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Guest post

I moved Bearlee’s comment over to its own post so we’re discussing real estate in a real estate post not a Make-A-Wish post. I got permission to do so:

Did you notice who is “up in arms”: NAR and National Association of Home Builders , not just any people.

It is truly a sales pitch. So who is promoting it?

Here’s a piece from NAHB

The mortgage interest deduction and the real estate tax deduction are two of the most important preferences for homeowners in the federal income tax code. The deductions promote homeownership and reduce tax liabilities for home-owning taxpayers. Moreover, as this article demonstrates, the deductions are used widely and expansively across the nation. Based on the most recent (2003) IRS data, this article estimates the number of taxpayers who claim these deductions, the average deduction, and the aggregate amounts of mortgage interest and real estate taxes deducted by state and congressional district [1].

24 Comments on “Guest post

  1. bearlee-

    The article ignores the bigger issue: Many people would simply pay the loan off if the net cost of capital was too high.

    The article does point out, however, that one must itemize to take the mortgage interest deduction. That being said, it does not mention how much must be given up to itemize.

    One more thing that is ignored is the benefit of the deduction. Those who deduct 10,000 in mortgage interest (keep in mind that this is near the standard deduction anyway), could very well have a 15% marginal tax rate. In other words, $10,000 is spent to “gain” a $1,500 tax benefit. Is it really worth spending $10,000 to gain $1,500?

    Again, this is a question of net cost of capital, but your observations about irrational behavior are noted.

  2. Is it really worth spending $10,000 to gain $1,500?

    I know, I wish more folks would consider this question. What people were/are dreaming about was/is the unsustainable appreciation that was occurring.

    Last time I worked the numbers we were six years into our mortgage we paid 12K in interest and property taxes to get a $4K tax break (gotta love TurboTax) and this tax break would dwindle each year as more went toward principle

    Now I pay 12K in rent w/ no tax break. Given the current state of the market I am coming out ahead: my ‘house’ isn’t losing value

    BTW Google: It’s a great time to buy a home

    What are the first two websites that appear?

    Can you really lay all the blame on the individual?

  3. And have you seen this week’s Business Week on the news stand? (This week’s edition is not online yet) A reputable periodical, IMHO.

    Go take a peek.

  4. OK, here’s my last cut and paste post (“thanks god” y’all say!)
    from Centex Homes:

    Q. AS A FIRST-TIME BUYER, SHOULD I WAIT UNTIL PRICES GO LOWER TO BUY A HOME?

    A. No.

    If you continue to wait, you may never be able to afford to get into the housing market. Even as home prices are currently moderating – or even falling in some areas – rents continue to climb. The best way to build household wealth is to own a home. Once you become a home owner, you are able to take advantage of the generous tax deductions that homeownership offers, and you begin to build equity in your property. As your property builds in equity, you can use those gains to sell your starter home and afford to move into a bigger house.

    With so many homes on the market to choose from, your best strategy may be to scale back expectations for your dream starter-home. Instead of trying to buy a 2,000 square foot home, consider shopping for a 1,500 square foot home. Remember, the sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your family. After a few years, you will be able to leverage this investment and buy a larger house.

    Q. IF I WAIT TO BUY A HOME, WON’T PRICES GO DOWN EVEN LOWER?

    A. Timing the market isn’t a great idea.

    All the market fundamentals show that now is a good time to buy – prices are down and interest rates are affordable.

    If you try to wait and time the market until it hits rock bottom, you are likely to lose out. Just as no one can accurately predict the peaks and valleys of the stock, the same holds true for housing. If you sit on the fence and wait for the absolute best deal, you could end up literally waiting for years. And most likely, your guess on market timing would be wrong. But if you choose to buy now, you will not only be in the driver’s seat during the buying process, you will also reap the gains of price appreciation once you become a home owner. Remember, those who purchased homes in the early 1990s during the last big economic and housing downturn came out as big winners.

    I think I have made my point:O)

  5. Great post bearlee!

    Be prepared for emotional and sarcastic responses from folks who want to see the market dive down so that “they can buy”!

    Your post is educating in pointing out the risk in waiting too long.

  6. No shit…Austin…Did you read the previous posts under “Make a million for Make A Wish”?

    The market is gonna dive…Loser (there’s a response for you!) So what inflated this market and the markets nation wide? Cheap and readily available money, creative financing and the dreams of getting rich w/ home ownership, the list goes on…guess what, the money is cheap but who can get it?!?! And the creative financing is GONE! thank goodness. Ever heard of 20% down? Cuz PMI is gonna be too painful for the average joe blow buyer. Got 60K lying around for that down payment.

    And have you notice all talk about folks walking away from their mortgages/homes? How many bank owned properties does it take? I say give it until this time next year when all those ARMs readjust this summer and fall and then you will see. And guess what, they can’t refi cuz they owe more than what its worth! Chew on that!

    Notice the talks of recession, some economists say we are already in one, some are predicting a depression. You really think that $600/person is gonna save us? Ever wonder what the $trillion$ dollar war is doing to our economy?

    Just wait and see big boy, I guess you won’t believe until it’s in your face.

    But I am just a lowly renter what do I know?

  7. And here is NAR’s position from their website:

    NAR’s position
    Housing is the engine that drives the economy, and to even mention reducing the tax benefits of homeownership could endanger property values. Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented.

  8. The condo market is what has me most worried about Portland’s market. It seems like a simple supply and demand question. That said, it took 10 years of us thinking that the Pearl wouldn’t become what it is now. Even if the single family housing market remains strong, I am afraid that the lack of differentiation in most conversations and stats between single families and condos may make single family market look worse than it is.

  9. Oh, single family dwellings will get hit, too, though not as bad as the overbuilt, overpriced condos. Think credit crunch and lack of good jobs in the Portland area and the ill effects of creative financing.

    Just this weekend I chatted w/ two neighbors who are out of here once nursing school is over and the other is done in April w/ his fellowship. Both used their schooling as a trial period in Portland and this winter killed ’em. One is going back to CO and the other WV.

    And my ex-hi-tech spouse met a guy dragging his feet back to Seattle. Loves Portland but can’t find work in hi-tech. Seattle advertises his type of work all the time.

    Just three little examples.

    Can you give me some concrete reasons why single family dwellings won’t get affected by the change in lending, foreclosures, etc.

  10. Speaking of jobs: how many folks are directly affected by the housing industry? You stated realtors are leaving in droves (sp?), what about construction workers, ie, framers, roofers, etc. And mortgage brokers and assistants. How will this impact our local economy. And now that the house ATM has been unplugged…think car dealerships.

    My brothers own a pizza shop on the eastside. SuperBowl weekend they had three people drop by asking for jobs. First time in years.

    This is big.

  11. TiP-

    It’s difficult to understand a person’s point when such person uses “cut and paste” so extensively–the words are all another person’s thoughts.

    Much like spam, too extensive use of “cut and paste” degrades the conversation.

    That being said, if the risk of not buying now is based on this logic, “If you try to wait and time the market until it hits rock bottom, you are likely to lose out. Just as no one can accurately predict the peaks and valleys of the stock, the same holds true for housing,” then there is a risk of buying on the way down. While I am not predicting that the housing market will go to zero, there is a time value of money to consider.

    In any even, take a look at this chart on how the Florida state pension fund purchased Enron at “bargain” prices:

    http://i28.tinypic.com/4ugd3t.jpg

    (Note the purchase points as well as the selling point–tragic)

  12. Can you give me some concrete reasons why single family dwellings won’t get affected by the change in lending, foreclosures, etc.

    I didn’t say they wouldn’t be affected, I do think that they will not take as hard as a hit as the condo market will. Nor am I saying either market will decline or advance. What I am a saying is that compared side-by-side, I don’t think condos will do as well as SFRs.

  13. Charles-

    If I understand you right, you are suggesting that the supply in the condo market versus demand is greater than the supply in the single family market versus demand. The issue isn’t whether lending standards will affect one more than the other, but rather the supply and demand in each market.

  14. JP, the cut and pasting was used to demonstrate that NAR and NAHB both were aggressive about keeping interest on mortgage a deduction. They both lobbied hard to keep it that way for now. Centax homes also uses it as a sales pitch. You would have to check the posts under the Make a Million for Make a Wish to follow the thread. The conversation was broken when Charles moved into a new thread.

  15. If you guys don’t realize what impact lending practices are gonna have on purchasing power you are in for a rude awakening. Did you notice Portland has now been ‘blacklisted’ by MGIC. Yeah, sure no impact on housing prices;O)

    So have any of you heard what PMI rates are up to given the rise in jingle mail?

  16. JP: the discussion is not about being the best time to buy it’s about the housing industry’s use of the tax deduction as a reason to buy even though it was pointed out that a standard deduction is a better way to go at times.

    I will be more selective w/ my C and P but I believe in trying to prove my points w/ evidence.

    NAR and NAHB are desperate these days.

    So how many properties are you all picking up?!?! There’s such a great selection.

  17. If we assume that a person is going to purchase a home anyway, then the tax benefit is only a bonus, just like donating to the Make-a-Wish foundation is a worthy cause, and any tax benefit is an added bonus.

    Large donations, such as Warren Buffet’s donation to Gates’ Foundation, may be largely driven by tax policy. This quickly gets into a discussion of public policy versus personal motives.

    My prediction: The home mortgage deduction will be around for many years to come, and any talk of doing away with it has little popular support. If, by some freak chance, the deduction is eliminated, I expect that it will be reinstated without much delay.

    I personally suggest that unless you are have a “high” marginal tax rate (it depends on filing status, but generally a taxable income over $160,000–the marginal rate for a married filing joint couple is only 15% at up to $63,000 in taxable income), then the home mortgage deduction is not a major reduction in the cost of capital. In other words, it should be ignored in the decision process. I generally suggest that the variance in pricing risk is just too large to include the deduction as a part of the decision process.

    I have also pointed out, several times, that the tax advantages are far greater for rental property–if you want to tax full advantage of the tax code, then you should rent or be a landlord. If the city puts in a new sidewalk (or sewer) and charges and homeowner, none of the cost is tax deductible, but if the property is a rental, then it is tax deductible (in this case a capital improvement that needs to be depreciated, but a homeowner cannot take this same deduction.) In general, landlords pay higher tax rates, so they can pass greater tax savings in the form of reduced rent than a homeowner can realize.

    I have a friend who rents a $500,000 place for $1,500 per month. In other words, the market value is over 300 times the monthly rent, and the rent includes taxes and maintenance. With relatively low rents, investors have a expectation of large positive changes in market value. If you purchase for investment reasons and have the same expectations, then buy today. The amazing thing is both my friend and the landlord are very happy: My friend thinks market values are going down, so he is protected from the affects changing market values by renting, both positive and negative. The landlord expects the future market value to significantly increase, so he is happy to have a tenant who is happy to rent, and he is willing to accept the risk of decreasing market values. This is very much like interest rate swaps and futures.

    I think it should be noted that both can be winners: The required rates of returns may be different enough that both end up satisfied in the end. For example, maybe the market increases 5%. This may not be enough for my friend to be interested in being an owner, but maybe the high tax paying investor is happy with the 5%, thus both are happy.

    (I have ignored Return on Equity which is sensitive to the level of debt–as the level of leverage increases the total risk increases, but large returns on equity may be realized, a dangerous game that is illustrated by the problems associated with the lending markets today)

  18. Sorry I came to this posting a bit late. I just want to thank Bearlee for that excerpt from Centex. I like how corporations and mututal funds have to print disclaimers about forward looking statements and explain that past performance is not a predictor of future profits, but Centex is partying like its 1929.

    I couldn’t find that on their website. Can you post an URL?

  19. Here is the Centex site I pulled it off of though it appears they have numerous sites for various regions.

    http://www.centexhomes.com/detroit/
    timetosell.asp?divisionID=1233

    Anyone catch the commercials last night on Fox 12? It starts out “You have been mislead. There is not a mortgage crisis out there.” on Fox 12. http://www.buynowclarkcounty.com

    Guess who it’s sponsored by…NAHB

    Kind of funny, huh.

  20. You do understand that the way this “help” is set up, it is only a loan. It will have to be paid back and the INTEREST RATE your wonderful government is going to charge is ONLY 3%!!!

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