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2. Changes in tax law made the housing bubble worse
4. Via Kottke, top astronomy photos
Posted by Tyler Cowen on December 19, 2008 at 01:01 PM in Web/Tech | Permalink
Comments
Why wouldn't removing a tax on home sales cause downward pressure on prices? Maybe this is too simplistic, but removing a tax on a simple supply/demand would increase sales but decrease prices...
Posted by: j at Dec 19, 2008 1:16:29 PM
I second the reccomendation for the link re: panic of 1873. That was one rough panic and you can't blame government intervention on its depth or length.
Will we call this period the Panic of 2008? In this case it wasn't just lenders acting like a bunch of teenage girls with no prom date, it was our Treasury Secretary, Fed Chief and, more typically, congressmen of both parties.
Posted by: guy in the veal calf office at Dec 19, 2008 1:17:32 PM
I second the reccomendation for the link re: panic of 1873. That was one rough panic and you can't blame government intervention on its depth or length.
I think you missed something in the article.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
It sounds rather eerily like ol'Fannie and Freddie.
Posted by: apostate at Dec 19, 2008 1:44:25 PM
'Changes in tax law made the housing bubble worse'.
This is an interesting interpretation. No doubt it's true that cutting the capital gains tax increased housing prices. I'll even take their word on the amount. Nonetheless this pronouncement seems to me along the lines of 'low-friction ball bearings made the car crash worse'. Yes, yes indeed, without the bearings the car does not go as fast. We could likewise apportion blame for the housing bubble to things like the availability of cheap labor, improvements in the manufacture of furnishings, and so on. But so long as these things are 'working as intended' while the system of capital allocation is most definitely not working as intended I don't think it makes sense to put *any* of the blame on these other factors.
Posted by: bbartlog at Dec 19, 2008 1:59:27 PM
bbartlog: "But so long as these things are 'working as intended' while the system of capital allocation is most definitely not working as intended"
But the claim is that these tax laws (and others) were part of what made the system of capital investment _not_ work as intended. They encourage people to invest in non-productive assets (houses) beyond the benefit these produce (rents).
Yes a lack of cheap labour would also have constricted the housing boom somewhat, but cheap labour might have been better employed had people been investing in stocks not houses.
I didn't know about this particular law, thanks for pointing it out.
Posted by: improbable at Dec 19, 2008 3:42:46 PM
One of the justifications for not taxing the capital gains on a home sale when you buy a new home is that the capital gains tax locks you into your home. So, if you buy house and it increases in value, you have huge tax penalty if you ever decide to sell and buy a new house. This penalty locks the home owner into existing investments, which is inefficient if they would get more utility by moving into a new house.
The tax benefit simply removes this lock in by not recognizing the gain if you buy a replacement house. If that is the case, then what we see with the tax benefit should be an efficient level of home sales as opposed to the inefficiently low level of home sales without the benefit.
Posted by: Rob at Dec 19, 2008 3:44:35 PM
The link about 1873 was very interesting, why haven't I heard about this? Everyone's so fixated on 1929.
Anyone have any good links about how deep it was? The article mentions 25% unemployment in NY, but some other numbers to grasp onto would be nice. Esp. for Europe.
Strange, now that I think about it, that there is no mention of the war of 1870-71, nor the Paris Commune and all that. Was there just two years of building boom? Or did Vienna get started earlier and Paris was late to the party? And did Britain's shift of wheat imports have anything to do with the war?
Posted by: improbable at Dec 19, 2008 3:52:24 PM
Everyone's so fixated on 1929.
To some extent I believe it's a boomer thing. Much of that generation never seem to have gotten over their strange guilt for not being as "good" as their parents. "Greatest Generation" and all that. They have a tendency try to blow up everything they are involved in to ridiculous proportions to equal their parents events. "See we have a Great Depression too!" At least that's my view from the outside.
I mean really, what economic crisis isn't compared to the crash of 1929?
Posted by: apostate at Dec 19, 2008 4:54:00 PM
A while back, Barry Ritholtz posted an interesting article about the Panic of 1873 and the following years that Roger Babson published in the New York Times in 1911:
http://bigpicture.typepad.com/comments/files/1873Panic.pdf
Babson's observations about the availability of credit and other aspects of the panic sound familiar.
Posted by: David Thompson at Dec 19, 2008 5:08:28 PM
I also found the 1873 article interesting. But the first time I read about it in depth, there was also some account of monetary policy in terms of after shots of rapid money supply expansion during the Civil War.
Posted by: John V at Dec 19, 2008 5:13:05 PM
"Changes in tax law made the housing bubble worse"
Gee, ya think? subsidized interest, 0% down, deduct interest from your income, cap gains are tax free
is there anything else that could possibly been done to distort investment in housing? Maybe we should have piad people to get mortgages too.
someone should calculate the total actual value of the subsidies for housing. All to make housing more affordable, but of course increases demand and what people are willing to pay for a house.
So prices go up making housing less affordable.
Such is the way with all government subsidies. Those holding the asset when the subsidy is put in place benefit, but its a wash for everybody else.
The deceptive part is what this does to the speed with which prices rise, convincing new unsophisticated entrants that this investment opportunity will continue indefinitely.
Posted by: Alan Brown at Dec 20, 2008 1:14:09 AM
I'm guessing a capital gains tax doesn't 'kick in' if you're selling your investment at a loss?
Posted by: Sebastien Chiasson at Dec 20, 2008 9:43:34 AM
thanks for the 1873 link tyler. interesting article. especially the "american commercial invasion".
Posted by: oops at Dec 20, 2008 1:02:53 PM
Railfans might find my Unfinished Railroads of New York State site interesting. A number of those railroads went bankrupt during the Panic of 1873. In particular, the Pennsylvania and Sodus Bay had done nearly all the grading, trestles, fences, signs, gates, etc., but the rail hadn't been delivered. 42 miles of railway, down the tubes.
Posted by: Russell Nelson at Dec 20, 2008 3:09:20 PM
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Posted by: nolosoft at Apr 6, 2009 11:34:46 PM
Do you mind have a look at TradeMax? A full featured tax software specifically designed for active investors or traders who have multiple accounts to manage their trade data, maximize their gain/loss strategy, prepare their Schedule D.
TradeMax® debuts innovative new tools that enable active investors or traders to effortlessly manage all their trades across various accounts.With customizable Vista® style “Views”. TradeMax® delivers important investment account information right to the desktop, without the need to access Internet. Users can manage their trade data, maximize their gain/loss strategy, prepare their Schedule D. It can import trade data from all kinds of formats files, monitor realized/unrealized gains & losses for current positions, adjust wash sales events, report capital gains/losses in printed Schedule D format or export to popular tax software such as TaxCut®, TurboTax®
All TradeMax® products are available today at http://www.nolosoft.com
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