davidbau.com

I don't think the one-time 50K plan is a good idea... Did you have some idea of how to limit it to one million people per year? It would set off a mini housing boom as everybody tried to take advantage of it, both people who thought the new law wouldn't last long and older folks who don't have much time left to get in on the deal... You'd probably also see various predatory "helpers" to assist the poor and elderly to buy houses they still couldn't afford even with the bonus cash.... and you still would have all the people who do better with the current deduction eager to vote you out of office. The real estate industry might like it, though, and they seem to be a key lobby supporting the current deduction.

If the goal is to support "ownership", one idea might be to change tax laws that apply to landlords to make it less attractive to rent housing to people. I don't know enough of the details here to have a specific idea, but whatever it is there will be team of lobbyists arguing against the change.

The idea from the 2005 advisory panel of replacing the deduction with a tax credit seems like a decent one; that would insure the benefit went to all homeowners rather than just the ones who itemize. I don't know if the panel recommended a refundable credit or not, but making it refundable would extend the benefit to people to people earning under $50,000/year who often have no income tax liability.

It's hard for the country to take painful steps to fix a problem that we'd rather not acknowledge in the first place....

You're right of course - the 50K plan would have no hope of working in practice. But I think the size of the equivalent-subsidy amount highlights the size of the mortgage tax deduction problem.

I guess it is a self-fixing problem. Eventually the housing bubble will crash on its own. Mortgaged homeowners will default; political realities will block reposession on any scale; bondholders who rely on housing collateral will lose their shirts; then bankers will realize that mortgage rates have to rise to offset the overspending risk that is caused by the tax credit distortion. Stay away from those Fannie Mae bonds.

In the meantime we will buy our overpriced houses, and we will continue to fritter away our tax revenues to finance McMansions. I still hate buying an expensive house knowing that crash will eventually come.

Australia has the "First Home Owners Scheme" - http://www.firsthome.gov.au/

Basically you can only claim the grant once, and only if you haven't owned a house before, avoiding causing a boom over the whole sector.

David Maymudes emailed me pointing out that my 1-million homes per year figure seemed too low to him. He is so good at back-of-the-envelope estimations. And he is right. I got my figure off the census bureau's new home sales index:

http://www.census.gov/const/www/newressalesindex.html

The problem is that this omits sales of existing homes, which are more numerous. The place for the existing home figures is the National Association of Realtors Existing Home Sales Index:

http://www.realtor.org/Research.nsf/Pages/EHSdata

The actual numbers: sales of new homes number almost exactly one million, and sales of existing homes stand at almost exactly 7 million. The total is 8 million homes sold every year.

If we distributed the morgage tax deduction to each of these home buyers, it would be about $9,500 per transaction. I find it interesting that this is about the same size as Australia's first home owner grant.

Yaron made a similar observation recently too http://www.goland.org/changeourtaxcode/. Not only does this drive up the price of homes, but it also drives up the size of new homes http://www.census.gov/const/C25Ann/sfforsalemedavgsqft.pdf.

Please Dave, give up that software career, and run for public office.

Roger

Nice essay.

IIRC, Congress did make some noises about mortgage tax reform a couple years back. Some of the ideas were quite reasonable (e.g., gradually lower the $1 million deductibility ceiling) yet they went nowhere.

Your 50k plan is interesting leaves the vast majority of homeowners out in the cold. 50k only for those who happen to be shopping at the time? Seems problematic both in terms of fairness and implementability.

The real estate industry would love it, though - just think of the buying frenzy it would generate. :D

Even without a deduction, using a loan to purchase real property or anything else for that matter makes sense. It is called leveraging. The average 30 year mortgage rate is currently 6.2% and the annual inflation rate approximately 3%. Since a mortgage payment is in fixed dollar terms, each year your payment to the bank is eroded by inflation thereby costing the homeowner 3% less annually. This lowers the effective rate the homeowner pays. If a person paid cash for a house he would lose the opportunity cost of investing the money. A nice, dull 10 year Treasury currently yields 4.8% free of Federal tax. Or spend the money and contribute to our already blossoming economy.

Eliminating the deduction simply means our "wonderful" government gets to spend more of your hard earned money on entitlements and earmarks. How about Steve Forbes' idea of eliminating all deductions and instituting a 17% flat tax? Great idea by a great capitalist.

Sorry! Typo on last post. T-notes and other Federal obligations are free of state and local tax, not Federal tax.

Gary - what people seem to forget is that, in the words of my old Cornell classmate and finance-nut, "money is freedom." When you tie up your cash by buying something - or even worse, when you give away your future cash by borrowing - you may be getting some extra stuff, but you are losing your freedom.

Houses are costly to maintain. And expensive houses are more costly. As soon as you build a new house, the structure starts to age and depreciate, and if the house is in a good area, you will be socked with high taxes for the privilege of owning it. What other investment requires that you carry insurance against fire? The bare costs of home ownership swamp any "profit" you might expect to make. I hope your roof doesn't leak.

But what if house prices go up a lot? They do that sometimes. What if they go up enough to cover your costs?

What would you say to a cattle rancher who offered to loan you $100K to buy a three-decade supply your favorite hambugers, deeply discounted? I don't think the answer depends on whether your expected returns might be a couple percentage points higher or lower because of a discount on the burgers. And I don't think it depends on whether the price of Angus Beef skyrockets in a decade. The fact is, you will be stuck paying $6K a year to pay off the interest for eternity, regardless of whether or your culinary choice still seems like a boatload of fun at the end of your 30-year debt obligation. There is a reason we don't buy most things this way.

Bankers call it "risk;" really what we are trading away when we are taking a loan is our freedom.

Yes, you should borrow money to build a business, hire some people, go to school, chase a dream. Borrow to invest in your childrens' future, absolutely. Does buying a mansion on a jumbo loan fit that description? No, I don't think so. Living in an expensive house is luxury consumption, pure and simple. It shouldn't be confused with an investment.

I think the biggest thing is whether or not people need a McMansion's square footage to live. It's inefficient to have a huge home with cathedral ceilings. I shudder at the thought of those home heating bills. Crazy.

I think too many people are overbuying homes. Your first home isn't going to be your dream home. You work up to that. My first home is a tiny condo, but I find as a single person, it's sufficient. I don't really need more than what I have. Sure I fantasize about owning a bigger apartment, but in truth, it's just a place to store stuff. To paraphrase George Carlin, "My stuff is stuff, your stuff is sh*t, and houses are just a place to store our stuff."

A mortgage shouldn't kill a person. And borrowing against a house just for a stupid tax deduction makes no sense at all. You are paying money just to reduce your taxes? Your deduction does not offer a tax benefit never equal to the interest itself. That's just plain stupid. (Oh, yes, I have done this once to manage my finances, not really my deductions, so I do know of which I speak and I do not consider it one of my wisest tactical financial decisions, but a strategically necessary ones.)