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September 13, 2009 – Comments (28)

I really agree with the position that the financial sector got enormous political favortism, in getting deregulation, and then in getting bailed out.  Good post at Big Picture.

The thing about laws and regulation, they all have an effect on behaviour.  Too many regulations these days are encouraging everyone to behave like grasshoppers rather then ants.

I have previously written how I think mortgages ought to be regulated, this business of allowing enormously more money to be borrowed just because rates are low is insane and we are dealing with the fall out from that insanity.

When I worked in banking, wow, I got my first job there 30 years ago, there was still common sense applied to loans.  For example, my loan officer mentor, who was nearing retirement age at that time, discussed the reasons for giving or declining a loan.  I always remember this one where the guy wanted to borrow for xmas gifts and pay it back over 18 months.  This loans officer said the maximum term for a loan for xmas that she would give was 3 months.  He wanted to take his girlfriend on a trip.  Now it is much more about qualifying criteria based on numbers, yet character and personal money management characteristics are very important.  Most people that wouldn't even thing about borrowing money as the man in the example probably also manage their finances better and people who make decisions like the man in the example are more likely get themselves swamped in debt. 

I have also previously spoken against the silly American policy of allowing mortgage interest to be deducted.  It encourages people to stay in debt.  But, a country or a household is simply stronger without debt, so by regulation the US makes itself finanically weaker.

28 Comments – Post Your Own

#1) On September 13, 2009 at 1:51 PM, awallejr (81.36) wrote:

Well I disagree regarding the "tax deduction" issue.  The purpose for it is to encourage home ownership versus renting.  It's also the only real deduction an average family has, that and deducting state/local taxes.

I do, however, agree with your very first sentence.

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#2) On September 13, 2009 at 4:00 PM, dwot (72.69) wrote:

awalleir, I would disagree that it that it has met it purpose.  There are far more positive ways to help people become homeowners.

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#3) On September 13, 2009 at 4:08 PM, starbucks4ever (98.50) wrote:

Agree. And the best way to do that is to withdraw the deduction to remove the incentive to bid up the house prices. A house is affordable when it's cheap, not when you get some super-low interest on a 100-year mortgage.

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#4) On September 13, 2009 at 5:05 PM, awallejr (81.36) wrote:

Why doesn't it meet its purpose?  People would have to borrow no matter what to buy a house.  Pretty rare to find an all cash buyer.  And that deduction makes a comparison to home ownership cost versus renting more economical.  The "theory" in encouraging home ownership versus renting is that  home owners will take stronger interest in their community because of the commitment.  I think encouraging home ownership is the greatest thing. 

Plus what other "positive" ways to help are there?  Although I can think of another program in NYC where buildings are rehabilitated through a governmental subsidy, which subsidy doesn't get repaid unless the property is sold (phasing out over time the longer the person resides in it, 10years and some at 25 years generally depending upon the program).  But that too is an economic subsidy supported by governmental funds and hence tax dollars.  But I am interested in hearing your suggestions.

And if the deduction was the incentive for bidding up prices Zloj, then why are prices declining while the deduction is still allowed? I suspect job losses, manipulated appraisals and reckless lending (not factoring in a person's ability to repay over the life of the loan, using snakeoil sales jargon in pushing risky loans, etc) did that.

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#5) On September 13, 2009 at 5:19 PM, starbucks4ever (98.50) wrote:

Prices are growing according to the latest Case-Schiller numbers, and they never declined enough in the first place. The index registered a decline in 2007-8 because of foreclosed properties that got in the mix. Now, since foreclosed properties usually sell for cash, the firesale prices of foreclosures just show you the correct price level in the absence of the mortgage decuction. Now, if they gave the deduction to you only, then you'd found your purchasing power enhanced, but since it is not the case, the deduction just helps you afford a hose that has become overpriced BECAUSE of the deduction.

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#6) On September 13, 2009 at 5:31 PM, starbucks4ever (98.50) wrote:

Actually, things are even worse than that. Because mortgage deduction on an entry-level property is not much greater than the default stardard deduction, it does little for the typical first-time buyer. The deduction really begins to kick in when you start looking at the luxury segment. It was one major reason behind the McMansion epidemic.

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#7) On September 13, 2009 at 6:02 PM, awallejr (81.36) wrote:

That is incorrect regarding foreclosed properties selling for cash.  Most go back to the lender because what is owed them is their built in tender offer which no one would want to match or beat (especially since the amounts owed would be greater than market prices).  Now a lender may accept a lower bid, but that is the lender's choice.  The income tax deduction is totally irrelevant at that point.

As for the actual dollar advantage of itemized versus standard, the amount borrowed and one's income bracket will obviously apply.  The deduction really kicks in for your middle classes since, helping them get over the initial threshold requirement, now they can itemize other expenses too such as state and local taxes, etc.  

Basically the deduction is designed to make monthly cost to ownership more competitive with simple renting.

 

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#8) On September 13, 2009 at 6:09 PM, AbstractMotion (55.06) wrote:

Awallejr, the problem with our current economic policy as a nation is that it makes debt the best option to buy everything.  If you look at it from a housing standpoint this has resulted in bigger mortages and longer terms.  You actually do see it with smaller purchases too, credit card debt functions in much the same way over shorter periods of time with much much higher interest rates.  It's not uncommon these days for people to $10k in credit card debt.  Likewise for at least the past decade we've seen interest rates kept very very low for fixed income savings vehicles.  This all adds together to encourage debt driven consumerism, which ultimately costs the consumer and arguably the government more money then actually having people save and buy what they can afford.  Keep in mind banks essentially lose money holding deposits if they aren't constantly loaning more out at higher interest rates, that's the real trick to all this.  

If people bought things with cash only groups involved in the manufacturing, distrobution and sale make a profit.  But if you buy it on credit well then the bank is getting a nice piece that transaction too.  Ultimately though it leads to a system where consumers save less and end up ultimately spending more for most of what they purchase due to interest.

 

In general I don't know that the federal government should be encouraging home ownership.  The pros and cons of owning a house compared to renting one alone should really influence that situation.  Even if you can incentives community participation with money, is it really the right way to do it?  I'd imagine a lot of people living in some of the worst areas of the country are stuck there out of necessity to begin with.  Given that they'll be there for a while wouldn't that in theory give them the same incentives to improve a given community?  I'm not here to say people do or don't, but just that generally where it's needed home ownership isn't going to help and perhaps the theory behind it is flawed.  It's more likely that these laws are simply there to benefit certain industries that have lobbied hard to make their products and services more appealing.  It's textbook crony capitalism being facilitated by lawmakers.

 

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#9) On September 13, 2009 at 6:58 PM, awallejr (81.36) wrote:

There are 3 things people need.  Food on their table, clothes on their back, roof over their head. You can rent or you can own.  If you want to hear the passionate side to it I urge watching the movie "It's a Wonderful Life" especially the scenes between George Bailey and Mr. Potter.

I can rant on how the change of Glass-Steagall Act in 1999 started the fire we are trying to exptinguish now, but that is for another thread.  We had a very healthy market in the 1990s and turned it into a reckless bubble eventually to be burst by Bernanke (people do tend to forget he was pushing up interest rates hard until the crash). So now it will take time to abosorb the excesses.  But that doesn't dispute the underlying thesis that home ownership is a preferred agenda to encourage for families long term.

I've discussed a couple helpful methods, such as the tax deduction incentive, and governmental subsidies.  Aside from "wait until you have the cash" (which would probably mean never), I haven't heard of any others.

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#10) On September 13, 2009 at 7:10 PM, starbucks4ever (98.50) wrote:

 awallejr ,

You know what happens when you try to walk toward the horizon? The horizon just moves farther away from you as you approach it. When they subsidize your mortgage interest, the price just shoots up just enough to erase any perceived advantage that you see. You don't think it's possible to buy for cash only because they kept throwing this deduction at the buyers so prices never adjusted downward.

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#11) On September 13, 2009 at 7:12 PM, alexxlea (58.49) wrote:

Americans have housing all backwards, if you ask me. Not everyone needs a home. In other countries, including those I come from there is the mentality that a house is something that a family invests in, not an individual, and it's a big purchase, not one that requires 0-20% down. There are many benefits as to why buying things with cash makes everything better. People are forced to get financially responsible for themselves if they want to buy homes, homes are priced more affordably because they are not seen as often as investments that can be funded by previous purchases of homes and other such nonsense, and so on. Also, what abstract said about who stands to profit from a culture of debt. Thought myself I am not Muslim I am a through and through opponent of the concept of debt and fractional reserve lending in a finite world.

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#12) On September 13, 2009 at 7:27 PM, awallejr (81.36) wrote:

Zloj the deduction really has nothing to do with what has happened.  You really think houses in NYC, for example, will drop so low so most people can pay all cash if you took it away?  You even think that was the case say in the 1950s for example?  In NYC people put $50 down on a $3,500 home and financed the rest. 

And yeah, owning homes by single people would make less sense, but then there are Coops and Condos for them.

What a bunch of Mr. Potters in this thread.  I need another George Bailey in here.

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#13) On September 13, 2009 at 7:57 PM, starbucks4ever (98.50) wrote:

"You really think houses in NYC, for example, will drop so low so most people can pay all cash if you took it away? "

Yes, I think houses in NYC would then drop exactly in proportion. Right now they are affordable to, I believe, something like 22% of buyers, so it will be the same 22% after the deduction is taken away. The same goes for coops and condos. The economics of buying and selling is the same for all classes of housing.

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#14) On September 13, 2009 at 9:49 PM, fredmahnke (< 20) wrote:

George Bailey here.

The tax deduction didn't cause the bubble.  Hasn't it been here forever ??  I've owned a three house somertimes two at once.  I never had a debt problem even when I lost a job.  But I was conservative - 20% down fixed rate, generally fifteen years,

I never borrowered on my equity much and only to stem a short-term funding issue.  Allowed me to afford nice places to raise my kids I could have never saved enough cash for, I really don';t see the problem as the bubble was caused by more narrowly defined  programs to subsidize housing for certain classes of citizens Reckless lending, securitization mirages and greed,  

Anyway it doesn;t matter much, because its not going away anytime soon.

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#15) On September 13, 2009 at 10:34 PM, awallejr (81.36) wrote:

"Yes, I think houses in NYC would then drop exactly in proportion."

That wasn't what I asked.  I asked if you thought houses in NYC would drop to levels where people can pay all cash should they ever take the deduction away.  While you might be able to buy all cash houses in Michigan, the average family is not doing so in NYC, nor will they in the future, with or without the deduction. Location and supply/demand controls; the tax deduction is not the driving cause. And where you got your 22% figure from I have no idea.

And I agree fred, the deduction isn't going away anytime soon.  Too many homeowner's vote. 

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#16) On September 13, 2009 at 10:59 PM, starbucks4ever (98.50) wrote:

It's not a fair question to ask because even if you take away the deduction, there will still be mortgages available, and as long as we don't stop bankers from offering mortgages entirely, people will never be able to pay all cash. So if we take away the deduction, prices will only drop to a point where people can buy houses without the deduction :) But you are right: practically speaking, there's not a slightest chance of that happening.

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#17) On September 13, 2009 at 11:12 PM, awallejr (81.36) wrote:

"It's not a fair question to ask because even if you take away the deduction, there will still be mortgages available,"

Exactly.  Mortgages control far more than the deduction.  But Dwot said this: "It encourages people to stay in debt.  But, a country or a household is simply stronger without debt, so by regulation the US makes itself finanically weaker." Since most people will never be able to pay all cash or even a good chunk of cash for a home without the need of a mortgage, seems she is suggesting people should just continue renting instead. Sorry, but that really does sound like Mr. Potter to George Bailey.

Now reckless HELOC borrowing (equity loans) is another story.

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#18) On September 13, 2009 at 11:28 PM, starbucks4ever (98.50) wrote:

I don't think it's a fair description of dwot's message. She must have meant that the rules of the game need to change. But as long as mortgages are available, sure enough, an individual has no choice but to take one becuase their availability means prices will be 3-4 times higher than they would be otherwise. This one is a no-brainer. Just don't tell me that banks are doing me a favor by offering me these super-low rates, and then it will turn out that we really have nothing to argue about. 

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#19) On September 14, 2009 at 2:12 AM, awallejr (81.36) wrote:

I am not talking about "teaser rates."  I referred to them in my "snakeoil sales jargon" comment.  And mortgages are available because it is the only realistic way a family can by a home (unless you think it only costs 20 bucks to build).  But Dwot 's quote is there.  She further argued  "There are far more positive ways to help people become homeowners."  It's her thread, if she chooses to itemize I am interested.  If it is merely a generic "don't bother me with details" comment, well I challenge it.  I assume discussion is wanted by virtue of making the thread.

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#20) On September 14, 2009 at 2:34 AM, starbucks4ever (98.50) wrote:

Before the 20th century there were no mortgages and the majority of people did not leave in caves.This proves that whatever it costs to build, is well within reach of the average person even when the builder uses oxen to transport stuff and digs the foundation with spades, picks and shovels. There goes, sir, your case for mortgages.  

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#21) On September 14, 2009 at 2:50 AM, awallejr (81.36) wrote:

K go try to build a house with oxen.  You are always free to build your own home from scratch.  Good luck in getting the permits and C/Os in any major city without some kind of acceptable building plan.  Hooking up to sewer lines.  Laying that cement foundation and complying with electrical underwriting requirements.

Sorry Charley it isn't costing you chump change to build, unless you want some basic cabin in the woods (and even then it will cost you).

 

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#22) On September 14, 2009 at 4:20 AM, dwot (72.69) wrote:

Here's a suggest to help first time buyers, let them deduct up to $5k per year for up to 10 years to help save for the downpayment.

Another would be to allow people to deduct principal repayment up to $x rather then interest.  Both encourage people to own more of their home rather then less.

By being able to deduct interest it discourages extra payments because the deduction declines and it also encourages people to borrow more for the deduction.  

 

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#23) On September 14, 2009 at 7:24 AM, angusthermopylae (39.53) wrote:

awallejr,

We've built our house a piece at a time over the last 30 years:  Basic house with mortgage, then (as and after it's paid off), new garage, reworked the bedrooms, living rooms, new offices, new barns, greenhouse, blacksmith shop, etc.  At times, we wish we had oxen, because all we had was the Mark I, Mod 0 human in small numbers.

Not that it discounts your point...just an example to the contrary.

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#24) On September 14, 2009 at 8:14 AM, awallejr (81.36) wrote:

Dwot  your first suggestion needs more clarity.  Is that deduction only available prior to home ownership?  So if they bought a house in 2 years only 10,000 would be deductible? And how would it be verified by the IRS since what if after a couple years the funds go elsewhere, such as a major medical expense, or people just continue to rent instead, or people get divorced? I am not sure if that is workable, although the motivation behind it sounds good.  And if a couple can get into a house without the need to wait by putting less down and paying PMI (private mortgage insurance) affording the monthly mortgage premium with the help of the current deduction, why not?

And deducting principal repayments sounds interesting but it doesn't help people with their monthly payment and  would actually make it greater even as a deduction.

By being able to deduct interest it helps people lower their monthly payment with the tax savings in the early years, which generally are the toughest to begin with.  Also people can voluntarily make additional principal payments, and even just making one per year can cut many years off the loan.  Bi-weekly plans are also useful for that.

And Angus, since you mentioned barns, I suspect you didn't build a house from scratch in a major city.  And  folks do buy "handyman specials." I tip my hat off to you. I am of the ilk that if I can't fix it with duct tape I don't. 

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#25) On September 15, 2009 at 11:58 AM, ByrneShill (75.11) wrote:

Dwot's point is merely that deducing mortgage's interest is subsidizing housing. And when you subsidize a commodity, the only effect is that the price goes up. Think of it this way: if the government decided tomorrow to give a 25k$ subsidy to every home buyer, then every home price would go up 25k$. The buyer would end up paying the same price, mostly because he's got the same money and revenue. In effect, subsidizing housing gives a one-time gain to current homeowner, end of story. Removing the subsidy is a one-time loss to every homeowner.

The effect of the mortgage interest subsidy is more pernicious than a direct subsidy to housing though. First of all, it is proportionnal to the mortgage (obviously), so even if you have cash to make a bigger downpayment, it encourages you not to. It also encourages you not to repay your mortgage too fast, as part of the mortgage repayment will cut into your tax break. So in effect, it doesn't really promote home ownership, it promotes debt. Think about it, the bigger your debt, the bigger your tax break. If I buy a plasma tv and a trip to italy, then mortgage my house to pay the bill, I end up with a tax break on my plasma tv and my trip. If this is encouraging home ownership then I'm Mickey Mouse.

And then the tax break is anti-progressive: the richer you are, the bigger(more expensive) your house. The bigger your tax break. So in effect, richer people have a bigger tax break. Making poor people pay for rich people isn't exactly what the founding fathers had in mind.

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#26) On September 15, 2009 at 4:09 PM, awallejr (81.36) wrote:

"If I buy a plasma tv and a trip to italy, then mortgage my house to pay the bill, I end up with a tax break on my plasma tv and my trip. If this is encouraging home ownership then I'm Mickey Mouse."

Now this point I agree with and alluded to it in my HELOC comment in #17 above.  It used to be you could deduct credit card interest, but that was changed quite awhile ago.  People then started using equity loans for purchases so they could deduct the interest.  Aside from a general dislike towards tax increases, if there was a way to limit the deduction off equity loans I wouldn't argue against it.  Equity loans are simply secured credit cards in my opinion.  And while they can be useful, such as trying to pay for a child's education, it becomes more of a trap (potentially endangering your actual ownership of the property).

And while richer people benefit off the deduction as well as the average homeowner, it still helps people get into homes, which, as I argued is a good thing.  Subsidize it.  Get people out of "Potter's Field" and into their own homes. As long as people remain responsible, and historically they have (until Glass-Steagall Act was changed and rampant greed was unleashed) absolutely encourage home purchasing and help it as much as is reasonable.  And the tax deduction accomplishes that purpose (aside from the HELOC's).

 

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#27) On September 15, 2009 at 4:31 PM, ByrneShill (75.11) wrote:

it still helps people get into homes

No, it doesn't, that's where you are wrong. Read my post again. If you give a 25k$ subsidy, prices go up 25k$, this is merely a transfer of money from the government (read, from taxes) to the seller, and nobody is helped into any home. This is the same thing.

If you want to help homeowner, start with regulating that title insurance scrummy buisness of yours. That thing is like having to pay the mafia when you buy a house. And since it's pretty much hidden, reducing that price (or do like in civilised countries and remove it completely) would reduce the total price without a hiccup.

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#28) On September 15, 2009 at 4:47 PM, awallejr (81.36) wrote:

The tax deduction is not a direct subsidy, it is a deduction.  There is a big difference.  It simply does not have a dollar for dollar impact on a houses' price.  Supply/demand/location does that. The deduction impacts affordability to a given purchaser. Itt is designed to in effect lower your monthly payments since you now have more income available to pay it as a result.  In other words, if you rent for $1000, but if you bought a home and your mortgage is $1500, and take deductions freeing up say $350 per month (interest plus real estate taxes) it makes the expense more comparable.

Historically you will always see demand for housing pick up when renting actually starts to become more expensive or close to actual home ownership costs.

As for title insurance companies, that's a different issue but if you really looked at their bills, as either buyer or seller, a good chunk of it goes to real estate taxes, transfer taxes and mortgage tax.  In New York their actual premiums for direct title insurance is regulated.  The real difference between companies are the little charges each company imposes (recording fees, lien searches, etc.).

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