Taxes, Regulations, Interest Rates All Working Against Housing
With the bursting of the housing bubble having played such a big part in the economic downturn, could housing play an equally big part in an economic recovery?
Stuart Vener, president of Wilshire Holding Group, which helps financially stressed homeowners, thinks it’s possible but has big fears it won’t happen because of government tax and regulatory policies. Vener spent more than 16 years as owner of his own mortgage lending firm and has been a real estate developer, broker, and consultant. He recently spoke about the housing market with FIRE Policy News managing editor Steve Stanek.
The following is an edited transcript of his remarks:
Anything that’s going to impact the real estate market negatively is going to hurt everything. Our economy is so dependent upon housing and a real estate recovery, but the real estate recovery is dependent on jobs and having confidence to invest and buy.
Capital gains taxes [in 2013] will go from 15 to 20 percent, then there’s going to be a 3.8 [percentage point tax hike] on investment income for Obamacare [if the fiscal cliff is not avoided]. That’s not going to be good for the market.
An individual living in a home who makes a profit of $250,000, or a married couple [who makes a profit] of half a million dollars would not be covered by that. The ones who would be hit with the tax would be a primary residence owner selling a multimillion-dollar house for a profit. So that’s not going to hit the average person.
But it is going to happen to investment property or second homes or anything that is not a primary residence.
Tight Loan Market
The big problem I feel is out there, is people can’t get loans, even if they have good income. The standards are so high. And the Dodd-Frank [regulations], which are sure to be implemented now, are making it harder and harder for people to get mortgages. It’s nice to have 3 percent loans, but if you can’t get it, what good is it?
The big problem now is that the banks that are making loans may have to take a substantial stake of maybe 25 percent ownership in these loans rather than market the paper on the secondary market. Many of them can’t afford that. So you’re going to be down to really just a few major lenders.
I think the direction that it’s headed, what it looks like to me, is pretty much every loan that’s going to be made in the future will be an FHA loan. They’re exempt from Dodd-Frank. We’re looking at national banking. If the loans on homes are all owned by the government, I don’t think that’s a good direction to go.
I’d much rather see a little less regulation. I’d rather see loans being made maybe at 5 percent, loans that are profitable, where the private sector could come in and take this over.
Harmfully Low Interest Rates
[Record-low interest rates do not give lenders enough return to cover the risks of long-term lending.] That’s why it’s better for them to make credit card loans, where they can make their 20 percent.
And there are so many people, like senior citizens in particular, who have relied on the income from their investments or their savings, and now they’re having to use principal to survive. They can’t live at 1 percent.
There are millions of people who have provable, verifiable income, and decent consumer credit, who would make their mortgage payments even though they’ve suffered the last few years, which many of us have, with this debacle that’s gone on in the real estate markets. These people should have a chance to get back in. They’d be more than happy to pay 5 percent.
It would be a profitable loan for the investor; they’d be buying property; you’d see everything start to turn around. But you’ve got to loosen this money up a little bit, not give it away at nothing but give them a chance in.
I would like to see the government out of the housing business, out of the mortgage business. Fannie Mae and Freddie Mac need to go on the road of privatization. It’s a business model that I’d love to have, where profits are privatized and losses are socialized.
We need the private sector to take over the mortgage market and let the rates seek their level. Let them be competitive. If someone’s credit is not quite as good, then they can pay 7 percent. That’s still good. If their credit is almost perfect, then they can pay 4 or 5 percent where it’s profitable loans for the companies that are making them, because these are companies that have to make a profit, too. You’ll see a flow of mortgage money coming into the market.
The demand is out there. The people just can’t buy the house. They’ve turned into renters. Turn these renters back into buyers and you’ll see a lot of homeowners.
Back to what we originally discussed. The average person right away is not going to feel the impact of these tax rates going up, but the investors who are responsible for spurring the growth of the economy, they’re going to be hurt, and that’s going to hurt the whole economy and the whole recovery.