Archives for August 2014

NAR Issue Brief: Commercial Issues and Actions: August 2014
Issue: Alternative Minimum Tax (AMT): On January 2, 2013, President Obama signed into law, the American Taxpayer Relief Act, providing a permanent “patch” that prevents tens of millions of taxpayers from being subject to the alternative minimum tax (AMT), starting with the 2012 tax year. Specifically, the measure sets the exemption amounts (i.e., the amounts yearly for inflation. It also allows various non-refundable personal credits to be claimed agains the AMT. The AMT was created by the Tax Reform Act of 1986 to prevent higher-income taxpayers from using credits and deductions to completely offset their federal income tax liability.
NAR Action: NAR successfully worked with Confress to ensure a permanent patch to the AMT.
Issue: Basel III: The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of Currency (OCC) have finalized a new risk-based capital category – High Volatility Commercial Real Estate Exposures (HVCRE) for commercial acquisition, development, and construction (ADC) loans. Specifically, the new changes raise the risk-weight for an ADC loan from 100% to 150%. In response to the final changes, it is highly likely that banks would substantially change their current lending practices and reduce the amount of available credit in order to avoid the higher capital charges associated with ADC loans.
NAR Action: After several letters to bank regulators and lawmaker, including comments sent to the Federal Reserve, FDIC, and OCC, NAR continues to meet with Congress and the Administration to modify the final rule in order to prevent a reduction in commercial real estate lending as well as an increase in borrowing costs.
Issue: Bonus Depreciation: In 2013, President Obama signed into law the American Taxpayer Relief Act, which extended the 50% bonus depreciation rule for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets). This provision allows businesses to take a deduction of 50% of the value of that property in addition to amounts of that they can otherwise claim under the depreciation rules. Bonus depreciation is allowed against both the regular tax system and the AMT. In addition, businesses could elect to accelerate some AMT credits in lieu of bonus depreciation.
NAR Action: Bonus depreciation rules have once again expired (although they are still in effect through 2014 for certain transportation property, as well as certain longer-lived items). NAR is urging Members of Congress to extend this provision as it considers the extension of other important tax provisions that also expired at the end of 2013.
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By: NAR Issue Brief (REALTOR.org)
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The 2014 Land Market Survey report, developed jointly by REALTORS® Land Institute and NAR to look at land-sales trends and the state of the market, is below.
Overview of Land Markets Survey Conducted by NAR Research for the REALTORS® Land Institute
By: Lawrence Yun, Senior Vice President & Chief Economist; Jed Smith, Managing Director, Quantitative Research; Gay Cororaton, Research Economist; August 2014
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In early 2000, the S&P 500 hit 1,553 and the tech-heavy NASDAQ surpassed 5,000. Two years later the S&P was at 768 and the NASDAQ was at 800! In the process, $6 trillion in household wealth was wiped out. We now call that period the dot-com bubble. About half a decade later, we experienced the housing market bubble. Interestingly, the value of residential real estate destroyed during that crisis was also about $6 trillion. Yet the dot-com bubble resulted in a mild recession while the housing bust lead to the Great Recession.   What was different? It turns a major culprit was which households suffered the destruction of wealth.
To set the table, ponder this: During the housing bust, retail spending fell 8% from 2007 to 2009, one of the largest drops ever. By contrast, retail spending increased by 5% between 2000 and 2002. Clearly, the losses sustained during the dot-com bust had minimal impacts on household spending decisions and thus on the overall economy. Here is why.
The decline in home prices that began in 2007 was highly concentrated among households with very limited financial resources. As a result, these now much-poorer households dramatically pulled back on spending and in the process unwittingly helped usher in the Great Recession. Remember, retail spending is about a quarter of GDP, so a decline of 8% over two years reduces GDP by 2% — a huge amount. It is as if these poorer households were the transmission mechanism through which the Great Recession got its energy.
Exacerbating and reinforcing this downward spiral was the role of debt or leverage. Remember, by 2004 or 2005 a large percentage of first-time home buyers had low FICO scores, sketchy employment histories and limited assets. To compensate, these Alt-A and subprime buyers borrowed heavily with their now highly levered house being their major financial asset. For example, among the poorest quintile of the population, 80% of their net worth is in their house. Even among the middle quintile, home equity is still 60% of their net worth. By borrowing so much, just a small decline in house prices could put these buyers upside down and wipe them out. Which is exactly what happened and is what turned a recession into the Great Recession. Between 2007 and 2010 the bottom 20% of the population saw their net worth fall from about $30,000 to zero.
By contrast, the financial losses sustained during the dot-com bubble were essentially walled off and had relatively little effect on the overall economy. This is because stock ownership is concentrated among the wealthy. As the wealthy have less debt and more assets, they could essentially shrug off the much larger financial losses they sustained yet not have them alter their day-to-day spending decisions. Among the wealthiest 20% of the population, home equity represents just 25% of their net worth. Moreover, depression-era federal laws make it hard to borrow more than 50% of the cost of stock purchases, thereby limiting the potentially negative role of leverage.
In short, the home buyers who bought in 2004 and 2005 had limited wealth and had more of it at risk than earlier home buyers. When the music stopped they were highly levered and wholly unable to protect themselves. That quickly resulted in (among other things) reduced spending, which shrank GDP and quickly cascaded into the Great Recession.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.
By: Elliot Eisenberg (GraphsandLaughs)
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