Real Estate Forecasts 2012 - 2026

The fundamental cause of the boom-bust “business” cycle is the real estate cycle. The period of the real estate cycle has averaged 18 years. Since the previous peak in real estate in the USA was in 2006, the next peak, if the 18 year average holds, will be in 2024. The next depression would then follow soon after, most likely in 2026, 18 years after the Depression of 2008.

Many real estate economists have analyzed the current data to conclude that the real estate cycle has already bottomed out. Inman News on 20 September 2012 announced, “Economists bullish on housing recovery.”

In a survey conducted by Pulsenomics LLC for the real-estate information company Zillow, the conclusion of 113 experts was that residential real estate prices, as measured by the S&P/Case-Shiller U.S. National Home Price Index, will rise steadily during the next few years. That Index has already risen 1.2 percent from the second quarter of 2011 to 2012. The September 2012 Zillow Home Price Expectation Survey average forecasts a price increase of 15 percent by 2016.

Zillow and Pulsenomics also announced the Zillow Home Price Expectation Survey 2010-2011 Crystal Ball Awards, but they have no award for long-term forecasts, i.e. for the next peak and crash.

Economic investment, meaning an increase in capital goods, drives the boom-bust cycle, and the most important investment is real estate construction, because buildings induce also more investment in durables (furniture, appliances, and fixtures) and also more production of materials such as wood, cement, and copper for wiring. When construction revives, investment will rise, unemployment will fall, and the next unsustainable boom will be underway.

The survey also shows that real estate experts understand the negative effects of governmental subsidies. Most of them believe the economy would benefit from the elimination of the mortgage interest deduction from income taxes.

Indeed, subsidies to real estate are the fundamental cause of artificial real estate booms. Since subsidies (rather than business as such) drive the cycle, it is better called the “interventionist cycle.” There are three basic subsidies to real estate: low interest rates, special tax reductions, and the generation of rent by government’s territorial goods.

The Federal Reserve has pushed nominal short-term interest rates down to almost zero, and has been keeping long-term rates low as it buys bonds with newly created money. The tax reductions for real estate continue as before: deductions for mortgage interest, property taxes, and depreciation; and exemptions and postponements of capital gains taxes. The biggest subsidy is implicit: the generation of land rent and land value by government’s public goods, paid for by taxing workers and entrepreneurs instead of land.

This gigantic redistribution of income from workers to landowners is the fundamental source of our economic woes, but it is hushed up in economic textbooks, and nobody talks about it or thinks about it. (“Nobody” here means “only the followers of the economist Henry George,” because to the public, they are nobodies.)

Politicians aware of this redistributive cause of economic problems dare not mention it, lest they lose their campaign contributions from real estate, financial, and lawyer interest groups. Even labor union leaders dare not speak of this redistribution, because if workers could keep their full wage, they would no longer anxiously seek to maintain labor union monopolies. And even the candidates of the “free market” Libertarian Party support the land-value subsidy and redistribution, because rent seekers are a major source of their campaign funds.

Thus political corruption, endemic in mass democracy, prevents the remedy from even being discussed. Georgists or geoists do talk about it, but they scare off potential allies with their misleading rhetoric of opposing the “private ownership of land,” instead of focusing on the force of governmental subsidies. Geoists do favor the private possession of land, conditional on paying a community rent.

At any rate, since “nobody” is even discussing the remedy for the boom and bust sequence, the good news is that real estate shall rise again, and pull up the economy into the next boom, but the bad news is that once again, the economy will crash. All the financial regulations and reforms will not prevent the next crisis, because they do not touch the fundamental cause, subsidy.

And most probably, the Crash of 2026 will be much worse than the Crash of 2008, because after the trillion dollar annual deficits, in the next crisis, the US federal government will be all tapped out, as it will no longer be able to pay the debt service, and it will no longer be able to borrow funds to bail out the real estate and financial industries, or homeowners. But you, dear reader, have time to prepare and brace yourself for the waterfall up ahead.

Government's War on Sharing

There is a fuzzy border between trading and sharing. Suppose Adam gathers apples and Eve gathers oranges. The each want some of the other, so they can either trade some of the fruits, or they can share them. The result is the same: they each eat some of both.

Sharing implies that one gives the other some of the goods, and the other gives some to you, but reciprocal sharing is about the same as trading, perhaps though with a psychological difference.

Now comes the income tax to turn the beautiful act of sharing into a taxable commercial transaction. To the government, barter is just as much income as selling for cash. If you trade an apple for an orange, it has the same economic effect as selling the apple for cash, and then using the cash to buy the orange from your trading partner. The person trading his apple is subject to the same tax as the one selling for cash.

But since sharing has the same economic effect as trading, sharing too might fall under the tax code. This is what people are finding out when they share apartments.

In San Francisco, California, as in some other cities, there is a hotel tax, officially called the Transient Occupancy Tax. If you have guests stay in your apartment, you must pay a 14 percent occupancy tax to the city.

Many city residents have been using web-based services that find tenants for short-term stays. The guest benefits by paying less than he would for a hotel, and also by being able to stay in locations in which there are no hotels. The resident gets some income during the time he goes on vacation or stays elsewhere. There are also organizations that provide for car sharing, or short-term car use. Such services have been called a “sharing economy.” But the sharing is subject to income taxes, as well as special taxes such as the hotel tax.

Other problems arise from tenant’s rentals. In San Francisco, for example, it is illegal to sublet an apartment for more than is paid in rental to the landlord. The rationale is that when apartments are subject to rental controls, tenants can exploit their subsidized unit by subletting, in effect getting some of the economic rent. Also, some landlords could circumvent rent control with phony subletting.

The problem with subletting is the rent control itself. What is being controlled is not the economic rent, but who receives it. If the landlord is not allowed to collect it, then in effect the tenant is obtaining the rent implicitly, as a benefit. Properly, the people should be receiving the economic land rent in equal shares, and restrictions on development should be eliminated, to allow the quantity of housing units to match the quantity demanded.

The issue of taxing barter is inherent in income taxation. Barter is economically similar to using money as a medium of exchange. Sharing does provide net gains, and if gains are to be taxed, then if sharing is not taxed, that offers a way to avoid paying the income tax. The dentist will share dental services with members of a sharing economy, and they will share the food they produce with the dentist, and so there is no income tax, but indeed the income is there. Production is income.

The basic problem is the taxation of activities. A tax on the activity of production or consumption stifles the activity, which is the purpose of the economy and of living. To live is to consume. To tax consumption is to tax life, and to consume we must produce, so to tax production is also to tax the creation of life.

We can avoid taxing life if we tax the surplus from production that goes to land rent, because the landowner has not produced anything in return. If the landowner keeps the rent surplus, he gets a subsidy. The problem is not just the inequity of society’s surplus going to land title holders, but that the surplus creates a land value that rises with economic expansion. Speculators then jump in to capture the rising land value, and that carries real estate prices beyond what people who want to use it can afford, and then we get a recession like the Crash of 2008.

A tapping of land rent for public revenue is not based on any activity. The tapping does not depend on what the landowner does. He can hold vacant land and pay the same community rent as his neighbor who has a tall apartment building. A single tax on land value would avoid a special tax on occupancy. The abolition of taxes on income, other than land rent, would let people share as much as they wish, tax-free. And with no taxes on gains other than from land, there would be no tax evasion, and most folks would trade for money, since money evolved to facilitate trade. A lot of the “sharing” comes from the desire to escape taxes.

With a single tax on land value, sharing would be authentic. So the presence of the income tax pollutes genuine sharing. The replacement of hotel taxes with public revenue from land rent would promote a fuller use of real estate. Government’s “War on Sharing” destroys community spirit along with productive activity.

Ex Post Facto Taxation

An ex post facto law takes effect in the past, before it was enacted. Suppose on September 3, 2012, a law takes effect banning smoking as of January 1, 2012. Someone who smoked in January 2012 would be penalized, even though smoking was legal in that month. The U.S. Constitution recognizes, in Article I, section 9, that such ex post facto laws are unjust.

Amnesty laws are also retroactive. When a law is passed decriminalizing acts committed in the past, these are ex post facto, but they benefit those affected, and so these are equitable. The amnesty law says that the previous law is changed and will no longer be enforced, so the action is forgiven.

When taxes change, they too must not apply greater tax rates for past events. If taxes go up, the higher rates should apply only to future actions, and when tax rates go down, transactions in the past must still get taxed at the rates then in effect, unless there is a tax amnesty.

The U.S. Commerce Department has now imposed an ex post facto tax of about $100 million. Higher tax rates, ranging from 31 to 250 percent, have been imposed on the solar cells made in China. The reason for the higher tariff on the panels, bought up to 90 days prior to the imposition of the higher tax, is anti-dumping legislation. The U.S. companies affected include many small businesses, the type that do the most to increase employment. Some of the companies were exporting low-cost solar energy products to rural areas in foreign countries. The higher tariffs also contradict the alleged policy of the government to promote the use of solar energy.

The Commerce Department responded to some companies that make solar panels. These firms claim that Chinese producers are getting subsidies that enable them to sell their goods below the costs of production. I will not analyze the anti-dumping legislation itself, but only the retroactive aspect of the imposition of tariffs.

Entrepreneurs make decisions based on marginal analysis. They calculate the marginal cost, the cost of producing extra amounts, based on the costs of buying more inputs. They calculate the marginal revenues, the income from selling extra units of output. To maximize profit, they produce more if the marginal revenue is greater than the marginal cost, and produce less if the marginal cost is greater than marginal revenue.

The firms purchased the Chinese panels given the cost, including taxes, at the time. Then they get slapped with a higher tax on the past purchase. When the decision would have been to avoid purchasing the panel, given the higher tax, the ex post facto tax destroys the firm’s economic calculation. The result is not just less profit for the firm, but greater waste and inefficiency for the economy. The ex post facto tax prevents resources from being allocated to their most productive and benefits-maximizing uses.

There have been previous similar retroactive import taxes. These ex post facto taxes violate the prohibition of ex post facto laws by the U.S. Constitution, but the courts have historically been very lenient on the Constitutionality of federal taxation. In 1994, in United States v. Carlton, the U.S. Supreme Court held that retroactive tax laws were Constitutional. The rot had started much earlier, in 1798, when the Supreme Court, in Calder v. Bull, illogically held that the prohibition against ex post facto laws applied only to criminal laws.

Logically, the reverse should be the case. The ex post facto prohibition should apply to civil cases, but not to criminal law when the crime was evil under natural law. Thus if it was legal to murder particular types of people in the past, then a law recognizing that such murder was evil and should be illegal would be proper, especially when the Constitution already recognizes the existence of natural law and natural rights. Thus also, slaves may be set free even if the slaves were legally the property of the owner in the past. But it is not immoral to import goods; indeed, the tariff itself violates the natural right to freely trade.

Ex post facto taxation is an assault on property rights. Nobody’s property is safe if government can confiscate it due to actions that were legal at the time, but later become illegal. Ex post facto laws also destroy the concept of the rule of law. Under the rule of law, people are supposed to know the current laws, and base their actions on such laws. But if laws change, not only do people have to alter their future acts, but they cannot know if their current acts will get slapped by a higher penalty than that set by current law. The regime becomes a rule by chiefs who arbitrarily impose costs rather than rules that apply to all at the current time.

The U.S. Constitution clearly and simply states, “No Bill of Attainder or ex post facto Law shall be passed.” What part of “no” do the Justices not understand?