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February 7, 1997
Another "relief rally" has taken long term rates down a notch: T-bonds to 6.65% and mortgages to around 8.00%. It's not a big drop, and there is not likely to be another one soon, but these are the lowest rates since mid-December.
A relief rally is a market improvement triggered by ordinary to poor news which wasn't as bad as it could have been. This morning, the Labor Department announced that January payrolls surged by 271,000 jobs. That's good news in that payrolls did not grow by the 400,000 in some forecasts, but not so hot if you were hoping the economy would slow down, and take mortgage rates 'way down into the sevens.
The President released his budget yesterday, and it contained a lot of authentic good news. It is heavier with fees and lighter with spending cuts than some would prefer, but would reach no-smoke balance in five years, and would get Medicare and Medicaid under some reasonable control.
And of special interest to homeowners, the capital gains tax exemption for sales of primary residences may actually pass. Last year I warned that no measure as fair and wise as this could ever pass through Congress, and there is more to that cautionary view than cynicism.
Taxes on home sales are not the only capital gains issue before Congress. Despite the benefit to such a huge majority of the American people, there is an even bigger capital gains issue: taxes on investments in the financial markets.
Today, nearly every mutual fund investor has a huge capital gains tax liability (except those who thought Japan was a good bet, or bought AOL for Christmas). This liability is far more likely to have to be paid one day than capital gains taxes on homes. Indeed, the rarity of payment on home sales is the best argument for eliminating the tax: ending it won't cost the Treasury any money. (If that's so, why have it in the first place? "The rich must pay!")
Beating the tax is annoying, but possible: keep records; stay put sometime when you'd rather move, or buy when you're not ready, or "roll over" to a more expensive home than you need. And, there are two complete escapes already in existing law: the one-time exemption, and death.
In the relief rally of all time, when you die, your capital gains go with you.
As a tax avoidance scheme, death works okay with houses (you've got to live someplace) but not so well with stocks, bonds, and mutual funds. Something like half of the American people are counting on selling their financial investments pre-death in order to be able to live until then.
If any capital gains taxes are going to be cut, there is a new and broad constituency that would rather exempt stocks and bonds than houses.
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