Real Estate News

How home ownership and small businesses can keep our economy growing

No matter what your party affiliation or personal views on the upcoming presidential election are, one thing most people seem to agree on is that this election cycle feels a bit unhinged. Beyond the normal political rhetoric served up in Tweet-sized bites, there is a fundamental lack of market confidence that either of these choices for leader has a firm grasp on what to do next with the economy. This leads to what economists and real estate analysts like myself generally call “volatility.”

You can think of volatility like an economic tug of war. On one side, you have the forces that tend to slow the economy (adverse tax law changes, immigration policy, banking regulations, business taxes). On the other side, you have the forces that drive the economy (housing growth, consumer spending, job growth, business and equipment capital investments).

When we are in the midst of a potential change in leadership, the candidates tend to focus on the team that’s pulling to grow the economy. We hear platitudes about “growing the middle class” or “bringing companies back to the U.S.” The candidates talk as if they are going to shift resources to the growth side of the tug-of-war. Unfortunately, the economic tug-of-war does not work that way. The economy is a zero-sum game. To give the growth team a foothold and the power to pull harder, the slow growth team has to give a little.

After decades of watching how policy changes actually affect real estate, I’ve determined that the two biggest components of long-term growth correlate to consumer spending and to job growth — not just the number of positions created, but employment plus increased waged. Historically, the strength of the U.S. economy and the value of assets in the economy, including real estate, has been buoyed by the accumulated and distributed wealth of its citizens (and non-citizen foreign investors).

In other words, our economy gets stronger because everyone in the system has “stored-up” value in their home, in their education and skills, in their retirement accounts and savings accounts, all rendered in our reliable currency. These assets, if not over-leveraged with debt, serve as a bulwark against temporary economic shocks. The more citizens that have shelter, education, solid employment and long-term savings, the more stable our economy and lives remain.

So the real answer we should be seeking is how our presidential candidates plan to foster an economic environment that enables all citizens to create their own wealth. It’s a hard question to ask, because people generally don’t like to envision themselves as “wealthy.” In a world of sound bites, people who have a job and a house and lead a “normal” life might assume that creating “wealth” is bad, and that a system that supports that helps only those who can afford yachts and private planes.

Wrong. Very, very wrong.

So what are the major pain points in the economy today?

▪ Small business: Small businesses are the engine of future growth. Apple, Microsoft and hundreds of other billion-dollar companies driving the direction of your 401(k) balance were started in someone’s garage. Big companies don’t start as big companies, they start as small businesses. The first presidential debate paid little tribute to the economic reality that small businesses comprise more than 50 percent of U.S. economic growth and employment. Unfortunately that trend is declining. For the first time in our history, more U.S. small businesses are closing than starting.

A diversified economy starts with an emphasis on small business. This includes tax relief to spur investment in small business, but it also includes changes to banking regulations to make it easier for these businesses to access capital.

It’s exciting when your city announces a new major employer has been secured, but attracting those jobs requires subsidies and concessions that oftentimes cost more than the benefits. A stable economy lays successful small business and entrepreneurship as its foundation. This also fosters demand for real estate in every city, not just the cities who can “win” big business.

▪ Home-ownership deductions: The deduction of interest and real estate taxes has been a major cornerstone to a diversified U.S. economy. This deduction is under attack by policy makers, and is being painted as a subsidy for wealthy people who own homes. A change in this policy could forever alter the economics of owning a home and further erode the “wealth” of our citizens. Our goal should be to expand home ownership and reward activities that help all citizens build equity. If there is any change to this tax policy, it should be to discourage leveraging one’s home to increase this deduction. The goal should be broad-based home equity and tenure for everyone.

▪ 1031 tax-deferred exchange: A well-known section of the IRS Code known as Section 1031 allows people to sell an asset, exchange it in like kind for another asset and defer the tax on the gain. This is not a loophole, this is a construct of the tax code that helps retain accumulated value in an asset by deferring the tax.

Ultimately, the tax gets paid. But in the meantime, the equity goes to work to buy a bigger office building for your local law firm, or to buy a new space for your small business. This portion of the tax code also affects all businesses that own real estate, so major businesses in your 401(k) portfolio are also affected. Entire segments of the real estate industry also serve this market, not to mention your accountant. Changes in this section will have far-reaching negative affects.

▪ Marketability and minority interest discounts: The Treasury department is currently under direction to eliminate the discounts for businesses and real estate transfers of minority interest holders. If you build a small business that includes real estate holdings (like an office building) and bring your five children into the business, currently you can transfer portions of that business tax-free to your kids (or other heirs). This is not the stuff of the yacht-club set. This is estate-tax planning 101 for entrepreneurs in their 60s and 70s who have spent their lives building a business or group of assets to leave to their kids. Taxing this transfer of wealth at full value reduces the accumulated wealth of the entire society.

In this tug-of war between stability and volatility, we need to acknowledge what our leaders will not. The fate of the U.S. economy does not depend on our congress or our president. It depends on us to be ingenious and entrepreneurial.

All we can ask is that our leaders do no harm. Don’t change the rules, and don’t take away the tools we use to make the economy grow.

Anthony M. Graziano is senior managing director for Integra Realty Resources — Miami/Palm Beach, based in Coral Gables. He has been involved in the real estate field since 1986. He can be reached at amgraziano@irr.cpm and www.irr.com

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