Encouraging homeownership without encouraging debt

The phrase “raise taxes” often insights rage amongst the American constituency already paying the government more than they feel comfortable paying. The homeowner’s plight is eased slightly by the knowledge they are privileged to deduct mortgage interest and exclude resale profits.

What is not discussed between a homebuyer and his lender or broker is the long-term consequence of taking on a mortgage. Mortgage interest tax deductions promote indebtedness and indirectly subsidize lenders at the expense of a homeowner’s solvency — as recently rediscovered. Brokers and lenders alike hesitate to discourage indebtedness because the more money a homebuyer borrows, the greater dollar amount their share will be. Witness the doubling of prices and their quick return to the historical price trend line, all within less time than the past decade.

The irrationally conservative mortgage bankers’ association, the more passive broker trade union and the aggressive builder trade union will, in a knee-jerk reaction, absolutely refuse to support the elimination of these subsidies (which ultimately subsidize them, not the homebuyer who has become a mere conduit). These groups are already screaming that eliminating tax loopholes will “kill” the housing market by failure of the government to promote homeownership.

But will individuals really cease to purchase homes simply because they can no longer write-off interest paid on their mortgage debt? Will the elimination of housing subsidies really eliminate the population’s desire (need) for shelter? Will this effectively kill the demand for housing, or just the brokers, builders and lenders’ access to increased earnings for each transaction?

The fate of the mortgage interest tax deduction in other western industrial countries tells us the elimination of housing subsidies will do no such thing. In the 1990s, Great Britain phased-out the mortgage interest tax deduction over a 12-year period to avoid any possible shock in prices from the adjustment. They gradually lowered the interest deduction amount, and then dissolved it completely in 2000. In the seven-year period following, housing prices rose 145%. It would seem, then, the elimination of the tax loophole actually helped increase the country’s homeownership rate — and broker fees — since prices were driven by more demand. [For more information about the arguments in favor of ending the mortgage deduction, see the New York Times article, The case for ending the mortgage deduction .]

On the other hand, both Ireland and Spain (like America) still use housing subsidies to entice people to purchase and own homes. Both countries offer homeowners a mortgage interest tax deduction, with Spain this year introducing a homebuyer’s tax credit of roughly $1800 —if they purchase a home. The housing markets in both countries (and America) are currently in crisis, much of which is owed to the lack of homeowner mobility inflicted almost exclusively by mortgage debt since negative equity homeowners cannot sell and move to where the jobs are. [For further information about the housing markets in those countries, see the Irish Times’ article, IMF urges support for homeowners in mortgage difficulties and Tax Precision’s  Mortgage tax relief in Spain.]

Still, the fear of any change to the tax policy in the U.S. is a powerful deterrent for many in the housing industry — an emotion which history and logic often do nothing to thwart.

The right choice for society


People will always need shelter. To the extent people have jobs or wealth, the need for shelter (read: sales and rentals) will follow the trend in population growth — a good thing for California brokers, builders and income property investors. As a result, long-term sales volume in California for all types of residential property will always increase. That increase in single-family residences (SFRs) is not at the mercy of continued tax loopholes like the mortgage interest tax deduction. [For more information regarding homeownership trends, see the October 2010 first tuesday article, Is homeownership a luxury or a necessity?]


The American dream is not to acquire a mortgage; it is to acquire a home. Why not reward those who acquire their homes without requiring they also encumber their property with the greatest debt of their lives? Legislation that truly keeps the homeowner’s best financial interest and family solidarity in mind would emphasize solvency and living within one’s means. This practice is called austerity.

For the preponderance of Americans who do not have the option of paying cash, we must confront the idea that owning a home that must be financed may not be a smart decision. For many, the financial risk of homeownership exceeds the threshold of financial risk they should prudently take. Families with fixed incomes will often find more success in maintaining liquid asset investments and renting shelter identical to the home they would like to own. This will actually create more stability than the ownership of a mortgage-laden prison disguised as a home. Germany’s high levels of both neighborhood stability and renting suggest it is more important for society to actually be stable, rather than just maintain the appearance of it. [For more information on housing stability, see the Economist’s article, Building castles of sand .]

We must confront the idea that owning a home that must be financed may not be a smart decision.

Most people would be better off renting. Since the 1970s, it has nearly always been less costly to rent property an individual has considered buying. Only those homeowners who rationally decide to take on the risks and limitations imposed by homeownership are fully aware of the illiquidity and immobility it generates. Even then, most are not prepared to lose it all as part of the risk inherent in owning any asset. It is investors who are prepared to win or lose, and buy property with the intention of making money and not just as a store of wealth.

Homeowners acquire a home to meet a combination of familial, cultural and professional needs. If their job changes or their family situation is altered, most all homeowners need more mobility than is available to those with a mortgage. As evidenced by the Great Recession, loss of employment or any other family disruption is a nail in the financial coffin of those with a mortgage to manage. California is still down over 1.5 million jobs from the peak employment of December 2007. The current housing crises (and high unemployment) in both Ireland and Spain only serve to further amplify the volatility of a population of homeowners encouraged to own by government housing subsidies and left trapped in their mortgaged homes when economic circumstances change.

If we really want a national housing policy that uses the tax system to encourage homeownership, those who pay cash and buy a home within their means instead of taking on a mortgage must also be rewarded. Rather than only giving subsidies to those who have a mortgage through the mortgage interest tax deduction or those who are exiting homeownership through the principal residence profit exclusion, homebuyers must be incentivized to own their homes.

Realistically, many of the gatekeepers of real estate are unwilling to work towards a tax policy that encourages owning a home without a mortgage because there will initially be less in it for them. The mortgage industry feeds off the short-term gratification mindset of American families who need their McMansions regardless of their income bracket. Lenders, builders and brokers who are afraid of change and have set their gaze only on the immediate future will forever encourage homeowners to take the route garnished with higher loan balances, prices and fees.

However, a government that gently guides its population towards decisions with long-term family benefits will fashion a more solid rapport with its people. In turn, its people will be much more willing to pay the taxes necessary to actually cover their government-funded entitlement programs and be more understanding in times of financial crisis. If we encourage homeownership, we will see sales volume move upward and prices follow customer inflation, which produces less leveraging and a less volatile economic cycle.