leejo

Your psychic posts are amazing. Guess what I'm thinking now.

Addict

I think he is being VERY critical of it! (har har).

But I blame the crazy CA(and other unusually high housing markets) prices on the loose standards and crazy lending vehicles loan originators have cooked up. 50 year mortgages, interest only loans, letting people borrow with 0(or negative???) equity, etc all make it easier to get in way over your head.

Sure, the interest deduction is now priced into the house, but I think that is targeted at, and helps the most with the middle class(and as Leejo said, would kill the middle class if it was taken away when the houses they bought were repriced without the tax break). It was put in place(from the begining of income tax in 1913 I believe?? must find supporting link) as an incentive for home ownership... and home ownership is near or at an all time high(again, I think? dang, more google time), so it works, despite the extra money people have to come up with to get in.

However, the mentality that it'll only cause a minor problem to existing house prices, and not cause a crash, makes me question how much of a positive impact it'll really have once it is gone? It'd have to be removed at one HELL of a slow pace to not crush what has become THE most important investment for many people...

edit : cool link http://www.stlouisfed.org/publicatio.../movin_up.html

home ownership IS at/near all time highs. And most of the recent gains are from first time buyers. They agree that the tax deduction in fact makes it HARDER for first time buyers, but obviously the market is compensating for that JUST fine. I don't think the cost of re-adjusting the market to no deduction is worth the pain, given that it doesn't really seem to be a problem.

xTYBALTx

:Tybalt closes eyes, rubs temples:

Hmmm. . . verrry interesting. . .

:Eyes open slowly:

"You're thinking it's about time to get lunch."

Oh, wait, that's my stomach talking.



@ Addict:

Fine, fine, it's more complicated than I'd originally thought.

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shroompicker

Mortgage-tax avoidance: Don't get a mortgage just for the tax break. If you pay $10,000 in interest and are in a 30% tax bracket, you will not pay taxes on $10,000 of income, so you won't pay $3,000. You just spent $10,000 to save $3,000. You can get the same effect by donating $10,000 to charity, only that idea doesn't have a hundred billion dollar marketing machine behind it. Anyone with $3,000 more in tax this year than last is really happy about it, they made $10,000 more than last year! Also remember income tax is a tax on profit, that is a tax on new wealth generated. Income on a W2 paycheck is all profit, but if you invest a grand on something and get fifteen hundred back, you only pay on five hundred, the new stuff you got. Everyone should be happy about paying taxes

Leejo, I have no idea what you said. In the same breath, you said owning land leads directly to an upside-down loan and a heavy maintenance expense so it's better to rent, and it's bad to have a society where most rent and few own. What? You spelled "car" wrong. it's c-a-r, not h-o-u-s-e. Cars always go upside down. Land rarely drops in value, it does so only in disasterous situations when many people move out of a city quickly. I don't live in a "system" that traps me in a big upside-down mortgage, and neither to the five million neighbors I've had my whole life of thirty years. I've sold two houses, both more than I bought them for. A friend of mine bought three 40-acre bare parcels in Kingman of all places for $40k apiece, he can sell each now for $150k apiece because of encroaching development. That's what Tybalt means by saying you're not thinking critically. No offense, you sound like a guy on dissability living in a bad neighborhood in New York. A person working at Subway in Yuma can afford a house and pay it off in ten to fifteen years. I don't think you're a worthless person, just one that doesn't know how money works.

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-- Shroom
I tried smoking mushrooms once. Couldn't keep the pizza lit.

ScratchMonkey

Good post, shroom. The deduction is on the interest, not the principal. It depends on a loan, not a purchase.

The net effect of the deduction is to (initially) enable more people to borrow for a house. But that means more people chasing the same number of loans, so the price (interest) of the loans go up until the market settles back down.

If we now take the deduction away, the number of people who can afford a loan drops, so there's a glut of loans, and supply and demand causes the interest rates to drop until the demand returns.

Also note that home loans aren't the only kind of loan (any interest-making investment is) so changing the demand for home loans may shift borrowing and investment to other instruments. Maybe people start buying stock (ie. become company owners) instead of seeking home ownership.

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Rincewind

OMG! Have you met leejo? How on earth do you know so much about him??












<3 leejo

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<---- You know you're getting old when you rely on your forum meta-data to remind you how old you are.

Required Reading for all TG sandboxers

leejo

I think you should edit your post liberally, and stick to your points about economics while removing your thoughts about me.

You will absolutely see people upside down on loans if you remove the deduction. That $3k a year deduction is worth $45,000 over the life of a 15 year loan, so you can knock a decent percentage of that $45k right off the asking price once you remove the deduction. This neglects the sell-off leading up to this legislation's serious consideration, much less passage. It's a horrible idea that, thankfully, will never happen.

I fully understand how it could work, but it requires the sort of perfect alignment of stars and moon and economic factors like dropping interest rates with elevated tax rates to all happen concurrently and during a favorable period in the market. In practice, plans like this never work. Also, in practice, the federal government can't make a move this radical without phasing it somehow, and once you phase a move like the one you're discussing, people get slammed hard. Pop quiz: Guess which move they'd make first?

Addict

It's even worse than that, isn't it? Because to get that deduction, you have to itemize, which replaces the standard deduction. So if that was your ONLY itemized deduction, then you're only deducting (10000 - standard(~4500?? I forget... i itemize = ) 5500 more than you would have otherwise, saving only (at 30% as in your example) 1650 really. And that only gets worse when you are married and the standard deduction is higher. So no, DON'T get a mortgage just FOR the tax break.


LOL. I like the rationalization, but no matter what, I twitch a little doing my taxes...

This all kinda assumes that the supply side is static. It hasn't been in recent history(early 90's to today), it actually grew supstantially. Part of the reason is because financial institutions figured out how to package mortgages into investment products that you could buy "shares" of. Which was really cool because it meant you could spread the risk out substantially among a lot of people. One really challenging part of packaging it was that people prepay all the time(even if only to refinance to a better rate or changing house or whatever). That makes predicting the "life" of the instrument hard. (good book, about the firm and guys who did it first, "Liar's Poker". It's great, you will probably trust bond salesmen even LESS than you probably already do! Really!) So anyway, as we had a prosperous late 90's more people invested... more money was available to borrow... interest rates came DOWN even though demand went UP. Damn I love a market driven economy. Ruthless as it may be, it moves vast capital around so damn quickly.

shroompicker

Removing the deduction won't make anyone upside-down, because they can still sell the house for more than they paid for it. But it would instantly suck money out of the pockets of everyone faster than oil at $100/barrel, so any legislator considering it should be laughed off of the podium.

ER.. I missed the news. What legislator tried this?? Who's trying to boil us like a frog and shave off the interest deduction? The banks would buy every U.S. congressman and senator an island before letting that happen.

There's no magic to the banking industry. There's a huge marketing machine out there convincing people that 80/20 mortgages and 50 year mortgages and interest-only crap is a good idea, making people buy too much house and paying interest all their lives. Mortgages are nice tools, because you can raise your family in a decent place now rather than when you've finally saved enough cash at age 50 for a house, but if you have anything but a 15 year fixed mortgage which you pay off early, then the interest payments kill off any profit.

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-- Shroom
I tried smoking mushrooms once. Couldn't keep the pizza lit.

ScratchMonkey

How so? If all existing loans are grandfathered, no one should be losing money.

This is the one big win for the deduction.

This deduction is the biggest obstacle to an ultra-simplified tax system that can be done with a postcard. And if you eliminate the income tax altogether (doable if you get rid of all the unconstitutional middle class "entitlements" and limit the Federal government to its original mission of national defense and protecting us from the States), people would no longer would have this deduction as one of those entitlements.

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Addict

I don't understand the reasoning you two are using here(esp the "you can still sell the house for more than you paid for it").

We all agree(so far in this discussion) that the deduction makes it more affordable to buy a higher priced home, increasing the demand for said home, increasing the price, right? So removal of that deduction would have a net effect of lowering its market value, makeing a loss on paper for anyone owning that house.

1)That paper loss becomes a real loss the moment you sell the house, and have to pay off that original loan, right? And people HAVE to move all the time(jobs, family, etc etc).

2)Anyone in one of these "no money down" loans, or just small % down, could easily end up upside down on the loan if the market value drops(enough, in the case of a small % down). And banks would probably be forced to consider foreclosing on all of them if they don't come up with the difference real quick.

So I don't see how grandfathering in the old loans really helps. Sure, it won't change your mortgage payment, protect your cash flow, but your net worth is going to be fubar'd because you are paying on a property that is worth less, and if you were close to the line to begin with, or had racked up some home equity loans on cars and stuff...


Now, is all this trouble WORTH the gains to be made by a simplification of the tax code to a post card... who knows, maybe... but to say that removing that deduction wouldn't cause a great deal of problems readjusting to a lower value of homes, including people loosing "money", seems wrong to me. But then, I'm no economist! I fully admit I could be way off base, and argued into seeing the arguments *against* deduction removal as just FUD.

leejo

Thanks for amplifying on the point I was making. The only way the owners don't get hurt is if the deduction is removed simultaneously with some other action that counters more-or-less exactly the downward pressure on the market that removing the deduction creates. Simpler, safer, and probably better to leave that one alone, I think. I also think political realities are such that Congress is unlikely to mess with this deduction.

ScratchMonkey

So how about just giving people the money instead of a deduction? Except that, politically, a deduction is more palatable than a handout, because it looks like you're keeping your own money instead of taking charity. But it means that, instead of filling out a more complicated tax form, you fill out a separate "mortgage voucher" to use each year.

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