The U.S. government just passed a $700 billion bailout bill it hopes will remedy one of the worst financial situations faced by this country since the Great Depression. As part of the bill, the government announced yesterday it would take an equity interest in America’s largest banks in exchange for providing much needed cash infusions into the banking industry.
Unfortunately, a cash infusion is only a short-term solution to a larger problem, which is that the housing market and the troubled securities associated with it are going to continue to be a drag on the credit markets. While the most recent cash infusion should help add some liquidity to the markets, it is unlikely to do anything to stave off the continued detritus of foreclosed and abandoned homes that is systemically infecting the global financial system.
Our government needs to look at options to boost the housing market. Housing prices have fallen precipitously around the country, which, in any normal market, would lead to a surge in demand. The problem, as we hear about in the news everyday, is that there isn’t any credit that Americans can draw upon to purchase these homes.
Until the ailing housing market regains some vitality, credit problems will persist, which is why the government needs to open up a source of cash to help create demand in the housing market. A huge untapped source of cash is the hundreds of billions of dollars held by U.S. citizens in their 401Ks and IRAs. The only problem is that because of current tax regulations, it is far too expensive for Americans to draw on the funds held in their 401Ks and IRAs.
Both of the presidential candidates have already proposed relaxing the penalties that are assessed for early withdrawals of 401K and IRA funds, but they should also consider providing other tax breaks.
The government should implement a significant tax cut or even a tax exemption on any withdrawals from 401K or IRA accounts as long as the funds are used to purchase real residentially zoned property or purchase equity in an existing home mortgage. Second, the government should extend the capital gains tax advantages that homeowners currently receive to a second home purchased under the auspices of this program.
Putting ownership of the thousands of abandoned or foreclosed properties out there into the hands of individual Americans is extremely efficient. There are hundreds of homes sitting on the market at fire sale prices. Yet, the credit markets are so tight, banks are requiring significant down payments on properties that they want to get off their books. Potential purchasers don’t have access to the funds they need so the “toxic” assets become more and more poisonous.
This country’s financial system is caught in a vicious cycle, and one of the ways we can help alleviate some of the stress out is to free up the cash that Americans have sitting in their retirement accounts.
If we give Americans a tax incentive to purchase second homes or investment properties, they will provide much needed liquidity to the financial system and also help remove significant portions of the toxic assets from banking industry balance sheets.
In addition, these tax cuts would give the housing market an instant shot of liquidity, which would result in increased demand in the housing markets and, in turn, a boost in housing prices. For struggling homeowners, this means an instant boost in home equity that could help provide them the means they need to refinance their home mortgages at lower long-term rates.
The government should give the people in this country that have money in the bank the opportunity to help support the country by providing much needed cash infusions into the housing market. The government’s current cash infusion will help free up some liquidity in the markets, but it’s not a remedy for the ailing housing market.
The government needs to free up the average American’s capital reserve and let them invest in property that is currently selling for pennies on the dollar when compared to market prices from only a few years ago. The current solution is attempting to fix the problem from the top down, but the government needs to look at the roots of the problem as well.
A tax cut puts some control of this bailout in the hands of the people in this country who have saved significant amounts of much needed capital. Let’s let go of the reins and allow Americans to invest their retirement funds in real property. We can not only provide some stability to our housing markets, but keep ownership of American property in America’s hands.
