Posts Tagged ‘new home sales’
Trump’s Tax “Reform”
Mark Twain is usually — and incorrectly — quoted with the phrase “No man and his money are safe while Congress is in session. (The actually quote goes to 19th century NY politico Gideon Tucker, but I digress.) There’s little to be said, in general, about TheDonald’s proposals yesterday, simply because there’s little substance to analyze. However, I’m old enough to remember the last tax overhaul, in the early stages of the Reagan administration, and perhaps I can offer a few observations. I’ll limit my mental meanderings to real estate for now.
First, the Reagan tax re-hab (the 1986 Tax Act) was a disaster for real estate investing, particularly at the individual, atomistic investor level. One of the “loopholes” to be cured was the elimination of deductibility of passive losses on real estate investments. The real estate community reluctantly supported the tax act, in trade for increases in the deductibility of home mortgage interest and a guarantee that passive losses on then-existing real estate deals would be grandfathered. Indeed, in the run-up to passage, there was a flurry of investing (by Main Street USA folks — the kind of folks who still, amazingly, support Trump) in just such “grandfathered” investments. At the last minute, the grandfathering was removed, costing Main Street USA investors tons of alternative minimum tax payments on now-sour investments. Some pundits suggest that this grandfathering-revocation, alone, led to the downfall of the Savings and Loan industry, but that excuse is a bit to simplistic. It did, however, shut down the time share industry for a while.
Today, according to news reports, single family residences are enjoying record demand (which may or may not be good news). The hottest market is among first-time buyers, and the demand is greatest among starter homes. The Trump proposals would double the standard deduction for a married couple filing jointly. While, on the surface this seems like a good idea, it will drastically shrink the number of tax payers who itemize mortgage interest and property taxes. In short, for the biggest tranche of homebuyers, the biggest differentiation between ownership and renting would be effectively removed. As a guy who invests in rental property, that’s nice, but the home building industry won’t react well.
Otherwise, I don’t see lowering the marginal tax rate on corporations as having much of an effect on real estate investing. For one, most of those projects are either done thru tax-advantaged REITs or thru other pass-thru entities, like partnerships and LLCs. Even if it did, the demand / supply of investment grade real estate depends on other factors, and slight changes in the tax rate may have an impact on the debt/equity mix, but not on the aggregate output of new commercial construction. The ONE area most affected will be low income housing, which is funding in no small part by tax credits. The value of those credits will be slashed, requiring a complete re-thinking in the finance side of low income housing. The last time such a tax cut went into effect, it was a real mess for low income housing.
If I was the government, and I wanted to create good paying construction jobs, I’d embark on a long-term infrastructure redevelopment plan. That would probably require actually raising tax rates a bit, but would have marvelous returns on investment for middle America. But that’s just me….
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The right number of new homes?
Much has been said in recent days about the Census Bureau’s August 23rd announcement about new residential home sales in July. To summarize, 372,000 new homes were sold last month, which is 25.3% above the July, 2011. This is good news for a lot of reasons — construction workers get jobs, banks get new loans, etc., etc.
Naturally, it begs the question, “what’s the right number of homes?”. Here at Greenfield, we’ve posited that the U.S. housing price “bubble” was really a demand bubble, fueled by easy money, which led to an artificial inflation of the nation’s home ownership rate. (Housing bubbles in other countries were fueled by similar problems.) We’ve also suggested that the market won’t get healthy again until several things happen, including a stabilization of the homeownership rate at long-term equilibrium levels, a restoration of “normal” conventional lending (both for home mortgages as well as for development financing) and a restoration of the housing infrastructure (development lots in the pipeline, local regulatory department staffing, hiring & training skilled construction workers, etc.) . It is highly doubtful that we’ll see housing starts and new home sales “bounce back” to normal levels anytime soon, and our own projections suggest several years before we get back to “normal”.
But this begs the question: What’s normal? (A great t-shirt from the Broadway play, “Adams Family” simply said, “Define Normal”.) Anyway, as new home sales go, it’s helpful to glance at the experience over time. It may surprise you.
One might actually expect the graph to be less erratic, but there are good explanations for the “bobbing and weaving” you see from year to year. During recessions, new home sales decline, and then bounce-back afterwards. During periods of economic overheating, the FED tightens the money supply, thus causing home starts/sales to decline. (In practice, this is a major tool in the FED’s toolkit, simply because it has a great multiplier effect on the economy.) Of course, the bubble is quite apparent, and following it the inevitable decline.
With all that in mind, though, we can see that there is a decided upward trend in the chart — that makes sense, since a growing population, coupled with a fairly consistent homeownership rate, will generally demand more new homes each year than it did the year before.
The second graphic adds a simple linear trend line for simplicity sake, which is not far removed from the actual household formation trend line during that same period. Note that from the beginning of the chart until about 2001, we had a nice cycle going, and in fact around 2001, the blue line should have turned negative to account for the recessionary impacts. However, money got very loose during the early part of the last decade, and rather than housing starts serving its normal “pressure relief” role, it was driven into a counter-cyclical path. This created the oversupply we are now trying to work through (often referred to as the “shadow inventory”) and we won’t see a healthy market until this inventory is mopped up.
Good news, though — if you glance quickly at the second chart, it becomes clear — albeit from a very simple visual perspective — that we must be close to a spot where an up-turn in the chart would give us as much negative area red line as we had during the previous cycle above the red line. In short, we’re not at the end of the tunnel yet, but this simple way of looking at things suggests we may be able to SEE the end of the tunnel in the not-too-distant future.
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The housing market — Damning with faint praise
Sorry we’ve been absent for so long — it’s been a terrifically busy summer and early fall here at Greenfield. Hopefully, we’ll be back in the saddle more frequently for the rest of this year.
From an economist’s perspective, there’s plenty to talk about — Euro-zone debt crisis, job growth (or lack thereof), Federal and state debt, etc., etc., etc. My own focus is the mixed-message on the housing market, which continues in the doldrums. If you listen to the reports from the National Association of Realtors, you get some positive headlines followed by fairly depressing details. Existing home sales are better than forecasted, mainly due to great borrowing rates and the influx of “investor-buyers”. Lots of single family homes and condos are being turned into rental property or held “dark” for the economic lights to come back on. A surprisingly large number of homes are purchased for all-cash, since if you believe that housing prices are near their bottom, then residential real estate may be more stable — and potentially have better returns — than equities.
On the other hand, new home sales continue to languish at their lowest levels since we started keeping score in 1963.
Intriguingly, if you ignore the post-2003 “bubble” period, and trendline the data (which grows over time, to account for the increasing population), you end up with about 900,000 new home sales in 2011. As it happens, we’re actually around 300,000, reflective of a significant decline in home ownership rates — now down to about 66%.
The real question is whether or not this change in home ownership rates is temporary or permanent. We happen to think it’s permanent. That’s not all bad news, but it means that when new home sales come back on-line (eventually getting back to somewhere short of 900,000, but certainly higher than 300,000), we won’t see a return to bubble-statistics.
From a small northwestern observatory... 