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?