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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: tradermike_1999 who wrote (8064)	9/1/2001 12:48:31 PM
From: Ilaine	Read Replies (1) \| Respond to of 74559

I think it's fair to say that nobody could predict the macroeconomic effect of the 1997 revision of the capital gains tax on home equity. As you no doubt recall, prior to 1997, homeowners were given a once in a lifetime exclusion for capital gains tax on the sale of their home, in the amount of $125,000 for one taxpayer, and $250,000 for a married couple. However, the exclusion only applied if you were aged 55 or over - and if both spouses were not aged 55, then only that one spouse got the exclusion and the other spouse could never use his/her exclusion - the so-called "tainted spouse" rule. Now all taxpayers get an exclusion, the amount is $250,000 for a single taxpayer and $500,000 if you are married, and you can take it every time you sell your house, as long as you have lived in it two years out of the last five. So you can take it every two years if you want to sell your house every two years. People used to "roll over" their home equity every time they sold their house, until they turned 55. So they were always buying bigger houses, which usually meant further and further out into the suburbs. That's why the law was changed, to help preserve center cities, but it's had unintended consequences. If your home equity exceeded the limit, they would just hang on until they died, because the kids would take the house at the fair market value at the time of death, and wouldn't have to pay the capital gains tax. I've known people who were frail and quite old, hanging on to a huge monster of a house so the kids would get the money, not Uncle Sam. That doesn't happen anymore. Now people with home equity can use it without paying capital gains tax - plus they get the mortgage interest deduction on the loan if they refinance - so the money's almost "free." Did some of that go into the stock market? Sure. Did some of that go to money heaven? Sure. Do we know how much? No. Will we ever know how much? Yes, probably next year, when the Fed finishes analyzing the data from the 2001 Survey of Consumer Finances. These surveys are conducted triennially, and contain a wealth of data about consumer credit and debt. federalreserve.gov Can we figure it out ourselves using anecdotal data from the newspapers? I would say no, there's going to be sampling errors that can't be overcome. Journalists only talk to people who make good stories. As the truism goes, "dog bites man isn't a story, man bites dog is a story." Has the American consumer taken on more debt than he/she can pay? I don't know. I haven't. Have you? I think it's worth noting that homeownership was not as common prior to the 1934 New Deal enactment of the National Housing Act designed to make it easier for ordinary people to buy houses, or refinance mortgages. Also during the Great Depression, the enactment of the FHA, the Federal Home Loan Bank, etc. So if you look at homeownership in the Great Depression, you're comparing apples to oranges. Prior to these new institutions being set up, home mortgages were typically only for a couple of years, and were refinananced as a matter of course. In 1931, half of all home mortgages were in default, and the banks could neither sell the houses, nor afford to maintain them. For better or worse, the New Deal changed a lot of the financial institutions of the United States. With respect to interest rate cuts, the long bond is telling us that long term, interest rates are going to go up.