Hiding Real Estate in Wall Street's Matress

Posted: Nov 09, 2011 12:01 AM

Taking a page from Wall Street, once again, the administration embarked on a strategy that was guaranteed to stabilize home prices, incentivize purchases, and create a lot of grateful voters. 

Thus was born in 2009-2010 was the $8,000 tax credit for the purchase of a new home. 

The results, in typical Wall Street fashion, could be summarized by the end not appearing to justify the means. 

Before we get into the “how did that work out for you” analysis, it’s time to first look at another misguided Wall Street strategy. 

It’s very popular today to buy stocks simply for their dividends. 

The thinking is that the price of the stocks will be continually supported by those people who are in search of a better yield. 

Let’s face it, from savings accounts and CDs to Treasury notes and T-Bills, the current income streams are almost non-existent.  

Thank you, Mr. Bernanke. 

However, let’s examine the dividend strategy in 2000 when GE was being touted for its 3% yield. 

Over the past 11 years, you would have received some cash-flow, but watched as your principal collapsed from $57 per share all the way down to $16 per share. 

So much for that plan. 

Now, we get the results of the brilliant tax credit policy. 

Unfortunately, unlike the dividend play which can only hurt the individual that participates in it, the $8,000 tax credit program cost you and me, the taxpayers, $26 billion. 

Zillow has released information stating the average price of an American home fell $14,500, and is still declining since the credit program. 

That means that you save $8,000, but lost another $6,500. 

In a few communities it’s not that bad, but in some notable communities like Santa Barbara, California and for my neighbors in Flagstaff, Arizona the losses are between $30,000 to $50,000. 

Once again, another strategy designed to avoid the risk and ravages of the market has been rendered completely ineffective. 

In both instances, tucking your money away in a “Chock full o’Nuts” can and burying it in your backyard would have been a much wiser approach.  

Rarely will you hear someone on Wall Street or in Washington champion that tactic.  

How unfortunate.