Federal Housing Policy: What Is The Conservative Response?
As someone who works in the real estate industry, and an oft-accused "right wing extremist", I find it interesting that I really haven't seen much from either conservative punditocracy or from the streets on the issue of housing policy. Certain foundations -- AEI, Reason, Cato, etc. -- have put out some publications a couple of years ago talking about things like eliminating the mortgage interest deduction in favor of across-the-board tax cuts. Certainly, the general conservative sentiment is to be opposed to things like TARP and porkulus and so on.
Yet, there are very big changes afoot in Washington DC. I've been following them for a while as an interested observer, yet not someone paid to follow such things (e.g., lobbyists and attorneys), and I believe we're at a crossroads of sorts. The relatively silence from the Right on this issue, which is far more important than one might believe, is puzzling.
Bottomline: The Homeownership Society is coming to an end. The future of housing in America is likely to be driven by rentals instead.
I can get into some of the specifics, if need be, in a later point. But right now, this is a bipartisan effort from what I can tell.
The Obama Administration, through Treasury and HUD, has proposed some fairly dramatic changes in the way that residential mortgages are financed. Fannie and Freddie will be phased out, or significantly minimized, and the Administration has set forth the goal of reducing (or entirely removing) the Federal government in the residential housing finance sector.
On its face, this seems like wonderful news. And Congressional Republicans, as well as right-leaning commentariat (e.g., Wall Street Journal, for example), are responding very favorable. As well they should, since Fannie/Freddie represented the worst kind of moral hazard and corruption endemic in state capitalist economies.
It seems to me that most on the Right generally tend towards a belief that the less the government is involved, the better. Yet, the political realities are such that it may be difficult to say to homeowners that they're going to lose thousands of dollars in tax subsidies. It may be impossible to come out for total free market reforms that will absolutely crush the already ailing real estate market (at least in the short term), which in turn affects the construction market. For a party to be seen as being against jobs may be political fatal right now, even if those policies would make for a healthier, saner real estate market years down the road.
I understand there are other Big Things (to quote Chris Christie) that conservatives need to be working on right now. Social Security, Medicare, Medicaid, other entitlements, the growth of spending overall, etc. -- but national housing policy is, I submit, a Big Thing. It might not be something we all pay close attention to, but it does impact, and will surely dictate, the day to day life of every American.
So, here's my question for the Ricochet community. Do you -- especially our learned Contributors -- have any thoughts on what a proper Federal housing policy ought to be? Given that this is just a website for discussion, I think "No role at all" is an answer; it might not be politically wise, but it's an answer.
Look forward to your thoughts.
-TS
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Dec '10
Re: Federal Housing Policy: What Is The Conservative Response?
The system seemed to work pretty well in the period from after WW II through about 2000. Before doing anything else, what's wrong with first rolling back the clock and returning to a system that worked pretty well for half a century? How much government involvement and meddling, besides the mortgage interest deduction, was there for most of this period?
About the mortgage interest deduction... If it is eliminated then in fairness interest payments on all investment debt should be eliminated for everyone, including corporations. After all, for most ordinary people a home is their primary, and often only, real investment. If they cannot deduct interest payments made on money borrowed for that investment, why should interest paid on debt incurred for other investment purposes be deductible?
Jul '10
Re: Federal Housing Policy: What Is The Conservative Response?
Nickolas
About the mortgage interest deduction... If it is eliminated then in fairness interest payments on all investment debt should be eliminated for everyone, including corporations. After all, for most ordinary people a home is their primary, and often only, real investment. If they cannot deduct interest payments made on money borrowed for that investment, why should interest paid on debt incurred for other investment purposes be deductible? · Feb 17 at 10:24am
Fairness has nothing to do with it. Interest paid is an expense integral to the the operation of a business which exists for the purpose of yielding a profit.
A house is not a business. It does not exist for the purpose of making a profit.
Dec '10
Re: Federal Housing Policy: What Is The Conservative Response?
Kenneth
Nickolas
About the mortgage interest deduction... If it is eliminated then in fairness interest payments on all investment debt should be eliminated for everyone, including corporations.
Fairness has nothing to do with it. Interest paid is an expense integral to the the operation of a business which exists for the purpose of yielding a profit.
A house is not a business. It does not exist for the purpose of making a profit.
It depends on whether one views home ownership as an investment intended to generate a future return or as an ordinary expense like an automobile, clothing, and food.
Also, I'm someone who thinks individuals and corporations should not be taxed differently. What corporations call pre and post tax profit individuals call pre and post tax disposable income.
Individuals and corporations make investments intended to generate a positive return, and borrow the money to do it. They borrow the money to purchase real estate as well as equity and debt securities.
The objective in all cases is to generate a return on the money borrowed that exceeds the interest paid, a positive return. And in all cases taxes must be paid when the positive return is realized.
Jul '10
Re: Federal Housing Policy: What Is The Conservative Response?
Nickolas
Kenneth
Nickolas
Fairness has nothing to do with it. Interest paid is an expense integral to the the operation of a business which exists for the purpose of yielding a profit.
A house is not a business. It does not exist for the purpose of making a profit.
It depends on whether one views home ownership as an investment intended to generate a future return or as an ordinary expense like an automobile, clothing, and food.
It has nothing to do with how you "view" home-ownership.
Almost all businesses must borrow in order to finance ongoing operations, just as they need other products and services. Businesses are taxed on their profits each year.
There is nothing analagous to home-ownership. You're mistaking capital appreciation on a home for profit.
Dec '10
Re: Federal Housing Policy: What Is The Conservative Response?
Kenneth
There is nothing analagous to home-ownership. You're mistaking capital appreciation on a home for profit.
What is analogous is the purchase of real estate intended to generate a positive return on the investment and borrowing money to do it. In some cases individuals happen to sleep overnight in the real estate purchased.
Jul '10
Re: Federal Housing Policy: What Is The Conservative Response?
Nickolas
Kenneth
There is nothing analagous to home-ownership. You're mistaking capital appreciation on a home for profit.
What is analogous is the purchase of real estate intended to generate a positive return on the investment and borrowing money to do it. In some cases individuals happen to sleep overnight in the real estate purchased. · Feb 17 at 12:10pm
Nikolaus, not to be snarky, but have you ever managed a business? Taken accounting or management courses?
You can own housing without borrowing. You cannot, in almost all instances, start expand and run a business without borrowing. For a business, interest expense is no different than any other expense. For home ownership, it is.
By your logic, a home owner should also be able to deduct insurance, maintenance, even the water used to maintain the grounds.
They're just two separate things.
And anyway, purchasing a home expecting a "positive return" is a fool's errand.
Dec '10
Re: Federal Housing Policy: What Is The Conservative Response?
Kenneth
Nickolas
Kenneth
There is nothing analagous to home-ownership. You're mistaking capital appreciation on a home for profit.
What is analogous is the purchase of real estate intended to generate a positive return on the investment and borrowing money to do it. In some cases individuals happen to sleep overnight in the real estate purchased. · Feb 17 at 12:10pm
Nikolaus, not to be snarky, but have you ever managed a business? Taken accounting or management courses?
Fair questions. I have been an officer of a corporation I had substantial equity ownership in. I worked with the corporate controller to prepare monthly financial statements. I read them. I have had to make payroll. I have signed the checks. I have worked for corporations that have gone bankrupt. I have dealt with the IRS in the aftermath of a corporate bankruptcy. I was interviewed by an attorney for a big six accounting firm that sued corporate officers in the aftermath of bankruptcy. I have been asked to testify in court for the plaintiffs about questionable accounting practices. I have several friends who are accountants and have often discussed accounting practices and finance with them. Etc.
Jul '10
Re: Federal Housing Policy: What Is The Conservative Response?
I doubt the era of home-ownership is coming to an end. Homes are a good so highly prized - and in the production, financing and marketing of which so many players are invested - that the free market will find a way to make them available.
The problem has been that government intervention into the market caused massive, unsustainable distortions. Government purchase of mortgages and other risk-shifting schemes made houses too affordable. Absent those interventions, consumers will just have to adjust to tighter underwriting standards and higher mortgage interest rates. Yes, this will shut out quite a few people, but those are precisely the people who have been defaulting under the present scheme. They never had any business owning homes in the first place.
As for mortgage interest deductions, I'm always opposed to using the tax system to encourage or discourage any economic activity.
The problem now, of course, is that removing the mortgage interest deduction would cause a huge decrease in housing prices, across the board. Some politicians advocate removing the deduction only for high-value homes. They're so obtuse they don't realize that if the top tier goes down, so will all the tiers below.
Aug '10
Re: Federal Housing Policy: What Is The Conservative Response?
Kenneth:
The problem now, of course, is that removing the mortgage interest deduction would cause a huge decrease in housing prices, across the board. Some politicians advocate removing the deduction only for high-value homes. They're so obtuse they don't realize that if the top tier goes down, so will all the tiers below. · Feb 17 at 1:27pm
I agree the government should stay out of personal financial transactions. But the government is already in deep with the mortgage interest deduction. How might it be removed without causing enormous calamity?
Not saying it can't be done. But it would have to be a major league problem to solve. If anybody has thoughts, I'd be genuinely interested in them. But remember, keep it in layman's terms: I'm a musician and numbers larger than eight confuse me.
Jul '10
Re: Federal Housing Policy: What Is The Conservative Response?
Songwriter
I agree the government should stay out of personal financial transactions. But the government is already in deep with the mortgage interest deduction. How might it be removed without causing enormous calamity?
Well, I don't think we need to worry about the mechanism for eliminating the deduction, because it's so politically-radioactive, it will probably never happen.
Jan '11
Re: Federal Housing Policy: What Is The Conservative Response?
Songwriter
I agree the government should stay out of personal financial transactions. But the government is already in deep with the mortgage interest deduction. How might it be removed without causing enormous calamity?
You can add a cap to the deductions per year and then tinker with that cap on some regular basis. This would be another way to impact the demand of mortgages outside of interest rate changes.
I don't have any strong feelings one way or another on taxable income deductions on interest payments. It's all about what the government wants to encourage, whether its businesses or housing. I'm okay with giving the Man a dial to control certain parts of the economy.
Aug '10
Re: Federal Housing Policy: What Is The Conservative Response?
fullfrontal
Songwriter
I agree the government should stay out of personal financial transactions. But the government is already in deep with the mortgage interest deduction. How might it be removed without causing enormous calamity?
You can add a cap to the deductions per year and then tinker with that cap on some regular basis. This would be another way to impact the demand of mortgages outside of interest rate changes.
I don't have any strong feelings one way or another on taxable income deductions on interest payments. It's all about what the government wants to encourage, whether its businesses or housing. I'm okay with giving the Man a dial to control certain parts of the economy. · Feb 17 at 7:12pm
Yep. Seems any attempt to remove the mortgage interest deduction would have to be incremental. Like Kenneth said - it's a radio-active topic. No politician wants to take it head-on.
Sep '10
Re: Federal Housing Policy: What Is The Conservative Response?
I have a couple of suggestions that may be overly simple.
First, I would suggest that the government cap the mortgage interest deduction at some level (maybe the national average home price plus 100%, I think that is around 500K for now). That would hurt home prices I realize. I also realize that you can't buy a home for that in many large cities. That being said this is an incremental move in the right direction. Maybe something could be done to shift the new tax revenue that would be generated to offset income taxes (You know tax cuts for millionaires, always popular).
Second, move the down payment for government sponsored loans from 5 to 10 or even 15%. (I don't know if this is a government issue after the GSE's get wound down). I understand that among homeowners with 10-20% down the default rates were much lower).
Oct '10
Re: Federal Housing Policy: What Is The Conservative Response?
Let's face it. Any cut in government benefit to the middle class will be a hard sell. There needs to be a democratic public process of negotiation based on mutually agreed upon principles of justice and equity in order to effect substantive reform of the tax/benefit equation. Unfortunately we are lacking in the "agreed upon principles of justice and equity" part of the equation. Conservatives, Libertarians and Progressives disagree on fundamental principles. This being the case, it is difficult to imagine a path forward that does not involve significant societal conflict. Witness the political brushfire in Wisconsin and the smoldering aftermath in New Jersey.
Edited on Feb 18, 2011 at 1:16pmAug '10
Re: Federal Housing Policy: What Is The Conservative Response?
I say phase out the mortgage interest deduction over ten or fifteen years. That's short enough to help pay for the coming entitlement tsunami but long enough that people who bought houses recently won't be unable to make their payments . Nonetheless, it would mean a pretty big haircut for all homeowners (and lenders) as it would knock 20% off the resale value of a home.
Despite the still weak housing market I say the sooner we start phasing out govt support the better because (like entitlements) the earlier you begin phasing out a part of the welfare state the more gradual it can be -- something I see as important both as a matter of politics and justice.
The other important policy reform is the Ed Glaeser pitch to reduce environmental and zoning regulations that prevent high-density residential. Most of these policies are at the local level but a lot are federal too.
Edited on Feb 18, 2011 at 1:28pmSep '10
Re: Federal Housing Policy: What Is The Conservative Response?
One last thing, many folks in CA got in trouble because of speculation (2nd houses) and also because of taking out home equity loans (which if I am not mistaken are also tax deductible).
2nd houses could be cut more substantially than 1st although, I can see how couples could game that by moving title.
I would think that we could really clamp down on the HE loans with respect to interest (maybe even eliminate that).
Oct '10
Re: Federal Housing Policy: What Is The Conservative Response?
Ross Conatser: One last thing, many folks in CA got in trouble because of speculation (2nd houses) and also because of taking out home equity loans (which if I am not mistaken are also tax deductible).
2nd houses could be cut more substantially than 1st although, I can see how couples could game that by moving title.
I would think that we could really clamp down on the HE loans with respect to interest (maybe even eliminate that). · Feb 18 at 1:29pm
Interest on Home Equity Line of Credit is generally deductible as equivalent to mortgage interest. Mortgage interest on a second home is not deductible; only mortgage interest on the primary residence is deductible.
I agree with your phase out idea. The home mortgage deduction is actually a fairly recent addition to the tax code. The whole darn tax/benefit equation needs to be renegotiated!
Dec '10
Re: Federal Housing Policy: What Is The Conservative Response?
Phasing out the mortgage interest deduction is essentially a tax increase.
Jan '11
Re: Federal Housing Policy: What Is The Conservative Response?
I prefer to think of interest deductions as tax shelters. If we want to simplify tax codes and maximize government revenue, stuff like tax deductible items have to go.
Dec '10
Re: Federal Housing Policy: What Is The Conservative Response?
fullfrontal
I prefer to think of interest deductions as tax shelters. If we want to simplify tax codes and maximize government revenue, stuff like tax deductible items have to go. · Feb 18 at 3:03pm
Nevertheless, eliminating it would increase the federal income tax bill of a very large number of middle class Americans. In many cases it would be a substantial increase.
However you would like to think of it, it would be a tax increase on middle class Americans.
It would also decrease their net worth by decreasing the value of their home.