Enclosed please find a brief article I wrote for the local neighborhood newspaper, the Rogers Park. It is quarterly paper and I am scheduled to write a more in depth article on the community housing profile in the September edition.
Here are a few things I would share with you that my research is showing:
§ Current housing prices are wilting at the dramatic increase in the cost of short term borrowing. Because so much of the starter market has been using variable rate instruments, and short term loans, a huge segment of the buyer market is on the sidelines. I am sure the first quarter realtor numbers will show that.
§ If the starter market is so slow, then the trade up market is necessarily going to be affected, how much is not clear yet. Prices are breaking on some units, but it is not clear whether sellers understand how many new buyers are out of the market.
§ It was inevitable that the Fed would continue to clamp down on the housing market’s access to short term capital. However, if there are two more short term increases in the works for this year; we can forget about 2006 even resembling last year. Federal deficit spending has also had an affect on short term rates.
§ What is so puzzling from a policy point of view is that first time buyer demand is at record levels. Back in the late seventies, governments were scrambling to accommodate those new buyers. The realtor buzz in this jaded new century is how many second homes are being financed in the long term credit market.
§ The mortgage interest deduction and preferred treatment of housing capital gains have wrought wonders for housing. But the truth is, prices for both investor and owner properties are now out of line with new owner and renter incomes. What is the old economics professor saw: “don’t tax something and you will get more of it.” But what we got in the last decade was more prices than product.
§ It may be time to start thinking about a new first time homebuyer program that is figured through the federal tax code, such as a first time homeowner tax credit. The lion’s share of the current mortgage interest deduction expense goes to the top two deciles of filers. The deduction is not producing that much more housing, just better housing for those who use it.
§ This is not to argue for the repeal of current housing tax code expenditures. It is to suggest that their cost, relative to their results, needs to be re-examined.
§ The information industry, and to a real extent, the capital markets, have this antiquated notion that the baby boom is housed, that it is looking for retirement options, and the new immigrants are happy in their urban apartments. The truth is, the baby boom’s large cohort of adult children is waiting to be housed, and the immigration boom we are experiencing is far larger than most big city housing inventories can handle. There is a lot of doubling up; rents are 30% higher for renters than after tax mortgage costs are for owners.
§ We all need to think about new housing strategies for the coming generation.
Peter Fugiel, Consultant April 2006 Newsletter
Lake View Office