A Tax Relief Plan to Help Homeowners

If politicians are serious about trying to stabilize home values, they need to understand what they are up against. Home prices moved above trend, and they are now in the process of reverting to the mean. Unfortunately, prices still have another 20% or so to fall just to get back to trend. And remember, prices can go below trend just as they can go above.

Therefore, if the desire is to stabilize home values; access to credit and stemming foreclosures will not be enough. We need to make buying a house more affordable for all Americans, not just those at risk of default. Thus, the dynamics of purchase affordability must be altered in a permanent way to have any hope of stopping mean reversion.

The Plan

If I were crowned king, here's what I would do -- lower residential real estate taxes across the country by funding schools in an alternative way.

Real estate taxes are perhaps one of the most unfair tax burdens that must be shouldered by Americans. It is a substantial tax that is compounding annually at high-single to double-digit rates in many parts of the country. In addition, it makes no allowance for situations of income volatility that can strike families of any income level.

Unfairness aside, this ever-growing fixed-overhead cost factors significantly into the financial and psychological equation of a home purchase. So any measure that will shift this tax burden to the progressive income tax side of the ledger will have a positive effect on housing demand and prices.

The way to approach this problem is to place all primary and secondary school teachers on the federal payroll. The United States has the most respected Armed Forces in the world, I don't see why the same could not be achieved in another discipline. By removing teacher salaries and benefits from the local municipal payrolls, real estate taxes could be decreased by as much as a third in many parts of the country. Now all of a sudden, the starter or dream home that once seemed out of reach because of the taxes is more attainable. Increased demand through greater affordability will help to support prices.

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At the time of publication, Masino was long International Coal Group, but positions can change at any time.

Rich Masino is president of Private Investor Research and editor of The Substantial Investor. He is a private investor who manages a family long/short investment portfolio that holds numerous positions across a variety of asset classes.

Before starting Private Investor Research, Mr. Masino co-founded a telecommunications company that grew to 500,000 customers. He sold all of his interests in the company in 1998.

He holds an MBA in finance from St. John's University.