Mortgage News: What’s Next? Your Thoughts?
As mortgage rates increase for the 8th straight week and the number of new loan applications reaches a 7-month low, the Bush administration is considering changes to the mortgage-interest tax deduction as well as other areas of the tax code. Part of the proposed tax reform will limit the deduction for first mortgages and could eliminate it for second mortgages or home equity lines of credit.
To read articles outlining or offering opinions on proposed tax reform, click on the following links:
How would you fare? Would lower tax preparation costs and greater simplicity in understanding the tax code off-set the potential for an increase in your tax bill if you live in a high tax state or a state with high home prices?
Winners & Losers Should the tax code continue to facilitate homeowners garnering huge deductions on their $1 million mortgages? Shouldn’t tax breaks be more evenly distributed among taxpaying homeowners? Will tax reform help or hurt economic growth?
Tax reform Is a mortgage-interest tax deduction sacred?
Crazy idea Maybe it’s crazy, but Uncle Sam needs the money!
Mortgage-interest deduction The mortgage interest deduction will cost the Treasury $72.6 billion this year alone, according to congressional estimates.
Whether you are a current homeowner or you are considering homeownership at some future time, I am interested in your thoughts on these topics. Politicians and economists can argue the pros and cons all day long but they’re a very small portion of the population. Average homeowners/taxpayers are rarely given the opportunity to voice their position. There are strong arguments for and against tax reform but, as always, changes of any kind could have unforeseen impact on many taxpayers, whether they’re homeowners or not. Send me an email telling me your thoughts on these issues. To email me, click here.
November 17th, 2005 at 9:32 pm
Limiting housing subsidies is a good idea (and I’m in California!)
In an ideal world, no one would have to pay taxes. But given the need for taxes, and to do it in the fairest and the most economically efficient manner possible, the proposal to limit mortgage deductions is a very good and timely one.
The current housing subsidies:
1) Encourage and reward those taking on the largest possible amounts of mortgage and home-equity debt, as early as possible.
2) Discourage saving in general, and saving for a home purchase in particular because the savings are at a heavy tax disadvantage. The savings also lose purchasing power rapidly because the home prices are inflated by cheap and tax-advantaged credit.
3) Contrary to popular belief, make housing less affordable by inflating home prices excessively.
The proper way to make housing affordable is not by pumping cheap credit into the system while endlessly inflating prices, but by keeping house prices low and increasing supply. This will also reward those that save more while making it easier for everyone to pay off the principal (what an alien concept!?) instead of encouraging overconsumption and outsized debts.
4) Distort the economy by channeling capital away from more productive investments.
These effects are very clearly seen today in abysmal personal savings rates, and a housing bubble that is pushing people into taking larger and riskier loans.
Over the long run, limiting these housing subsidies will have a very positive effect because saving and investment will be increased, housing will be cheaper, and the economy will become more efficient and productive.
In the short run of course, there will be huge resistance to these proposals from those who stand to lose the most. Home owners have seen huge un-earned increases in their wealth in the recent past. These increases are largely a transfer of wealth from current and future homebuyers, and other taxpayers. The prospect of these unexpected wealth gains slowing down or reversing is not a compelling reason to avoid implementing a better and more equitable tax code.
Also, most opinions in the media seem to assume that rising home prices are a “good thing” to be cheered, while advocating reduced home prices is somehow completely unacceptable and almost sacrilegious. The past several years have seen enormous inflation in home prices with little income or job growth, primarily fueled by explosion of credit, tax subsidies and speculation. After 100% or more increase in home prices, if the prices are scaled back 20 or 30%, is it not something that should be welcomed? Are unlimited wealth gains for every homeowner and real-estate speculator part of a social contract that needs to be underwritten by future homebuyers, savers and other taxpayers?
Transitions can be tricky and specific measures might be looked into to ease the pain, but there is nothing more important for long run US economic health than to encourage saving and investment. These changes to the tax code are a step in the right direction.
November 18th, 2005 at 9:02 am
Thanks Hari for the excellent comments. I agree that the best solution long-term is for Americans to become more conservative in their access and use of credit.