Good Ideas that Home Salespeople Hate

There are two good ideas that have been circulating recently that would help keep the housing market from experiencing another dangerous bubble:

  • End (or greatly scale back) the mortgage interest tax deduction.
  • Require at least a 20% down payment for purchases.

Here’s a recent article that covers the arguments in favor of ending the deduction: Mortgage-interest tax break in spotlight

Ending tax breaks for oil, corporate jets and hedge-fund managers is nearly every Democrat’s favorite way to reduce the federal debt.

But one of the biggest tax breaks is the mortgage-interest deduction, and its benefits are heavily concentrated in a handful of pricey cities, none of which votes Republican.

As Congress’ new deficit-reduction committee sets about finding up to $1.5 trillion to trim by Thanksgiving, tax breaks of all kinds, including the interest deduction, are getting new scrutiny. Beloved by the public and the real-estate industry, the deduction will cost the government more than $1 trillion over the next decade.

But few homeowners know how skewed it is by region and by income.

Three metro areas — New York, Los Angeles and San Francisco — receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourko.

The bigger the mortgage, and the higher one’s income, the bigger the deduction. A person in the top tax bracket of 35 percent who borrows $1 million can receive a tax break of $17,500. That’s on top of a slew of other subsidies, such as preferential capital-gains taxes on the sale of a primary residence, deduction of local and state property taxes, and subsidies to mortgage giants Fannie Mae and Freddie Mac.

By comparison, those earning less than $75,000 receive less than $200 in savings from the deduction. More than three-fourths of taxpayers do not itemize and so don’t claim the deduction. Those who rent or have paid off their mortgages, most of them seniors, get none.

The chief recipients are younger, well-off households that receive “a big incentive to increase the size of their mortgage or house,” said Eric Toder, co-director of the Tax Policy Center, a joint research group of the Urban Institute and Brookings Institution.

The deduction’s value increases with the cost of a home, suiting pricey real-estate markets such as San Francisco and Manhattan, or hot vacation spots such as Aspen, Colo.

I’m sure you can guess where most real estate salespeople fall in this debate. Here’s a recent piece from the NAR that lays out their position: What We’re Fighting For

“We’re at a turning point,” said Phipps, “not just because our livelihood is at stake, but because home ownership in an absolute sense is at stake. The privileges we’ve had, our parents had, and our grandparents had since World War II are being eroded, and our children face having [those privileges] denied to them.”

The ­public policies that enshrine home ownership as part of the American dream, including the mortgage interest deduction and readily available 30-year financing, can’t be counted on unless the nation’s citizens become engaged in the political process.

Wow, that is some thick rhetoric. Nothing like appealing to emotions when you can’t make a rational argument for your position.

The other good idea, requiring 20% down payments from most buyers just makes sense: Don’t buy stuff you cannot afford, right?

From the Wall Street Journal: Regulators Push 20% Down Payments on Homes

Banking regulators are pushing for mortgage-lending rules that require homeowners to make minimum 20% down payments on loans classified as lower-risk, according to people familiar with the matter.

The proposal is being floated as a way to rewrite the rules for mortgage lending to prevent a rerun of the housing bubble and financial crisis that resulted from years of easy credit. The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agencies—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—back a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these “qualified residential mortgages.” One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

To hear real estate salespeople tell it, requiring 20% down would be Armageddon for the housing market. From the same REALTOR link above: What We’re Fighting For

[Buyers] hear regulators talking about the need for skin in the game, so they think QRM is great. But when they hear a minimum 20 percent down payment would be required, they say, ‘That’s ridiculous.’ None of them have 20 percent to put down.”

Efforts to limit or eliminate the mortgage interest deduction, do away with the government-sponsored secondary mortgage market, or require 20 percent down for an affordable mortgage are just a few of the ways the financial crisis and today’s federal budget debate are upending the generations-old consensus in Washington about the central place of home ownership in the United States.

I especially enjoyed the headline and some of the quotes this article that popped up in my inbox last week: Get ready to rent: If home buying rules change, more than half can’t afford it

Future homebuyers could have to make a down payment of 20 percent under new rules proposed to prevent another financial meltdown.

[Ohio Association of Realtors CEO Robert] Fletcher said the 20 percent rule has the potential of knocking 60 percent of the buying public out of the housing market. Because the housing market is a key part of the economy, eliminating low risk buyers from the housing market will create another severe obstacle for the economic recovery to overcome, Fletcher said.

However the potential impact if the rules were to go through on the rest of the economy is less people could afford to buy a house if they have to pay 20 percent down or banks might be less willing to lend to them for less. Then demand for houses will decrease.

That last sentence really gets to the heart of the matter for real estate salespeople. It’s not about what’s good for the economy, homebuyers, or neighborhoods in the long term, it’s all about selling more houses. Who cares if they can actually afford it or not, right? Just move the goods, right?

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

114 comments:

  1. 1
    Brady says:

    Requiring 20% and eliminating the deduction would be downright scary.

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  2. 2
    cotomwed says:

    I don’t totally disagree with your points, Tim, but as someone who recently moved away from the SF Bay area, I take slight issue with the first one. While it is true that tax breaks are skewed to the “rich” areas, I think it’s worth pausing to consider what it means to buy a house in a high cost real estate area. For the sake of discussion, I’ll give you my own example: we bought a 1190sf house in a not-the-best part of Berkeley CA for 650K. (Yes, it was in 2006, but it’s still appraised at over 500K now, so it’s still a ridiculous sum for such a small home.) It wasn’t that we were rolling in dough; that was our option. Trust me, if there had been *any* homes in a “safe” area larger than 1000sf for under 500K, which seems to be a number thrown around for the limit for tax breaks should things change, we would have considered them. (By the way, we did put more than 20% down.) The tax break we got b/c of the interest credit made our cost of living in a very high cost of living area manageable.

    My only concern with your argument is that it seems to assume that anyone who owns an expensive home is, by definition, rich beyond measure, compared to the folks in less expensive areas. I can tell you that salaries are higher in the Bay area, but not by the same percentage that housing prices go up. (Let me digress to say that we are, indeed, extremely wealthy compared to 99% of the world, so I’m not intending to imply that we don’t have adequate food, shelter, safety, etc. I am only considering a comparison within US households.)

    Just a thought.

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  3. 3
    Jon says:

    The rich get richer… you have to have 20% down to purchase? Ridiculous… there are a lot of people out there that have great salaries but are too young in their career to build up the nest egg… so I am not in favor of that.

    I am in favor a Mortgage Interest Tax change… but not an elimination. Let’s eliminate all Mortgage Interest tax reductions for any loan over $417k… so if you borrow $500k, you only get to write off $417k of the interest… that seems fair to me.

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  4. 4
    Grant says:

    Assuming everyone here is interested in stabilizing the housing market and facilitating home ownership…

    The mortgage interest deduction should only be eliminated if tax rates are reduced, so fine to eliminate the subsidy, but can’t significantly reduce disposable income just like that either.

    And down payment requirements should be up to lenders to decide, not via legislation–if Fannie doesn’t want to buy LTV’s greater than 80%, fine, but private lenders should be able to loan to whomever they want–if someone has the income and credit, and depending on the state of the market at the time, 20% down shouldn’t be necessary–lenders would be wise to require larger downs if the market is strong and there’s a risk of correction, but if prices are down and the market is close to bottoming, obviously much less risk.

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  5. 5
    Pegasus says:

    The VA default rate versus other loan types proves that requiring 20 percent down is baloney. Its all about the ability to repay the loan based on income. By poorly verifying incomes the banks created this mess and inflated property values.The 20 percent is only to protect the banks and not the buyer. The depression we are in was created by the banks as they crashed the mortgage market. The ensuing economic nightmare then created more people in default as they lost their jobs. Requiring everyone to deposit 20 percent will not restore the housing market. It will do the opposite. Reducing unemployment will help housing.

    I am in favor of reducing the tax deduction for interest to $500,000 from $1,000,000 as the money is better spent elsewhere. That would not have as big an impact as completely removing the deduction and still allow the less fortunate some help on their taxes.

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  6. 6
    doug says:

    I’m glad I wasn’t required to put 20% down on a house. I’d still be stuck renting in this vastly overpriced market. If we required 20% down on houses, sure houses might go down a bit, but how much more would rentals go up? 10%? I don’t see the point of overcorrecting after the pendulum has swung back the other way.
    I’ve got a nice payment locked in for 30 years, and I’m not subject to the vagaries of my alcoholic neighbors. Thanks FHA!

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  7. 8
    Lurker says:

    Seattle is still pretty rent friendly, I think. I don’t know if I would agree on declaring it overpriced considering I can still rent less than it costs to buy. (at least where I live) I also believe that rental prices are mostly anchored to home prices. Sure, they can (and will) flux but for the most part they follow each other.

    I agree with a previous poster, down payment requirements should really be at the choice of the lender (exception tho for GSEs). With that being said, I fully expect the lender to write down losses in the event that they occur. No fancy prop-ups.

    Finally, in my layman opinion, forego the housing tax deductions and just let housing get cheaper. It is in the best interest of future generations IMO.

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  8. 9
    3rd Generation says:

    “Wow, that is some thick rhetoric. Nothing like appealing to emotions when you can’t make a rational argument for your position.

    Since when has that rationality intereferd with any used-house peddlers or their supporting casts?

    Think 6% or “Origination Fee” and get back to me.

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  9. 10
    doug says:

    RE: Lurker @ 8

    I should always preface my comments with the fact that I bought in Mill Creek, where the homes are much cheaper. I can’t argue that rents are overinflated in Seattle, when the home prices there are still so expensive.

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  10. 11
    deejayoh says:

    80% of voters are home owners. And most of them have mortgages. Find me the politician brave enough to tell them that they want to take away the only significant tax deduction available to most Americans and I will show you a politician who is not going to be re-elected.

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  11. 12
    The Tim says:

    RE: deejayoh @ 11 – Oh of course it will never happen, but I can dream, can’t I? I can say that there is at least one homeowner that would vote for such a politician… me.

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  12. 13

    Tim-

    The best quote in one of the articles: “Three metro areas — New York, Los Angeles and San Francisco — receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourk” – is grossly incorrect.

    “Owners in just these three CBSAs [New York, LA, and Chicago] received 17.7 percent of all
    metropolitan-area benefits while constituting an even smaller share of the nation’s owners, at 9.3 percent.” – http://ideas.repec.org/h/nbr/nberch/10872.html

    Opportunity for you to correct the MSM.

    (of course, I still think they should reduce the home interest deduction).

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  13. 14
    JD says:

    I tend to be in favor of both ending the subsidy and requiring 20% down. Its good for the neighborhoods as people who can’t afford must of a down payment can’t really take care of any major repairs on their home. I see plenty examples of this driving around Kirkland.

    But, the other side of the coin is not terribly appealing. First, there will be more unemployed construction folk and realtors — now’s not a time to add to unemployment rate. More homeowners will be unable to sell. Some of them will be bought up, demolished and replaced with 600K homes further excluding buyers and some will go to investors, who have little incentive to improve the property (I’ve lived in one of those).

    Either way, its a tough cookie.

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  14. 15
    The Tim says:

    RE: Consultant Ninja @ 13 – A longer quote:

    For example, if we focus on the three CBSAs that contain the nation’s three largest cities, New York City, Los Angeles, and Chicago, their homeowners received benefit flows equal to $27.3 billion in 1979. While being home to just 10.1 percent of all owners living in designated metropolitan areas in the 1980s, these owners received 14.7 percent of all benefits flowing to metropolitan census tracts. By 1989, the spatial skewness of aggregate tax subsidy flows had become even more extreme. Owners in just these three CBSAs received 17.7 percent of all metropolitan-area benefits while constituting an even smaller share of the nation’s owners, at 9.3 percent. The share of owners in these areas had fallen to 8.5 percent by 1999, but their benefit share was 1.72 times higher, at 14.6 percent.

    Figure 8 plots benefits scaled by the number of owners in the CBSA. The figure highlights the fact that the subsidy flows disproportionately toward owners in a relatively small number of metropolitan areas and that the skewness is increasing over time.

    The article was referring to “Three metro areas — New York, Los Angeles and San Francisco” while the number you quoted from the paper was three “CBSAs” and swapped SF for Chicago.

    I think the article might be adding up a variety of “metro area” CBSAs together to get different numbers. The paper you linked doesn’t seem to contain the complete data set so it’s hard to tell.

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  15. 16
    Pegasus says:

    By deejayoh @ 11:

    80% of voters are home owners. And most of them have mortgages. Find me the politician brave enough to tell them that they want to take away the only significant tax deduction available to most Americans and I will show you a politician who is not going to be re-elected.

    I don’t know about that. Where did you get that 80 percent number? Homeownership rate is about 66 percent down from the peak of 69 percent in 2004. Many of those owners don’t have a mortgage and many that do are not able to itemize the mortgage interest deduction. Social Security affects 100 percent of voters and those politicians are making that an election issue. Maybe they are just trying to draw the voters away from the mortgage deduction issue for the lobbyists?

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  16. 17
    S-Crow says:

    Tax decuction going away? For your viewing pleasure: http://youtu.be/k6Qd9VR1gD8

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  17. 19
    No Name Guy says:

    Get rid of the interest deduction. The purpose of the tax code is to extract money from the productive elements of society to fund Government operations, period. Anything that complicates this, as the home mortgage interest deduction does, or targets one class of citizen preferentially to another (again, as this does on several levels – richer vis-a-vis less rich, homeowners versus renters, etc) is wrong.

    As for the 20% down – A better way would be for the Government to get out of the mortgage business via FHA, Fannie, Freddie, etc and eliminate the moral hazard they create. Let the investors / lenders decide how much down payment / leverage allowed is right. After all, better that its their money to make (via interest) or lose (on a default / foreclosure).

    Will the transition from the current system be traumatic to the status quo and all those who have a vested interest in it? You bet. Rent seekers are known for defending their privileges to the end.

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  18. 20
    Pegasus says:

    RE: The Desponder @ 18 – “I would also like banks to keep mortgages on their books and make sure they never, ever, ever get bailed out again. That last bit might be the only piece of regulation we need.”

    The banks can’t handle retaining all of the mortgages they fund. They are already leveraged to the hilt and beyond. We continue to bail out banks constantly mostly through below the surface methods. The only way for what you wish for is to happen is if the entire system fails and that is something we might not want to live through.

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  19. 22
    Scotsman says:

    Get the government out of social engineering, out of the business of passing out favors to the select few, especially when those favors are sold for campaign dollars and influence. Most of the rationals for tax deductions can be disproven, including the mortgage interest deduction. A dollar spent on interest for a home purchase is no more valuable to society than a dollar spent on rent. it’s just another variation of the myth that having a million dollar home with a $900K mortgage makes you wealthier than having $100K in the bank. This country has done nothing but leverage itself up for the last couple of decades- there’s no real increase in wealth- as is now quite clear.

    But the games will continue until the checks bounce- mark my words.

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  20. 23
    S-Crow says:

    My first house (garage) was an absolute piece of chocolateake and I went FHA ARM with little down. Very glad I was able to get into the housing market at the time.

    20% down payments, while excellent for buyers that have that coin, would be highly corrosive to the market and the significant industries that is connected to it.

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  21. 24
    Suitably Skeptical says:

    RE: Grant @ 4 – As long as we don’t have to bail them out when the bubble bursts

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  22. 25
    Scotsman says:

    RE: S-Crow @ 23

    “20% down payments . . . would be highly corrosive to the market and the significant industries that is connected to it.”

    Unlike the current mess we have now which has completely ruined many. ;-) Change is hard.

    I don’t think 20% down would be a significant hurdle. Owner financing would come back, a market for seconds would pop up, prices would fall some. But prices are going to continue down for some time- that’s a given. The home as an “investment” is dead for the next decade at least- it’s shelter, nothing more.

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  23. 26
    The Desponder says:

    RE: Pegasus @ 20 – I am not sure that the system as it is can be saved without a massive transfer of wealth to the oligarchs – a transfer so big it would fundamentally alter the shape of everything (think Greece). It would have been better if these changes were made decades ago, but continuing the easy-credit, bubble-based facade doesn’t seem like the way to go either. At some point there must be a painful reset, which should include the implementation of de/regulations free from special interests like Fannie, Freddie, and the NAR.

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  24. 27
    deejayoh says:

    By Pegasus @ 16:

    By deejayoh @ 11:
    80% of voters are home owners. And most of them have mortgages. Find me the politician brave enough to tell them that they want to take away the only significant tax deduction available to most Americans and I will show you a politician who is not going to be re-elected.

    I don’t know about that. Where did you get that 80 percent number? Homeownership rate is about 66 percent down from the peak of 69 percent in 2004. Many of those owners don’t have a mortgage and many that do are not able to itemize the mortgage interest deduction. Social Security affects 100 percent of voters and those politicians are making that an election issue. Maybe they are just trying to draw the voters away from the mortgage deduction issue for the lobbyists?

    Well, not everyone votes, and voting is disproportionately skewed to those with higher incomes and education. As is home ownership.

    Then there is also google
    http://www.census.gov/prod/2002pubs/p20-542.pdf

    Homeowners and longtime residents are more likely to vote.
    Individuals with more established
    residences, as measured by
    home ownership and duration of residence,
    were more likely to vote
    than those who rented housing or
    recently moved into their homes.
    Sixty-five percent of homeowners
    reported voting in 2000, compared
    with 44 percent of citizens who
    rented housing.

    From the Census p 7 (Data is from 2000 but I doubt the percentages have changed much.)
    Owner-Occupied voters = ~90M
    Renter-Occupied voters = ~20M

    That’s 82% of voters. If only 2/3 of them have a mortgage that is still 55% of voters.

    Good luck taking the steak away from the tiger.

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  25. 28
    AddyLaddy says:

    Back in the UK there is no Fannie or Freddie and there has been no tax break on mortgage payments since 2000. Unfortunately this failed to prevent a speculation led bubble in house prices which was greater than that seen in the USA. Poorly regulated lending practices fuelled the bubble and eventually led to the first run on a bank in 150 years.

    Now, the average down payment in the UK is 20% but house prices still remain significantly high. However, sales volumes have plummeted and many expect a large correction soon.

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  26. 29
    Pegasus says:

    RE: deejayoh @ 27 – Even if your 80 percent is correct and two thirds of them have a mortgage only 20% of American households itemize their deductions on their tax returns, while about 65% of American households own their own homes. Guess what? If you think it will be decided by voters you will lose. The real estate industry will make or break the deduction through lobbying.

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  27. 30
    S-Crow says:

    RE: Scotsman @ 25 – 20% may not be hard to overcome for some in our local community here in Washington but with our median prices where they are 20% is not chump change. IMHO, Owner financing is not coming back anytime soon with rates this low. There is zero incentive for sellers and they don’t want to necessarily have a “tenant” that can’t or won’t get financing the traditional way. Usually, owner financing involves a good chunk of change and if the owner has listed the property the down payment has to cover commissions and closing costs.

    You would think that owner financing would be pretty well entrenched with this market the way it is but the opposite is occurring.

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  28. 31
    deejayoh says:

    By Pegasus @ 29:

    RE: deejayoh @ 27 – Even if your 80 percent is correct and two thirds of them have a mortgage only 20% of American households itemize their deductions on their tax returns, while about 65% of American households own their own homes. Guess what? If you think it will be decided by voters you will lose. The real estate industry will make or break the deduction through lobbying.

    Well, actually it’s 34% of tax returns that itemize (as of 2008, and that figure has been rising) and even that figure is misleading because it ignores the impact of married couples (who also disproportionately own homes) that file together on a single return – so it really doesn’t tell you much except that your claim of 20% of households is almost certainly understated.

    Next argument?

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  29. 32

    By Pegasus @ 5:

    The VA default rate versus other loan types proves that requiring 20 percent down is baloney. Its all about the ability to repay the loan based on income. By poorly verifying incomes the banks created this mess and inflated property values.

    I would agree with Pegasus!

    The things I’ve called for in the past are:

    1. Less emphasis on credit scores (or using an alternative credit score not designed for issuing credit cards).

    2. Having the percent loaned not be more than 96.5% of the current value or XX% of the value two years ago.

    The former would result in better loans, and the second would tighten financing in bubble markets like Phoenix if say the percentage were 90% of the value two years ago.

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  30. 33

    By wreckingbull @ 7:

    RE: Jon @ 3 – I got my first decent-paying job when I was 21 and did not buy my first place until I was 30. Took 9 years to save 20%. What entitles someone to be able to buy without a reasonable amount of skin in the game?.

    That was you choice, as it was everyone’s choice. Unless you’re well over 50 (60?, 70?), you could have bought with less than 20% down with private mortgage insurance..

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  31. 34
    Peter Witting says:

    Agree that mortgage interest deduction should be substantially reduced or eliminated.

    The percent down is a function of the institution underwriting the loan; if they wish to use sloppy or loose underwriting, the the risk should be shouldered only by that institution, not the government (taxpayers).

    That said, prudence on the part of the lending institution as well as the buyer suggests that 20% down is a good idea. Likewise, you CAN buy cars on a 76 month loan, but that doesn’t mean it’s a good idea.

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  32. 35

    By Pegasus @ 16:

    By deejayoh @ 11:
    80% of voters are home owners. And most of them have mortgages. Find me the politician brave enough to tell them that they want to take away the only significant tax deduction available to most Americans and I will show you a politician who is not going to be re-elected.

    I don’t know about that. Where did you get that 80 percent number? Homeownership rate is about 66 percent down from the peak of 69 percent in 2004.

    Maybe he’s assuming renters are less likely to vote?

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  33. 36

    RE: The Tim @ 15

    Tim- that is the source paper. If LA + Chicago + NY = 17%, how can LA + SF + NY = 75%.

    The paper itself never cites LA + SF + NY. Given the existence of one error in the reporting, its unsurprising there are two errors.

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  34. 37

    By Scotsman @ 25:

    I don’t think 20% down would be a significant hurdle. Owner financing would come back, a market for seconds would pop up, prices would fall some. But prices are going to continue down for some time- that’s a given. The home as an “investment” is dead for the next decade at least- it’s shelter, nothing more.

    With the Garn Act in place, owner financing is dead and will stay dead. That act is federal law overriding state law regarding the enforcability of due on sale clauses. And I think it’s far too early for seconds to come back–and with our laws I don’t think they should come back.

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  35. 38

    I think I posted the link to that first San Fran Chronicle article last week. What I suggested then was to limit the deduction as stated in the article (or some similar way) and to also limit the deduction to the interest on the value of the house based on the sales price and any improvements. The current tax law encourages people to borrow against their homestead for consumer purchases, and that’s not a good thing.

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  36. 39

    BTW, Tim, why is it a “good idea” to limit home ownership to relatively wealthy people? Even back in 2007 I was saying government was going too far the other way with some of their first time buyer programs (e.g. finance the required down payment and closing costs with a negative amortization or no interest for X years loan). But I have a hard time seeing how requiring someone to come up with $40,000 to buy a $200,000 home is good social policy. That goes too far the other direction, IMHO.

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  37. 40
    ESS says:

    Require 20% down payment and eliminate the home deduction write-off on taxes? If that happens – you will see a permanent class of renters who will never be able to afford a home. Furthermore, rents will increase dramatically. Landlords will never have to worry about lowering rents ,even if those rents are out of proportion to the cost of purchasing a home in a given area, as there will be many that will never be able to afford to purchase or maintain their own home.

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  38. 41
    Pegasus says:

    By Kary L. Krismer @ 35:

    By Pegasus @ 16:
    By deejayoh @ 11:
    80% of voters are home owners. And most of them have mortgages. Find me the politician brave enough to tell them that they want to take away the only significant tax deduction available to most Americans and I will show you a politician who is not going to be re-elected.

    I don’t know about that. Where did you get that 80 percent number? Homeownership rate is about 66 percent down from the peak of 69 percent in 2004.

    Maybe he’s assuming renters are less likely to vote?

    He already presented that but the numbers still don’t work.

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  39. 42
    fubarrio says:

    RE: cotomwed @ 2 – i’m sure others pointed this out below your comment…but on the off chance they let me down…the price of shacks in the bay area is directly influenced by that which the populace can afford with their after tax income, cash and credit.

    reduce any of these and the price of homes comes down.

    to me, the big questions (not asked) are:

    is ownership of property a greater good than renting?
    and, more generally, is attempting to differentiate and control behavior through the tax code moral?

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  40. 43
    Pegasus says:

    RE: deejayoh @ 31 – My argument using the 20 percent number is for households that itemize and not each filer. If 65 percent of households own homes and only 20 percent of households itemize you still lose. Compare apples to apples.The fact remains that far less than 50 percent of Americans benefit from this subsidy. Even most of those that do benefit are only benefiting in a small savings. Households earning less than $75,000 get less than $200 in savings from the deduction.The more fortunate are the big benefiters and it is a very small group when compared to the population. As I said before it will depend on the lobbyists and not the voters as to how this plays out.

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  41. 44
    Jonness says:

    Mortgages should be based on risk. If you have money in the bank and 20% down, you are a lower risk than someone with 0% down and $5 in the bank. Relating mortgage rates to the level of risk of the loan is a no-brainer. The less risky loans are cheaper to service because less of them go into default. In addition, the cheaper rates on less risky loans provides incentive to save enough money to qualify for the better rate.

    As far as the mortgage interest deduction, I highly doubt it would completely go away. More likely the max claimable value would be the first $500K of the loan or whatever. Personally, I’d like to see it completely go away. All it does is drives up house prices and costs the taxpayers money. Get rid of it and let house prices reset to what they are legitimately worth and the market will bear. Furthermore, why should someone who doesn’t even own a home subsidize the lavish lifestyle of some rich fat cat who doesn’t even need the money?

    Then again, I don’t think the politicians are capable of true cuts. The trillion they save from eliminating this program would most likely just be given away to the organized criminals who back the politicians’ campaigns. Politicians know how to do two things extremely well and aren’t capable of much else, manipulate the dummy majority, and spend money.

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  42. 45
    RottedOak says:

    It’s worth pointing out that the proposed regulations would not prohibit loans with less than 20% down. Those just could not be classified as “qualified,” low-risk loans. Thus they would be harder to get and would cost more, but they would still exist. Of course that won’t stop over-entitled bellyaching.

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  43. 46

    By fubarrio @ 42:

    RE: cotomwed @ 2 – i’m sure others pointed this out below your comment…but on the off chance they let me down…the price of shacks in the bay area is directly influenced by that which the populace can afford with their after tax income, cash and credit.

    reduce any of these and the price of homes comes down.

    to me, the big questions (not asked) are:

    is ownership of property a greater good than renting?
    and, more generally, is attempting to differentiate and control behavior through the tax code moral?

    Is ownership of property a greater good than renting? I don’t know. The general thought is that if you own a home you’re going to be more invested in the community.
    But it always struck me as a little strange that homeowners were getting a tax deduction but renters weren’t. Homeowners do tend to have more money than renters. Certainly there are exceptions, and there are plenty of working stiffs who take advantage of the tax deduction, but plenty more who don’t itemize, so in general the benefit of the mortgage interest deduction goes to more wealthy people. I don’t see stuff like that changing. If they did take away the mortgage interest deduction, they’d make sure that they gave a bigger deduction to less people, but to wealthier ones.
    That seems to be the direction this country is going in. Take away benefits to the poor and middle class, and give them to the rich in the name of ” job creation.”

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  44. 47
    ricklind says:

    This is a great thread that should carry over and not die on Tuesday daily thread.

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  45. 48
    Lake Hills Renter says:

    By Ira Sacharoff @ 46:

    That seems to be the direction this country is going in. Take away benefits to the poor and middle class, and give them to the rich in the name of ” job creation.”

    Wasn’t that “trickle down” economics (e.g. pissing on the proletariat), and wasn’t it pretty much disproven in the 80s?

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  46. 49
    Hugh Dominic says:

    Oh my loins this is a great post. REALTOR panic.

    Yes. 20% down is the right rule. This has more to do with having the buyer put skin in the game and reduce the walk-away risk. The zero-down nonsense is part of what pumped up the prices to crazy levels.

    Yes. Eliminate or reduce the interest deduction to $100k or so, and as Kary said, do not allow cash-out interest. Also, no deductions on second homes. This is just another policy that pushes home prices up for no good reason.

    And. Nobody over 40 years old should be allowed to take a 30 year mortgage if they use wages as the basis of their income. Wages should be assumed to stop at 70.

    Hey, it’s a start. It’s time to end this culture where prices are determined by whoever is willing to take on the most debt.

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  47. 50
    Sparky says:

    RE: Kary L. Krismer @ 39 – If so many people can’t come up with the $40k, then maybe $200k isn’t really what the house should cost? I’m not sure if The Tim is suggesting that homeownership should be limited to a small minority of wealthy individuals, and don’t want to put words in his mouth. However, as I see it, it seems like the only reason prices can be so high that hardly anyone can get their 20% down is because you can borrow an extraordinary amount of money relative to your income. If it’s harder to get a loan, you don’t have to compete with others who are willing to take on crushing debt, because they can’t get the money in the first place. That doesn’t seem too terrible to me…

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  48. 51

    By fubarrio @ 42:

    is ownership of property a greater good than renting?
    and, more generally, is attempting to differentiate and control behavior through the tax code moral?

    As to the first, it would be if the goal were what it was years ago–owning your own home free and clear during your retirement. But when it becomes a tool to spend more and more money, and borrow more and more money, then no.

    As to the second, I don’t see how it’s immoral. The problem I see with it though is people will do things that don’t make sense just to save taxes. They don’t do the full analysis.

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  49. 52

    By Ira Sacharoff @ 46:

    But it always struck me as a little strange that homeowners were getting a tax deduction but renters weren’t.

    It used to be that all interest was deductible, even credit card interest. That changed during Reagan if I recall correctly. The house deduction is just a carry over.

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  50. 53
    The Tim says:

    By Kary L. Krismer @ 39:

    BTW, Tim, why is it a “good idea” to limit home ownership to relatively wealthy people?

    You seem to be assuming that when artificial supports such as easy financing and tax deductions are removed that prices will not correct to a level that allows non “wealthy” people to afford a home under the tighter standards.

    Also, you do not have to be “wealthy” to save up a 20% down payment on a modest salary, you just have to be prudent and patient, two qualities that most Americans lack when it comes to their money.

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  51. 54
    Hugh Dominic says:

    RE: The Tim @ 53 – I prefer to agree with you without thinking about it.

    But, it is possible that rents will spike due to an increase in demand from renters who cannot qualify for a loan. The higher rents could bring in wealthier investors, who may shift money out of stocks or bonds. That could counteract the reduced demand for homes from Joe Sixpack.

    I am not sure what the outcome would be. Still, I prefer to try it.

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  52. 55
    deejayoh says:

    By Pegasus @ 41:

    By Kary L. Krismer @ 35:
    By Pegasus @ 16:
    By deejayoh @ 11:
    80% of voters are home owners. And most of them have mortgages. Find me the politician brave enough to tell them that they want to take away the only significant tax deduction available to most Americans and I will show you a politician who is not going to be re-elected.

    I don’t know about that. Where did you get that 80 percent number? Homeownership rate is about 66 percent down from the peak of 69 percent in 2004.

    Maybe he’s assuming renters are less likely to vote?

    He already presented that but the numbers still don’t work.

    dude. your numbers don’t work.. mine are all linked. you have proven to be as bad at the internet as softwareengineer. blue text. click. fail

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  53. 56
    deejayoh says:

    By Pegasus @ 43:

    RE: deejayoh @ 31 – My argument using the 20 percent number is for households that itemize and not each filer. If 65 percent of households own homes and only 20 percent of households itemize you still lose. Compare apples to apples.The fact remains that far less than 50 percent of Americans benefit from this subsidy. Even most of those that do benefit are only benefiting in a small savings. Households earning less than $75,000 get less than $200 in savings from the deduction.The more fortunate are the big benefiters and it is a very small group when compared to the population. As I said before it will depend on the lobbyists and not the voters as to how this plays out.

    Ummmmmm… If 34% of returns are itemized, how can it possibly represent 20% of households? Marrried filing jointly mean much to you? Please splain it to me lucy. Better yet, give me a link. I gave you the IRS. You post assertions, made up numbers, and faulty logic. Absolutely no backup. I’m sure no one else is bothering to follow this but if you want to get in an argument about facts, please at least come armed with some.

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  54. 57
    Scotsman says:

    RE: Hugh Dominic @ 54

    Cash flow wins in the end- someone has to write the rent check and make it good. And if the jobs aren’t there, if the wages are falling, if competing needs- say fuel, food, taxes, mandatory health insurance- are taking a bigger portion of what income there is then less is available for rents or home purchases. Prices will have to adjust. A vacant house isn’t the kind of investment the wealthy want to make.

    Wealth is actually very fluid in the U.S., or at least it has been. Think of the wealth, $trillions of it, that has been lost over the last few years, much of it in housing. Maybe it’s not the investment many think it is- or was.

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  55. 58
    Scotsman says:

    RE: Hugh Dominic @ 49

    “And. Nobody over 40 years old should be allowed to take a 30 year mortgage if they use wages as the basis of their income.”

    That’s rediculous- think about it. Why shouldn’t a couple in their forties be able to get a loan on a large home, raise the kids, then sell it at say 62 to downsize for retirement? You can’t force home buyers to own outright every home they ever enter into a purchase agreement on. Despite changing down payment requirements, etc. a mortgage is still essentially not much more than a long term lease with an attractive end provision.

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  56. 59
    MichaelB says:

    In the long run these are both good ideas, but in the short run they would push the US into recession as both would reduce demand for housing.

    End (or greatly scale back) the mortgage interest tax deduction. This will make buying even more expensive than renting and would push more homeowners into foreclosure.

    Require at least a 20% down payment for purchases. This would reduce the number of people that could qualify for a loan, pushing prices down further and pushing more homeowners into foreclosure.

    A better option would be for banks to not loan more than 20 x the annual expected rental return. This would keep speculation under control without depressing the market.

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  57. 60
    fubarrio says:

    RE: Kary L. Krismer @ 51 – thanks for the reply kary. i obviously have my own biases which were prob pretty transparent given how i asked the two questions.

    i always thought home ownership was desirable for the PTB, because it increased ‘stability’…this was before the myth of ‘real estate always goes up’ was put into question. the point about it being a good retirement strategy never dawned on me, but this is valid..esp pre-roosevelt.

    for the second ?, i actually believe that preferentially taxing (or forgiving taxes) for people to encourage taking on debt is incredibly damaging and foolish….unless your goal is to turn people into debt slaves…then it’s just morally bankrupt.

    i realize not everyone has the same view.

    i lived in uruguay, south america where there are no mortgages (basically). believe it or not, they still buy and sell houses….and there aren’t giant swaths of homelessness….and there are even realtors making a living. go figure.

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  58. 61
    Cheap South says:

    By Sparky @ 50:

    RE: Kary L. Krismer @ 39 – If so many people can’t come up with the $40k, then maybe $200k isn’t really what the house should cost? I’m not sure if The Tim is suggesting that homeownership should be limited to a small minority of wealthy individuals, and don’t want to put words in his mouth. However, as I see it, it seems like the only reason prices can be so high that hardly anyone can get their 20% down is because you can borrow an extraordinary amount of money relative to your income. If it’s harder to get a loan, you don’t have to compete with others who are willing to take on crushing debt, because they can’t get the money in the first place. That doesn’t seem too terrible to me…

    Bingo!!! If 20% is so high, maybe, just maybe, the home price is outrageous. Let’s remember that 20% was the norm when our parents bought their homes. And they pretty much had it paid off by their late 40s, early 50s.

    Tim: “Also, you do not have to be “wealthy” to save up a 20% down payment on a modest salary, you just have to be prudent and patient, two qualities that most Americans lack when it comes to their money. ”

    After 8 years as a professional (making under 45K at the peak), I was able to come up with $26K for our first townhome ($110K price), My wife brought no car and a $21K student loan to the marriage. Three years later we had paid off her loan and bought a new $19K car (paid off at just about the same time). But of course, our 1000 sq.ft. home was un-American, and don’t get my going about the faces I got in my office because I used to send out for diaper $3 rebates (Costco).

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  59. 62
    Pegasus says:

    RE: deejayoh @ 55RE: deejayoh @ 55

    “As for the mortgage-interest deduction specifically, the best way I’ve found to explain that it makes sense to abolish it is to point out that only 20% of American households itemize their deductions on their tax returns, while about 65% of American households own their own homes. This clearly isn’t something which helps most homeowners: it basically just helps homeowners in very expensive houses in New York and California.”

    http://blogs.reuters.com/felix-salmon/2010/05/18/how-to-attack-the-mortgage-interest-tax-deduction/

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  60. 63
    Pegasus says:

    RE: Ira Sacharoff @ 46

    Look at all the benefits of home ownership claimed by Habitat For Humanity:

    http://www.habitatnyc.org/pdf/Toolkit/homewonership.pdf

    Habitat has an endless list of reasons. If you replace the words “home ownership” with “those with more wealth” I suggest you get the same benefits. Isn’t distortion wonderful?

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  61. 64

    By The Tim @ 53:

    By Kary L. Krismer @ 39:
    BTW, Tim, why is it a “good idea” to limit home ownership to relatively wealthy people?

    You seem to be assuming that when artificial supports such as easy financing and tax deductions are removed that prices will not correct to a level that allows non “wealthy” people to afford a home under the tighter standards.

    Also, you do not have to be “wealthy” to save up a 20% down payment on a modest salary, you just have to be prudent and patient, two qualities that most Americans lack when it comes to their money.

    I purposefully chose a modest price in my example.

    I agree (with you and another poster) that people buying houses should be able to have demonstrated an ability to save money. I just disagree on the amount. On a similar note I’ve complained that banks in making loans often (always?) don’t factor in the change in expenses of house ownership. If someone has only saved $5,000 when they were paying $700 of rent, but their house payment will be $1,500, it seems obvious they won’t be a good credit risk if they only have to use their $5,000 for a down payment (or even if not). So the ability to save is important, I just don’t see 20% being the level that should be required. 20% is a number that protects the bank in the event of foreclosure through equity, and has nothing at all to do with the ability to actually make the payment (income and expenses, and past history do).

    Getting back on point, I just don’t see how requiring a 20% down is a “good idea.” I think there are much better options that would still lead to better loans being made and fewer foreclosures.

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  62. 65

    By Scotsman @ 57:

    RE: Hugh Dominic @ 49

    “And. Nobody over 40 years old should be allowed to take a 30 year mortgage if they use wages as the basis of their income.”

    That’s rediculous- think about it. Why shouldn’t a couple in their forties be able to get a loan on a large home, raise the kids, then sell it at say 62 to downsize for retirement? You can’t force home buyers to own outright every home they ever enter into a purchase agreement on. Despite changing down payment requirements, etc. a mortgage is still essentially not much more than a long term lease with an attractive end provision.

    I think the difference in thinking is the difference between the way things were and the way things were recently. If someone 40 gets a 30 year loan, by the time they’re 65 the amount owed would be relatively low, and that’s how it would have likely been if the loan had been made in say the 60s. If that same loan was made in the 90s, the balance owed would probably be 2x the original loan amount in some new loan.

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  63. 66

    By fubarrio @ 59:

    i actually believe that preferentially taxing (or forgiving taxes) for people to encourage taking on debt is incredibly damaging and foolish….unless your goal is to turn people into debt slaves…then it’s just morally bankrupt.

    Your question about morality and taxes wasn’t so focused on debt. I don’t have any moral issues at all with allowing say a tax credit for making a home more energy efficient.

    If you focus just on an interest deduction or debt I would agree it leads to bad results. Back when all interest was deductible, people would buy a $25,000 car (in 2011 dollars) in part because they would justify it by saying they would save taxes. Even using high interest rates and high tax rates, the savings would be only about $1,500 a year at most. Hardly something that makes a new car a good decision. But when you then change the tax laws and make only home interest deductible, and allow it to be deductible on amounts in excess of basis, you not only encourage a bad financial decision, but you encourage that bad financial transaction’s debt to be secured by a house! So you’ve made a bad situation worse.

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  64. 67

    By Cheap South @ 61:

    Let’s remember that 20% was the norm when our parents bought their homes.

    Care to back that up with a citation? I think that is largely myth (unless maybe you’re 80 or 90 years old.)

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  65. 68

    By Kary L. Krismer @ 67:

    By Cheap South @ 61:
    Let’s remember that 20% was the norm when our parents bought their homes.

    Care to back that up with a citation? I think that is largely myth (unless maybe you’re 80 or 90 years old.)

    I tried to find this myself, with limited success. I know less than 20% was allowed in the mid-70s. This link indicates that zero down VA loans started in the 1940s.

    http://www.lowvarates.com/va-loan-blog/the-history-of-the-home-mortgage/

    And here’s a link that says one large developer was selling $10,000 homes for $100 down in the 1950s.

    http://www.capitalcentury.com/1951.html

    What I’m not finding a a history of how much of a downpayment FHA required throughout the years. There are references that in the 1930s, before FHA, some banks required 50% down, but that was probably affected by the depression. More interesting would be what they required in the 1920s, but also what FHA required when it was first set up and thereafter.

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  66. 69
    The Desponder says:

    RE: Jonness @ 44 – I wish there was a thumb’s up option.

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  67. 70
    David Losh says:

    RE: The Tim @ 53

    Ah, kids today are so funny when it comes to those new ideas they have.

    20%? What another crock of if I can do it so can you. Let’s all just follow the same logic of we need to put 20% down so the bank feels more secure in the price of the asset they lent on.

    20% down? How about we just leave the market place for housing alone for a while and we see who buys it.

    A bank should feel lucky to get any down payment. Why would any one give a bank a down payment? The bank is lending on the asset. If the person who gifts the bank interest income doesn’t pay, the bank has a quick foreclosure, then sells to the next sucker.

    I mean isn’t that your point? Aren’t we all just suckers for buying a property? We are all paying way too much, but isn’t that just a part of the game? House, kids, car, and college fund?

    20% down? Come on let’s get the banks out of the way, out of residential Real Estate, and move on.

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  68. 71
    The Tim says:

    RE: The Desponder @ 69 – I’m actually working on adding that feature!

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  69. 72

    By Jonness @ 44:

    Then again, I don’t think the politicians are capable of true cuts.

    King County is an example of that. Because they’ve added so many programs over the years they no longer have the funds to pay for core services. Last year it was animal control on the chopping block. Today I read that they’re going to simply stop maintaining lesser used roads.

    How about terminating any program that did not exist in 1970 that doesn’t involve the use of computers? If it didn’t exist then, we probably don’t need it, unlike say animal control and road maintenance.

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  70. 73

    RE: cotomwed @ 2

    You Actually gave a Good Argument In Favor of Ending the Mortgage Interest Tax Deduction

    You said salaries in the SF area aren’t high enough for the house prices. End the tax deduction and prices will plummet to the salary levels. Of course if you already bought in and need the tax deduction to survive, doing the right thing means kicking yourself in the rear.

    That’s the trouble with this country IMO, we’ve made our selfish interests as a reason for lawlessness and bankster fraud. Look at how well SF [Seattle too] enforces immigration laws too, or should I say TOTALLY ignores immigration laws on the books. Same conundrum for ignoring banking regulations and laws that caused the housing bubble and current economic mess [its root cause is lack of population planning by the foreign lobbyists that pick our political candidates out for us].

    Its time for a new paradign that emphasizes the environment and population planning, or we’re heading for slamdunk economic failure if we “stay the course”.

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  71. 74
    David S says:

    RE: The Tim @ 71 – Careful, it could become an unabated popularity contest with that feature.

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  72. 75
    WestSideBilly says:

    RE: Kary L. Krismer @ 64 – I agree with Kary here. If my rent is $1800, and I’ve demonstrated the ability to save $500/mo on top of paying rent, I can certainly afford to make a $2000 house payment. At that savings rate I’m looking at something along the lines of 14 years to save up 20% down. The 20% doesn’t mean I was a bad loan for those 14 years.

    I’m not suggesting that 0% no-doc loans are the right way to go. But verifiable rent, savings, and income statements are better indicators of ability to pay than having a horde of cash.

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  73. 76
    ChrisM says:

    Holy cow, what a bunch of time/effort devoted to pie in the sky ideas. Well… here’s mine (complete with IRS link, deejayoh!!!)

    http://www.irs.gov/pub/irs-utl/1913.pdf

    Let’s simply go back to using this form. As long as I’m dreaming, switch tax due date to be the same day as election day.

    Everyone satisfied?

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  74. 77
    doug says:

    I’m looking at rental comps… It would be minimum $1600 to live in a house that’s the same size, but much crummier, than the house I live in. Probably $1750 is more likely.

    I’d rather spend $1950 a month to own my house, which will eventually be $1800 a month when I get to 20%. And with double payments on principle, and dumping bonuses into principle, that shouldn’t take too terribly long.

    They absolutely ran my wife and I through the wringer, turning over every possible rock on the way to getting my FHA loan. That’s a good thing! I don’t think requiring 20% would be a good thing.

    To reiterate, if 20% were required, home prices would go down, sure. Maybe 10%?

    Rents would go up 10%, and it would take longer than ever to save up that 20%. Meanwhile, we’d be consolidating wealth in the hands of those that can afford to buy up a ton of homes and rent them out. Rents used to track home values, but people are more cutthroat now. My rent went up 25% over the span of a year as the housing market collapsed.

    Sometimes the contempt that the bears on this site have for homeowners is a bit disconcerting.

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  75. 78

    By WestSideBilly @ 75:

    RE: Kary L. Krismer @ 64 – I agree with Kary here. If my rent is $1800, and I’ve demonstrated the ability to save $500/mo on top of paying rent, I can certainly afford to make a $2000 house payment.

    I was actually using the inverse. Someone who couldn’t save but was having their payments go up significantly. So I was using it as a disqualifying factor, not a qualifying factor.

    But yes, that type of calculation should be part of what is used to determine loan approval. I’d also use other assets and credit history (prior defaults).

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  76. 79

    RE: Pegasus @ 63
    Obviously I’m not against home ownership. I’m a real estate agent. But I think the inference that simply by being a homeowner, you will be wealthier and your kids will do better in school is just nuts. It might work if we gave people houses, but loose lending standards, avaricious (that’s my million dollar word of the day) real estate agents, and politicians who were promoting this without thinking about the consequences contributed mightily to the economic gutter we’re lying in. It’s great to own a home. I got really tired of being a renter. But it’s not great to own a home you can’t afford and it’s not great to own a home thinking that it’s your road to wealth, or the guarantee that your kids will do well in school..

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  77. 80
    doug says:

    RE: Ira Sacharoff @ 79

    Well said, Ira.

    When looking at a home, I had a few questions: Can I live here for the next ten years? Can I comfortably afford this house indefinitely even if it never appreciates in value? Can I raise a family here? When the answers to all of these were affirmative, I bought.

    If the mortgage interest deduction went away tomorrow, it would be to my financial detriment, but I’d still be doing fine. I certainly wouldn’t be broke or defaulting.

    Unfortunately, many homeowners can’t say the same thing, and I’m not willing to make that decision for them.

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  78. 81
    TBone says:

    Some kinds of changes are already in the works…My bank, Wells Fargo, refused to refinance my home from a 30 year fixed to a 15 year because of policy changes at Fannie Mae. We put down 20% originally and have great credit scores. Their refusal was based on my tax return showing negative income ( I am self-employed in the electronics industry ) and even though I have additional savings as well as business assets they denied me anyway.

    To be honest I had a hard time swallowing it since I have been their customer for 8 years…And feel like I am getting dumped on for their bad decisions before the crisis:

    “I want you to know that sufficient income is required on all loans these days. This is not a Wells Fargo requirement but rather a Fannie Mae requirement. ALL lenders are subject to the same Fannie Mae guidelines. In the past, “stated” income loans could be done with good credit and cash assets. They are no longer available.”

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  79. 82
    randomlife says:

    I don’t think we necessarily need rules like “you must put 20%” down. It’s possible that a person could afford 20% down, but not be able to afford the monthly payments after that. All that a person needs to get a loan from a bank in order to buy a house is just to come to a logical agreement with the bank.

    If I tell the bank how much money I can afford to spend each month on housing, including perhaps a certain amount of cash I can give right now, it’s up to the bank to decide if they can live with that or not. If I can’t find a bank willing to give me a mortgage and/or line of credit according to those terms, I need to look in to renting. That’s it.

    If the bank regrets giving me a loan based on the terms I told them, that’s their fault. If it turns out I can’t actually afford the amount that I promised I would give them each month, that’s my fault.

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  80. 83
    Hugh Dominic says:

    RE: Scotsman @ 58 – In both your & Kary’s examples, you approve a 30 year loan to a 40 year old on the basis that the borrower will exit the loan ahead of schedule. I don’t like that assumption. There are a lot of homeowners who recently got in trouble based on that assumption, they cannot sell or refi.

    In my scenario the borrower is demonstrating wage earnings that are not expected to be sustainable due to old age. If not 40 years old, what about 65? Would you grant a 30 year loan to a 65 yo based on his current wage? It seems foolish to me.

    On the one hand, the bank should make the loan based on the income expectation that exists for the term of the loan. They should not make loans that assume the borrower will have to evade or restructure the loan before paying it off per schedule.

    On the other hand, older people should not take on a net debt as they approach retirement. As Kary said, they should plan to retire without debt, not with a massive debt and an oversized house.

    I don’t think this should be law, by the way, but since it seems that our government is in the business of issuing home loan credit guarantees and assessing borrower quality, I guess these credit standards are a matter of public policy. Unfortunately.

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  81. 84
    Macro Investor says:

    By doug @ 77:

    Sometimes the contempt that the bears on this site have for homeowners is a bit disconcerting.

    Sorry, Doug, but you really don’t get it… AT ALL. We are for you, not against you.

    The reason you can’t afford a house without all the gimmicks is — drum roll, please — prices are TOO HIGH. And why are they too high? Because all the gimmicks you think you need caused the bubble in prices. We all want to take away ponzi financing, ponzi tax policy and banker bailouts, precisely because they caused you (and most of us) to be PRICED OUT.

    You never needed the gov to help you. You needed the gov to stay the h*** out of all these hair brained schemes that enriched industries at your expense.

    Yes, the changes would cause every owner to take more losses. It’s too late for them. We are really talking about what happens after the bear market. Do we want another bubble that nobody can afford, or do we want sanity and affordability?

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  82. 85
    doug says:

    RE: Macro Investor @ 84

    I get what you’re saying. But I don’t think you really know what is good for me, and my situation. I guess I should have been gladly spending $1200 a month on small apartment and slowly saving my dubloons? They probably would have raised my rent a few hundred dollars every year, as they did after the first year.

    For the record, I’m on a 30-year fixed- hardly a gimmicky arangement in my eyes. Yes, I went in with a low down payment, but I’m personally grateful that I didn’t have to suffer 5+ more years of apartment living to save up 20%.

    I made a decision to buy based on economic fundamentals unique to me. My family’s home price to income ratio is (2.2):1. Why should I wait to have 20%? Why is 20% magic? Why not leave it up to the twice-shy lenders?

    I bought the house 8 months ago, so I haven’t seen one cent of benefit from the mortgage deduction yet, and I’m doing just fine. I’ll be dumping it all into principle anyway.

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  83. 86

    By Hugh Dominic @ 83:

    RE: Scotsman @ 58 – In both your & Kary’s examples, you approve a 30 year loan to a 40 year old on the basis that the borrower will exit the loan ahead of schedule.

    I don’t think I was assuming that. I was just saying when they hit 65 the debt should be relatively small, so the risk to the bank low. When you factor in even low inflation, it’s likely that they could make the monthly payment. The only way they’d exit early would be selling to move to a retirement community, and I don’t see a problem with that.

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  84. 87

    RE: Kary L. Krismer @ 68 – I’m not sure how long this post stayed in moderation due to the links, but I’ll ask again in case that’s the reason there was no answer.

    Can anyone find a history of the required down payments for FHA loans going back to the 40s?

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  85. 88
    David Losh says:

    RE: Macro Investor @ 84

    20% down would keep pricing the same. Increasing to 30% down would inflate prices. Every dollar you give a lender is another dollar out of the pool of risk.

    0%, even a law saying banks have to make loans with no down payment, would lower the price of property faster than requiring larger down payments.

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  86. 89
    Hugh Dominic says:

    RE: Kary L. Krismer @ 86 – Irregardless – which is not a real word – the issue then comes down to a point where you agree with me but we debate some age which is the acceptable risk threshold. I’m OK somewhere in the 40-50 yr old range. If you agree to 45 instead of 40, fine.

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  87. 90

    RE: Hugh Dominic @ 89 – Should we somehow account for the fact that by the time someone 40 today retires, that 70 will be the age they’ll be allowed to start collecting Social Security? ;-)

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  88. 91
    Jonness says:

    By ESS @ 40:

    Require 20% down payment and eliminate the home deduction write-off on taxes? If that happens – you will see a permanent class of renters who will never be able to afford a home. Furthermore, rents will increase dramatically. Landlords will never have to worry about lowering rents ,even if those rents are out of proportion to the cost of purchasing a home in a given area, as there will be many that will never be able to afford to purchase or maintain their own home.

    I disagree. Other than in housing bubbles and overpriced darling meccas, rentals are cash-flow positive. If the people can afford to pay the rent, they can afford to buy the place. Of course, in order to qualify, they will have to live frugally while they save a down payment. If they can’t hold on long enough to get 20%, they won’t get the cheapest rate, but they will still get a loan. It’s not like the banks are going to suddenly stop preying upon the poor. Instead, they’ll simply stop loaning until the market bottoms and begins to slowly appreciate again, at which time they’ll have plenty of high priced loans for people who are too impatient to save up a realistic down payment. The 20% down requirement for the cheapest loan simply speaks to how quickly we get to a stable bottom before people who can’t afford to buy houses can begin buying them again. The longer we artificially prop up house prices, the longer people will have to suffer through this horrific economy.

    True economic resets are healthy because they pave the way for rapid growth in the future. However, if you artificially prop up the economy prior to a healthy floor, you end up where we currently are, and there’s not a paddle in sight.

    Americans love to borrow money they can’t afford to pay back, which explains why the U.S. government borrows 40 cents on every dollar it spends. Americans also love to complain if they are faced with the prospect of having to pay back a tiny amount of principle without being able to continually borrow greater and greater amounts for eternity. Greeks are the same way.

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  89. 92
    David Losh says:

    RE: Jonness @ 91

    WTF?!

    20% and the rent should be able to cover the mortgage payment. For investment property the guide line was 20% down.

    Just because we had an apparition in the Real Estate market place since 1995 doesn’t make it a reality.

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  90. 93
    Scotsman says:

    RE: Hugh Dominic @ 83

    I still think your expectations are unrealistic. The average stay in a home is less than 7 years. And while not as liquid as stocks or other asset classes homes do sell on a regular basis, even fairly rapidly when priced right. And why should age be treated any differently than say physical accidents, illness, tech changes that lead to layoffs, or other disruptions to income streams?

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  91. 94
    lecadidupe says:

    RE: cotomwed @ 2

    Grrreat. The poverty rate is 15%, but, hey, let’s not lose sight of our obligation to subsidize people’s right to live in a “safe” (wink, wink) neighborhood.

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  92. 95
    Jonness says:

    By doug @ 85:

    RE: Macro Investor @ 84 – For the record, I’m on a 30-year fixed- hardly a gimmicky arangement in my eyes. Yes, I went in with a low down payment, but I’m personally grateful that I didn’t have to suffer 5+ more years of apartment living to save up 20%.

    That’s great. In a couple of years when you are 20% underwater, you can walk away without a scratch and stick the taxpayers with the bill. It’s the American way.

    Prediction: Republican president in 2012. By 2014 they’ve borrowed more (in the name of national security and fake tax cuts) than Obama borrowed in his runaway stimulus period. Then another Republican president in 2016 with more borrowing to ensue. In 2020, we get a female Democrat who sets the all time record for spending. In 2025 the U.S. defaults on its debt.

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  93. 96
    Scotsman says:

    RE: Jonness @ 95

    We have to do it- “for the children.”

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  94. 97
    Jonness says:

    By David Losh @ 92:

    RE: Jonness @ 91

    WTF?!

    20% and the rent should be able to cover the mortgage payment. For investment property the guide line was 20% down.

    Just because we had an apparition in the Real Estate market place since 1995 doesn’t make it a reality.

    Unless I’m misinterpreting your post, that’s pretty much what I said.

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  95. 98
    David Losh says:

    RE: Jonness @ 95

    I don’t understand how the tax payers get stuck. I’ve heard that, but I also know that banks have made billions more since we gave them money. Isn’t that money supposed to be coming back?

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  96. 99
    2kt says:

    RE: Jonness @ 95

    Nonsense, really.

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  97. 100
    David Losh says:

    RE: Jonness @ 97

    Hardly what you said, “If the people can afford to pay the rent, they can afford to buy the place. Of course, in order to qualify, they will have to live frugally while they save a down payment. If they can’t hold on long enough to get 20%, they won’t get the cheapest rate, but they will still get a loan.”

    You are waxing eloquently about how we have to qualify for a loan from a bank.

    The bank is getting the gift of interest income. We are forced to use the banks because they have the due on sale clause.

    In order to get banks back out of the Real Estate business we need to lower the price of property.

    Do you see what that means? We have to lower the price of property? That means trillions of dollars in equity to purge.

    You are talking about perpetuating a banking system.

    Rents are another gift the consumer gives to the land lord. The lord, and master of your life controls whether you stay, or are evicted. So you are advocating a choice that we either gift money to a bank, or to our lord, and master.

    You want us to be debt slaves, or serfs.

    What I was pointing out is that there used to be a time when the price of property was so low that it could cash flow with 10% down, at 10% interest. It would be a positve cash flow at 20% down. In both cases it was possible to own property free, and clear, and a lot of people did.

    1995 the dynamic of property ownership changed. Appreciation, without inflation, made owning, and controlling property equity positive with short holding times. That’s where Scotsman gets his 7 year hold model from. You only had to hold a property 7 years to get a positive net, net, no matter what the holding cost was. Property would double in price every 10 years?

    Cash is king, and we are headed back to cash prices.

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  98. 101
    Azucar says:

    By deejayoh @ 31:

    By Pegasus @ 29:
    RE: deejayoh @ 27 – Even if your 80 percent is correct and two thirds of them have a mortgage only 20% of American households itemize their deductions on their tax returns, while about 65% of American households own their own homes. Guess what? If you think it will be decided by voters you will lose. The real estate industry will make or break the deduction through lobbying.

    Well, actually it’s 34% of tax returns that itemize (as of 2008, and that figure has been rising) and even that figure is misleading because it ignores the impact of married couples (who also disproportionately own homes) that file together on a single return – so it really doesn’t tell you much except that your claim of 20% of households is almost certainly understated.

    Next argument?

    So using your numbers, if 34 percent of returns itemize, that means that 66 percent take the standard deduction. Married couples filing together on a single return get a higher standard deduction than single filers, so I’m not convinced that the 34 percent of itemized returns really correlates to more than 50 percent of voters taking the mortgage deduction (as you imply it does)… and that’s what it boils down to. What percentage of VOTERS benefits from the laws the way they are versus if it were changed to eliminate the mortgage deduction? Eliminating the deduction should theoretically allow the government to increase the standard deduction while maintaining the same tax revenue. Therefore, everyone who is currently taking the standard deduction (more than 50 percent of the voting population) should benefit from elimination of the mortgage interest deduction. And even if you generously assume that the 34 percent rate of itemized returns represents more than 50 percent of the voting population, some of those voters probably wouldn’t be itemizing if the standard deduction were increased… they’d get more benefit from an increased standard deduction than they get from itemizing.

    So in my opinion eliminating the mortgage deduction would not necessarily be a negative from the standpoint of the popular vote.

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  99. 102
    Hugh Dominic says:

    By Scotsman @ 93:

    RE: Hugh Dominic @ 83

    I still think your expectations are unrealistic. The average stay in a home is less than 7 years. And while not as liquid as stocks or other asset classes homes do sell on a regular basis, even fairly rapidly when priced right. And why should age be treated any differently than say physical accidents, illness, tech changes that lead to layoffs, or other disruptions to income streams?

    They shouldn’t, if those things be quantified as risk factors they could also be used to gauge credit risk. Aging out of the work force certainly can be. Occupational industry and experience could be. Medical fitness could be (e.g. Smoking, weight). Whatever.

    But what we have now is a system that is set by public policy, not by effective risk measurement.

    A million years ago, banks actually met the borrowers, interviewed them, took a down payment, and fretted over whether they would be paid back before making the loan.

    More recently the government declared home ownership a public interest and got into the business of issuing ineffective blanket rules for assessing and guaranteeing borrower credit risk. Someone decided that showing up with two pay stubs and a credit rating was all you needed to prove to the public’s satisfaction that you were good for 30 years of payments on a $400k house. The banks were let off the hook and allowed to originate loans to any warm bodies that passed that test and could sell them (along with the risk) to the taxpayers and forget them.

    This is insane. My preference would be for the US to get out of the business of home loans entirely, as it is clearly unfit for the job, and force lenders to really think about who they loan to, how much, and for how long. But if my own tax burden is going to be used to create loans, then at least let us get more intelligent about our standards.

    Did you know the US taxpayer is the #1 owner of foreclosed homes?

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  100. 103
    Hugh Dominic says:

    RE: Hugh Dominic @ 2 – Sorry, now I’m all fired up and must continue.

    It’s not even that the government declared home ownership a public interest. That may have been the case at one time, but now that is just the cover story for industry lobbies, interest groups, and social engineers to use government policy to enrich themselves. These standards have been shaped to maximize their benefit at the expense of the taxpayer, and to leave the average person in tremendous household debt right into their retirement.

    The sooner you recognize that, the sooner you will see that these policies that you think you depend on are in fact your worst enemies.

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  101. 104
    Hugh Dominic says:

    By David Losh @ 98:

    RE: Jonness @ 95

    I don’t understand how the tax payers get stuck. I’ve heard that, but I also know that banks have made billions more since we gave them money. Isn’t that money supposed to be coming back?

    Oh, how I long to be so naive again. You are thinking only of TARP. That was just a sideshow.

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  102. 105
    Pegasus says:

    RE: Azucar @ 1 – Another study demonstrates that the removal of the mortgage interest deduction only increases taxes for 23.5 percent of the tax payer units. The mortgage interest deduction is regressive in nature primarily benefiting the financial better off. Removing the deduction results in an average increase in taxes of $559.00. The bottom 20 percentile of incomes would see their taxes increase by a whole $2.00. The next 20 percent by $32.00, the next 20 percent by $215.00, the next 20 percent by $689, the 95-99 percent by $4234.00 and the top 1 percent by $5393.00. Clearly the mortgage interest deduction mainly benefits the financially better off with the largest deductions going to the financially elite. The majority of tax payers units get little or no help from the mortgage interest deduction. Another study estimates that the mortgage interest deduction artificially raises the price of housing by ten percent. Finally, the mortgage interest deduction has done little to nothing to increase home ownership rates. It clearly is a financial boon for the better off and the wealthy at the expense of the rest of the tax payers.

    See Table 2a on page 19 for the percentile breakdowns of taxpayer units: http://www.urban.org/uploadedpdf/412099-mortgage-deduction-reform.pdf

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  103. 106

    A couple of side issues on the mortgage interest deduction. If you remove the deduction entirely, then given the fairly healthy standard deduction, the deductions for many other things (e.g. state taxes, health care costs, etc.) would become practically meaningless. They could reduce the standard deduction to account for this, hopefully reducing rates at the same time to compensate. But when they start doing things like that, it won’t be as clear who is benefiting and who is paying more. I see that as another benefit to simply restricting the deduction, because there you better know who the change is hitting.

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  104. 107
    doug says:

    RE: Azucar @ 1

    Remember the ****storm that ensued when they tried to reset the top 1%’s income tax 3% higher? People don’t vote strictly by their own self-interest.

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  105. 108
    David Losh says:

    RE: Hugh Dominic @ 104

    How were we stuck? I don’t get that.

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  106. 109
    David Losh says:

    RE: Pegasus @ 5RE: Azucar @ 1

    You should be debating tax reform. Taking one part of an over all system of tax deductions that only benefit those who use an accountant is like drawing the line between who uses H and R Block, and those who have an individual accountant.

    We can all deduct. We can all become our own set of tax write offs, it’s just a matter on whether it’s worth it.

    I almost forgot, how does the government owning all those foreclosures become a government issue? Shouldn’t we be looking at the lenders, banks, and investors?

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  107. 110
    Pegasus says:

    By doug @ 107:

    RE: Azucar @ 1

    Remember the ****storm that ensued when they tried to reset the top 1%’s income tax 3% higher? People don’t vote strictly by their own self-interest.

    Actually they do. When that top 1% is paying your way you vote how you are told. Don’t and the contributions into your coffers disappear. Its self-preservation.

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  108. 111
    doug says:

    RE: Pegasus @ 110

    Point taken. I was talking more about the populace in general, but who’s a person to vote for to vote against corporate pandering today?

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  109. 112
    Edward Smith says:

    On the latter half of the article. I guess that means that VA loans have a super high default rate since they are 0 or 1% down loans. I can’t believe that. Does anyone know the default rate of VA Loans?

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  110. 113
    Keith says:

    I don’t think either of reforms you are advocating actually make sense — and I’m hardly a Real Estate industry shill.

    1. 20% down requirement
    I tend think this will lead to less middle class home ownership. Most people cannot afford to save 20% of a house price, which is likely to lead the market for rentals to heat up to where rental properties will be very profitable for people with the cash to buy. The end result (after the current unusual market conditions subside) will not be a deflation in housing prices, but a (even more of) land owner class vs. a rentor class… of course, it will be the land owners who will benefit from that situation — not the people who are forced to save up 20%.

    2. Repeal the home interest tax break
    What you are not mentioning is that people who buy expensive property also pay higher property taxes. For me, this deduction is approximately a wash with the property tax I pay – so the benefit of buying an expensive house is really just a trade of a federal tax for a local tax.
    Maybe a cap on the tax break would make sense. Lets say a $15k maximum deduction with an escalator for inflation. What does that look like?

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  111. 114
    robroy says:

    I’m a huge fan of eliminating the interest tax deduction, and it makes me few friends. It is where government manipulation of it’s citizens through tax policy hits us all. And, unfortunately, since most people vote their wallets, they are opposed to it. And the electorate always voting their wallets is what has gotten us into the economic mess we are in.

    I love the freedom of purchasing what I want and doing what I want based on my ability to afford it and physically do it as opposed to the tax benefit/hit. That makes me feel like a slave to the state, and it is a very icky feeling.

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