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Today’s Real Estate Boom Built On 1997 Taxpayer Relief Act

Economists in increasing numbers are citing an unappreciated force that may have infected a strong housing market with home-buying mania. They say it’s bad tax policy—the Taxpayer Relief Act of 1997, signed by President Clinton.

According to Mark Zandi, chief economist at economic-consulting firm Economy.com, the tax law change created much of the economic incentive to buy, flip, and buy again every two years. (A family can exempt the first $500,000 in profit on the sale of the home from capital-gains taxes, for a single filer it’s $250,000.) The lure of tax-free profit has been a powerful incentive as it’s the kind of math everyone can figure out.

But experts say we’re overinvesting in housing as a nation. “Residential investment accounted for 35% of private investment in the past year, a level not seen since the early 1970s,” reflects Martin Barnes, the perceptive financial-market observer at Bank Credit Analyst.

What’s ahead for the most politically successful segment in society (homeowners, builders and realtors)? William Ahearn of the Washington, DC-based Tax Foundation, says the home-mortgage deduction is sacrosanct on Capital Hill, but the capital-gains law is different. It’s only eight years old and action ought to be taken before this bit of policy becomes as enmeshed as the tax break for mortgage interest.

Editor’s note: The foregoing information was condensed from an article titled, “A Housing Boom Built On Folly,” in the July issue of MortgagePro News.