home prices speculation land value housing

Wall St Bets Billions on Homes in Distressed Markets
mania amenities trusts income taxes

As Real Estate Trusts, Firms Avoid Taxes, Keep Rents

Our economies are shaped by grasping and speculation, not by justice, not until we demand it. These 2013 excerpts are from: (1) The New York Times, Apr 20, on history by RJ Shiller; (2) NYT, Apr 26, on rent factors by C. Rampell; (3) The Washington Post, Apr 21, on bets by MA Fletcher; (4) NYT, Apr 21, on REITS, by N. Popper; and (5) Forbes, Apr 23, on taxes by T. Worstall.

by Robert J. Shiller, by Catherine Rampell, by Michael A. Fletcher, by Nathaniel Popper

Since 1997, we have lived through the biggest real estate bubble in United States history — followed by the most calamitous decline in housing prices that the country has ever seen.

Fundamental factors like inflation and construction costs affect home prices, of course. But the radical shifts in housing prices in recent years were caused mainly by investor-induced speculation.

Most speculators in past decades didn’t focus much on home prices. The term “housing bubble” was not even in their vocabulary. Land, not houses, was the object of their desires. They had “land mania” or “land fever.”

The share of nonfarm home value accounted for by land rose to 36.4 percent in 2000 from 15.3 percent in 1930.

People may have been deluded into thinking that investments in housing and land were one and the same.

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Why housing is so expensive is that a lot of amenities that wealthy people like are bundled into the price of an apartment, including a high concentration of bars, restaurants, and theaters, and a greater variety of high-end goods. Living in New York gives you access to a lot of perks that you would not have in lower-income places like Detroit, no matter how much you were willing to pay, and you’re paying for the cost of the entire bundle. For high-income people, who value these kinds of amenities, the cost is a bargain. The problem is that low-income people, for whom these perks are less important to the quality of life, cannot unbundle the cost of having a roof over their heads from the cost of being in close proximity to 66 Michelin-starred restaurants and the Metropolitan Opera [not without public recovery of location value].

New York offers higher salaries than most other cities, too, for both high-skilled and low-skilled people, which is another reason that housing costs are higher. High salaries and high housing costs are sort of mutually reinforcing: for high-skilled people, access to lucrative jobs nearby is baked into the cost of an apartment, and for low-skilled people, who are pinched by the higher cost of housing (and everything else they spend money on), better wages are required to convince them it’s worth staying and working here.

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Big investors are pouring unprecedented amounts of money into real estate hard hit by the housing crash, raising the prospect of another Wall Street-fueled bubble that won’t be sustainable.

Drawn by the prospect of double-figure profit margins on rents and the resale of homes whose prices plummeted in the crash, hedge funds, Wall Street investors, and other institutions are crowding out individual home buyers.

Wall Street investors and other big institutions account for 70 percent of home sales in some Florida markets, raising doubts about the state’s housing recovery.

Lower-income Americans will lose their opportunity for the American Dream of building wealth through owning a home.

The influx of investors may explain why home prices have been rising in parts of the country most affected by the housing crash, despite high jobless rates and relatively few new mortgages being issued by lenders. In the past year, prices have risen 23 percent in the Phoenix area, 15 percent in Las Vegas, 9 percent in Tampa and 11 percent in Miami. Nationally, prices are up more than 8 percent over the past year.

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The Corrections Corporation of America, which switched to a REIT structure, runs the Stewart Detention Center in Lumpkin, Ga., and estimates it will save $70 million in taxes this year.

American corporations, operating in businesses as diverse as private prisons, billboards, and casinos, are reducing — even eliminating — their federal tax bills.

They are declaring themselves special trusts that are typically exempt from paying federal taxes.

Changing from a standard corporation to a real estate investment trust, or REIT — a designation signed into law by President Dwight D. Eisenhower — has suddenly become a hot corporate trend.

Today, there are more than 1,000 real estate investment trusts, about 10 percent of them traded publicly on the stock market. Investors like them because, by law, they must distribute at least 90 percent of their taxable income to their shareholders — a particularly alluring prospect today, given the low interest rates paid by many other basic investments.

The mere rumor that a company might convert has been enough to send its stock price soaring.

This is not the first wave of companies seeking out a new type of corporate status to avoid taxes. In the 1980s, dozens of companies, including Sahara Resorts and the Boston Celtics, became master limited partnerships, another corporate form that is tax-exempt. After the practice attracted notice, Congress passed laws that limited the industries that could use the structure. In the 1990s, hotel companies took advantage of the laws, but a change to the laws in 1999 soon snuffed that out.

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The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property … These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth.

We may well spend the tax money on nice things that then increase economic growth: and it will certainly be true for some tax and spend policies that the growth from the spending will be higher than the loss of growth from the taxing.

Least awful of all, so less awful that it’s actually good, are taxes on fixed property. Land value tax is a good example of this last.

This spectrum is why so many economists do advocate that a land value tax is a great idea (even if they don’t agree with Henry George that it should be the only tax) and why others, Sir James Mirrlees for example, argue that capital and corporate taxation rates should be zero.

We want to raise our money from one end of this spectrum, the one that does the least damage to future growth, not from the one that does the most.

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JJS: Housing bubbles actually are land bubbles. Buildings wear out; it’s locations that rise, even if not steadily, in value. What pushes up site values is not what land sellers get paid for; they didn’t create the nearby amenities, society did. So Society should recover the site values it creates, and not tax the values that workers and investors create; that is, eliminate taxes on earnings and instead charge land use fees or deed fees or land dues. Plug the loopholes that politicians now open up for land speculators (mistakenly called real estate speculators). The last writer sees part of the solution. But it’s not just the value of land that society should recover, but also the rental values of resources, airwaves, ecosystem services, and privileges like patents/copyrights, utility franchises, corporate charters, and the bank’s power to issue brand new money. Do all that and you’d flatten the business cycle (actually, land speculation cycle), be able to shut the hood on the economy -- and there’d be a lot less business news articles sold. .


Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .

Also see:

In Los Angeles, on Iowa farms, rents mean hardship

When Mortgages Exclude the Location

Forbes Blogger Defends Green Taxes As

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