Housing Starts Fall to Lowest Level Since 2009

For every story showing potential for economic recovery, there's another that suggests recovery is still a long way away.

Huffington Post reports:

Groundbreaking on new U.S. home construction fell more than expected in December to its lowest in over a year, suggesting the battered housing sector remains a major roadblock to economic recovery.

U.S. housing starts dropped to an annual rate of 529,000 units, the Commerce Department said on Wednesday, down from November's 553,000 and well below forecasts around 550,000 in a Reuters poll. At current levels, starts account for less than a quarter of their boom-time peaks.

At the same time, building permits soared, a hint of optimism about future demand. Permits jumped 16.7 percent to 635,000, far above a median forecast of 560,000 and the biggest jump since June 2008. Changes to state building codes may have boosted permits in California,

Pennsylvania and New York, the report said. For example, permits surged 80.6 percent in the Northeast.

Housing was at the epicenter of the worst financial crisis in generations, which began when banks started to take a hit from rising defaults in the mortgage sector in the summer of 2007.

Read more at Huffington Post.com...

Mortgage Tax Break in the Crosshairs

Looking for ways to reduce the deficit, one panel is recommending limiting, or even killing altogether, the mortgage interest deduction. You can bet the housing industry will fight this tooth and nail!

From CNN.com:

Don't even think of touching the mortgage interest tax deduction in the midst of a fragile housing market.

That was the immediate response of the housing industry, which has come out with guns blazing against the presidential deficit commission's proposal to overhaul the coveted tax provision.

"We will fight this proposal," said Joe Stanton, chief lobbyist for the National Association of Home Builders. "From everything we've read, it will end up being a tax hike."

Charged with finding ways to reduce the nation's exploding federal debt, the bipartisan debt panel recommended Wednesday a wide range of controversial spending cuts and tax changes that would slash $4 trillion in deficits over the next 10 years.

Among the proposals was a major change to the mortgage interest deduction, which costs the Treasury Department an estimated $131 billion a year.

Currently, taxpayers who itemize their deductions can deduct the interest on mortgages of up to $1 million for their principal and second residences, plus on home equity loans of up to $100,000. The provision generally benefits higher-income Americans since they are more likely to itemize.

Continue reading here...

Three Signs Housing's Getting Weaker

Towards the end of 2009 there were reports suggesting the housing marketing was improving. However, as this new article from NPR.org points out, new statistics are suggesting a weakening real estate market once again. Listed below are their top three signs that the housing market is getting weaker.

1. Sales of previously-owned homes fell by 2.2 percent in May, the National Association of Realtors said today. Economists were predicting that sales would rise, driven by the tail end of the homebuyer tax credit.

2. Home builders' confidence in the housing market fell this month, according to a monthly survey of the industry.

3. Home prices have been falling this year, according to the Case-Shiller index.

To qualify for the home-buyer tax credit, people had to sign a contract by April 30 and close by June 30. Programs like this often encourage people who are planning to buy a home to hurry up and do it before the program ends. In that way, they sometimes steal home-buyers from future months.

In a note this morning, Ian Shepherdson of High Frequency Economics argued that this phenomenon will lead to more weakness in the housing market in the coming months.

Continue reading at NPR.org…

Housing Market Shows Some Signs Of Recovery

This week NPR posted an article with good news for the housing market. According to new studies home prices in cities like Boston, Chicago, San Francisco and Dallas were on the rise last month. Although in some parts of the country housing prices are stagnant or still on the decline, any increases in home values anywhere is a good sign. Yale University professor Robert Shiller even stated that "this is the first time in almost three years that we've seen price increases,"

What do Boston, Charlotte, Chicago, Cleveland, Dallas, Minneapolis and San Francisco have in common? They're cities where home prices rose recently.

That's according to the Standard & Poor's Case-Shiller Home Price Index, which shows that prices are actually starting to rise again in some parts of the country.

Other recent data show that there are some tentative signs that the real estate market may be starting to recover. The housing crisis helped propel the country into the worst recession in decades.

"This is the first time in almost three years that we've seen price increases," says Yale University professor Robert Shiller, who helped design the home price index. "So when we see a break in the downward trend that's definitely encouraging news."

For a long time Shiller was known as a pessimist about the housing market. And it turned out he was absolutely right.

But now, he's striking a different tone.

"Well, I think the worst is probably behind us — the worst pace of decline," he says. "We were going down at 2 percent a month for a number of months in a row nationally. That was really something. Now home prices relative to rents or construction costs are back at normal levels."

Shiller stresses that he doesn't think we're about to see another housing boom.

During this downturn, we've seen record drops in prices. And when it comes to new homes — it's been more than 50 years since we were building and selling so few of them.

But over the course of the spring, sales have been picking up.

Who’s to Blame for the Housing Market Crash?

In a new article on the Wall Street Journal the Mortgage Bankers Association suggests that zero money down loans, not subprime loans, led to the recent mortgage meltdown. Their research found that negative equity was the number one cause of foreclosures during the first half of 2008, and that down payments of under 3% were also a significant contributing factor. Check out their chart below.

The article then goes on to claim that the myths about subprime loans are delaying any efforts by the government to improve the dragging economy. I’ve included a clip of their article below, but be sure to check out the full text at WSJ.com.

Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went into foreclosure.)

Sharing the blame in the popular imagination are other loans where lenders were largely at fault -- such as "liar loans," where lenders never attempted to validate a borrower's income or assets.

This common narrative also appears to be wrong, a conclusion that is based on my analysis of loan-level data from McDash Analytics, a component of Lender Processing Services Inc. It is the largest loan-level data source available, covering more than 30 million mortgages.

On Dividend Taxes, It’s a Post-Partisan Race

From NYTimes.com:

Barack Obama is often described as a post-partisan politician who transcends traditional ideological divides. Is it true? At least when it comes to one small but important aspect of tax policy — the treatment of corporate dividends — the answer appears to be yes. Without much fanfare or public notice, Senator Obama has embraced a central element of the Republican agenda.

Let’s start with some history. Before 2003, when a person received dividends from his stock holdings, this income was taxed at ordinary income tax rates. That is, a dollar of dividends generated the same individual income tax liability as did a dollar of wages.

But many economists have long argued against taxing dividends this way. Dividends are a stockholder’s payment from corporate profits, and these profits have already been subject to the corporate income tax. Any tax on dividends represents a second tax on essentially the same income.

One can question whether this double taxation of income from corporate capital is fair. But fairness aside, there is also the problem of incentives. Taxing dividends twice substantially raises the overall tax burden on this form of income and distorts various decisions. Whenever taxes, rather than true costs and benefits, drive the allocation of resources, the economy shrinks below its potential.

Here are five ways a heavy tax on dividends messes things up:

CONSUMPTION VS. SAVING

When the tax system depresses the return on a major asset class like corporate equities, households have less incentive to save for the future. Reduced saving means less funds for capital accumulation, which in turn impedes economic growth.

HOUSING VS. BUSINESS CAPITAL

Wealth invested in your own home has several tax advantages. These include the mortgage interest deduction and the absence of any tax on imputed rent (the value that homeowners earn implicitly by getting a place to live). By taxing business capital highly, the tax laws induce people to invest too much in housing and too little in businesses.

NONCORPORATE VS. CORPORATE

Because non-corporate businesses like partnerships are taxed only once, they have an advantage over twice-taxed corporations. Consequently, too much of the economy’s capital stock ends up in the non-corporate, business sector.

DEBT VS. EQUITY FINANCE

Because interest payments on corporate debt are deductible for corporate income tax calculations, this capital income is taxed only once. This asymmetric treatment of debt and equity finance induces companies to issue more debt than they otherwise would, increasing leverage and the economy’s financial fragility.

RETAINED EARNINGS VS. DIVIDENDS

Companies can avoid the dividend tax by retaining earnings rather than paying dividends. Excessive retained earnings, however, impede the movement of capital from older cash-generating companies to newer ones with better prospects.

Housing Bill to Hurt Small Business Owners?

Although everyone seems to be talking about how much the new American Housing Rescue and Foreclosure Prevention Act is going to help American homeowners, it will to make life harder for thousands of small business owners. According to Sharon McLoone's business blog on WashingtonPost.com, the bill will force credit card processing companies to collect more information from merchants, and will even impose a 28% fee on those who do not comply. Below is a quote from McLoone's blog, but you can read the full thing at Housing Bill Includes Sweeping Data Reporting Provision.

"The housing bill includes a sweeping provision requiring credit and debit card firms to report the transactions of certain businesses to the IRS, sparking privacy concerns and stirring the ire of the small business community.

Small business lobbyists plan to aggressively push back on the language requiring firms like MasterCard and Visa to give the IRS data on businesses that have made at least 200 transactions annually that together total $20,000 or more.

The provision says that any company that processes electronic payment transactions will have to report to the IRS the annual gross receipts of those transactions for each merchant beginning in 2010.

The soon-to-be law 'will have a significant, negative effect on the small business community,' said Kristie Darien, executive director with the National Association for the Self-Employed.

The provision is part of a greater effort to increase business and consumer tax compliance and narrow the 'tax gap,' which the IRS defines as the difference between the amount of tax that taxpayers should pay for a given year and the amount that is paid voluntarily and on time.

The proposal, which originally was included in President Bush's fiscal 2009 budget request, will raise an estimated $9.5 billion over 10 years, according to a summary of the bill by the House Ways and Means Committee."

Mutual Fund Taxes To Break Records

According to CNN Money, major mutual fund companies have begun estimating this year’s taxable distributions and the taxes are set to break records yet again. Last year their tax bills totaled $23.8 billion, which was the largest since 2000, but this year’s total is expected to be over $24 billion. One reason for the ever-growing tax bill is the past years "wild market," with plunging stocks and a soft housing market.