The Housing Industry Why Does America Always Get A Fixer-Upper!

Discussion in 'Economics & Trade' started by JimfromPennsylvania, Apr 4, 2021.

  1. JimfromPennsylvania

    JimfromPennsylvania Active Member Past Donor

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    A really lousy development is currently taking place in America. We have close to historically low home mortgage interest rates brought about by the activities of the Federal Reserve Board in their effort to protect the economy from the economic turmoil caused by the Covid 19 pandemic but there is a shortage of homes for sale in America and banks have tightened up lending standards, understandably they don't want a repeat of the 2008/2009 mortgage loan crisis, excluding a large group of Americans from being able to get home loans that in normal times would qualify. On top of that for home buyers, home prices are skyrocketing because of the shortage of supply the average price of a home in America has risen by double digits in the last twelve months. Can't Congress help these Americans take advantage of this once in a generation tremendous opportunity to acquire a home which will make a profound difference for good in these family's economic wealth across their lives? One doesn't see much opportunity for Congress to be able to quickly bring on line a significant increase in the supply of "new" homes because of the dearth of skilled workers to build homes (that workforce never returned in numbers since the downturn in the building industry from the Great Recession), there is a shortage of land to build in most areas, local government regulation costs for home builders have steeply risen and the price of building materials has dramatically increased recently because of increase in demand! That is not to say that Congress couldn't step up and help reduce the problem in even a few material ways!

    Some potential borrowers are being denied home loans because they availed themselves of the forbearance on school loans created by Washington's emergency efforts to respond to the pandemic; Congress by law could ban banks and home loan providers from considering that fact in evaluating a home loan application - on the whole this factor is not material on whether a home loan borrower is going to default on their loan. Congress could for this year and the following two years double the capital gain exclusion on the sale of home loans currently it is 250 K of the profit from the sale that can be shielded from the capital gains tax, doubling it would shield 500 K of profit; that would incentivize some home owners to sell especially older ones who because of their age are looking to get out of their large home and the burden that is involved in taking care of such a home and that the existing home may not be set up for their current health status, for example, they cannot use stairs. Although this government policy change will not directly solve the problem where there is a shortage of entry level homes on the market like one's in the 300 K price range what this policy change will do is that it will increase the supply of high end homes which will incentivize current owners of entry level homes to move out of their current home and upgrade to a higher quality home thus indirectly increasing the supply of entry level homes on the market. The American people need to keep in mind that this low home mortgage rate window will only last at most until some time into 2023, just last month the number of jobs created in the economy was in the 900,000 range and we are only now down eight million jobs from right before the pandemic so two years from today the employment numbers should be back to normal and the rationale for historically low interest rates will be gone and so interest rates will normalize! The third thing that Congress could do is allow people to combine three years worth of gift tax exclusion into one year if the gift is for a down payment for a home loan and the giftee, the home buyer, has an income under 100K. Currently, the gift tax exclusion is for 15K per year per person, this change would allow a young borrower to have at least 45 K as a down payment it would go a long way to enabling these home buyers to having a twenty percent of the home purchase price down payment which is a threshold a lot of lenders require to provide a home loan. This policy change would probably move a significant number of families where grandmom and/or granddad is pushing 80 years of age so therefore doesn't have too much longer to live and has been financially lucky in life and is going to leave the majority of their wealth to their children and grandchildren anyway to help out their grandchild get a good start in the beginning of their life by facilitating them becoming a homeowner. To stop gamesmanship, the IRS could have a form on their website that a giftor and giftee have to electronically sign confirming the transaction and requiring the monies provided by the giftor going directly to the seller of the home, of course it could be routed through a bank, and documents confirming the transaction would have to be uploaded by the parties - in todays world uploading is common place e.g. getting tax credits for health insurance on the state exchanges! Part of the problem in America is that so many of her citizens live in economic hardship, hey members of Congress there is no silver bullet to solve this problem it is a lot of little government policy changes like voila that is going to remedy this really wrong situation; how about it Congress could you provide a helping hand here!
     
  2. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    This is an interesting economic phenomena I have elaborated on before, where allocation of scarce goods is not based on price but rather based on other more qualitative factors.

    This (I believe) typically happens when the demand curve takes on a certain shape, that is not the smooth curve that is stereotypical of classic basic economics examples, but rather a certain curve where demand rapidly falls off at a very steep slope beyond a certain price gradient. This creates virtual "shortages" where price is not a very effective factor in allocation. Instead, sellers must take other factors more into account, in this case credit worthiness.

    It's basically what happens when everyone needs something that there is not enough of, and most all of those people have a very similar ability to afford that thing.

    thread about the economics of that here:
    non-classical forms of market rationing
     
    Last edited: Apr 5, 2021
  3. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    It's hard to see how government could help when the problem stems from a shortage of supply.

    Maybe the problem is (in one way) not really so much a problem of shortage of building space, but rather that the economic opportunities seem to be so concentrated into certain limited areas of the country.
    Just a different way of looking at this.

    Maybe the government should be investing in new infrastructure to build new cities in places far away from where lots of people currently live?

    Or maybe the population levels have gone up too much. (Time to cut off immigration? doubt that will happen anytime soon)

    If government can't afford to build new cities for all these people, then maybe the country can't afford more people. putting a big strain on available infrastructure. (and yes, previous existing housing is a form of infrastructure in the economy, interestingly)
     
  4. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Would that really help solve the overall problem? It would probably just raise the cost of a loan for everyone else.
     
  5. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    You realize that when interest rates go up, that generally puts an inverse downward pressure on home prices. (since it becomes harder for buyers to borrow as much)
    Although there is typically some lag time of several years between the two.

    I'm not saying of course that home prices will go down, but all other things being held equal (no population increases, no inflation, no economic improvement) they would.
     
    Last edited: Apr 5, 2021
  6. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Well, I don't think Congress is going to be able to help when it comes to money.
    Biden is already spending it all!

    (priorities, priorities...)
     
    Last edited: Apr 5, 2021
  7. Chrizton

    Chrizton Well-Known Member

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    To bring $300K price range homes online would require new subdivisions. Subdivisions can take at least a decade to get in place before the first foundation goes in, particularly of there is anything involving a body of water or seasonal wet spot nearby. There are very long lead times to these type developments.

    The county won't approve it until the state approves it and the state won't approve it until the EPA approves the plans and the EPA is not particularly efficient in its handling of these things. A developer told me that it it taking the EPA alone about 6 years to process an application and our state about 2 years, and then the county takes about another two years to oversee the installation of all the in-ground infrastructure before it will permit the home construction to begin.
     
  8. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    In many places that's not going to happen. In the biggest city areas, such as Los Angeles, San Francisco, Seattle, New York, Atlanta, etc, including the suburbs that sprawl out from them 50 miles, the land space alone to build a modest house on costs $300K.

    This is not in "most places", but we have to remember "most people do not live in most places of country". The overall population over the entire country is quite concentrated into certain specific areas.
    There's basically an inverse correlation between housing prices and availability of good middle class job opportunities. There are some parts of the country where there are empty houses lying abandoned and falling apart, but the job opportunities are not good there. The local economies of these places are depressed.

    In other places there are already too many people, things are overcrowded, there is not enough parking spaces, and the roads are already clogged and congested with cars and the local people there do not want more houses going up. In many cities there is little open space left, and the people already living there don't want more housing built on the little space that is left, which is perfectly understandable.
     
    Last edited: Apr 6, 2021
  9. drluggit

    drluggit Well-Known Member

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    Clearly you don't live in tx....
     
    Last edited: Apr 6, 2021
  10. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I had a discussion with someone in another thread who used to be a construction contractor and he said that all the stupid permits, as well as time delays they cause, end up adding on an average of $75,000 to the cost of building a new home.

    Anyway, I think most of this would not be such a big problem if the country's population were not increasing so fast.
     
    Last edited: Apr 6, 2021
  11. Chrizton

    Chrizton Well-Known Member

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    Clearly I do not.
     
  12. Chrizton

    Chrizton Well-Known Member

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    That also likely depends on where you live. I know of a pending transaction locally where the estimated cost for getting approval for a new section to an existing subdivision is around $40K-$50K for the whole 35-40 tracts that will be in it.
     
  13. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    You realize that is only one part of the permitting process? There will be additional permits during the construction phase.

    I do agree with you that the permitting costs are probably much lower in some parts of the country than others.
     
    Last edited: Apr 6, 2021
  14. Chrizton

    Chrizton Well-Known Member

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    I used that number because of this part of the OP "Although this government policy change will not directly solve the problem where there is a shortage of entry level homes on the market like one's in the 300 K price range what this policy change will do is that it will increase the supply of high end homes which will incentivize current owners of entry level homes to move out of their current home and upgrade to a higher quality home thus indirectly increasing the supply of entry level homes on the market."
     
  15. Collateral Damage

    Collateral Damage Well-Known Member

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    Part of the inventory problem is the moratorium on foreclosures, so the houses that normally would have been added to existing home inventories will flood the market after (I think) April 15, unless they extend it.

    Supply and demand at play. When the back log of foreclosures hit the market, we could likely see a collapse of existing home prices, which will leave a number of people weeping as the value of the new, bright and shiny home they bought a couple of months ago deflates while they watch.

    Since we rehab homes as a sideline, this could work to our benefit, since building supply prices have skyrocketed over the last year, and those too will decrease, and foreclosure inventories will provide projects that can be profitable.
     
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  16. Chrizton

    Chrizton Well-Known Member

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    Building permits run 1-2% of the construction costs in most places. Add in another $5K for the utility hook ups and another 1-2% for the cost of the electrical, mechanical, and plumbing permits and I think you are really overshooting the mark at $75K per property unless you are building mansions or live in somewhere where the mob controls the jobs.
     
  17. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Oh, and who'd want to rent to someone these days knowing you may not be allowed to evict them if things go bad?

    With the implementation of this "eviction moratorium", even the very idea of that existing, landlords are probably going to be a whole lot more selective about which tenants they are willing to rent to.

    I'd rather have an empty house not earning any money than a renter whom I'm worried will soon stop paying rent and I can't get rid of them, meanwhile they will be creating all sorts of wear and potential expenses on the home.

    Government policy, even well intentioned ones, ends up having consequences.
     
    Last edited: Apr 6, 2021
  18. drluggit

    drluggit Well-Known Member

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    Which is just to say that there are other places that don't have the restrictions that you identify.
     

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