We were cautioned that if Treasury’s plans were not adopted, all hell would break loose. After all, the Dow Jones industrial average was telling us so. So the bailout legislation passed. The stock market did not respond favorably to the fix. In fact it went into free fall. The fall in housing prices didn’t just stop, and the securities that are in part collateralized by the housing stock did not all of a sudden trade.
And the U.S. is on a path that will accelerate its already well‐established departure from free‐market principles, individual liberty and personal responsibility.
What do we do, then, to reverse this trajectory, to support housing prices and facilitate the market for toxic securities that ultimately are tied to housing? Here’s a simple, promising idea:
No tax on short‐ or long‐term capital gains or other income realized upon sale of the asset through 2013 for any individual or institution that purchases either the distressed real estate or securities collateralized by the real estate. This idea will produce winners and no — or few — losers.
When the seller would keep all of the proceeds from the sale of a house, because none are taxed, the future value of the house is greater than if it were taxed. The present value, therefore, is also greater.
Stated differently, housing prices rise when taxes are reduced. An individual who has been thinking of investing in distressed real estate may now find the timing right. If he assumes that housing in his market would rebound within five years, he now has an incentive, at the margin, to buy.
Institutions may provide a limited‐purpose collective pool, such as a mutual fund, to buy distressed real estate, and then distribute the sales proceeds tax‐free within five years. This structure would allow individuals who are not real estate professionals, but who nonetheless find the present housing market now more attractive because of the tax treatment, to easily participate and profit in its rebound. Private capital would enter the market, buy distressed property, and aid in re‐establishing the market for housing.
Homeowners who are able to service their mortgage, but who are considering dropping the keys off at the bank, will rethink because their negative equity will shrink. Homeowners who are unable to meet their mortgage responsibilities would also benefit in those cases where the equity flips from negative to positive.