Housing and the Recovery….How to Stimulate

December 26 – 2011

Almost all the pundits agree our economy is going nowhere until housing begins to recover.

Unless I am reading the wrong material I see  no solutions being offered beyond the far out idea of bulldozing the supply overhang into a reasonble relationship with demand. And the news gets worse monthly.

I’ve watched the Republican  debates and haven’t heard a practical solution proposed.

So…I am offering the following  idea to any candidate, including President Obama.  

There is probably an ocean of 401K pension money invested in a narrow menu of financial investment choices. These are, mainly mutual funds, offered by investment firms, via employers, to employees.  Plus there is all that money which has been rolled from 401Ks into IRAs .  Some of this  money is exactly what is needed to jump start housing  and the economy.

BUT, the tax rules relating to early withdrawal of 401K money and IRAs  do not allow this money to flow to  the housing market. 

Rules relating to early withdrawal of 401K money and IRAs ( before age 59 1/2 ) stipulate it be taxed as ordinary income plus a 10% penalty for early withdrawal.  That’s a very strong disincentive to remove money from  a 401K or IRA   for practically any purpose. Why  ?? 

Do you suppose  there could be a financial industry lobby protecting this disincentive ?

My question is why can’t 401K/ IRA  funds be withdrawn to purchase a personal residence. Why can’t such an investment in a hard asset inflation fighter  enjoy the same status as investing in financial assets offered by Wall Street.

What I would propose is that the 10% early withdrawal penalty be removed for individuals using this money for  the purchase of a  primary residence.

Then, I would spread the withdrawal amount  (to be  declared as ordinary income) over the life of the mortgage.  Thus, for those purchasing a house to be financed by a 30 year mortgage, the ordinary income declaration would be spread over 30 years.

This is a benefit for the middle class, for  the housing market and absolutely for the economy. For sure, financial industry special  interests would actively oppose it.

Too bad. With housing prices depressed and no bottom in sight, its time we  take back at least some of the money we put in the hands of Wall Street and invest it where it will benefit ordinary people via housing and jobs  on Main Street, Chestnut Street, and Bayberry Lane ! 

Richard, aka Richie, Dick and Smiley from Woodlawn.

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