Dean Baker: The Bubble Boys and the Recession

[marmar]

from OurFuture.org:



The Bubble Boys and the Recession
By Dean Baker
February 29th, 2008 - 4:41pm ET


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While the recession is just beginning, it’s not too early to start pointing fingers as to who is responsible. This is not just an exercise in vengeance (although that might be fun); the people who wrecked the economy should be held accountable. We also should be clear about the policies that gave us this mess so we don’t go this route again.

As everyone should know, we are having a recession because the housing bubble burst. This was not an accident or surprise – the housing bubble was clear visible to anyone who cared to look. There was an unprecedented run up in house prices in the decade from 1996 to 2006, which the price of a typical home rising by more than 70 percent after adjusting for inflation. Over the prior hundred years, house prices had just kept even with the overall rate of inflation.

There was no change in the fundamentals of the supply and demand in the housing market that could possibly explain this sudden surge in prices. Population was growing far less rapidly during this period than it had in prior decades, especially among families in their prime home-buying years. Income growth was healthy in the years from 1996 to 2000, but very weak in the current decade. Clearly no changes on the demand side could explain the run-up in prices.

Similarly, there were no new constraints on the supply-side. Land has always been in limited supply, it did not suddenly become more limited in the mid-nineties. In fact, the growth of the Internet reduced constraints, since it is now possible for many people to do their work from anywhere.

Since there was no explanation for the run-up in house prices based on market fundamentals, then the obvious alternative explanation was that house prices were driven by a speculative bubble, just as speculation drove the stock market to record highs in late 90s. Of course bubbles burst, and when they do, it leads to very unhappy outcomes.

In the case of the stock market, the bursting of its bubble lead to the recession in 2001 and two more years of negative job growth. It also derailed many pension funds, as well as wrecking the retirement plans of millions of families who saw the value of their 401(k)s shrivel. .......(more)

The complete piece is at: http://www.ourfuture.org/blog-entry/bubble-boys-and-recession

[fed-up]

1. 2000 article (cap gains tax changed in 1997-Clinton) Making Home Sale Capital Gains Disappear

turning homes into investment vehicles and giving investors the opprotunity to "flip" houses every two years started the house buying frenzy. It didn't get into full swing though for a few more years.


http://www.austinhomeloan.com/articles/cap_gains.html

Real Estate Capital Gains
Tax Law Change Highlights

by Verne F. Moser, CPA
August 1997

In a widely heralded spirit of bipartisan compromising, the Taxpayer Relief Act of 1997 was passed by Congress and has just been signed into law by President Clinton. While there is much debate about who of the taxpaying public will enjoy the most from the tax reduction provisions, one that can affect a cross-section of the American taxpayers is the reduction in the tax on the gain to be realized on the sale of real estate. For most of us, this is the home we have been buying for most of our working lives. The changes to the capital gains portion of the new law should be of eventual benefit to every homeowner when they ultimately sell without being able to defer the gain. A summary of the capital gains provisions below should be good news to us all:

..snip

Exclusions: The previous "over 55 one-time exclusion of gain" rules were repealed by the 1997 tax act. A new exclusion of $500,000 for married filing jointly or $250,000 for individual filers is now in effect. This exclusion is available every two years. To qualify for this new exclusion, the home must be used as a principal residence in two of the five preceding years prior to the date of sale. For couples claiming the $500,000, either taxpayer can own the property but both must meet the use test. A taxpayer that has had a previous excluded sale within the two year period that would normally preclude the use of the exclusion may still qualify for partial exclusion if the most recent sale was due to a change in place of employment, health or unforeseen circumstances ( all of which will be clarified in future regulations). Also, taxpayers who previously used the former "one-time exclusion" are eligible for the new exclusion rules.

,,snip

http://www.fool.com/taxes/2000/taxes000428.htm
Making Home Sale Capital Gains Disappear
By Roy Lewis

I've always been enthralled with magic. Sleight of hand... illusion... call it what you will. But when these artists step on stage and make a dove, a rabbit, or even the Statue of Liberty disappear, I'm just completely amazed and astounded. I've always wanted to be able to do something like that myself. And now I can. And you can too.

With the right knowledge, information, and patience, you can make the taxable gain from the sale of a rental property or a vacation home completely disappear -- stick the gain in your pocket and thumb your nose at Uncle Sammy. Poof... gone.

How? Simply convert the property to a primary residence, use it as such for the appropriate period of time, and then sell it for a tax-free gain. Simple as that. Well, it's a bit more complicated, but you can read more about the rules for tax-free treatment on the gain of a principal residence in my series of articles entitled Home Sale Exclusions in the Taxes FAQ area. You'll also want to read more about the rules regarding the home sale gain exclusion in IRS Publication 523 to make sure that you've got all your bases covered. If done correctly, there are some large tax-saving opportunities out there.

How It Works

The key to the entire plan is that you are allowed to sell a principal residence once every two years and exclude up to $250,000 ($500,000 for a married couple) of the gain on the sale. Many of you may be under the mistaken impression that the home sale exclusion is still only "once in a lifetime," or only available to those of a certain age (such as the elderly), or only available if you buy a more expensive home. Those were the old rules, and they no longer apply. If you meet the two-year ownership and use tests for a principal residence, and don't sell more than one principal residence in any two-year period, you can exclude any capital gain tax on the sale (up to the $250,000 or $500,000 limits mentioned earlier). So, to get the maximum bang for your buck, you'll want to understand the rules and have the patience to wait out the two-year residence period. For those of you with substantially appreciated real estate in the form of investment properties or second homes, the tax savings could be worth the wait. Let's look at a few examples.