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Originally Posted by AlethiaSi
I've heard a variety of things about this, whether it will work or not, is debatable apparently. I'm still trying to figure out the "facts"
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I have not read through all the specifics yet, but this is very much like what happened in 2002 (it was 2002 I think) except it is directed a bit differently.
The check we all got in 2002 was a refund of $300 as I recall for individuals and $600 to couples. It went to anyone who had paid taxes (I am not sure what the rule was for people who had paid taxes, but less than the amount of the refund.)
This time, the checks are larger- but if you earned more than $87,000 as an individual (in 2006 I assume- I doubt 2007 data will be ready in time for the checks to go out), then the amount gradually gets reduced based on your actual income.
Plus, the refund will this time go to people who may not have paid any federal income tax, but who filed a tax return and had Social Security and Medicare withheld from their paychecks.
This is not necessarily "fair" to those who pay tons of income tax and earn lots of money, but it is more viable politically for obvious reasons and it does target a wider range of people who would be likely to spend the money immediately (not because lower and lower middle class people are less responsible with their money, but because they unfortunately don't have the luxury of saving a lot of what they earn.)
At the end of the day, this will have little actual financial impact- but it could have an important psychological impact- and that can matter a great deal in a consumer-driven economy which is heavily reliant on people using credit.
Because credit is a buy now and pay later scheme, actually having the money to buy something with cash becomes less important to spending on a given day relative to the spender's perceptions about having future money to pay the bill for today's purchases. So there are positive implications in this "stimulus plan" which will make something of a different I think.
But in the larger picture I am surprised there are not more people on TV talking about the fact that a housing market and subprime crash- which is what is driving the broader economic deterioration- is actually a very good thing for the vast majority of Americans.
Houses are fairly permanent assets. The supply of homes has not declined in the US at all- in fact it has skyrocketed since existing homes are still there, or have been replaced with a new home, plus there has been much new building in the last 15 years.
And so the sharp increase in housing prices is the result of increased demand.
But it is not demand based on higher incomes. A significant number of areas have seen home prices rise overall 50% or much more in the past 10 years. How many of you have gotten a pay increase of 50% or much more in the past 10 years?
The increased demand came from a restructuring of credit. With ARMS, interest-only loans, more lax lending practices etc.- all that happened is people were allowed to get more credit based on their income than was possible before.
So, let's say you have a $250,000 home 15 years ago. That home might be $500,000 now because the number of people who can get the credit to buy that home has doubled or tripled and that many more people are competing to buy your home. And there are not more people competing because they earn more money- but rather because they can borrow more now than they could before, regardless of whether they can ultimately pay for it.
And so of course when it turns out even a small percentage of buyers cannot afford the long term costs of the credit they took on, we get into this death spiral.
The first to suffer were those who had no business taking out their mortgages in the first place. But as the impact of those foreclosures spreads, housing prices fall and suddenly a great many people find themselves upside down in their houses (owing more than the home is worth) and unable to refinance or sell their home for a quick profit and move on- as many have planned to do.
And this brings us to now when there has been a substantial decrease in home values, and with no end in sight. More importantly, it scares a lot of these home owners because suddenly they have fewer choices. Even if they can afford the mortgage, they can no longer flip the home for profit if that was their goal. This is where the psychological effect kicks in and really kills consumer spending (which is THE driver of a service-based economy like ours as industrial jobs continue to go abroad.)
Lower and middle class Americans are getting really messed over in this process. Not only are many forced to leave their homes now, but rents have gone up sharply as large numbers of people go back to apartments. Rent at my apartment complex just went up $60 a month!
But wealthy investors are still sitting pretty. I have been house hunting here in Austin lately and a good 50% of the homes I have looked at are either empty or being rented out until sold by the owners.
If some of you caught the big news story about Michigan last fall, you will note huge foreclosure rates in some areas- and a report on a foreclosure auction where several investors bought up 10+ homes each to hold and resell later.
The growing gap between rich and poor in this country is often thought of in terms of jobs- but the real ugly side of this gap is situations like what I have outlined above where a handful of people have turned the key component of the American Dream into a personal get rich quick scheme.
The fallout of the housing market is far from over, and it is important that it see its end so that the speculators take a bath and prices get back to where real people can afford to buy real homes.
Sure the government has to do their "stimulus package" in an election year- but at the end of the day I see this recession as a good thing since it should bring housing prices back within reach for the average American.
Right now there is too much investment money out there in the hands of a very few. In the last 5 years, thanks largely to Sarbanes Oxley implementation costs for public companies and a slowdown in the IPO and tech growth market, a lot of investors have taken public companies private to consolidate them and take them public again later for profit.
This has drastically reduced the availability of stocks for investors- and I think that has been an important driver in real estate speculation. If the availability of one investment tool drops- then the players have to find something else to dabble in.
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