One of the most popular home renovation shows has been “Flip Or Flop,” starring an Orange County couple that buys ratty houses, renovates them, then sells – usually but not always – at a profit. The pair, who eventually split, developed a loyal following of viewers. But in the eyes of some California lawmakers, they’re predatory speculators who need to be shut down.
Naturally there’s legislation in Sacramento for this, Assembly Bill 1771, also known as the California Housing Speculation Act. It would impose a 25% levy on top of the capital gains tax on homes sold within three years of the initial purchase. The rate falls until there is no additional tax after seven years. Anyone who would buy a property, improve it, then make a profit off its sale after short-term ownership would be hit with the tax.
“If somebody’s trying to go in there, fix up a fixer-upper and then sell it for record profits, that is distorting the market because somebody else could have gone in there, done the same and kept the home,” says Assemblyman Chris Ward, the San Diego Democrat who introduced the bill.
The legislation is built on the premise that “individual homebuyers find it increasingly difficult to obtain a home because cash-rich investor-buyers have added additional demand for housing … causing home prices to skyrocket.”
“Housing speculation makes it nearly impossible for working Californians to buy a home,” Ward tweeted recently. “#AB1771 is about leveling the playing field so everyone can achieve a place to call home, and not rewarding investors looking to make a quick buck.”
Speculators have been stigmatized in our culture. They’re often blamed for rising gasoline prices, stock market bubbles, even the cost of feeding a family, and looked down on because they don’t bake bread or build cars, nor do they provide services. Tom Clark, attorney general for President Harry Truman, complained in 1947 that speculators were “profiteering in human misery.”
“If their detractors are to be believed,” John Tamny, editor of RealClearMarkets has said, “they’re a destabilizing force in the economy.”
It’s possible, however, that they’re not ruthless monsters we’re supposed to believe they are. According to Investopedia, speculators simply “provide the markets with liquidity, aid in price discovery, and take on risk that other market participants wish to unload.” They also ensure that commodity markets are efficient “and stave off shortages of goods by bidding them up when prices fall and financing the middlemen who link supply chains.”
In the housing market, speculators are often responsible for upgrading neighborhoods. According to economic researchers at CoreLogic, a data, analytics, and business intelligence company based in Irvine, flippers might “improve dilapidated or distressed segments of the housing stock that may otherwise be unsuitable for most first-time homebuyers,” and in doing so actually “provide more supply for such buyers.”
There are community advantages to flipping, as well. Returning previously vacant homes to the tax rolls and increasing the value of nearby properties are positive effects, as is the employment of the local contractors who transform shabby properties into homes with appeal, and the reduction in crime associated with unoccupied housing.
The resurgence of Old Town Pasadena along Colorado Boulevard is a story of the indispensability of speculators.
“Throughout the 1970s and much of the 1980s,” says Tamny, it “was a dangerous place,” cheapened by “dive bars, seedy stores selling X-rated goods, and pawn shops.” But what was once “run down, dirty, and largely bereft of foot traffic is now teeming with shoppers,” having been “revitalized thanks to land and business speculators who were unwilling to be intimidated by the present, and who instead saw potential that few others did.” The entire city benefits today “from their intrepid nature.”
Speculators certainly take risks; but with that risk comes local economic progress. It “propels economies and motivates entrepreneurs to innovate,” says Allison Schrager, a senior fellow at the Manhattan Institute. “For better and worse,” risk “is at the heart of economic growth, and successfully apportioning it – not avoiding it – is the key to prosperity.”
Speculation is also a source “knowledge that no amount of market research could ever match,” says Tamny. Without it, “nearly every venture would amount to flying blind,” and “the root of all economic activity” would wither.
Granted, not all flippers are like that genial couple on the TV screen. But neither are they the ruthless sharks they’re made out to be.