U.S. home mortgage interest deduction may be restricted

I know at least one regular poster who bought (and I believe subsequently sold) a house in the U.S. For those thinking of putting their money into real estate there, there’s a bit of a trial balloon being floated regarding reducing the mortgage-interest tax deduction. This has the risk of triggering major effects in the housing market, especially since inflation is rising and the Federal Reserve has signalled that it will raise interest rates to fight inflation even if it cuts economic growth.

Here’s one of many recent articles on it:
news.yahoo.com/s/usatoday/200510 … &printer=1

[quote]Home builders vowed Wednesday to fight any attempt to eliminate tax preferences for homeownership. But several economists said a federal commission’s plan to trim mortgage interest deductibility was needed to address broad market distortions.

Homeowners can now deduct interest on mortgages up to $1 million. The panel likely will suggest a threshold of around $300,000 when it makes a final report on broad tax code changes Nov. 1.

Mark Zandi, chief economist at Economy.com, argues the nation has been putting too much money into housing - about 35% of net private investment since 1980, according to the CBO - instead of other economic sectors. Consumers have cashed out trillions of dollars in home equity during the five-year boom market.

“There are strong arguments to be made that we’re overinvesting in housing and that households increasingly are too reliant on their homes as a source of cash,” Zandi says. “That’s in part a result of tax policy.”

With more limited tax breaks, consumers might not cash out as much home equity, eventually boosting personal savings from current low levels.

William Gale, senior fellow at the Brookings Institution, says the value of the tax deduction has diminished in past decades as tax and mortgage rates have fallen: “The notion that any diminution in the value of the mortgage (deduction) is a catastrophe for America’s homeowners is just completely off base.”
[/quote]

Bad news for the US housing bubble.

Tax breaks gone, interest rates may be rising. Ouch, I say.

As mortgage refinancing and housing related spending has powered US growth for the last couple of years, I foresee a bit of a hangover if the double whammy comes into effect.

Anyone here with houses in the US? comments?

This is just a ploy to raise Bush’s popularity rating…

[color=blue]Friendly mod note: Stay on topic, don’t discuss Bush here.[/color]

Maybe, however what they are describing as minimizing the tax breaks will lead to a recession, as it’s the refinancing keeping the US afloat currently. If that source of cash goes, then you will see less spending, some foreclosures, higher unemploment, a vicious circle will run for a year or 2, leading to Bush becoming rather unpopular. However from a business viewpoint, that would mean that anyone invested in US properties or other assets would have to prepare for a haircut.

On the plus side, it might stop the wild bubble market in housing. While I would feel marginally sorry for anyone who bought near the top, housing prices in the last several years have become disconnected from reality, and many of the people who are in the market now are just playing real-estate games.

New Orleans and the rest of the Gulf Coast are a sparkling example right now. Before Hurricane Katrina, people were struggling to sell homes there. Now that the houses have been destroyed or turned into slimy mold-infested heaps, prices have INCREASED as speculators have rushed in to buy any property at any price. I kid you not, this was in the news a couple of weeks ago.

I deliberately deleted some of the political comments from the original article. However, just to point out something to those who would bash Bush over this: if the housing bubble is popped, the “working poor” will better be able to afford housing, and the “rich” will be the ones getting scalped. The current idea being floated is to limit the deduction to a mere $300K mortgage, which is about the limit that people making $100K/year can afford (roughly). So this is currently targeted against those making well into six figures, which is a pretty decent income in the U.S.

My point is simply that this originates with president xxxx, and usually presidents don’t do things that lose them popularity and votes, in other words I am skeptical that this will come to pass. It affects people whose mortgages are between $300,000 and $1,000,000 (the current limit). They’re also talking about eliminating the AMT. And eliminating the estate (excuse me mr. Luntz, DEATH) tax. I would think the president would push the latter two give-aways but keep the former. None of these are certain to happen.

That would be a bummer if they cut/drop/adjust the tax breaks for home owners.

The only reason why I don’t just pay off my place in the States is because of the writeoffs I get by making payments. It pains me to “owe” money but there we are…

On a side note

Tonight we sealed a deal to sell an old house we have near Monkey Mountain (Kaohsiung). Mrs. Bane and I are mulling over whether to use her “one shot” tax free option on this house or to save it. We are looking at other places to invest/buy (I went to a couple of building companies near where we live to ask about prices and…ouch) One place had apartments at 225,000NT to 250,000NT per ping near the Science Museum. The smallest apartment they were offering is 90 pings. I then went to a place nearby that was offering land with a three storied place…at about the same price. The benefit for buying this kind of place is that we could always rent out the first floor. I like the area and the design. But I have reservations about investing too much in Taiwan.

The other option is to spend the money on wine, women, and song…

I think a lot of where one has a house in the States is important. My parents bought a house ( 2.25 acres) in 1976 in the foothills of the Sierra Nevada mountains in the San Jaoquin Valley in California. The bare minimum that BoA has for farm loans is 15,000 acres.( I asked for a loan for 14 acres to join with my parents property but BoA just laughed at me :blush:) But my dad insisted that one share of the oldest water company be included in the deal when he bought the land. That one share doubles the value of the house and property. Water, where I come from, is key. He has first dibs on water and in California that means a lot.

An Australian perspective: If you are paying a mortgage on your own home you are entitled to no income tax deductions. If you have a rental porperty you can claim the interest on the mortgage, repairs and leasing agent’s fees. The huge boom in housing prices over the last 5 years is blamed on the massive increase in investors moving into the market to take advantage of the invstment cost deductions. Some argue that this should be ‘restricted’ because low-income earners now can’t afford housing - the mean house price in Sydney has doubled in 5 years, infaltion is 2% and wages have kept pace with that.

I presume that the the same logic is at work in the US, restrict investment in the market and prices will drop and allow low-income earners a chance to buy. It would be a brave government, despite the logic, that would put lots of voters in a difficult position, ie cutting or reducing the deduction. They tried in Australia about 15 years ago and the public went mad, the investment deductions were reintroduced after about a year.

Yes, taxation deductions on mortgage interest and homeowner tax breaks distort investment in residential housing in the US. Meaning, that yes too much investment is now directed in fixed asset residential buildings. Seems like it does the same thing in Australia. But there is no way that any govt. is going to eliminate mortgage interest deductions and other homeowner deductions in the US. That government would get booted out in a hurry. I am no fan of the government but even if proposals only target those with US$300,000 homes or more, the median US home price is about US$200,000 and in states like CA most homes in major cities are well over that $300,000 price. So many americans will revolt to any reduction in their benefits.

Actually, when one ads in the repairs, insurance, and other hidden costs the tax and homeowner deductions are not that good and in some cases even not worth it…unless your property soars 100% in value in 3 to 5 years.

when it coms to investments, properties have always been at the bottow of my list. The reasons are:

  1. Not very liquid market, where the units are not standarized. Note, that if we both own a share in say company x, then they are identical. If we own 2 houses on the same road, they are not, improvements, exact loaction etc. are all different.

  2. It’s harder to get in or out of the property market than it is to get out of the stock market. If I want to sell a stock, my transaction costs will be US$10 or so, and I will be out in a matter of minutes, if it’s really important. Houses can take years to sell, if the market is going against you.

There’s only one set of conditions, which would make me invest in property. That’s if I planned to live in it. However, the goal of the investment would be to have a place I could call mine.

[quote=“Mr He”]when it coms to investments, properties have always been at the bottow of my list. The reasons are:

  1. Not very liquid market, where the units are not standarized. Note, that if we both own a share in say company x, then they are identical. If we own 2 houses on the same road, they are not, improvements, exact loaction etc. are all different.

  2. It’s harder to get in or out of the property market than it is to get out of the stock market. If I want to sell a stock, my transaction costs will be US$10 or so, and I will be out in a matter of minutes, if it’s really important. Houses can take years to sell, if the market is going against you.

There’s only one set of conditions, which would make me invest in property. That’s if I planned to live in it. However, the goal of the investment would be to have a place I could call mine.[/quote]

  1. fungible

    Of or relating to assets that are identical in quality and are interchangeable. Commodities, options, and securities are fungible assets. For example, an investor’s shares of Xerox left in custody at a brokerage firm are freely mixed with other customers’ Xerox shares. Likewise, stock options are freely interchangeable among investors, and wheat stored in a grain elevator is not specifically identified as to its ownership.

  2. illiquid

    Of or relating to an asset that is difficult to buy or sell in a short period of time without its price being affected. For example, a large block of stock or a small amount of an infrequently traded stock is likely to be difficult to sell without a reduced price being offered to potential buyers.

Your points are well taken. Non-fungibility contributes to illiquidity too. However, some advantages to real estate are 1. tax advantages of home mortgage 2. diversification 3. It generally doesn’t drop like a rock, as stocks did on black monday.

Well, when it comes to your advantages, would REIT’s not capture those?

I do angree that housing prices don’t drop like a rock, but I remember a protacted 6-year decline 1987-1993. Not funny at all. Housing prices took a 10% hit per year, for a total of some 50%

Most people tend to overestimate the value of those tax breaks anyway…the rise in real interest rates will do much more to curve the level of leverage in the US housing market.

How is the foreclosure level looking anyone?

Any trends/reversals?

[quote=“Mr He”]when it coms to investments, properties have always been at the bottow of my list. The reasons are:

  1. Not very liquid market, where the units are not standarized. Note, that if we both own a share in say company x, then they are identical. If we own 2 houses on the same road, they are not, improvements, exact loaction etc. are all different.[/quote]

Whilst property is illiquid, its value is much more stable, therefore its easy to get a line of credit on the value of that property. That cash can then be used to invest elsewhere.

[quote=“Mr He”]
2. It’s harder to get in or out of the property market than it is to get out of the stock market. If I want to sell a stock, my transaction costs will be US$10 or so, and I will be out in a matter of minutes, if it’s really important. Houses can take years to sell, if the market is going against you.[/quote]

Houses can take years to sell, but if you need access to cash, see above. If the house is your own home (at least in Australia) you pay no capital gains tax either.

[quote=“Mr He”]
There’s only one set of conditions, which would make me invest in property. That’s if I planned to live in it. However, the goal of the investment would be to have a place I could call mine.[/quote]

The other benefit to housing is the leverage you can get. Therefore if you are lucky enough to find an undervalued place (less arbitrage in property) then you require less capital for the investment. I am lucky to get a 50% leverage on stocks.

Fine and good, a very very thoughtful post which I read with a lot of interest. I like your viewpoints, and would actually consider acting on them, next time the property markets enter a bull. However the only place I would feel comfortable investing would be copenhagen, as that’s a place I know well.

However, the cycle is looking dcidedly toppish there. and it’s the same in most markets globally.

Also looking at property, then well… You need a lot of local knowldge, and you are hostage to local regulations, IE like the removal of capital gains taxes, or the application of them, the tax value of interest deductions, etc. In Denmark it was illegal to refinance and free up cask from 1987-1991, for instance. Fat luck if you needed cash.

REITS only hold asset pools of commercial properties. I have never heard of a REIT that was focused on residential real estate. As for the not drop like a rock scenario. That is true. As it is difficult to make more land (unless you start dumping dirt into the ocean), and it takes time/resources to build structures. But is is also true that over the long run, housing tracks the growth in incomes and inflation. 10% and 20% gains annually are not sustainable unless incomes and inflation are near these levels.

With the tax breaks, people usually overestimate them once you factor in insurance, repairs, maintenance, etc…sometimes the tax benefit is small or negative unless the property soars 100% in value in 3 years…But since many people underestimate it and do not know it, the market does not price it…so valuation ignores that prices should be lower as there is less tax goodies…

Coming soon: futures on residential real estate!

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