Why the mortgage deduction is a bad idea...it subsidizes leveraged gambling on housing.

[dkf]

Problem #1: Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets. The size of the tax benefit is proportional to your debt. The deduction essentially encourages us to make leveraged bets on the swings of the housing market. That leverage means that housing price swings can easily wipe people out. We are currently experiencing the consequences of subsidizing gambles on housing.

Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets. Economics 101 teaches us that if we subsidize demand where supply is inelastic then the only effect is to make prices go up. Housing supply is pretty constrained in places like New York City because of land-use restrictions and lack of land. In these places, the deduction doesn’t make housing more affordable. It just transfers money from buyers to sellers, and that makes little sense.

Problem #3: The deduction is wildly regressive. The tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000 a year, according to recent research by James Poterba and Todd Sinai.

If there ever was a case for small-government egalitarianism, then this is it. Eliminating the home mortgage deduction and replacing it with an across-the-board tax cut would equalize after-tax incomes without a single new government program.

Problem #4: The deduction encourages people to buy larger, single-family detached homes, and that increases carbon emissions and pushes people out of cities. The deduction encourages people to buy more expensive homes, which are generally bigger homes.

http://economix.blogs.nytimes.com/2009/02/24/killing-or-maiming-a-sacred-cow-home-mortgage-deductions/?hp

[Rockholm]

1. Wrong.

[MrsBrady]

2. we can't itemize because we don't have enough deductions to include

our mortgage.

we have to take the standard deduction.

[Warren Stupidity]

3. horseshit. It makes home ownership affordable.

What a load of rightwing tax the middle class crap.

[Nictuku]

4. Amen!

[SammyWinstonJack]

11. "What a load of rightwing tax the middle class crap." Not unexpected.

:evilgrin:

[dkf]

15. Not really if it pushes prices up.

The Home Mortgage Deduction
By Kevin Drum on Tue. February 24, 2009 10:59 AM PDT

The home mortgage deduction is regressive, pushes up housing prices, motivates people to buy bigger houses, and doesn't increase homeownership rates anyway. 

http://m.motherjones.com/kevin-drum/2009/02/mortgage-deduction

[Cosmocat]

39. +1,000,000

save me the post

[madrchsod]

5. yuck....what a vile opinion.

[mmonk]

6. Or it is a way the middle class can pay lower taxes and offset costs

as well as allow some of us to make decent living. This is nothing more than thinking of anyway possible to avoid putting any tax burden on the top 1%.

[DURHAM D]

7. nonsense

[Digit]

8. With that logic, why not everyone have 12 or 15 kids?

Seriously

:eyes:

[Dreamer Tatum]

9. Are you aware that it's a deduction, and not a credit?

In other words, it doesn't come off your taxes dollar-for-dollar?

[bbgrunt]

18. that is why it is regressive. Those at higher

marginal tax rates save more, dollar for dollar, on the deduction than do people at lower incomes. There are ways to fix this problem, however. Simply putting a cap on the deductible amount would make it a more progressive feature.

The OP's points are all very correct from an economic standpoint. People who depend on the deduction however, reflexively scream against any adjustments to its existence because they can't understand how regressive it is in its current form.

[ileus]

10. I like it, I'll keep it thanks...

Three out of four of your points were wrong in my case, and in the case of the three previous homes I claimed the deduction on.


The fourth makes no sense it's not a tax it's a deduction. If you buy a 400k home you'll pay more interest than with a 190k home. No one buys a home with the plan of making money off the mortgage deduction.

[Nye Bevan]

12. There is no mortgage deduction in the UK.

And the housing market there seems to work just fine. Oh, and everyone has free health care. Would you give up your mortgage deduction if you got free health care?

[CarmanK]

13. TAX THE MIDDLE CLASS AND SHAFT THEM ALONG the way!

This is a tax on the middle class. The cure for the nation's financial problems is to tax the Wealthiest their fair share: the costs to benefit ratios of their living and having the opportunities for wealth like no other country in the world. It is not the middle class that is damaging the financial sector, the economy: it was and is the WALL SREET HUSTLERS.

Not taxing the Interest paid on housing, is fair. You don't tax businesses for their rent or interest payments.

Construction business creates jobs, lots of jobs.
Home ownership keeps the construction trades active and vibrant for maintenance and remodeling.
Home Ownership creates stability in neighborhoods, which ultimately makes the community safer, cuts costs for police.
Home ownership gives a sense of security that is unavailable in "rental units" where your fate is up to the landlord.
Home ownership provides stability in neighborhoods where schools, sewer systems etc... are constructed and maintained by govt.
Home ownership promotes a pride of ownership, stability in the family and a sense of accomplishments.

Home ownership is a cornerstone to the AMERICAN dream for working folk. Taking away the interest deduction on a 1040 is unfair to the middle class, detrimentatl to whole neighborhoods and inequitable in taxation. This idea stinks.

It was the market place that provided for the construction of the McMansions. It was WALL STREET THAT took a healthy home ownership program and turned it into a WORLDWIDE scam on the financial markets and the people who participated in mortgage programs that were unsustainable.

Home ownership promotes energy savings because it creates a sense of belonging to a community and a sense of responsibility to others that encourages competition for energy saving ideas and participation in neighborhood programs.

[Turbineguy]

14. That is some fine, pure,

unadulterated bullshit.

Qualifying for a mortgage is based on income. Therefore mortgage rates and income influence the size of homes people buy. The deduction does not discriminate between condos or single family. If the buyer loses his/her job, the deduction goes away. The deduction is not regressive by its purpose, but obviously high earners, who also happen to be in a higher tax bracket, are going to buy larger houses. Owners of rental housing will keep their deduction as interest is an expense. While there may be something to Problem #2 how can you legislate this away? Lay out deduction free zones (another opening for corruption and gerrymandering)?

[still_one]

16. You want another great depression, get rid of the mortgage deduction. Not only will housing have a

second wave down in prices, but even more people will go into bankruptcy

[Nuclear Unicorn]

17. I appreciate your well-stated points but I must disagree

Problem #1: Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets.

If the difference between buying a house and not buying a house hinges on the back-end savings of tax deductable interest payments I say it is an acceptable risk. A home is one of the few things people will get to own that can also increase in value for them.

The potential risk to be leveraged to the hilt exists in any medium of credit. Better a home than a fistful of credit cards.

I would also argue that a deduction is not a subsidy. It is taking less of what the owner has already earned. Letting me keep my money is not a subsidy. I earned it.

Econ 101 also says that if supply, in this case space for new houses, runs short the price will go up but that in turn reduces demand. If a buyer teeters at the cost threshold I can offer no other rebuttal save for the one I offered above -- it is their choice and they are the ones best endowed to make that decision.

Of course, it may be said that anyone who is of the mind to leverage themselves to dangerous percentages will do so with or without the deduction. The only thing the deduction will influence is the value of the property.

Perhaps what you might consider is lwering the DTI threshold. If a PITI takes up 25% of the owners salary and that is too dangerous then perhaps not approving loans over 20% is the answer.

Problem #3: The deduction is wildly regressive.

Maybe not regressive but definitely not progressive. It's relative to the interest rate of the loan and the amount financed. A person securing 100% financing for a $100,000 property at 5% will have the exact same deduction as someone financing 80% for a $125,000 property at 5% because their loan amounts and interest are exactly the same. That one person could afford a higher (or more inflated) priced house doesn't figure into it.

I don't see how reducing this deduction is egalitarian. I believe just the opposite. Without the deduction those people who were at the cusp of ownership will now be pushed out of the market because their end-point cost is too high. That means only those with more money can afford homes.

This decrease in the consumer pool will also ripple into those who build homes as demand drops requiring fewer workers.

Problem #4: The deduction encourages people to buy larger, single-family detached homes, and that increases carbon emissions and pushes people out of cities.

As urban crowding is often cited as a cause of inner city crime and despondency I'm not so sure getting people out of housing projects and cramps apartments is such a bad thing. People we not meant to be penned-up like herd animals.

[The2ndWheel]

20. The again, neither were the animals

[dkf]

24. It's not my points...it's a Harvard economist.

Edward L. Glaeser is an economics professor at Harvard.

[Nuclear Unicorn]

26. I understand and saw the link but since they were quoted without comment

I figured perhaps you agreed with them as written. I apologize if I misunderstood your intent.

That being said, I'm pleased to know I'm smarter than a Harvard economist. :P

[gratuitous]

27. Then let Glaeser make his own post

Unless . . .

Goodness, what a chickenshit response. Almost makes it look like the original post was designed for something other than thoughtful discussion.

[zipplewrath]

19. It may be imperfect

The primary effect of the deduction is to increase the price of homes. It does that of course because it increases the size of the market, and the price they're able to pay.

The purpose and intent of the deduction is to adjust income taxes on the basis of actual expenses. They guy who makes 50K but lives in a high cost housing market doesn't really have as much "income" as the guy who makes 50K in a small market.

A better approach of course would be to adjust the deduction as a function of various factors. And to some extent the deduction should "decrease" in some sense as the income (and really wealth) grows. As it currently is configured, it is less than perfect. I'm not sure that's a reason to get rid of it entirely. Second homes, and to a great degree second mortgages, should be exempt. But in the end, what we really need to do is to tie taxes to WEALTH, not merely income.

[dionysus]

21. bullshit. when i was buying my house, i wasn't thinking "gee, i get an interest deduction, let me

buy a house two times more than i could afford"

[valerief]

22. You're the one who want to privatize social security, too, aren't you? nt

[DrunkenBoat]

37. yes she is

[MadHound]

23. You're out to kill the middle class aren't you,

Not to mention driving the economy into a ditch again, why?

[louis-t]

25. Serious over-reaction.

The only thing that increases value of Real Estate is demand vs. supply.

[JVS]

28. I seldom find myself in agreement with dkf, but on this issue he has a good point.

Remember when talking about supply vs demand that demand has two components, the desire for a product and the ability to pay for it. Usually ability to pay for it is the limiting factor for the demand of a good. When a policy decision makes it easier to pay for something then it will effectively increase demand and is likely to result in increased prices. In markets where the buyer has very little control and the seller has a great deal of control, that money will end up in the sellers' pocket. Two markets where this has happened are education (based on easily obtainable student loans) and housing. It's not a coincidence that these two products are considered essential. After all, you have to live somewhere, and you have to have an education. But the result of a subsidy issued with no oversight is that the prices of both become astronomical. The consumer (who was intended to benefit from this) is only marginally better off or perhaps even worse off, while the seller has made out like a bandit.

[Warren Stupidity]

29. Fine but after nearly 100 years, this pricing is baked into the housing market

consequently a massive change to this policy - as in eliminating it - would further reduce the already suffering equity value of existing homes while increasing the foreclosure rate by decreasing the affordability of existing mortgages. Middle class tax increase, decrease in home values, increase in foreclosures. That is quite the ticket you are selling.

[JVS]

30. I don't know how to best handle it. And I'm not going to pretend to know what to do at the moment.

I suspect that to really clean up the problem that has been made a much more interventionist policy would have to be made than merely ending the deduction (which I didn't advocate in this thread). This policy would be much more complicated than to be able to be sketched out in the few minutes I have to dedicate myself to this problem today. That doesn't change the fact that instituting the deduction has proven to be a bad policy decision. Nor does it change the fact that we should look into how to mitigate the damage it has done by figuring out how to get rid of it or by adding the kind of oversight that would have prevented it from just being more fuel on the fire.

About timing: While it's baked in, as you say, there are few better times to solve the problem than when a bubble has popped. Any attempt to reform this while a bubble is inflating would trigger a collapse of the bubble. The same argument could have been made against starting mandatory participation and payments into FDIC depositers' insurance by the weakened banks of the depression. Doing it now would help keep this policy from contributing to another repetition of the crisis.

[Warren Stupidity]

32. This is a solution in search of a problem.

We don't have a problem with inflated housing prices right now, we have a problem with DEFLATED housing prices. A huge problem. A multi-trillion dollar liability that still hasn't worked its way out of the system. This middle class tax hike is just another right wing assault on the peasants.

[JVS]

33. No, we definitely have a problem in this policy.

The problem is that we do have in this deduction a policy which exacerbates housing bubbles at the expense of the treasury. There is also the problem of this not being an efficient way to assist the middle class, as their increased spending power from the tax deduction is immediately eaten up by a higher real-estate price level.

The thing is that it's a complicated problem and it's hard to come up with a solution in which the middle class won't get screwed. That's because the upper class is very good at making sure changes work to their own benefit and against those of the middle class.

[Warren Stupidity]

34. The policy has been in effect since 1913

we had one huge real estate bubble just recently and it had NOTHING AT ALL to do with the mortgage deduction, it had to do with a huge financial scam initiated on wall street, a scam that was based on turning crap loans issued to people who couldn't possibly pay them off, deduction or no deduction, into triple A bonds by slicing and dicing blocks of those loans, mixing up new securities from the pieces and calling the result 'a really good investment', selling that shit to other criminals on wall street, buying tons of insurance against the inevitable collapse of said poofed up securities, and then watching the resultant bonfire and government intervention from a safe distance in Greenwich Connecticut. The problem isn't and wasn't the mortgage deduction, it was the transformation of the local savings and loan mortgage industry into a vast nationwide scam - the problem is and was the complete deregulation of the banking industry and the abolition of the Glass-Steagall firewall that existed to keep the criminals on Wall Street out of the banks on Main Street.

And the rightwing perfidious solution is to sock it to the middle class, or what is left of it. Of course.

[Better Believe It]

31. So is this the latest lame excuse in defense of ending a rare tax deduction for working people?

Already the talking points are being circulated to defend higher taxes for working people (via closing all those working class tax loopholes and exemption like the mortgage interest deduction) while the rich shall have their taxes cut yet again to a new "high" base tax rate of 25%!

So Let's close all those big tax loopholes, especially those used by ordinary working people and the middle class!

That's called fairness and shared sacrifice .... my ass!

Don't worry.

It shall be done in the name of cutting the deficit .... on the backs of working people and the elderly.

[DrunkenBoat]

35. easy to avoid by just allowing a deduction for the first home.

[WinkyDink]

36. Yep. TERRIBLE idea......for how many DECADES???? Riiiiight.

Of course, you can always send your money back to the U.S. Treasury. You DID have a mortgage deduction, correct?

[RegieRocker]

38. Mortgage reduction last after all wealthy and corporate deductions

are eliminated. Then maybe, maybe not.

[Luciferous]

40. We bought a house earlier this year and I didn't even consider the

mortgage deduction. I seriously doubt that people are buying houses just so they can deduct the interest from their taxes. :eyes:

[EstimatedProphet]

41. I did the same thing too

You buy a house because you need a place to live and you want to build equity instead of just sending your money away on rent. People that buy houses for investment aren't looking at the mortgage deduction either, so the article is ridiculous.