Government Policies Destroy Middle-Class Home Ownership

Housing Prices Skyrocket – Government Policy Started The Last Bubble 20 Years Ago

Real estate and the owner-occupied housing market have been permanently repriced higher than what the free market would dictate. Over the past 20 years, house prices and rent rates have risen much faster than consumer prices and the disparity is widening. The causes are real and numerous, and unfortunately, we have government policy to thank for much of the mess.

Government incentives get arbitraged into the market causing housing prices to rise faster than general inflation. Last decade’s bubble in house prices can be traced back to the Tax Relief Act of 1997

Thus, we cannot look at simple price growth charts and conclude that housing is in a bubble. Indeed, house prices may fall, but they may remain at elevated levels when compared to everything else forever. In other words, the average person may always be priced out of owning real estate, regardless of what happens to house prices.

This nominal price chart may show a bubble to the untrained eye, but perhaps this is a permanent repricing.

So what is causing house prices to rise seemingly out of control? Why have house prices become volatile like stock prices? Below I provide a list of the major factors caused by government interference that have turned our homes into speculative tools for the savvy investor and millstones for those homeowners who cannot comprehend how the housing market has been profoundly and permanently altered.

Question: Why have house prices become volatile like stock prices?

Answer: Government policies, tax laws, and regulations of all kinds

Tax Laws, Government Programs, And The Reasons Behind The Rising Rents Need To Be Considered 

Why is this multidimensional analysis important? The housing bears continue to view their house price analysis with simple price charts and make conclusions based on price movements. This is a seriously misguided analysis as we need to consider a number of other factors that affect prices.

We need to consider why rents keep rising, which affects price-to-rent ratios, capitalization rates, and imputed rents of owner-occupied housing. As long as these values remain fairly consistent, then housing price levels can be supported.

Moreover, we must view real estate as a bundle of benefits, with tax advantages and government subsidies as one of the most important. Restrictive zoning and laws designed to alleviate the affordable-housing problem also exacerbate the dilemma. As I will discuss, items such as changes to capital gains exclusions, affordable-housing laws, and restrictive zoning all play their part and have really provided a tailwind to housing prices.

Taxpayer Relief Act of 1997 – Last Decade’s Housing Bubble Starts Here

I spoke on past shows about how tax legislation promulgated over the past 20 years have clearly had a profound effect on supporting house prices. The 1997 Taxpayer Relief Act was the most important legislation affecting owner-occupied real estate in over a generation.

Since the TRA of 1997 was enacted housing prices have become much more speculative. There is an incentive to drive prices upward. We are past last decade’s highs on a nominal basis.

Prior to 1997, home sellers could only exclude a gain if they used it to buy another and more expensive residence within 2 years of the original sale. Those aged 55 or older had a one-time exemption of up to $125,000 available.

On an inflation-adjusted basis, we are still well below last decade’s peak

The Taxpayer Relief Act of 1997 drastically changed this. Now, the federal tax code allows an exemption of up to $250,000 of capital gains for singles–up to $500,000 for married couples–on the sale of a principal residence. This means that there is no federal income tax levied on a gain of any amount up to and including these amounts when you sell your home.

Since capital gains to a large extent can be excluded with respect to many owner-occupied home transactions, home owners have an incentive to bid up house prices by “flipping” their houses. A tax payer has an unlimited amount of exclusions as long as they abide by the qualifying rules stated in the Act.

Governments Continue To Intervene As The Unwashed Public Demands Action. This Self-Reinforcing Loop Continues Forever.

When it comes to the growing affordable housing crisis, the public’s instinctual reaction is to demand more government intervention and action. But, as I have been saying, every time the government gets involved, the benefits get arbitraged into the system, which just raises prices and makes the operating framework more difficult with each enacted law, code, and regulation. These laws are written by self-serving lobbyists and firms with conflicts of interest and the entities that end up benefiting in the long run are real estate investors, real estate investment trusts, and institutional landlords. There is rarely an instance when this is not the case.

Let’s look at California for example. California is ground zero of the housing crisis. This article titled, Affordable housing crisis grips California illustrates the willful ignorance of the populace and their elected politicians.

California lawmakers are in midst of trying to solve a housing crisis that has spread throughout the state. An array of housing-related bills — 130 and counting — have been proposed in the Legislature since January.

The crisis is impacting people at higher and higher income levels, so I think members of the state Legislature are hearing about it far more from people in their district.

The state’s Department of Housing and Community Development — an agency that works to expand access to affordable housing — says California has built an average of 80,000 homes a year for the past decade, which is less than half of the 180,000 new homes needed to keep up with the predicted population growth through 2025. – Capitol Weekly

Yes, you read that right; there are an array of housing-related bills — 130 and counting — that have been proposed in the Legislature since January. How can anyone, especially Landlords and home builders keep up? They cannot, unless the are the large REITs or institutional landlords.  They help lobby for the legislation anyway. The more laws and regulations that California passes the worse (and more profitable) their housing crisis becomes. We can almost say that many of their problems are self-inflicted.

According to California’s Department of Housing and Community Development, home builders have built 1,000,000 too few homes over the past decade, as population growth and immigration have swamped the real estate markets. I am sure these politicians will never admit they are causing the problems they are trying to fix.

Open Borders and Household Formations Continue To Outpace New Construction of Single-Family Homes and Apartments
Population growth continues to move up in a linear fashion with no end in sight

The United States population has grown by almost 25 million people in the last decade. Since WW II the population has continued to increase on a consistent basis. While the annual growth rate may have fallen a few tenths of a percentage points, the total population is large enough that the numbers grow on a consistent linear basis.

Home builders can’t (or don’t want to) keep up with household formation

This chart shows how household formation has continued to rise at a much higher clip than construction of single-family houses after the last recession. Naturally, household formation fell during the last economic crisis, but soon rebounded as the economy stabilized. However, home builders chose to build higher-end single-family homes and condos, as construction costs, labor, and zoning regulations and costs continued to spiral upward.

New Home Builders Concentrating On Higher-Priced Housing as Local Zoning And Building Codes Become More Burdensome

Here is an article titled, Home building slowed as cities try to tame growth, which describes the troubles of a local home builder, who is trying to build a community of affordable housing.

On a parcel in Sammamish, Wash., a Seattle suburb, Mike Walsh would like to build 36 relatively affordable houses. But since zoning changes in recent years permit just 25, he’ll have to sell each at $1.2 million to make the project profitable.

An increasingly byzantine maze of zoning, environmental, safety and other requirements partly accounts for housing construction that remains 35% below normal levels across the country, especially for affordable starter houses, builders and economists say. And that building deficit is the chief culprit behind a skimpy supply of both new and existing homes that has driven up prices about 40% the past five years, says Lawrence Yun, chief economist of the National Association of Realtors. Rising prices are good for homeowners but shut out many buyers, especially Millennials shopping for their first house. – USA Today

Every Economic Sector With Out-Of-Control Costs Has A High Amount Of Government Regulation And Interference

I can go on and on about the reasons for high-priced housing and why I believe it may be permanent, but I observe the same problems in other economic sectors as well. I notice similar price distortions in the medical and health care sectors as well as in the legal and higher-education sectors, too.

When government attempts to “help” a market, all it does is distort pricing, necessitating more and more intervention until it effectively controls the whole thing. This was the intent all along. – Chris Pirnak

Government interference is prominent in every sector of the economy that has out-of-control costs. Notice that the government’s role is prominent in the medical and health care, legal, education, and housing sectors. The “benefits” of every program are arbitraged into the system, resulting in higher prices for everyone. This, in turn necessitates another round of “benefits,” which forms a self-feeding loop. This continues until the government controls just about every aspect of the industry. The ones who benefit are the ones who understand the system. The ones who lose are the ones for whom the legislation is ostensibly intended.

In microeconomics, government interference causes the supply curve to shift up and to the left, artificially restricting supply of whatever is affected. With respect to real estate, each time the government and tax jurisdictions implement a program or tax legislation designed to help real estate owners, the benefit get arbitraged into the system, raising the prices of real estate. These increases are permanent as long as the benefits are not rolled back.

Unless people really understand these harsh realities they will always end up with the short-end of the stick. Of course, this is done by design as most believe whatever they are told. If you are reading this research article, perhaps you won’t fall victim to the disingenuous reasoning and logic by the government, which says it is out to help you.