Sunday, August 14, 2011

The New Homestead Act

In the August 1 issue of the Morning Briefing, I started to float an idea for fixing the economy that was suggested to me by Carl Goldsmith, the chief investment strategist at Delta Management in LA. We believe that our “New Homestead Act” would quickly revive the US housing market and our economy (1). It turns out that Puerto Rico already implemented such a program with great success. According to this weekend’s WSJ (2), “A stimulus program on the island, long ripe with vacant houses and condos, has sent sales of new homes surging 80% and sales of existing homes up 24% in the past 10 months from a year earlier, even as the market in much of the U.S. mainland is dead.” The program includes a bunch of tax breaks for both buyers and sellers of residential and commercial properties. It was rolled out by Gov. Luis Fortuño as part of his effort to revive the Commonwealth’s economy.

Here are the key elements of the Fortuño initiative: “One of the incentive program’s popular provisions offers qualified buyers down-payment assistance for homes purchased with a mortgage, as well as a second mortgage of as much as $25,000 that can be used to make down payments and pay closing costs. Buyers of new homes also pay no transfer taxes when a property changes hands, escape paying property taxes for five years and future capital-gains taxes, and pay no taxes on rental income for 10 years. Sellers don’t have to pay capital-gains taxes on profits.” This is very similar to the plan Carl and I have been promoting for the US mainland.

Last Wednesday, the Obama Administration announced it is seeking input from investors on how to rent homes owned by Fannie Mae, Freddie Mac, and the Federal Housing Administration (3). The goal is to turn thousands of government-owned foreclosures into rental properties to help boost falling home prices. Carl and I have proposed a 10-year tax exemption for rental income, which is one of the features of Gov. Fortuño’s program.

The WSJ embraced the Administration’s initiative this weekend (4): “This is positive news if the Administration is finally ready to accept market-based solution to our housing problems. The Wednesday document encouraged ‘investment of private capital’ and welcomed input from market participants with ‘the technical and financial capability to engage in large-scale transactions.’ Could it be that the Administration is courting hedge funds and private equity to scoop up foreclosed homes? We can only hope so.” The Journal recommends setting up a new Resolution Trust Corporation, similar to the one set up by George H.W. Bush, which worked so well to clear out the overhang of real estate in the early 1990s. Carl and I second the motion.

(1) Carl Goldsmith & Ed Yardeni, "The New Homestead Act" (August 16, 2011)
(2) Puerto Rico Fires Up Housing Market," WSJ (August 13, 2011)--requires subscriptions
(3) "FHFA, Treasury, HUD Seek Input on Disposition of Real Estate Owned Properties," US Treasury Press Release (August 10, 2011)
(4) "Foreclosure Brainstorm," WSJ (August 13, 2011)--requires subscription

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