Dear Father in heaven, I'm not a praying man, but
if you're up there and you can hear me [begins crying]
show me the way ... show me the way.
-- George Bailey, It´s A Wonderful Life --
George Bailey, enlightened good ol` boy, Mr. Community Spirit and defender of truth, justice and the American Way -- how dare anybody suggest he could be among the perpetrators of The Crime of The Century.
I agree -- the suggestion is wrong. If the world economic recession on 2007-8 is any indication, it could be The Crime of The Millennium.
There is only one good thing about house flipping. There is a cure for it.
To understand the cure requires that a few basic assumptions be expressed.
Real Versus Unreal Estate
1. The real value of a house or other building is its replacement cost. If it burned down or was towed away, how much would it cost to build another one just like it today?
The fact that Robert Redford bought a house down the road means nothing. Any value he adds is unreal estate, not real estate. That fact will become evident the moment he sells; the unreal estate value will vanish along with Robert Redford. The real estate value, however, will remain, unglamorous but unscathed.
2. To determine the real value of land, start with population. Is it growing or declining? In my town, the population increased over 45% from 1970-2010. Sounds like a lot. However, the U.S. population grew from 203 million to 315 million over the same period -- or 55%. Prima facie, then, there is no reason for my town´s land to reach stratospheric prices relative to those of the rest of the country.
Population is the starting line -- not the finish line -- for calculating the real value of land. So fundamental is this point that house flippers blew a gasket when I noted in an interview with the local newspaper that the vast majority of housing starts in my town belonged to people who were already living there. The flippers were using starts as a "scientific indicator" to "prove" that everybody and his brother was moving to our area -- ergo, Hurry! URGENT!! Buy now!!! RUN, RUN, RUN!!!!
3. If you want to make money in real estate, as opposed to unreal estate, don`t follow movie stars. Instead, follow artists. They buy cheap property and fix it up. They beautify -- as opposed to prettify. Improvements of that nature are real improvements -- not retinal junk food -- hence worth real money. To repeat: that Robert Redford bought a house down the road is not an improvement, contrary to what every house flipper will tell you. Stop listening to the chaos whisperer.
Stop being the Bigger Fool.
4. Only unreal estate, versus real estate, has bubbles. The answer, my friend, is not blowing in the wind.
5. Finally, anybody who has ever bought or sold property knows there are few things more ritualistic than a real estate transaction. The reason: it is not always easy to separate real estate from unreal estate.
If you´re up there and you can hear me ... George Bailey´s anguish is still palpable. And no wonder: as far as anybody can determine, God doesn´t believe in real estate. Neither do little children.
* * *
The Cure For House Flipping
Well whaddya know about that!!!
-- George Bailey --
As noted, population growth is what ultimately causes property values to rise. That fact is the basis for the following political position:
Population = society. Discounting renovations/repairs -- which the house flipper by definition does not make -- society causes property values to rise. Therefore, society is entitled to -- among other things -- the lion´s share of the profits brewed by house flipping.
We have rejected the term speculation in this discussion. The defining characteristic of speculation is significant risk. Risk motivates the speculator, but it de-motivates the house flipper. Indeed, risk terrifies the house flipper. Terror is why he flips -- sells as fast as he can -- in the first place.
We just saw the flipper´s Achilles´ heel.
The horror of risk is why the mere mention by government officials of the cure presented below -- that it is being "studied," "considered" -- would blow house flipping out of the water in a matter of days -- maybe hours. The house flipper will flip out. The chaos whisperer will be silenced.
House flipping consists of two fronts:
(1) the time period. The shorter the better.
(2) The amount of money must be big. The flipper isn´t going to worry about how to save three cents on a length of pipe. He could care less about making a 100% profit if his final take is a pipsqueak $500.
The cure is a special tax that attacks flipping on both fronts.
(1) The time period. If my house has been in the family for 30 years and I sell it, house flipping is not involved, consequently, neither is a flip tax. If, on the other hand, I buy a house and sell it the next day for a $100 K profit, house flipping occurred. I should have to pay a steep tax, e.g., 90% for less than 90 days separating purchase from sale. In this case, $90,000 would go to cash-starved state, county and/or city coffers to hire more teachers and nurses, to buy a new fire truck, to replace the street lamp the kids shot out. I would keep $10,000 -- not bad for a day´s UNwork.
The longer the time between purchase and sale, the less flip tax would apply. After a specified period the flip tax would disappear.
Which specific tax rates would apply for particular time frames? And when should a flip tax expire? Those questions must be resolved -- at least initially -- at the state and local levels.
Why must? Well, because there is no alternative ...
Unreal estate is a pillar of the oligarchic political system that seized control of America in 2007-8. As representatives of that system, no congress will pass a flip tax; no president will sign it.
Actually, it may be a good thing that Washington is for the time being a total waste of time. Local conditions and circumstances pertaining to property vary greatly. Numerous experiences with different flip taxes would provide a concrete basis for designing an eventual federal flip tax that is relevant and coherent.
We need to be just as realistic about something else. The conquest that is forced to wait dies. House flippers know it, which is why they will fight the creation and imposition of a flip tax with every fiber of their being.
2. The amount of money. Let´s start by looking at how to avoid an injustice that the best-intentioned flip tax could cause.
Property bought and sold quickly for little or no profit would be exempt from a flip tax. Assume a poor farmer bought land and died a week later, and that his family had to sell the property immediately and for a minuscule profit to pay off his debts. There is no reason why they should be punished for flippers´ abuses.
What minimum profit threshold should be required for a flip tax to kick in? Again, specific amounts would be locally determined.
Another key consideration regarding the amount of money: improvements and repairs weigh in. The house flipper in the purest sense engages in neither.
An illustration: assume two people, A and B, separately purchase houses for $200 K. Four months later, each sells and turns a $100 K profit. If A made $40 K in improvements whereas B made none, A would pay less flip tax.
Why worry about renovations/repairs? Why not simply leave them to the buyer?
The problem is, the buyer could turn out to be another flipper. If so, renovations/repairs are put off again and again, and the property deteriorates. In my town there are stacks of condos that have never been inhabited except by venomous centipedes and plague-carrying carnivorous mice.
Look around at the eye sores in your area. Public policy should encourage -- not discourage -- renovations/repairs. A properly worded flip tax is a powerful incentive. Roofing, painting, landscaping and tile contractors -- take note.
A good flip tax would do something else. To the extent the house flipper makes renovations/repairs, the house flipper per se ceases to exist. He becomes something else.
Two other issues must be addressed in considering a flip tax:
4. Wherever there are weasels, there are weasel holes. Designing a flip tax requires plugging up the holes that inevitably appear in laws and regulations where megabucks are at stake. Playing games with the legal dates of a sale and/or purchase is a case in point. Side deals -- on paper I sell you my house for no profit but you slip me cash in a dark alley -- are another.
5. To make a flip tax meaningful, severe penalties must be applied. The possibilities run the gamut from fines and imprisonment to confiscation of property.
* * *
When all is said and done, society pays itself
in the false money of its dreams.
-- Marcel Mauss, Esquisse d’une théorie générale de la magie* --
For millions of Americans, house trafficking has proven to be the worst possible outlet for laundering billions of narco dollars. Specifically, flipping pushes housing evaluations to astronomical heights beyond the reach of middle income families. As our prior post observed:
It is not easy to get a handle on the damage which the post-2006 housing crisis inflicted on the middle class as distinguished from the other two classes. However, a highly probative clue is found in net worth (total assets minus deficits). The Pew Research Center concluded in August 2012 in an aptly-titled study, The Lost Decade of The Middle Class: "Net worth of middle-income families dropped 39% ... [from $129,582 in 2001 to $93,150 in 2010] as the housing market crash and Great Recession wiped out the previous advances. Over the 1983 to 2010 period, only upper-income families registered strong increases in wealth."
So, why don´t middle class house buyers just say no to absurdly bloated prices? After all, nobody is forcing them to buy houses.
Or are they?
The dream of middle class Americans to own their home is highly inelastic -- meaning they will pay almost any price to buy a house. The proof is that from 2007-2012, 10 million families tried to pay it. Result: they were -- or are about to be -- tossed in the street.
In the end, that inelastic demand is what makes house trafficking possible. Here, a primordial contradiction wells to the surface:
As long as house flipping is real, the American Dream will never be realized by millions of people. Either (i) a home of their own now or (ii) continue to allow flipping with its possibility of a never-specified amount of free money in an unspecified future. The latter option is the chaos whisperer; we didn´t call it such for nothing.
So, door (i) or door (ii)? The huge number of Bigger Fools shows which option Americans are choosing. That reality is why house flippers need not worry about a single word said here. They can and will sleep peacefully in their palaces. The flippers know that unreal estate is an untouchable totem, that what they do is a pillar of the oligarchic political system running and ruining America.
You disagree, Dear Reader, that house flipping is a centerpiece of the new order? You might want to wonder why there is no flip tax anywhere on the planet. China, Australia, Hong Kong, Singapore all have taxes on speculation but not flipping (see above). As far as I can determine after a search far and wide on the Internet, Austria´s speculation tax comes closest to a flip tax.
You might also wonder about your local oligarch´s responses to our version of the Rotary Club´s 4-Way Test:
(i) Ask him what he thinks of drug trafficking.
(ii) Sit back and watch him pound on the desk, foam at the mouth.
(iii) Next, ask him if he favors stopping a major venue for laundering drug money -- house flipping -- via a special tax.
(v) Again, sit back. You will be treated to a classic display of The Red Neck Shuffle. "Ah, well..."
To repeat, no flip tax is possible today on a national level in America. Unfortunately, in the long run that is where it is needed. Until a federal flip tax exists, flippers will simply travel from state to state, community to community, wherever rates of profit are higher and corruption of local officials is easier. I saw it happen in my town. Don´t wait to see it in yours.
A federal flip tax awaits The Third American Revolution. That revolution will be the renaissance of the polity with a greatly enhanced democratic component (see this blog, The Big Movida: The Third American Revolution).
* * *
"It´s A Wonderful Life" was released in 1946, when America still had a polity, i.e., the oligarchy/democracy hybrid moderated by a large middle class, which the Founding Fathers created in 1789. The polity was destroyed by the Second American Revolution (2007-8), which installed an oligarchic political system via a financial coup d´etat. The mega-rich stepped out from behind the curtain, demanded and received in the full light of TV cameras, billions of public dollars.
That coup created a change of -- not in -- systems. That historic transformation of context is what makes Frank Capra´s film today so misleading, if not a lie.
The long and short of it:
"It´s ä Wonderful Life" needs to be dethroned as America´s most inspiring movie.** Because house flipping is El Dorado for gringos, we will believe it when we see it.
Until new and tragic economic realities force needed changes in America´s values and political system, here is what you can do:
Stop worrying about the college kid smoking a joint. Start worrying about your pal, neighbor and implacable Main Streeter, George Bailey.***
He almost brought the house down.
* « En définitive, c’est toujours la société qui se paie elle-même de la fausse monnaie de son rêve. » Marcel Mauss, Esquisse d’une théorie générale de la magie, in Marcel Mauss, Sociologie et anthropologie, Presses Universitaires de France, Paris, 2004, p. 119. [My translation]
**We are not suggesting that "It´s A Wonderful Life" is inherently evil and should disappear forever. Paradoxically, another change in context -- notably the Third American Revolution with its empowered democratic component -- could give the movie a renewed, positive value.
***Not all realtors and S&Ls are house flippers. However, somebody has to sign off on flippers´ deals.