No one seems to be talking about "cui bono?" in this situation. But there were some big beneficiaries, and I think we need to acknowledge that; and the awareness of the dynamics might just lead us in some productive directions.
Who benefited the most ? Well, the obvious answer is the FIRE sector ... finance, insurance & real estate. More transactions happened than would have occurred in the absence of lax lending rules, and at far higher levels.
- Mortgage brokers -- a business with rather low barriers to entry; mortgage lenders, mortgage packagers; hedge funds
- Title insurance companies; mortgage insurers (PMI -private mortgage insurance); rating agencies; who else?
- Real estate agents, with their 6% commissions, on the sales that got made at higher levels because of the relaxed lending rules.
But the bigger answer is that the beneficiaries included the folks who had houses and condos to sell. Developers, yes, but also lots of individual homeowners and individual speculators.
Houses and condos, contrary to what the popular press suggests day in and day out, do not appreciate. They depreciate, at roughly 1.5% per year. The "real estate appreciation" we've been hearing about is really land appreciation, offset by that depreciation on the buildings. Where land represents 85% of property value, as it does in San Francisco, 1.5% depreciation on 15% of the property value is barely visible. In, say, Oklahoma City, where land represents about 25% of property value, 1.5% depreciation on 75% of property value is a larger figure, particularly if land is appreciating relatively slowly, or value is deflating, as it might after a bubble bursts or mortgage rates rise. (Source: table 6, here)
When buyers have more spending power, sellers of a scarce resource -- in this case, housing within a manageable commuting distance of jobs which pay well -- can and will bid it up. Houses, being reproducible, are not scarce; what is scarce is the place to put them.
So who benefited?
1. The FIRE sector, as detailed above;
2. The sellers of the properties that were financed by mortgages that would not have been written if the standards had been more rational. They received the home equity created by the first-time buyers' increased buying power. That became their down payment for their "move-up" house.
3. The sellers of the "move-up" properties, even those which were purchased with very conventional mortgages which would have met the stricter lending standards of 10, 20, 30 years ago, but which also included down payments made possible by ridiculous lending practices.
4. Those who refinanced their mortgages and took out additional "home equity" based on the valuations supported by the transactions described in #1 and #2.
Something for everybody, right? At least for FIRE and for homeowners. The other 30% didn't benefit.
A headline in the NYT of 2/23 said "Stimulus Plan Aids Buyers of High-Priced Homes".
Nonsense! The people who will be aided are the SELLERS of some
"high-priced homes" -- those in areas where the definition of a
conforming loan will rise from $271,050 (if I interpret the article
correctly) to 125% of the local median sales price. (How "local" gets
defined will make a big difference, as suggested by an accompanying
graphic; those definitions will be up to HUD.) The article suggests
that for Tiburon, Fannie Mae might be backing mortgages as high as
$729,750. The homes may not be much larger, fancier or newer than what
one could buy in Texas for $250,000; it is the site value which makes
them "high-priced."
Who benefits from this? SELLERS! And they aren't even asked to pay a "capital" gains tax on the land gain unless it exceeds $250,000 for an individual, $500,000 for a couple; and the amount over that is taxed at 5% (1 for the commons, 19 for the seller) or 15% (3 for the commons, 17 for the seller!) as long as they've lived there at least 2 years.
Think of it. We tax wages at 10% to 35% (plus the 7.65% -- more accurately, 15.3% -- in social security, etc., taxes). We tax land gains less or not at all. (Even when the second of a couple who has "earned" large land gains over their lifetime dies, we currently exempt the first $2 million -- each -- from taxation via the estate tax.)
Is this any way to run a civilized society?
What is the alternative, you might ask? The answer goes back to local taxation. Instead of a small annual property tax that falls both on land and on buildings, supplemented by sales taxes on some or most of one's purchases, and city and state taxes on our wages, I propose that we simply tax land value. The result would be that the selling price of land would go down, which would reduce the selling price of housing, because in the places where most of us live, land represents more than half of the price of housing. Instead of paying the seller -- who didn't create that value -- and, because we can't afford to pay the seller with cash, we must borrow all that money in the form of a mortgage, which we pay monthly, we would pay each month or each quarter to the local tax collector the value of the land we occupy. Yes, we might still need to borrow in order to pay the seller for the house; but it would be a much smaller figure. The local tax collector would pass along a portion of the local land tax to the state, and some would be passed along to the federal government as well, where land values are particularly high.
Think of this. The next federal pork project gets proposed. It is something definitely worth doing -- say, a new bridge that will raise local property values and make commerce work better, or a new transit system, with property values rising for a 1-mile radius around every station along the route, with gains higher than the price of the project. The federal government finances the project. Property values rise when the project is done. What we do now is leave most of that value in the hands of the property owners. What we'd do under land value taxation is collect that value in the form of a tax on the rising value of that land. The higher revenue would benefit the local area, the state and possibly the nation -- get recycled infinitely into government services, instead of getting stuck in the pockets of the lucky ducky landholders with good friends in Congress.
Now it is entirely possible that some folks in the local area would prefer not to have that new transportation system. They LOVE their car, and don't want property values to rise if it means that they must pay more to the commons for the privilege of occupying land in that place. They are perfectly welcome to vote against it and to attempt to persuade their neighbors that the transit system is a terrible idea! (We'd be wise to find a way for elderly people to remain in their homes, even if they could not afford the rising property tax; my sense is that the best way to do this is by permitting them to defer, with interest, some portion of their tax, as a lien against the property, to be satisfied upon its sale or transfer. The interest and lien would avoid burdening other taxpayers to subsidize them.) [I suspect, however, that one of the results of utilizing land value taxation would be that entrepreneurs would be incentivized to use some of the land to create the sort of housing that would be sufficiently appealing and affordable to draw many of those seniors into something well-located, modern and comfortable. Would they all want to go? Probably not; but many would.]
Should we start recycling all that economic value -- land value --
and thereby be able to fund a lot of other important projects (e.g.,
think of all the infrastructure maintenance we need), or should we keep
giving permanent gifts to a lucky few, financed by everyone else
through taxes on wages, sales, buildings, etc.?
You decide. What sounds like the sort of society you'd like to live in? What sort of society would you like your grandchildren to live in? Do you think those around you would see it the same way?
(And, parenthetically, the next time someone suggests that we should privatize Social Security, with all of us running our own retirement portfolios, in our spare time and with our skills, and the FIRE sector in the foreground, just say no! Cui bono? The answer may be FIRE!)
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