2001 Essay on US tax benefits for real estate developers, and that it encourages bubbles and flipping

My friend Matt Ostrowski sent me a link to an article written in 2001 by Michael Hudson.  Not an easy read, but interesting because it was written in 2001, therefore the before the housing bubble popped in 2007.    It shows some of the favorable tax treatment afforded to the real estate industry, and the encouragement to trade properties to leverage repeated depreciation cycles to maximize this tax treatment.   I have wondered why properties never get past their 30 year mortgages, and this helps explain why.

Further this paper showed how the bubble could have been made more obvious except that the Federal Reserve stopped reporting some key statistics in 1994:

“But nationwide totals [of land and building values] were no longer compiled [by the Federal Reserve]. … Instead of making better land estimates, the Fed has dropped what had become a political and statistical hot potato. 1994 is the last year for which it has estimated economy-wide land and building values.”

But not reporting this is important because it fueled leverage buyouts (now called Private Equity) deals:

“Since the late 1940s ‘concealed value’ in the form of properties carried at outdated book values reflecting low acquisition prices was a major factor behind corporate raiding, mergers and acquisitions. Aggressive firms employed accountants to pour over the Stock Exchange’s 10K reports searching for such hidden values.”

This also shows how certain appraisal approaches help avoid income taxes through depreciating buildings over and over again:

“These fiscal considerations help to explain why it has been so hard to get Washington to produce national land value statistics.”

This lead investors to sell and resell properties quickly.

Combined with low cost credit leads to price appreciation and bubbles ensue.

Interestingly, nothing in this analysis has changed, so all these incentives still exist and the lack of public statistics and lack of political will to change seem to imply we are in much the same position we were before this last run-up popped.

This makes me more encouraged to find a way to create stable housing outside by changing some of the rules, in our case non-profit and debt-free housing.

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