More reasons why housing prices may drop

Bush’s tax cuts included a provision that dropped the lowest capital gains tax rate for 2008-2010. If you’re below the 25% tax bracket, for three years the capital gains tax drops to zero!Imagine having an appreciated asset, like a rental home, that you could sell tax free; would you pass up that opportunity? Few people would.

Bush also wants to temporarily eliminate taxes on mortgage debt forgiveness for a primary residence. Say you get foreclosed and the bank takes back the house and forgives your $100,000. Currently the IRS will treat that $100,000 as taxable income, something which seems unduly harsh. However, the IRS code already says if the foreclosure was due to insolvency, then the taxes are forgiven, so this will only help the upper middle class who still have assets left after losing a house.

A lowering of capital gains tax along with no taxes on mortgage debt forgiveness will mean a flood of homes for sale, coming on top of a market that already has way too many homes for sale. So, prices will have to drop to accommodate the glut.

I just went on and looked up home prices for the area in Los Angeles where we sold our home in Jan. Comparables are now going for 20% less and what we sold the house for in Jan. will now get you a house with 33% more square footage. Looking at the prices is illuminating. Some homeowners clearly think it’s still 2005 and are asking $650,000 for homes that others are listing at $470,000. Which home are you going to buy for $650,000 – 2600 sq ft or 1400 sq ft? I thought so.

What happens to prices there when those $470,000 homes start going for $390,000 at bank auctions?

  • DJ

    What happens? Forward-thinking people buy them.

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