Do you think mortgage interest deductions increase the volume of homes sales to families in California?
- Yes (83%, 207 Votes)
- No (17%, 43 Votes)
Total Voters: 250
As the homeownership rate declines unabated by one percentage point annually, and interest rates remain at essentially zero, the federal and state governments are collecting more tax revenue since fewer taxpayers qualify for the mortgage interest tax deduction (MID). They are becoming renters during this Lesser Depression.
Individual federal income tax returns filed in 2009 claimed $71 billion dollars less in mortgage interest deductions than those filed in 2007, according to the IRS. Preliminary data shows the trend has continued through 2010, as use of the MID dropped 7% from 2009. When released, 2011 numbers will certainly see more of the same decline as homeownership has dropped, eliminating yet more MID claims and further increasing taxes the governments receive.
Downward trends in interest rates, home prices and homeownership levels have proven to be a considerable boon to the federal government’s tax revenue. However, employment has declined over this period as well, balancing the government’s revenue gains from fewer MID filings with revenue losses from a decrease in taxable income.
Still, the drop in MID filings has saved the federal government an estimated $13 billion to $26 billion from 2007 to 2010, according to researcher and MID expert, Andrew Hanson.
In states with exceptionally high foreclosure rates, such as California, tax revenues previously lost through the MID subsidy are making their way back into the state’s coffers. From 2007 to 2009, California state income tax filers taking the deduction dropped 9%. Even more significant, the total value of MID deductions fell by 20% over the same period — an unexpected turn in the government’s favor during a time of high unemployment.
first tuesday take
The dark side to the MID is old news for renters. As taxpayers lose their jobs and their homes they pay a greater share of their earnings in taxes, now that they too rent.
This is only one half of how the MID irrationally plays out in a bear housing market, a market that for the next couple of decades is held in place by rising interest rates. As property prices stagnate at present levels, and interest rates are grounded at essentially zero by the full force of the Fed and global economies (a set of market conditions that supposedly stimulate ownership) the benefit of the MID subsidy diminishes in kind.
The data reported above reveal the fatal flaw of the MID subsidy — it only works when leverage and interest rates are high. These function to inflate prices and engorge lenders’ coffers. Now that home prices are beginning to reach equilibrium and low interest rates provide financing at a reasonable cost to the borrower, it has become clear that the application of the MID needs to be reconsidered.
Do you think mortgage interest deductions drive up the price a buyer will pay for a home?
- No (61%, 102 Votes)
- Yes (39%, 65 Votes)
Total Voters: 167
Instead of allowing the subsidy to all borrowers under all market conditions, even to those high-income earners that render the deduction regressive as we are seeing today, it ought only to be applied to targeted homebuyers or under weak economic conditions that may prove most effective in driving events.
For example, a MID for those purchasing homes in a price range that is glutted with inventory unsold during generally depressed economic conditions (such as delivered by the one-year tax credit stimulus of 2009), or in locations requiring government assistance to encourage population growth. This might be possible if the functioning of the real estate market were not emotionally dependent on the dysfunctional drug that is the MID subsidy applied today.
Related articles:
Subsidizing the American Dream
The home mortgage deduction: inducing debt and stifling mobility
re: “Mortgage tax break curbed by housing slump” from Bloomberg.com
Don’t take away mortgage interest deductions. I am a small investor with several properties. Half are upside down. I pay: lenders their interest; insurance companies their insurance fees; propertiy mgrs their mgmnt fee; states their taxes and of course repairs. I am the only one who doesn’t make any money. If I must also claim all the rents paid as income with no interest deduction to offset them, it would exaserbate the problem. I think the perception is that if you are an RE investor, you must be rich. I’m not. I believe Loan modifications with balance forgiveness is a real solution but will probably never be available to “rich” investors.
Interest rates are low now, which does not give much write off today, but they will go back up, as will the values of our homes. Here in Sonoma County Califronia we have bidding wars over all listings, short sales as well as REO’s. Our inventory is at an all time low, most homes on market no more than 30 days, if they are under $400,000. This is pushing prices up, supply and demand is always how the Real Estate market works with values, to the agent that said greedy agents pushed the market up, I disagree. We work for our clients and if they have to make a higher bid to get a home, most are willing to do so, espically after losing 3-4 offers on homes. Yes banks are doing Short sales faster, spoke to Chase who has been the worse and the negociator I am now working with said they are trying hard to make changes and work with us.
No end in sight!!
People continue to loose their homes contributing to an unsettled market. Now the line is being drawn in the sand poising REO listings against Short Sale listings!(Is anyone else seeing it?) I provide financing for Real Estate Investors. In the last 3-4 months I have noticed many of them bringing me deals to finance Short Sales for well under market value! Guys that would not touch a short sale with a 10 ft pole!
Also the banks are “moving along” the approval of these transactions allowing us to close in 30-40 days! If this continues and picks up the pace, REO listings will have to lower there prices to compete or risk sitting on the market as prices begin to fall. ? Could it be?
I for one, am actively seeking short sale listings again.
Guess I went of the subject a little but its all R.E. related!
I know the MID is a strong motivating factor for those considering home ownership. However little it may be. It is supported by another great desire, to have your own home.
As mentioned above, with interest rates so low, the “starter home” with say, a $100,000 mortgage will probably not generate enough MID to put the married taxpayer over the standard deduction, so this problem really is not an issue for the low end buyers just starting out.
Get real people. I get a big kick out of real estate agents who never seem to do the math. Most homeowners in California and most states, are in the lowest income tax bracket after all their deductions, etc. on a mortgage payment of $1000 per month the MID is a wopping $150 a month! With interest rates as low as they are today the average MID is even less! $150 isn’t going to be a deal breaker. And if it is….. the buyer shouldn’t even think of buying a home as they will more than likely lose it in the near future. Real Estate agent, (and I have been a broker for 27 years), stop thinking about your commissions and start thinking about what is best for your potential buyer. Real Estate agents who think only about their wallet were a major cause of this real estate melt-down.
One wonders if the author knows anything about how taxes work. If the home owner can’t deduct the MIB (schedule A), then the purchaser of that property will deduct it via their schedule E. The net result is that the state will receive LESS taxes because most likely the repurchased property will carry a lower interest rate and cost less than the original price.
Very nice post, I am also associated with real estate, foreclosure Los Angeles County, California taxes and properties. I enjoy reading new stuff on this subject, and I hope you will be adding new and fantastic posts on property services. Thanks for writing such a wonderful post.