Wonderfully accurate discussion about why we have such a mess in
America with home mortgages, and so why can't the American press
articulate the problem as well as the posters on this discussion
thread?

Also, it was Alan Greenspan who during the bubble period actually
publiclly stated that consumers should be getting ARM loans and not
fixed rate loans. When he said that, I was absolutely stunned.

One item that is missing in this discussion is that the real estate
bubble in the United States started in 1997. That being the Tax
Relief Act of 1997. If you study home prices in many U.S. markets,
you will see prices begin to take off starting in 1998, that was due
to the Tax Relief Act of 1997. And so home prices in the United
States should be at their 1997/1998 levels to be relatively "normal",
and so when you hear the "real estate experts" say a market is cheap,
compare that market's prices to their 1998 prices, and if they are
still above their 1998 prices then that market is still overpriced.
You will often hear folks say it should be at 1999 prices, and this is
how many of those folks pick the year "1999", they know about the Tax
Relief Act of 1997.

IMHO, we need to stop the damage caused by the Tax Relief Act of 1997
ASAP. Most of us are now paying more for our homes because of the Tax
Relief Act of 1997. It has created a generation that buys homes to
resell them within a few years to get the tax free income. I’ve seen
guys buy multiple homes, rent all but one of them, and then they
rotate thru the homes as their principal residence, staying in each
them for 2 years, selling it, taking the profit, and then move into
one of their remaining rentals, sell that after 2 years, and keep the
cycle going by buying more homes and churning thru existing homes.
I’ve seen many people do this, sometimes with just one home at a time,
and other times at the other extreme where they queued up multiple
homes at once. When things fell apart in 2008, I knew one woman who
was maybe 25, probably should have been making $50K or so at a decent
job, but instead she went to work for an Los Angeles mortgage company,
purchased 6 homes in LA... she was so overextended that when she
couldn't rent one of them, the entire mess came crashing down on her,
and that caused at least $1 million in mortgage losses from just one
person who was engaging in this destructive speculation. The same
destructive speculation that was also causing those of us who just
wanted to buy a home to live in to have to pay 2x to 3x what we would
have paid for it if the Tax Relief Act of 1997 never existed.

Below is summary of what the Tax Relief Act of 1997 did.

...."Starting in 1997, what's the best tax break available to Jane and
John Q. Public? If they're homeowners, it's selling their house.

Homeowners already know the many tax breaks that Uncle Sam offers,
most notably mortgage interest and property tax deductions. Well, he
also has good tax news for home sellers: Most of them won't owe the
Internal Revenue Service a single dime.

When you sell your primary residence, you can make up to $250,000 in
profit if you're a single owner, twice that if you're married, and not
owe any capital gains taxes.

"Most people are not going to have a tax obligation unless their gain
is huge," says Bob Trinz, a senior tax analyst at RIA, which provides
tax information and software to tax professionals.

Some sellers are surprised by this break, especially if they've been
in their homes for a while. That's because before May 7, 1997, the
only way you could avoid paying taxes on your home-sale profit was to
use the money to buy another, more-expensive house within two years.
Sellers age 55 or older had one other option. They could take a once-
in-a-lifetime tax exemption of up to $125,000 in profits. And in all
instances, there was tax paperwork (Form 2119) to fill out to show
that you followed the rules.

But when the Taxpayer Relief Act of 1997 became law, the home-sale tax
burden eased for millions of residential taxpayers. The rollover or
once-in-a-lifetime options were replaced with the current per-sale
exclusion amounts.

"There is some logic to this law change because most people under the
prior rules didn't recognize a taxable gain because they rolled it
over into another residence," says Trinz. "The change essentially
makes it easier to dispose of your residence."
Still some requirements to meet

If you used pre-1997 rules for residential sales, don't worry. That
doesn't disqualify you from claiming the exclusion on any residential
sales now. The law change applies to all sales since it took effect.

Another bonus of the new rules: You don't have to buy another home
with your sale proceeds. You can use the money to travel to Europe in
style, buy an RV and drive across the country or get all those
designer shoes you never could afford before.
Even better, there's no limit on the number of times you can use the
home-sale exemption. In most cases, you can make tax-free profits of
$250,000 (or $500,000 depending on your filing status) every time you
sell a home.

Ah, but we are talking taxes here. You did notice that phrase "in most
cases," didn't you? There's always a catch. Before you put a "For
Sale" sign in the yard, you need to make sure your house-sale
situation is one of those "most cases."

First, the property you're selling must be your principal residence.
That means you live in it. This tax break doesn't apply to a house or
other property that you have solely for investment purposes. In those
cases, the usual capital gains rules apply.

You can, however, turn a rental house into your primary residence,
making the sale of it eligible for the exclusion. This is accomplished
when you meet the IRS use and ownership tests: You own and live in the
home for two out of the five years before the sale."...