The mortgage interest deduction (MID) is never left alone for very long. In Unmasking the Mortgage Interest Deduction: Who Benefits and by How Much? Economists Dean Stansel and Anthony Randazzo lay out their arguments for eliminating the popular deduction from the tax code. Written for the libertarian Reason Foundation, the article examines the history and reasoning behind MID, looks at the financial impact on individuals, the housing market, and tax collections, and presents alternatives which they say would more evenly distribute tax benefits and help the economy.
“The least distortionary income tax system is the one with the broadest possible tax base and the lowest possible marginal tax rates. Consider that if the tax base was broadened to include the $1.2 trillion in itemized deductions for 2011, the average tax rate could be reduced by nearly one-fifth, from 17.3 percent of taxable income to 14.2 percent.”
Stansel and Randazzo say such a reduction in marginal tax rates would directly increase the reward for productive (income- generating) activity. As a result, closing loopholes such as the MID and lowering overall rates would likely lead to a more prosperous economy with higher economic output and incomes.
One defense of MID is that is helps increase homeownership which is usually viewed as a societal good. But the authors maintain the MID fairly ineffective at this.
Renter households that would prefer to own “if they had just a bit more financial flexibility,” tend to be low income and thus less likely to itemize their deductions. So, instead of increasing the homeownership rate, the MID increases the amount spent on housing by consumers “who would choose to own anyway, subsidizing spending on housing rather than homeownership.” If the MID had a significantly positive effect on homeownership, they contend we would expect to see a faster and continuous increase in homeownership, rather than a gradual increase and subsequent decline.
The MIDencourages consumers to use debt rather than their own assets to finance home purchases. This creates a distortion in how financial capital is allocated, which leads to greater amounts of mortgage debt. The paper frequently quotes economists James Poterba and Todd Sinai who estimate taxpayers could reduce their mortgage debt by nearly 30 percent by using other financial paper assets, (savings or brokerage accounts) to pay off loans. If all non-housing assets, such as retirement accounts, trusts, and annuities, were liquidated to pay off mortgage debt, Poterba and Sinai estimate that the reduction could be 70 percent.
Furthermore, the marginal effective tax rate for owner-occupied housing in 2003 was only 2 percent, compared to 18 percent for noncorporate investment and 32 percent for corporate investment. By creating favorable tax treatment for housing compared to other investments, the mortgage interest deduction encourages individuals to over-invest in housing, contributing to housing bubbles. The Federal Reserve Bank of Philadelphia estimate that government incentives for homeownership, including the MID, have skewed distribution of resources so much that the American housing stock is 30 percent larger than it otherwise would be.
This over-investment means less capital is put toward productive assets in the rest of the economy, like machines and equipment used to produce goods and services. If there are fewer productive assets, there will be less economic growth and a lower standard of living.
In 2011, only about 32 percent of income tax returns filed with the IRS contained itemized deductions and about 21 percent of itemizers do not take the MID. The percentage of taxpayers claiming a MID has been relatively stable at between 21 and 26 percent since 1991.
A pair of realtors are accused in a lawsuit of trying to keep buyers away from a New Jersey home so they could use the place for “sexual escapades” which were caught on camera, according to a news report.
Richard and Sandra Weiner of Denville, N.J., filed a suit in Passaic County Dec. 6 alleging that former Coldwell Banker realtors Robert Lindsay and Jeannemarie Phelan intentionally priced their house in Wayne above market values so they could use the home as a love nest in late 2011 and early 2012, reports The Record of Bergen County.
Fannie Mae and Freddie Mac are too big, and changes are coming.
Beginning on January 10th, the new QM rules take effect – limiting the debt-to-income ratios to 43%, and capping points and fees charged by lenders to 3% of the loan amount.
Because lenders will be subject to repurchasing any mortgages that don’t comply, some lenders are talking about limiting the DTI to 39% to provide a margin of error.
In the past, borrowers with compensating factors have been able to stretch their D-T-I ratio as high as 50%. Now they won’t.
Is it a big deal?
It is for lenders, but to home buyers and sellers all it means is that there will be fewer people in the buyer pool for each house for sale. Buyers may need to lower their sights, which will make the cheaper homes in each market more competitive.
The other change is how Fannie/Freddie will add more fees depending on your down payment and credit score. It is rather arbitrary too, where borrowers with 680-740 FICO scores get hit the worst. They can look forward to a nasty choice; to pay 1/4% to 3/4% higher in rate, use a 30% down payment, or manipulate your credit score downward to pay less fees.
For home buyers who are looking for more to reasons to stay on the fence, this is a truckload of fun. But for the highly motivated buyers (the ones making the market), all it means is being more determined to fight for the best deal you can find, and hope that home prices will reflect the new era.
For anyone selling a great house on a great street, these changes won’t mean a thing. For those trying to sell an inferior home for retail-plus, don’t be surprised if 2014 brings a more-measured response.
It’s probably just the holidays but there are a fair amount of the standard newer tract homes lying around these days. The average pricing is grouped fairly close together between active and sold listings – it appears that buyers are just being very selective at what they are willing to buy now:
Encinitas Tract Houses Built since 1999 priced between $1M and $2M:
Active listings: 23 – with list prices averaging $366/sf
Pending listings: 9 – with list prices averaging $373/sf
Sold in last 90 days: 15 – at an average of $353/sf
Month’s supply: 4.6
Carlsbad Tract Houses Built since 1999 priced between $1M and $2M:
Active listings: 25 – with list prices averaging $353/sf
Pending listings: 12 – with list prices averaging $327/sf
Sold in last 90 days: 24 – at an average of $305/sf
Month’s supply: 3.1
Carmel Valley Tract Houses Built since 1999 priced between $1M and $2M:
Active listings: 24 – with list prices averaging $388/sf
Pending listings: 14 – with list prices averaging $392/sf
Sold in last 90 days: 26 – at an average of $376/sf
Month’s supply: 2.8
The sky isn’t falling, but buyers aren’t jumping at everything. Here’s one that typifies – newer, larger, but with irritants: road noise, high fees, and smaller yard:
“Rates will be low for a long long time …” As far as the “Appropriate timing of policy firming”, the participants moved out a little with three participants now seeing the first increase in 2016.
Buyers should be rejoicing at the thought of rates staying low for the next couple of years, and be very deliberate about what home they buy, and for how much. Conditions are ideal for the wait-and-seers!!
But can buyers keep a hold of themselves?
In spite of every reason to stay patient, buyers will be tempted to jump at every decent deal they see. The definition of ‘decent deal’ will likely be a moving target in 2014!
LOS ANGELES (Dec. 17) – A run-up in home prices, coupled with higher interest rates, put downward pressure on housing affordability and led to the fourth straight month of sales declines in November, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported.
“Improving home prices are a double-edged sword for the housing market. While welcomed news for homeowners and prospective sellers, diminished affordability is squeezing out many buyers and dampening their enthusiasm for home purchasing,” said 2014 C.A.R. President Kevin Brown. “Buyers are playing the waiting game and putting their home search on hold until prices stabilize and more inventory becomes available in the market.”
When you dig into C.A.R.’s own research, there is this graph from the 2013 Realtor Survey taken early this year:
It appears that 50% of the potential buyers just need to find the right house. The motivated buyers won’t let higher prices and rates stop them; they will just be more critical about what they are buying.
Sellers will be smart to do more home tune-ups prior to listing, be sharper on list price, and pick a great realtor to help create a more attractive package for buyers. With higher prices and rates, they will want a better value now!
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