The home mortgage interest deduction serves to inflate house prices in high income areas without significantly promoting home ownership. Further, it costs the federal government $100,000,000,000 a year, which makes it a target of deficit hawks in Congress. The deduction has widespread support among taxpayers despite the fact only a select few gain any benefit from it. This support makes it a sacred cow in Washington, but it’s starting to look increasingly likely that some compromise in the fiscal cliff debate will curb this benefit. If it does, the so-called housing recovery in high income areas like Coastal California will be stopped dead in its tracks.
Long-treasured mortgage interest deduction may face changes
‘Fiscal cliff’ debate has put home mortgage interest deduction on the table. Critics contend it benefits the wealthy much more than the middle class.
By Jim Puzzanghera, Los Angeles Times — December 10, 2012, 5:00 a.m.
… The home mortgage interest deduction is one of the most cherished in the U.S. tax code. It’s also one of the most expensive, estimated to cost the federal government $100 billion this fiscal year.For that reason, the deduction taken on income tax returns is expected to be on the table in Washington’s search for more money to reduce the budget deficit and resolve the fiscal cliff.
$100 billion is a lot of money. That makes curbing this tax break a tempting target. Further, since the high wage earners who benefit from the deduction are overwhelmingly Republican, the Democrats don’t fear the repercussions of going after this group.
But the specter of scaling back the tax break, particularly with the housing market still trying to recover from the collapse of the subprime mortgage bubble, is raising alarms among homeowners, realtors and home builders.
Those special interests that benefit the most are the ones crying the loudest about its potential reduction.
It’s also sparking a debate about the true effect of the deduction, which critics argue benefits the wealthy much more than the middle class. They contend that the break hurts first-time home buyers by driving up house prices and that other countries that have no such deduction still have high homeownership rates.
Every one of those points of criticism is true.
When people itemize to take the home mortgage interest deduction, they give up the standard deduction. For the majority of Americans, this removes any advantage. It does not help first-time homebuyers or families making less than $100,000 per year. Further, many other countries that don’t have this deduction have home ownership rates equal to or exceeding the rate here in America.
“If we really care about homeownership, then the deduction is just the absolute wrong way to go,” said Dennis Ventry, a UC Davis law professor who has studied its effect.
There is agreement that reducing the interest deduction — no one is talking about eliminating it — would cause prices to drop as buyers scale back the amount they could afford to spend.
My monthly reports on the cost of ownership reflect that monthly payment affordability is relatively high as compared to historic norms. Affordability plus a lack of inventory is what’s driving the recent price rally. If the deduction were reduced or eliminated, the cost of ownership would rise, and affordability would crumble. Declining affordability will at first cause transaction volumes to plummet, and prices would soon follow.
The concerns are even greater in Southern California and other high-priced regions where homeowners benefit more from the deduction because their mortgages are larger.
“A lot of people buy rather than rent simply because, after the mortgage deduction, it’s more affordable,” said Syd Leibovitch, president of Rodeo Realty in Beverly Hills. “To limit it or take it away, I think you’re going to be surprised at the shocking effect it has on the real estate market.”
Let’s be realistic. There are two major policy changes being considered that would flatten the California housing market. Curbing the home mortgage interest deduction is one of them. Lowing the conforming limit on FHA and GSE loans is another.
President Obama’s deficit commission proposed lowering the limit on mortgage principal eligible for a deduction to $500,000 from the current $1 million, removing any break for interest on a second home and turning the deduction into a tax credit capped at 12% of interest paid.
The likely change may take that form, or it may be an overall cap on itemized deductions of $25,000. Either one would effectively reduce the value of the home mortgage interest deduction by about 50%.
A tax credit would allow homeowners who don’t itemize deductions to subtract the interest from the taxes they owe. But while more taxpayers could take advantage of the benefit, a cap would mean those with large mortgages on expensive homes couldn’t get a credit for all the interest they pay.
Other proposals have called for similar changes.
Supporters of the tax break worry that proposed changes would not only push down prices but also spook potential buyers.
Yes, it will do both of those things.
…The mortgage interest deduction is one of the most popular tax breaks. In a nationwide poll released this week by Quinnipiac University, two-thirds of respondents said they opposed eliminating it.
I find it shocking that so many people who don’t enjoy the subsidy still support it. Only about a third of taxpayers claim it.
… President Ronald Reagan said he wanted to keep it because it symbolized the American dream.
“For people of my generation, the baby boomers, from the time we were kids we were told by the federal government and its policies to build our nest eggs around housing,” said Gerald M. Howard, chief executive of the National Assn. of Home Builders, one of the strongest supporters of the deduction.
“Now our elected officials are going to tell us in the name of tax simplification they’re going to further reduce the value of our housing by 10% to 15% right as we’re about to retire?” Howard said. “When you make that kind of case to lawmakers, you should see their eyes widen.”
Considering the values of their homes already declined 30% due to the collapse of the massive credit bubble and its associated housing bubble, the fears of a 10% to 15% reduction in value is fear mongering. If the deduction were curbed, it would probably reduce prices back near the recent bottom.
But a lot of that concern is based on the misconception that the deduction is a boon for average Americans, critics said.
“This is a sacred cow to the real estate industry, and it’s almost an entitlement to homeowners,” said Anthony Sanders, a real estate finance professor at George Mason University. “They could cut it in half and it would not harm a lot of middle-income households.”
Cutting the value of the mortgage interest deduction in half looks like it may happen.
Part of the reason I think Congress will do this is because the areas which would be most effected are the areas currently enjoying the most robust recoveries. In other words, if Coastal California is hit, it won’t be as damaging to the national housing market as a change in policy that might impact Las Vegas or Phoenix.
An analysis by Congress’ Joint Committee on Taxation found that 78% of the $83 billion in mortgage interest deductions in 2010 went to households with income of more than $100,000. Households with incomes of more than $200,000 got 35% of the benefit.
The upper-middle class is the only segment of the population that benefits from the deduction. The truly rich often own their homes with no debt, so this won’t impact them near as much as it will high wage earners in places like Orange County.
… In addition, people in high-cost areas benefit the most from the deduction. A 2001 study found that three metropolitan areas — Los Angeles, San Francisco and New York — combined to receive more than 75% of the deduction’s benefit.
Clearly any change to the home mortgage interest deduction will have a dramatic and negative effect on the Coastal California housing market. However, is that really a bad thing? Inflated house prices serve no one other than the banks who enjoy larger interest payments due to the subsidy. Reducing the home mortgage interest deduction may temporarily derail the housing recovery here, but it will have little or no impact in the most beaten down markets where very few homeowners take advantage. With the enormous pressures lawmakers are under to increase federal tax revenues, some form of reduced benefit from the home mortgage interest deduction is looking much more likely.
Lots of free money and plenty of squatting
The former owners of today’s featured REO bought back in 1993. Although I don’t have their original loan balance, suffice to say it was less than the $273,000 purchase price. By late 2005 they increased their mortgage to $610,000 thus extracting more than $337,000 in mortgage equity withdrawal. The gamed the system with three different loan modifications to squeeze an extra three years of squatting out of the deal.
Foreclosure Record
Recording Date: 12/29/2010
Document Type: Notice of Default
Foreclosure Record
Recording Date: 09/10/2010
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 08/18/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/05/2010
Document Type: Notice of Default
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Proprietary OC Housing News home purchase analysis
1445 DIXON Pl Placentia, CA 92870
$555,000 …….. Asking Price
$273,000 ………. Purchase Price
4/6/1993 ………. Purchase Date
$282,000 ………. Gross Gain (Loss)
($44,400) ………… Commissions and Costs at 8%
============================================
$237,600 ………. Net Gain (Loss)
============================================
103.3% ………. Gross Percent Change
87.0% ………. Net Percent Change
3.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$555,000 …….. Asking Price
$111,000 ………… 20% Down Conventional
3.36% …………. Mortgage Interest Rate
30 ……………… Number of Years
$444,000 …….. Mortgage
$99,831 ………. Income Requirement
$1,959 ………… Monthly Mortgage Payment
$481 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$139 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,579 ………. Monthly Cash Outlays
($302) ………. Tax Savings
($716) ………. Equity Hidden in Payment
$115 ………….. Lost Income to Down Payment
$159 ………….. Maintenance and Replacement Reserves
============================================
$1,835 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,050 ………… Furnishing and Move In at 1% + $1,500
$7,050 ………… Closing Costs at 1% + $1,500
$4,440 ………… Interest Points
$111,000 ………… Down Payment
============================================
$129,540 ………. Total Cash Costs
$28,100 ………. Emergency Cash Reserves
============================================
$157,640 ………. Total Savings Needed
The property above is available for sale on the MLS.
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29 Responses to “Home mortgage interest deduction may fall off the fiscal cliff”
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Studies like this are misleading. Just like nobody dreams of a career selling insurance, nobody sets out to be a renter for life.
Trulia: 93% of Young Renters Plan to Become Owners
Consumers are becoming more positive toward the idea of homeownership as home prices rise and the threat of delinquencies and foreclosures subside, Trulia reported Wednesday.
Confidence in future ownership is especially prevalent among young renters. According to Trulia’s American Dream survey, 93 percent of renters between the ages of 18 and 34 plan to purchase a home some day.
For 31 percent of renters, that “some day” is actually within the next two years, an increase from 28 percent in May 2012 and 22 percent in January 2011. In addition, 27 percent of consumers feel more positive about homeownership compared to six months ago.
However, a downward trend was seen among consumers who say homeownership is part of their own personal American dream. Seventy-two percent said it is part of their own dream, a decrease from February 2009 and January 2010, when 76 percent and 77 percent, respectively, said homeownership was part of their dream.
Also, plans to own was not seen among older renters, with only 39 percent in the 55-plus age group stating they plan to buy, while 75 percent of those between ages 35 and 44 plan to buy.
Even though nearly all renters in the Millennials category (those between 18 and 34) say they plan to buy, the age group tended to be less optimistic about future home prices compared to older age groups.
When asked about the housing market in 2013, 37 percent of Millennials said prices will rise, compared to 55 percent for the 55-plus age group and 49 percent for those between ages 45 and 54, according to Trulia.
Millennials though were more likely to believe mortgage rates would continue to decline next year, with 20 percent stating rates will go down, compared to 12 percent among 35- to 44-year-olds and 13 percent for the 55-plus group.
“Millennials have been shaken, not scarred by the housing bust,” said Jed Kolko, Trulia’s chief economist. “Nearly all of them want to own a home someday, if they’re not homeowners already. But many of them think today’s low prices and low mortgage rates will last. They may be in for sticker shock if the cost of homeownership has returned to normal levels by the time they’re ready to buy.”
Rising prices are also encouraging homeowners to consider selling next year, which could lead to an increase in inventory, Trulia explained. Among homeowners, 22 percent say they’re at least somewhat likely to sell their home next year.
“2013 could be the year that inventory turns around, just as 2012 was the year that prices started recovering,” Kolko added. “Homebuyers need inventory to choose from, and with fewer foreclosures on the market, new inventory will come from new construction or homeowners wanting to sell. Rising prices will bring out more sellers, especially if price increases lift them back above water.”
FOMC Ties Fed Funds Rate to Unemployment
Despite recent improvements in the unemployment rate and housing, the Federal Open Market Committee (FOMC) voted Wednesday to continue its program of purchasing $40 million a month of mortgage backed securities and to maintain the target Fed Funds rate at 0 to 0.25 percent. The FOMC vote was 11-1 with only Richmond Fed President Jeffery M. Lacker dissenting.
“This exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal,” the FOMC said in its post-meeting statement. “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
According to the Federal Reserve’s own projections, issued two hours after the statement, those targets will not be met until 2015, a forecast unchanged from the projections issued in September.
Those uber-gifted Ivy-league PHD (LOL) genius’s really painted themselves into a corner this time.
Govt wants/NEEDS macro to improve + the markets want/NEED more QE/stimulus to continue their upward traj’s, yet if employment improves as a result of more QE/stimulus, there will be less QE/stimulus.
Brilliant!!!
Is the end of the road really high inflation? How do you plan against stupid economic decisions. It was better let everything crash in 2008 and would have been recovering by now.
Hasn’t ”really high inflation” already happened over decades via the issuance of bogus credit?
Government officials and lenders are getting increasingly desperate to get squatters to modify their loans and at least pay something to the banks.
Government Delivers Desperate Message of Hope to At-Risk Borrowers
Treasury, HUD and the Ad Council, are reaching out to struggling homeowners with a message of hope.
On Wednesday, the groups announced the launch of the third and final phase of their Foreclosure Prevention Assistance Public Service Advertising (PSA) Campaign. With data showing nearly one in 14 homeowners knows what it means to be behind on a mortgage payment, the campaign aims to identify those struggling homeowners and educate them about the free resources available to help prevent foreclosure.
“While communities across the country are beginning to recover from an unprecedented housing crisis, too many families are still struggling with their mortgage payments and are unsure of where to turn for help,” said Mary Miller, Treasury undersecretary for domestic finance. “Millions of homeowners have gotten help to avoid foreclosure since 2009. We want to make sure struggling homeowners know today that there are free government resources available to help homeowners avoid foreclosure.”
I think that’s why you’ll see a push for Federal Reserve “modification” program. It’s will basically just be principal reduction.
Only one thing is going to happen: Can Kicking. Congress isnt capable of anything else.
It’s hard to argue with that. They will be joined by the banks who are experts at can-kicking.
A lot of people don’t know how of figure out the mortgage tax deduction. The law is going to get implemented and then a year later when they file their taxes they will be surprised. The affect of this might take some time.
That’s true, particularly if they implement some overriding cap on all deductions. People will be comforted that the home mortgage interest deduction was saved, but when they do their taxes and see the impact of the cap, that’s when they will realize what Congress did — about 18 months later…
The vast majority of Americans haven’t a clue about how they’re taxed nor how any tax changes may affect them. The tax code is just too complicated.
The complicated nature of the tax code makes it easier for politicians to make politically unpopular decisions without people realizing what they did.
Regarding the sector, take a look at the 3 year results of…. >$20trillion in freshly minted debt flooding macro + another >$2trillion targeting housing….
http://advisorperspectives.com/dshort/charts/guest/2012/LR-Home-TotalActivityIndex-112812.PNG
The next leg down will be brutal
Homebuilder stocks will be very volatile over the next few years. The entire industry is supported by a series of government props and asset disposition strategies of lenders and hedge funds. If cutting the government props reduces demand or if the banks or the hedge funds liquidate in an erratic manner, the supply and demand imbalance that builders currently enjoy could evaporate overnight.
How many legs down should we expect? Seems like you’ve been predicting this for many years now.
… every leg down is brutal, no?
Have a look for yourself…….since the 09 bounce, even your fav C/S index denotes 3 legs down.
http://confoundedinterest.files.wordpress.com/2012/12/hp112712.gif?w=736
Looks like I’ve been spot-on.
Estancia sed mi amigo
I hope the MID is limited dramatically and that it has an effect on Irvine house prices. When we were spending $40k on mortgage interest annually, I supported MID changes, but wanted them phased-in, because it would have had such a dramatic effect on our housing costs. Now that we’ve lowered our annual mortgage interest to < $13k, I'm more open to a one-time immediate change.
A big cut would serve you well. Now that you won’t get such a large benefit, a cut won’t hurt you much. Plus, if it drives down prices on the move up home you want, it will help you make that purchase at a lower price point.
I hope the MID goes away. Yet another example of government meddling in what should be a free market.
I’ve got to believe that the NAR/CAR industrial complex is going to fight MID removal to the death.
The MID has been the kernel of so much NAR/CAR propaganda that I think even many Realtors truly don’t understand that the MID only generally benefits high income/high mortgage individuals.
Unlikely NAR/CAR pro MID bedfellows may be local governments, who stand to lose plenty of property tax revenue once prices inevitably drop and property values are reassessed.
Add to the mix CPA’s / tax preparers and other assorted paper pushers who benefit from our insanely complex tax code. (No MID would mean 1 less schedule to fill out).
If they change the tax code to cap deductions, this will add a further layer of complexity that will keep tax preparers happy. It will be like the AMT that requires a preparer to go through the motions both ways to check which one applies.
Very true.
The MID is becoming more like Lernaean Hydra in Greek Mythology.
You cut off one head and another grows back.
I wonder if anyone in Congress will rise to the level of Heracles?
Larry, I’m not sure that I agree that this will hit Republicans harder. The higher-priced coastal states are dominated by Democratic voters. All of the red states in the middle of the country have lower prices. I think the general ignorance of the masses on this topic might lead to unintended consequences at the polls.
Yeap, this is the greatest argument that the Right should acquiesce and give Obama his many tax increase measures on the $250k+ crowd – these professionals live in the North East, LA & SF and voted for Obama overwhelmingly. The intransigent congressmen most opposed to Obama’s tax increases, are from districts that include a fractional percentage of $250k+ households.
People working in the medical profession with annual household income above $250K dislike Obama’s tax policy and overwhelmingly voted republicans. I’m sure this is true as well here in California.
I know two doctors and they’re both very conservative and dislike ObamaCare. So yes, there is that. But I think I’ve read that Obama won the $250k+ households by a nearly 20 point margin.
You’re not cynical enough. This is printed in the LA Times, an organ of the Democratic Party. The point is to rally public opinion behind the President’s proposal to crank the tax rates up on high earners — by threatening them with eliminating the HMID instead. You’ll recall raising revenue by “closing loopholes” and reducing deducations was part of Romney’s proposal, and the latest from the Republican House. What the Time is doing is saying — look! see what might be at stake if Obama doesn’t win this one? Write! Donate! Thrash and scream!
The exact reasons you quote, that this most benefits urban New York, Washington DC, the Bay Area, and LA — exactly where wealthy Democratic Obama donors live — is why it won’t happen. What the Democrats want is the tax code of the 50s back, with sky-high marginal rates at the top, and a huge forest of loopholes, incentives, and deductions. Because that gives government the maximum power to influence economic decisions — by tweaking this or that deduction — and that’s always what Democrats want: more money and more importantly more power for their lawyers in DC.
This is not unlike the President floating Susan Rice for SoS. That was never serious. The point is to soften the opposition up for the real candidate, e.g. John Kerry. If Kerry was proposed first, there would have been serious opposition. But if Rice is pushed first, and the opposition freaks out, until the President finally “regretfully” withdraws — he can count on the opposition quietly agreeing to his second choice, in relief.
These people are not stupid. They play hardball Chicago politics, and just as in real estate, your opening bid is not generally your best and final offer. In Chicago you often open with a completely outrageous offer, and you act crazy about it, like a gangbanger amped up on crack, to rattle your opposition. Jesus! He might actually take us over the cliff / let us default / et cetera…!
Then you calm down a little and offer something only unreasonable. Works great when conservatives are on the other side, because they usually don’t understand how to play chicken like they do in the hood. They tend to take words at face value, assume people mean just what they say, and be fraidy cats about craziness and the unpredictable future besides. Those are, after all, conservative values.
Taking Romney’s word at face value was your biggest mistake. Luckily, he was “the most electable candidate”.
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