FXHedge stated in another article, higher long term interest rates are probably the norm for the foreseeable future as it appears that the Fed only has control over short term rates. For young couples and first time home buyers just starting out, the American Dream is vanishing.
Since houses rarely depreciate, Congress should increase the depreciation period to 100 years (or make corporate homeownership solely subject to capital gains), eliminate accelerated depreciation on tenant improvements, and bring back the American Dream!
"Reducing government borrowing will reduce the demand for borrowed money, and that will bring down the price, which is the interest rate—it’s Econ 101. Therefore, if Congress wants to help the housing market, they must spend—and borrow—less money."
We know this is never going to happen as both parties are wed to the kick the can down the road until the economy collapses under the weight of their spend, spend, spend insanity.
Furthermore, let the market set the interest rates. We act as though the Fed has some magic wand to determine what interest rate is the best for the very complex American economy. The Fed never has a clue. With that said, it is time for interest rates to be higher anyway. Zombie companies kept alive with cheap interest rates will die and allow that capital to be used for better uses. Higher interest rates rewards savers versus the usual, backward view of rewarding debtors. Remember when passbook savings used to pay 5.25% and the economy didn't collapse?
I'm late to the party with my comment. Anyway, the government will not reduce spending and borrowing until a failed Treasury auction forces them to do so. What the government CAN do now is sell ALL Federal land including the Federal highway system, engage in sale-leaseback transactions for all Federal buildings and national parks, sell the US Postal Service, and Amtrak, outsource TSA, the Passport Office, the Patent Office and air traffic control, and abolish the US Marshals Service and the Bureau of Alcohol, Tobacco and Firearms.
All proceeds from the sale of Federal assets and other savings will be applied to the national debt. The proceeds raised will be massive (80% of Nevada is owned by the Federal government, which begs the question - is Nevada even a state at this point?) My rough estimate is that not only can the entire national debt be paid off, but a very large "national dividend" can be paid to every taxpaying individual - i.e., a nice down payment on a house.