How Homeownership Became the Engine of American Inequality

https://www.nytimes.com/2017/05/09/magazine/how-homeownership-became-the-engine-of-american-inequality.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=photo-spot-region&region=top-news&WT.nav=top-news

by johnny313 • 9 years ago

150 209 9 years ago

nytimes.com

arielweisberg• 9 years ago

When I crunched the numbers for the mortgage interest deduction it really didn't seem that compelling. It replaces the standard deduction so the first 12,500$ in mortgage interest does nothing for you.

After that it's just a minor reduction in taxable income and your tax burden is only reduced by a fraction of your mortgage interest. Not enough to cover the costs of maintaining a home and the tendency to consume more housing when owning vs renting.

At the high end sure we are talking real money. Maybe some day it will all be high end housing and then it will more substantial.

fixxer3• 9 years ago

Sounds like we should increase it to make home ownership more attractive, resulting in greater civic engagement from the population ("skin in the game").

maxxxxx• 9 years ago

We should make it more attractive up to a certain amount and then cut off all subsidies.

obstinate• 9 years ago

Civic engagement is just fine in other countries where there are much lower rates of home ownership.

clarkmoody• 9 years ago

I think you forgot the /s

Seriously. The global financial crisis of 2007-08 wasn't that long ago...

at-fates-hands2• 9 years ago

Isn't this kind of what happened in the 2008 collapse?

Laws were loosened to allow more people to get into more risky loans to get homes. It incentivized a lot of people to take on mortgages they normally wouldn't qualify for.

I'm not talking about low income earners either. I had several friends who are upper middle class earners who suddenly purchased mansions on the lake, only to lose their house months later when the market collapsed. I also had other friends who suddenly realized the value of their homes went through the roof and took out two or three loans against that value, only to take it in the shorts when the market collapsed. Sure, the low income folks were hit pretty hard, but the middle and upper middle class folks got hoodwinked as well.

While I agree, it would help, it feels like its the same huge mess that we just came out of.

dcdanko4• 9 years ago

Agreed. This article makes it sound like you can get a mortgage practically for free.

The couple of proposals to get rid of it still leave the MID in place up to $500,000 though which roughly matches what you found.

readams• 9 years ago

For people in high tax states though it's pure gravy. California tax by itself blows away the standard deduction by a wide margin. With the Trump proposal if they remove the ability to deduct local tax though it becomes a lot less compelling though.

pkaye2• 9 years ago

The MID barely cancels out my property taxes. Imagine if your investment accounts had to pay 1% tax every year based on its current worth even if you didn't realize any profits.

epistasis3• 9 years ago

Sounds like a lot of mutual funds...

AnimalMuppet6• 9 years ago

Well, if you rent, you're paying the owner's property taxes anyway, and you're definitely not going to realize any profits.

njharman3• 9 years ago

Imagine other investments supplying roads, police, fire, parks, and education (or at least a place to store kids during work day) for 12 years.

rconti2• 9 years ago

MID pays for my property tax (bay area).

Without a property tax payment, my mortgage payments are very close to what rent should be.

In fact, a couple of years on, it's already less than rent for a comparable place.

awkwardtortoise2• 9 years ago

Except that there are other tax deductions you can add on top of the mortgage interest. Also, there is no taxes on capital gains on your home ( $250K for single and $500K for married ).

Home ownership is a great deal in terms of tax treatment.

ProAm• 9 years ago

I dont believe you are taking into consideration appreciate and long term savings/planning. If you pay your home off in 15 years, then you also only have to worry about maintenance and taxes. If it appreciates greatly when it comes to retire you can move to a more affordable area and take the rest of your appreciation with you for the nest egg.

shados4• 9 years ago

Any itemized deductions have to add up and pass the standard deduction. Thats normal, but they add up.

With that said, as a lot of people said, in high cost areas, it goes really quick, especially if you add municipal taxes which can also be deducted. So if you have 500 bucks a month in municipal taxes (which is kind of low in high cost areas), you're already halfway there. Add the interests (often half of your mortgage payments), and you're well beyond.

If you're in an area with million dollar houses being quite common (we are talking about the rich poor gap after all), you're talking about a 30-40k deduction easy, and even more for super rich.

One thing beyond that (any accountant in the crowd correct me if I'm wrong), the mortgage interest deduction for your primary residence is special in that it is one of the deductions that can be applied to AMT. So again, it helps the ultra rich.

I'm no 1%, but I am affected by AMT, and my place is in a high cost area, and this tax deduction is the only thing saving me from crapping my pants every year when I file my taxes.

ww5202• 9 years ago

500 dollars/month for municipal taxes? Can you elaborate on those? I might be missing these deduction in the past.

jupiter90000• 9 years ago

When I was thinking of buying a home, some people said "it's great because you can deduct your mortgage interest and property taxes." I haven't seen it help more than the standard deduction yet, and even if I do it may only reduce my taxable income by a few grand.

The only thing I can come up with as to why people think the deduction is so great is that people can be really bad at math and think removing tax on perhaps a few grand of income is a huge deal.. for the few thousand that are returned, I'm sure at least that much will be spent in home maintenance/repairs/tools/etc... I may sell soon and go back to renting.

The only part that makes it work out is home value appreciation, which is somewhat speculative and overall seems worse/equal to other standard investments.

clavalle• 9 years ago

I'd be willing to bet that if we eliminated the home mortgage interest deduction completely it would barely move the needle of what homes people choose to buy or the number of renters vs. owners.

I would love to see the numbers, though.

dcdanko4• 9 years ago

Yep, bigger issues are the lack of low cost housing units to buy and older institutionalized discrimination. Not the MID.

Swizec2• 9 years ago

Until I can afford a down payment [in a location I like] you can put up as many carrots as you want, I still can't cough up the dough to even think about them.

cmdrfred• 9 years ago

Look into FHA loans. You can have a pretty low down payment.

shados4• 9 years ago

Its like municipal taxes. People don't get about the cost of the house itself. They only care about the monthly payment (or well, the total cost of ownership, since the deduction only directly affect you yearly).

This is kind of like municipal taxes. Take the city of Cambridge in Mass, which has an absurdly low tax rate. Compare it with some of the cities near by (eg Somerville). A similar property in a similar location will bring you down roughly the same amount per month. But in Cambridge, the value of the property itself is way higher, mainly because less goes to the city and more goes to the bank (and your equity).

People factor in the deduction when they check what they can afford. If you save 12k a year in taxes, you can pay 1000 bucks a month more, which translates in a significantly more expensive property. If the deduction goes away, property value will adjust accordingly (blips down at first, maybe go up a little slower for a bit until things even out considering inflation and stuff).

People who currently have a property and cut it a little close might be in trouble if they are not grandfathered, and people selling in the short term might be a little sad.

rootusrootus3• 9 years ago

I have no doubt that some folks get out a calculator and plan out their budget based on the deduction, but I think many do not. Anecdotally, myself and the people in my group of friends who also own houses, we budgeted for the mortgage payment irrespective of tax benefits and just smiled on tax day. I really try to avoid as much as possible relying on outside variables like tax deductions when planning my budget. I go in conservatively and then appreciate the benefits while they last.

DamnYuppie• 9 years ago

I don't know of anyone who bases a home purchase decision on the mortgage interest deduction. Seriously location, school district, cost of home, time to commute, yard size, cost of HOA are all more important to everyone I know. In fact it has never come up in conversations about home purchases with my peer group.

dcdanko4• 9 years ago

It can be useful for small scale real estate developers who can use their home to get cheap capital.

skwirl• 9 years ago

It definitely factors into my home ownership cost spreadsheet that I use when looking at houses. There's also a property tax deduction.

at-fates-hands2• 9 years ago

Agreed.

I've bought three houses in my lifetime and the MIB was never even in the conversation in any of those purchases.

kgwgk• 9 years ago

Didn't you deduct the mortgage interest you paid?

awkwardtortoise2• 9 years ago

Everyone does. Mortgage, property tax, etc deductions can significantly lower your tax basis.

maxerickson• 9 years ago

That's because people are mostly going to be able to use it, there isn't anything interesting to say about it.

To the extent it factors into the monthly payment people can make, it impacts all the things you list.

shados4• 9 years ago

The renting vs buying choice is absolutely a common topic when people consider buying. Also, when comes time to see how much you can afford per month, it is absolutely part of the calculation. In SF, NYC, Boston, etc, it can make a difference of 1000+ a month when doing your budget in the range software engineers look at (which is not an uncommon case, obviously).

refurb• 9 years ago

Sure it does. Think of it this way....

Targeting an all in home payment (principle, interest, insurance, taxes) of 1/3 your $100K income, so $30K or $2,500 per month.

In a world with MID, the ~$1500 in interest payment each month can be paid with pre-tax money. Assume you're in the 30% bracket, that means an extra $450 each month. Now you can afford a mortgage that costs effectively $3000 per month, which comes out to another $50K to $75K in purchase price (rough estimate assuming 4% interest rate).

kudokatz4• 9 years ago

Now you can afford a mortgage that costs [more due to market distortions]

sounds like a great way to push up prices!

slantedview• 9 years ago

The MID certainly does play a factor in determining how much home to buy.

x3n0ph3n3• 9 years ago

It's one of the big reasons I want to purchase a home right now. My effective tax rate was 27% last year and I feel like I'm burning my money by renting.

dnautics2• 9 years ago

It also has an indirect effect. Because it exists, it alters the prices of what exists on the market even if it doesn't change the individual (go / no go) or selection choice.

accountyaccount6• 9 years ago

I did to some extent. I bought at the right time in one of the most expensive housing markets and I'm saving ~$500 a month because of MID. I couldn't even have a stable savings account until I bought a house.

njharman3• 9 years ago

It's exactly why I bought instead of rented. In fact I bought another house and rent the original. It's a tax loss and yet every month equity builds.

smileysteve3• 9 years ago

cost of home

The MID indirectly affects the monthly payment on a home. It reduces the effective monthly payment.

Anecdotally, for me; it 1/7 discount on my mortgage cost. (Which I can realize more quickly by adjusting my w4)

anovikov• 9 years ago

Why is it somehow bad that people who are investing their money in the place where they live - thus becoming more responsible citizens than renters who can just pack up and leave - are getting a small bonus for it?

arbuge• 9 years ago

Please provide proof to back up your claim that this makes them "more responsible citizens".

rootusrootus3• 9 years ago

Although the parent poster was being a little inflammatory with the choice of words, there is a bit of an interesting point there. Is there a benefit to society in general from people owning homes instead of renting? High portability can benefit the renter, but a bigger commitment to the neighborhood perhaps benefits the rest of us? Maybe enough to incentivize?

avelis• 9 years ago

I think I remember hearing something on Planet Money on if the MID was reformed or eliminated that house prices would drop basically across the board as an adjustment to that tax code change.

Certain homeowners with a mortgage could, almost overnight, go underwater with their home and on the other end homes could become more affordable under a smaller price point.

dcdanko4• 9 years ago

Surely the MID would need to be slowly phased out or just capped?

rootusrootus3• 9 years ago

I would think so. Assuming it was politically feasible at all, it seems like it would need to be phased in. Or at least announced quite publicly that loans originated after a particular date could not have their interest deducted. It's not particularly fair to existing homeowners to eliminate the deduction after they've already purchased a house.

smileysteve3• 9 years ago

Micro economically, the same happens as interest rates go up. As interest rates go up, the demand at that price drops, which means that supply has to lower the price to keep a liquid market.

If you're in the currency manipulation / house flipping game, you ideally want to buy when interest rates are high and sell when interest rates are low.

frgtpsswrdlame2• 9 years ago

Here's the economist perspective:

Above all, it is inefficient. By subsidizing bigger, more expensive houses, the policy misallocates scarce savings away from productive investments that raise living standards through income- and job-creating innovations. It also makes our financial system more vulnerable: as we wrote in an earlier post, it encourages people to take on risks – in the form of large, subsidized mortgages – that they are not equipped to bear. In the recent crisis, risky mortgage debt was sufficient to put the entire financial system at risk.

http://www.moneyandbanking.com/commentary/2015/6/3/why-the-m...

kcorbitt6• 9 years ago

So this article advocates for the removal of the mortgage interest tax deduction, because subsidizing home ownership leads to a larger economic divide between owners and renters. As a renter, I appreciate the intent, and I also appreciate any measure to simplify the tax code. That said, I also see compelling arguments in the deduction's favor. The sad truth is that most Americans are terrible at saving and in very poor shape for retirement[1]. And empirically, a home mortgage is perhaps the most successful mass-market forced-savings program in American society today, with much higher participation than tax-deferred retirement accounts[2]. So I see the advantage of tax policies that encourage people to buy their home.

[1] Time to get on my customary soapbox: spend less, save more! You'll be happier today, and much happier in the future.

[2] Back on the soapbox: If you're an American making a professional salary, have no debt and are not maxing out your IRA and 401(k) contributions, there will be a moment in your future when you do the retrospective calculation on how much more money you would have if you had done so and be very sad. :) Minimize regret, and save more today!

frgtpsswrdlame2• 9 years ago

But most of the MID goes to benefit those who have plenty to save already. Also, I think looking at mortgages as a savings program is incredibly short-sighted. Mortgages are risky and the MID encourages people to overleverage.

marze• 9 years ago

The interest deduction benefits higher income people with more expensive houses. Like you say, it has no benefit to those paying -10k in interest.

Declanomous• 9 years ago

Even if you have debt, you should be taking full advantage of your employer 401k match if one is available to you. In almost every case you will come out ahead even if you withdraw the money early.

So many of my coworkers do not contribute to their 401K at all, which is literally just leaving free money on the table.

colordrops• 9 years ago

Are there employers that still match? I'm only half joking.

martincmartin• 9 years ago

It used to be forced saving, but now people can get second mortgages, HELOCs, reverse mortgages, etc.

Also, we could cap the home mortgage interest deduction, and it would still benefit the poor, but not the rich.

epistasis3• 9 years ago

Your goal appears to be to increase savings among the population that has difficulty doing it.

The question is whether this tax deduction actually promotes what you want. I think that the article casts a huge amount of doubt that it would.

accountyaccount6• 9 years ago

It might make more sense to kill the tax break on properties north of $1m and shift that to relief for renters under a certain income threshold.

You'd leave in place the break for the majority of middle-income wealth builders, close yet another loophole for the wealthy, and enrich lower income renters.

It would never ever happen with our current political climate (money is influence), but I feel like it would make sense. As the article mentions, a complete repeal of MID would be even more difficult.

blawson• 9 years ago

Interest is only deductible on the first $1m of a loan already.

mjevans• 9 years ago

Shift the relief to renters by doing __everything__ possible to have more rental units on the market. The only way to ensure competition in this space is to have over-supply of potential units so that bad pricing and poor service have the relief valve of moving somewhere else (near by).

tehlike3• 9 years ago

It sucks to be in the bay area, where houses start from 1.XM$.

alistairSH• 9 years ago

You could also remove the MID on second homes, which are generally a true luxury.

komali22• 9 years ago

Regarding 2: I cannot wait to pay off my debts (scheduled in September!) and start putting money in IRA and 401(k) :) Every time someone asks me if I'm using the 401k I always feel sheepish answering "no... because I have debts with a higher interest rate than I'd get on the return..." Nobody seems to buy it but I've run the math again and again, it's just true.

tehlike3• 9 years ago

how much was your loan interest?

pyoung2• 9 years ago

Does your company offer a 401k matching program? If so, that is basically an instant 100% return. If they are not matching, then you might be right, but if their is a match on the table, it probably makes sense to max that out.

rb808• 9 years ago

"no... because I have debts with a higher interest rate than I'd get on the return..."

Sorry to tell you now but this is the wrong way of looking at it.

The 401k will save you from paying tax the next 50 years. The first few years you might be a little behind but its worth it because later you'll have your contributions throttled. (assuming you can pay that much in)

kcorbitt6• 9 years ago

Totally, there are people who have higher-leverage savings strategies than investing in a 401(k), like paying off debt in your case. In the end, the most important number to track is your savings rate (total consumption / total income). If you have a savings rate of at least 25% and can maintain that throughout your working career, don't worry, you'll retire rich. :)

snuxoll2• 9 years ago

Something worth keeping in mind is employer matching as well as the ability to take loans from your 401(K). My employer matches up to 6% of my salary at 150% (man is this awesome), the past year I've been putting my 6% in and just last month I took half of everything (including the employer match) out as a loan to pay off debts at 4.25% APR. The money would perform better in the market than the interest I'm paying back to myself, but I'm not throwing money away on interest to the banks and instead paying it back to myself while continuing to make my regular contributions.

ianai6• 9 years ago

I just personally disapprove of 401ks. For one, I remember the Great Recession. They bailed out the banks and left the little guy/gal to ruin. Contemporaneously, all those fancy market valuations stink of an economy about to tank, again. I value investing in stocks/bonds, but in current conditions I would not trust a 401k investment broker.

cbhl2• 9 years ago

Yes, this is the right thing to do.

From /r/personalfinance: https://i.imgur.com/fb7Dtmh.png

Retric• 9 years ago

Savings are only part of the equation. Home ownership lowers income mobility by reducing the competitiveness of the labor market and increasing commuting costs.

Worse it promotes moving to areas with the maximum possible jobs which destroys smaller towns and city's while creating even worse congestion.

kudokatz4• 9 years ago

Home ownership lowers income mobility by reducing the competitiveness of the labor market

Yep. But I still bought anyways, even though houses are what I consider "bad investments" if looking at them in the abstract:

* high transaction costs * illiquid * concentrated * requires maintenance ...

But the calculation was that since the local market and job market for me are amazingly hot right now, it'd transfer my variable costs into fixed costs and be a cash transaction.

Still worth it in some cases.

aswanson3• 9 years ago

It's a massive bet on a local employment market in an increasingly volatile economy. It's not an unalloyed good incentive.

cubano• 9 years ago

What about the inevitable growth in telecommuting? Surely owning a home with plenty of space for a semi-isolated home office would be a good thing?

kcorbitt6• 9 years ago

Totally. All else being equal, socking away your money in broadly-diversified index funds within a tax-advantaged account is a more reliable strategy for wealth building than buying a single house in a random market. But human psychology gets a much bigger kick out of owning your own home than owning very small slices of profitable companies in 191 countries, and when public policy and human psychology collide, human psychology wins. :) It's better to incentivize people to save in the way they're willing to save anyway than have people not save at all.

zaph0d_2• 9 years ago

The problem with renting is, that it will return to you a temporal value(a space to live in each month, after the month this value is basically gone), whereby buying a house will return a lasting value, which you can even use by selling the house. In order to tackle this, the law should be implementing mechanisms to return value to the renter, like the ability to buy the flat after living in it for a certain number of years(like 15-20 years) for a multipel of the monthly rent. This would encourage people to rent longer and would return a fraction of their paid rent to them. But the details would be very complicated, like how do you prevent the landlords using the contract to kick people out, when they've rented the flat almost long enough to buy it?

As rents were cheaper in the previous decades compared to the monthly income, this mechanism would not be necessary. But basically burning half of ones income in order to live somewhere must return some value or around the world not only in the US we will have very poor renters and very rich home owners. This can even lead to even more radical political movements.

rlanday2• 9 years ago

If you want to live somewhere for 15 to 20 years and guarantee you won't be kicked out, you should buy the place. Not everyone renting wants to live somewhere long-term.

ltdanimal• 9 years ago

This falls apart pretty quickly when you think about the fact that the government would be forcing someone to sell something they own

kudokatz4• 9 years ago

like the ability to buy the flat after living in it for a certain number of years

The market would price this in, and then renters would just pay more for that right. Why not just leave the system as-is and let them buy if they choose?

OR there would be people getting kicked out of their rentals in order to avoid the "option" to buy becoming active, and then reactive legislation, and then ... a huge spiral of fights over market distortions that layer on top of each other.

jayess• 9 years ago

Renters get absolutely screwed. Not only is there a mortgage interest deduction, I live in an area that has a special tax on rent. So not only do we pay property tax through the landlord (and probably a higher property tax for non-primary residences), we get a sales tax on top of that, being a tax on the tax.

Either end the mortgage interest deduction or allow rent to be deducted (at least in part).

cmurf2• 9 years ago

If the tax were dropped, the short term effect is people would spend the saved money on something else. And in the long term they'd find rental that ends up in the same ballpark price per month - so they'd end up not saving anything and the various governments wouldn't collect taxes. So the tax would have to come somewhere else.

njarboe• 9 years ago

I think the ease of getting a home equity loan and the ease of refinancing (see Rocket Mortgage, etc.) has reduced this forced saving dramatically. If you don't have the saving mentality, it is easy to get in the habit running up credit cards, paying high interest, getting a home equity or refi offer in them mail, deciding "save money" by cashing out any home equity built up to pay off the higher interest credit cards, repeat as necessary. This cycle is even more tempting in places where the price of homes have rapidly appreciated and the cost of living is going up much faster than wages or the official inflation rate.

naravara• 9 years ago

And empirically, a home mortgage is perhaps the most successful mass-market forced-savings program in American society today, with much higher participation than tax-deferred retirement accounts[2].

You just made an argument for a forced-savings program, not for a home mortgage deduction.

Moreover, I think the issue with savings is a service problem, not an impulse control problem. Tax deferred accounts are complicated to figure out for a lot of people and it can be difficult to keep track of for people who don’t do regular, salaried work. I still have 2 or 3 401ks from previous jobs that I haven’t gotten around to rolling over just because coordinating with them and getting the form filled out is a bit of a hassle and it’s an easy thing to procrastinate on. And I have the advantage of actually knowing how this stuff works!

If it was as easy as just having a chunk of my salary taken out on a regular basis, and made opt-out rather than opt-in, you'd get a way higher participation rate.

kcorbitt6• 9 years ago

Yes, I am also in favor of auto-enrolled savings programs. I would be happy from a public policy perspective if we replaced the MID with some sort of automatic savings program that was difficult and annoying to opt out of (maybe intentionally overtax everybody and then stick the tax refund in an IRA by default, and require annoying paperwork to actually get your money back in cash?).

logfromblammo• 9 years ago

I would actually argue for an opposing viewpoint. Rather than eliminate the mortgage interest tax deduction, allow the interest on all debts, and rents, to be deductible. If you really need to tax that money twice, raise the tax rate on incomes earned from interest and rent.

The problem, as I see it, is FNMA and FDMC. Those entities, whose purpose was to ensure that a market for residential mortgages would exist, is now actually just engines for inflating housing prices and commoditizing low-risk real estate investment. They are the means by which an investor may become an absentee landlord without assuming any of the normal responsibilities of property management. Ordinary people volunteer to maintain and improve the investment properties, because they are offered the illusion of ownership.

A wise and shrewd financial plan can certainly make the mortgage system work in one's favor, to produce genuine ownership, but for the most part, it has done little more than create another class of resident somewhere between owner and renter: the mortgage-payer.

Having been both renter and mortgage-payer, and having seen some of the ugly hidden details of the US housing market, I do not recommend that anyone in the US software industry actually choose live in a mortgaged home except in the following places: New York City, Chicago, Washington DC, Austin, Seattle, Boston, Portland, Phoenix, Denver. (California properties near LA and SF are simply too overvalued, in my opinion.) Nowhere else has a sufficiently dense industry to ensure that one can work an entire career in the same place without sacrificing higher regular pay as an alternative to moving.

I would still like to actually own my own home one day, but as parent poster mentioned, I have done the math, and determined that I would be better off renting and saving, rather than borrowing and paying. And one of the major reasons why is that I have little sense of certainty with respect to where I will be living in five years, and that is roughly the absolute minimum timespan required before taking a mortgage can become less expensive for me than renting. Another is that any event likely to force me to move to find work is also likely to depress local property values. I would prefer to park my net worth in an asset that rises in value when people like me lose their jobs, and in assets that I am not forced to sell when I move, lest they become a financial burden. The money I save can be used to buy a retirement home, after I am done worrying about the consequences of place involved in moving around or staying put.

The problem with that mass-market forced-savings program is that dumping all your retirement funds into just one depreciating asset is just a horrible way to retain value. The only reason it works at all is because it forces people to literally sit on their nest egg. They must be aware and cognizant of everything happening to it, and actively defend against any threats to it. It forces people to be active investors in a market they are familiar with, because they live in their own neighborhoods.

Steuard• 9 years ago

The desire to encourage home ownership to encourage savings was addressed in the article, I think. They pointed out that lower income people usually rent (because they can't afford to own, maybe particularly the down payment) and middle income people who own their homes are often still better off taking the standard deduction (rather than itemizing to include the mortgage interest deduction at all), so the overwhelming majority of the mortgage interest deduction's benefit goes to people who are wealthy enough that they would almost certainly own their own homes regardless.

I'd be interested in seeing a careful study of the degree to which the mortgage interest deduction actually plays a significant role in home ownership rates. But at least based on this article, it sounds like it's noticeably less significant than I'd thought.

rconti2• 9 years ago

But it only drives housing prices up so it's not really an incentive.

scarface74• 9 years ago

The mortgage interest deduction doesn't help the middle class that much with today's low interest rate.

If you're married filing jointly, your standard deduction is already $12000 -- which is more than you would pay in interest the first year on a $300,000 mortgage at 4% interest.

The median price of a home is $188,00 (http://m.huffpost.com/us/entry/4957604).

jakelarkin• 9 years ago

MID is a nice subsidy but one really can't speak to economic inequality in housing with calling out use of local zoning regulation as cause of artificially low supply. A lot more people would be able to afford a house or at least have cheaper rent if it werent for the shenanigans going on with development/zoning reviews.

dnautics2• 9 years ago

"It is difficult to think of another social policy that more successfully multiplies America’s inequality in such a sweeping fashion."

Tax deduction for employer-insured healthcare?

rqebmm• 9 years ago

Carried-interest loophole?

11thEarlOfMar• 9 years ago

It's a very complicated effect to model. Some random thoughts: Increasing home prices also means increasing property taxes and increasing insurance costs. Larger homes mean more expense to heat, cool, furnish, maintain, etc. Some of the tax savings can contribute to a larger mortgage and thereby drive higher home prices, but there are quite a few offsetting expenses.

Home equity is a contributor to the wealth effect. The wealth effect is a driver for consumer spending. Consumer spending is one of the more potent economic forces.

The mortgage deduction makes home ownership more affordable, but does not mean anyone can buy anywhere. Most people who rent can identify some other location in the US where they could afford to buy. They'd need a job that produces a sufficient income, and they'd need a down payment. But they need those with or without MID.

If we simply eliminated the MID, we'd see a period of volatility in real estate prices that would eventually settle out into a new equilibrium. But would that equilibrium be better overall for the economy? Would more people be able to own?

kemiller3• 9 years ago

Removing the MID would make middle-to-upper-middle-class people poorer, and so reduce inequality that way, but would it help poor people at all? The net monthly cost of housing would stay the same, just shift the proportion of your payment that goes to the government vs the bank. It's true that it's regressive, but I'm skeptical that's a huge factor.

I think it would just help landlords, who would retain the ability to deduct mortgage interest as a business expense, and who would suddenly have both an influx of people kicked back into the renter pool and cheaper properties.

The real issue is lack of supply due to zoning and planning issues, and probably the cultural preference for single-family. Also the crazy-low rates.

Edit: To be clear, I'm not saying the MID is a great thing. If it didn't currently exist, I wouldn't be in favor of introducing it, and it was a huge windfall to whomever owned property when it was introduced. But what's done is done, and it would be pretty punitive to impose a negative windfall on every homeowner in America now. Maybe grant a one-time benefit when you change the tax code and let things sort themselves out from there?

accountyaccount6• 9 years ago

I think adding an upper limit to MID would serve everyone well.

hkmurakami2• 9 years ago

Already exists.

tanderson923• 9 years ago

It is currently in-place at $1m of mortgage debt, and this fact was mentioned numerous times in TFA. It was mentioned in the article that Rep. Keith Ellison wants to move that number down to $500k.

dustingetz• 9 years ago

the article says that the MID causes upward pressure on prices, which you acknowledge in the edit but not in your first sentence

kemiller3• 9 years ago

That's why it would make them poorer. Removing upward pressure on their largest asset makes them poorer as the price falls.

strictnein3• 9 years ago

"it was a huge windfall to whomever owned property when it was introduced"

It is my understanding that all interest used to be tax deductible and college and home mortgage are the last ones remaining.

kemiller3• 9 years ago

That's not what TFA said as I read it.

thescriptkiddie3• 9 years ago

The proposal I have seen elsewhere is to replace the mortgage interest deduction with a refundable tax credit capped at some fraction (perhaps 40%) of the median housing cost. That way it would be equally valuable to the rich and poor, and would not encourage people to take out high-interest mortgages. It would still be a distorting force pushing housing prices up, but it could be phased out gradually (perhaps over 30 years) if necessary.

I also very much agree with your point that the main cause of high housing costs in the US are poor planning and zoning.

homeowner55• 9 years ago

Just a thought experiment: If home ownership was rare, almost everyone would be renting. The management company in addition to having to pay the bank loan would also have to make a profit.

To me that sounds tantamount to another tax on living. Anecdotally, owning in LA is cheaper than renting a comparably nice place. And that's irrespective of tax breaks.

rlanday2• 9 years ago

The management company can probably manage and maintain a large number of properties more cheaply per-property than a homeowner can maintain a single property. So even if the management company is turning a profit, that doesn't necessarily mean it's a bad deal for the homeowner. Your argument is basically the same as "no one should ever hire a plumber because the plumber is turning a profit which makes it a bad deal."

1_2__3• 9 years ago

I think about how recently and spectacularly housing has gone off the rails and I get so sad. What a complete disaster this is turning into.

gricardo99• 9 years ago

You can go back further, start around the 1930s, and see housing policies/practices that didn't just drive inequality, but also segregation[1]. I was shocked (pardon my ignorance).

1 - https://www.amazon.com/Color-Law-Forgotten-Government-Segreg...

KboPAacDA3• 9 years ago

What's done in Europe?

bigpeopleareold• 9 years ago

In Norway here, many municipalities do not have property tax. Oslo implemented it recently, but only for property greater than a certain limit (and there is a push, of course, to remove it.) You can tax write-offs on interest from mortgages and also writeoffs and hire interest if you save in a BSU account (Bolig Sparing for Ungdom, or House saving for the young, which only applies to those 18-34.) Also, I think you can get any rental income written off if you rent a room or a basement apartment for 7000 NOK or less.

The fact is now, Oslo is experiencing what people are calling a housing bubble. Prices are also impossible given salaries (given conversion rates, they do not compare to the prices like in NY, for what it is worth.)

All these things tend to point to two directions: a) there is such a drive to own your own home here that it has done something to housing prices and b) they want people be maintain debt. Unlike the US, you can write off credit card and personal loan debt. It's a nice thing to be able to do but I'd presume that encourages a credit boom.

gumby3• 9 years ago

The mathematics of the MID are dumb; the optics are what sell it. If it lets someone making, say, $100K a year able to spend 30% more on a house payment, it also enables everyone else making 100K/year to pay that much more. So the same people compete for the same houses. Its main effect is to push up the commissions the agents pay and increase the amount of interest banks earn. It doesn't actually help the person buying the house.

Except that if you're in an increasing market it can push the sale price up.

A fetish for home ownership also screws up labor force mobility and reduces the granularity of variations in cost of living (some of which is discussed here). We'd be better off if large, publicly traded corporations owned most of the housing stock and provided it on long term lease (which is almost the situation today, but in the most complicated fashion possible). Then nobody would be "tied to the land".

hrxn• 9 years ago

So, in effect, large, publicly traded corporations would then own the land, as you describe it? You think that's a good idea?

gumby3• 9 years ago

A reply to my comment is marked dead and I can't revive it, but I can still reply to it:

So, in effect, large, publicly traded corporations would then own the land, as you describe it? You think that's a good idea?

I don't mean it "in effect" I mean it explicitly. The advantages are large and the risks addressable:

- It spreads ownership around: the shareholders all own the housing stock the corporation owns. Thus they are buffered from the risks of a local market downturn.

- It makes moving easier (if you live in a place that suffers, say, a huge factory closure, you can't sell your house since everybody else wants to do so as well).

- It encourages a variety of housing types (single family to semi detached to large apartment blocks) and again buffers against, let's call it, "style risk").

And frankly when you have a large corp you can regulate some of the most egregious problems like fair housing rules, environmental and code issues, etc. Such companies are likely to be stable equities good for retirement funds etc similar to publicly traded utilities and less like airlines much less high tech businesses.

gumby3• 9 years ago

Wow, so this got down voted too. It's not inflammatory or off topic: how about responding to it instead?

kcorbitt6• 9 years ago

From the article: "She goes without a savings account and regularly relies on credit cards to buy toilet paper and soap."

Maintaining a relatively constant credit card debt (which is what it usually meant by "relying on credit cards" for routine purchases) is often more of a financial literacy problem than an income problem. It's obviously harder to get out of this trap on a low income, but if you're servicing your debt -- and if you're living off of credit cards long-term you have to be -- then your average income actually matches your average expenditures, including credit card interest charges. Someone in that situation would be so much better off if they could just pull together the few $1000's necessary to pay off the debt, and then start slowly accumulating savings from the money that would otherwise go towards interest payments. Unfortunately, the people I know who live on credit card debt seem willing to spend any small windfall that comes their way immediately, instead of using it to pay down those high-interest loans and start saving.

I have a brother-in-law who's in this situation. He makes $90k and has no dependents, but seems to have constant credit card debt that fluctuates between $10-$20k. That's an extra $1500-$3000 free and clear he could have every year by just paying off his cards and pocketing those interest payments, but for whatever reason he sees things differently and is totally content to carry that balance indefinitely.

lr4444lr• 9 years ago

But then you invite an onslaught accusing you of blaming the poor for their cyclical poverty, because they never had parents who taught and modeled sound financial behavior.

SaltySolomon• 9 years ago

I really don't get this deduction, it is basically rewarding people to take risk and makes it better to take a morgage than buy the home outright?

AnimalMuppet6• 9 years ago

No. If you pay $X in mortgage interest, you get $X * Y% back, where Y% is your incremental tax bracket. That is not a net win. It's just less of a loss.

JustAnotherPat• 9 years ago

if you put your money in something like crypto instead, you can come out ahead easily.

macmacaka• 9 years ago

Is this the right TL;DR of this article? "Homeownership leads to inequality". "Inequality is bad". Therefore, "Home ownership is bad". Therefore we should make home-ownership as hard as possible. So when nobody owns a home, everybody is equal. Sounds about right.

wnissen2• 9 years ago

The subsidy is enormous compared to the cost of other housing programs, and it almost all goes to well-off or rich people. So, no, your TLDR is not accurate, as it points to homeownership as an important wealth-building mechasism for those who can afford it. Furthermore, since the FHA was straight-up refusing to insure mortgages in black communities until 19-freaking-68, there is a strong historical effect of perpetuating racial inequalities by making only whites eligible for housing subsidies. We spend more than four times as much on mortgage interest than Section 8 housing subsidies.

TL;DR: The mortgage interest deduction is a welfare payment that you have to be rich (and until 1968, white) to get. Maybe we shouldn't spend $71 billion a year on it.

spaceflunky5• 9 years ago

This article is incredibly misguided for several reasons...

1.) If you truly are "rich," then you pay for your home in cash. You do not take out a mortgage on your house. Look at a distribution of loan amounts, the vast majority are around $600k. Very few are are >$1M [0]. Home loans are a product for middle-class Americans.

2.) A lot of rich people don't really pay income taxes like middle class people do. This is something a lot of people fail to understand. For example, you can be multi-billionaire and make $0 in given year and still be a multi-billionaire.

3.) If you're rich, do you really care about the $20k deduction you get every year? Probably not.

4.) Interest rates are so low that the deduction is becoming less relevant. For example, if you take out a 3.75% loan on $600k, your deduction really isn't that much, you get to deduct a whopping ~$20k, which even if the highest tax bracket, you'll get back ~$10k The deduction argument holds a lot more weight when interests rates are high.

But glad to see more attacks on the "bourgeoise middle-class" from the trusty NYTimes.

[0] http://lenkiefer.com/2016/10/11/hmda-viz1

microdrum• 9 years ago

This, 1,000x.

There are a lot of families making $1 million gross ($500K net) in income. They live in SF and NY. Both parents work 10 hour days. They live in an uncomfortably small house and have a $1 million mortgage. They can barely save for college after paying for childcare costs and the mortgage. But they're "rich." Yeah, right.

mi100hael• 9 years ago

Is there really no cheaper housing options available to people like that? That sounds absurd.

chadgeidel• 9 years ago

Not sure about your numbers here. A million dollar mortage today represents just under $5k per month or $60k per year. that's well under the recommended 30% for a $500k income. I have a hard time believing "They can barely save for college after paying for childcare costs and the mortgage" - I have no idea what childcare costs are, but I would be shocked if they were in excess of $300K-$400k per year.

kudokatz4• 9 years ago

Their choice to buy a house like that in such a market and have a kid on top of a huge mortgage with almost no free time. Consider an alternative: live together in a tiny $3k/mo apartment, save hundreds of thousands of dollars a year, move to a low-cost market, and retire at 35 with an amazing amount of money. THEN have children while the investment portfolio goes bananas over the next few decades ...

zardo• 9 years ago

1.) If you truly are "rich," then you pay for your home in cash. You do not take out a mortgage on your house. Look at a distribution of loan amounts, the vast majority are around $600k. Very few are are >$1M [0]. Home loans are a product for middle-class Americans.

Looking at the distribution of loan amounts would only be meaningful in the context of the distribution of home sale prices.

Obviously fewer loans are made for houses that fewer people are buying.

spaceflunky5• 9 years ago

Right, but who would take out a $750k loan on a $8.5M house?

I concede I lack the data to prove my point, but common sense would tell you that these loans are almost all within the middle class home bracket.

jrs235• 9 years ago

5.) As principal is paid down and the interest portion of the payment decreases, the credit approaches zero.

humbleMouse2• 9 years ago

1.) If you truly are "rich," then you pay for your home in cash.

You might buy a house in cash if you're rich to get a better purchase price and have a quicker closing process. However, you would likely mortgage the house AFTER purchase and then invest that cash in a high dividend stock or some other security.

Only a rich fool would keep a house mortgage when interest rates are as low as 2.5% in some cases. (source: friend who has this interest rate)

For instance - there are some REITs that return dividends higher than 8%. What rich person would want to keep non-liquid capital tied up in home equity when there are plenty of high performing dividend stocks out there?

spaceflunky5• 9 years ago

Yes, but in that case low interest rates are driving the decision to loan, not interest rate deduction as the NYTimes article posits.

southphillyman• 9 years ago

Your points ignore real estate developers..... Even the most successful ones that I know leverage debt in order to minimize risk. There is an entire strategy around this which developers use to scale quickly. It relies on them taking out loans and allows them to continue to use their capital on other things.

npongratz2• 9 years ago

1.) If you truly are "rich," then you pay for your home in cash. You do not take out a mortgage on your house

As a counterpoint, Mark Zuckerberg paid for his home with an adjustable rate mortgage, as reported in 2012:

http://www.sfgate.com/business/article/Mark-Zuckerberg-s-mor...

hectorr• 9 years ago

Depends on the interest rate and your opportunity costs.

pg314• 9 years ago

The point of the article is that the upper middle class is profiting disproportionally from the MID, while the poor don't. From the article:

What this means in aggregate is that households with at least six-figure incomes receive more than four-fifths of the total value of mortgage interest and property-tax deductions.

Your arguments about the "rich" and multi-billionaires miss the point.

spaceflunky5• 9 years ago

But are "upper-middle" class really the problem here? Again, look at the distribution of mortgages, at most someone is writing off like $40k worth of interest, which will net them $20k a year. Does that really make the whole housing market that much more expensive?

Why not attack the bigger problems, like off the top of my head...

how housing has become a commodity and large equity firms and snatching up real estate...

the amount of foreigners buying homes...

the fact that we've barely built ANY housing in major cities in the past 30 years...

how our population has grown significantly, but our housing stock hasn't...

how people are living longer and staying in their homes longer for lack of better options...

wmblaettler• 9 years ago

Anyone able to find a link to the "widely cited 1996 study estimated that eliminating the MID and property-tax deductions would result in a 13 to 17 percent reduction in housing prices nationwide"?

cmurf2• 9 years ago

FWIW, business rent is tax deductible, whereas personal rent is not. Another way to look at it is, personal rent is taxed, so it acts as an indirect consumption tax.

ars• 9 years ago

who generally fail to acknowledge themselves to be beneficiaries of federal largess. “Today, as in the past,” ... “most of the recipients of federal aid are not the suspect ‘welfare queens’ of the popular imagination but rather middle-class homeowners, salaried professionals and retirees.”

This quote is extremely misleading! There are not given aid, they are just not charged as much tax.

When people think "welfare queens" and "federal aid" they are talking about people who pay negative tax - they get more aid then their tax.

Simply not taxing people at 100% of their income should not be considered "aid".

pjmorris• 9 years ago

"It is difficult to think of another social policy that more successfully multiplies America’s inequality in such a sweeping fashion."
"In 2015," "That same year, the federal government dedicated nearly $134 billion to homeowner subsidies."

The article author isn't thinking of the Fed's various QE programs, which have subsidized lenders through the purchase of ~1.8 Trillion in mortgage-backed securities over a five year period after the financial crisis. MID is a drop in the bucket next to that.

If you treated the 1.8T as a single 30 year mortgage at, say, %3.5 interest, that's about a 10 Billion/month mortgage payment we're collectively carrying to bail out whoever sold those MBS to the Fed. That's about the same as the aggregate homeowner subsidies mentioned in the article.

acconrad• 9 years ago

Can anyone speak to how taxes are appropriated? Because in all of this talk about MID and perhaps how eliminating it might level the playing field, that only seems to make sense if that money is then appropriated to lower income individuals. I mean the government could simply take that surplus of taxes and shove it into the military for all we know, which in the end doesn't help anyone given our already exorbitant military spending budget.

I also wonder how much of this is personal accountability, and I say this as someone who has voted for and willingly pays additional taxes to provide low income housing opportunities in my community. I mean one of the families that was highlighted was a family of 6 that lives off of $50k/yr with only one parent working. Personally I can't imagine raising one child on $50k/yr in the greater Boston area, let alone 4, and knowingly not trying to have both parents employed. The wife even mentions that the husband was out of work for 8 months...were you not trying to fill in the gap? Even a minimum wage job should cover the cost of day care for their youngest child, who is too young for full-time schooling. I'm really trying to be on the side of some of these folks, but their stories and situations find it hard for me to empathize.

ianai6• 9 years ago

Why would you remove something to lower everyone? How about looking for tax incentives for renters? Maybe make rent increases tax deductible. I read this as a tale about "how the property owners are standing on the promise of the working class".

xherberta• 9 years ago

Even a minimum wage job should cover the cost of day care for their youngest child, who is too young for full-time schooling.

In many markets, no it won't, if you can even find a daycare with an opening.

Anyway, this plan sounds like a net negative for the family unless the job can cover daycare PLUS commuting costs, work wardrobe, increased food costs (less time to cook from scratch), and the hassle involved with finding alternate care when any of the four kids are sick.

Some people consider the "humanity value" of having a parent at home to care for children to be worth the financial downside. That's their choice. By the way, most developed nations agree...

From the New Republic: *Among developed nations, the U.S. is now the only one that doesn’t guarantee some kind of paid employee leave available for new parents." http://bit.ly/2pZ03Ay

ProfessorLayton• 9 years ago

Removing the mortgage interest deduction is the third rail of politics. Until most people are renters, I realistically don't see it ever going away, and is one of the few major benefits widely available [1] to the middle class.

The US is still reeling from a strong racial divide, particularly in regards to homeownership. As stated in the article, banks would literally redline neighborhoods that weren't white enough as late as the 80s [2]. But it was worse than that, my parent's house (Built in the 40s) in the East Bay came with old covenant documentation stating that no POC were allowed to live in the home unless they were servants! Thats how bad it was in some areas as prosperous as the Bay Area, and we're still feeling its effects.

[1] https://www.census.gov/housing/hvs/files/currenthvspress.pdf [2] https://en.wikipedia.org/wiki/Redlining

smileysteve3• 9 years ago

It can however, be implicitly reduced. The rumours of the trump plan include doubling the standard deduction and removing the state tax deduction. Minus other major itemized deductions, this will reduce the MID usage.

mikekij2• 9 years ago

It seems many of these articles see tax deductions as the government giving money to tax payers, instead of the government agreeing to forcibly take less of a tax payer's income. It's an important distinction I rarely see made by the NYT.

callalex• 9 years ago

What practical difference does this actually make?

mikekij2• 9 years ago

They're conditioning a generation of taxpayers to see tax dollars as the government's money, rather than the taxpayers' money. This breeds economic entitlement and class warfare.

pc2g4d• 9 years ago

I've been wishing for the following: a compelling, interactive visualization of wealth transfers in the united states. Which states give/get more from the federal government? Which parts of the income spectrum give/get more in taxes/benefits? Is there something like that out there?

Yesterday there was the thing about county wealth disparities. Something like that but more general.

terminlvelocity• 9 years ago

If they wished to show the effects of the MID, I wish they would have started by comparing a renter vs. a homeowner that were in more similar circumstances.

Of course a family with 2 adults that are 10+ years older and waited a decade longer to have kids are going to be in a very different financial situation than a 26 year old single mom that makes 13% of the income of the couple. How does such an apples-to-oranges comparison remotely demonstrate that the MID is the "engine of American inequality?"

But perhaps the point is that the renter has no chance of escaping her current situation? The story of the homeowners proves that it is absolutely possible to do so. Recall that Asare grew up poor. While we don't know much about his wife's background, we do know that the two were also renters for years, before a nonprofit program helped them buy their first house.

How Homeownership Became the Engine of American Inequality

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