Hello, Real Estate Crash

Jeff Taylor | October 11, 2005

The all-but comatose Bush tax reform panel evidently thinks cratering the U.S. real estate market is great tax reform. Capping deductible mortgage interest on loans as low as $350,000 -- down from the current $1 million -- will make real estate more expensive to own, and hence, less attractive. And note, this is not in service of real reform of the tax code, like losing all preferences and replacing the current code with a flat tax.

No, it is merely scratching around for money to "offset" the cost of repealing the absurd alternative minimum tax. That is exactly backwards. Junk the rest of the code and keep the AMT and call it a flat tax. There is also nothing radical about proposing to use ability-to-pay standards to soak the "rich" in search of more government revenue. Wow, that's a new one.

This is a horrible idea and needs to be taken out behind the barn and dispatched as quickly and as painlessly as possible before real and lasting damage is done. The Bush spending spree followed by the Bush tax hikes. Like night follows day, people.

Comments

|10.11.05 @ 10:19PM|#

Could be trying to burst the bubble? It is a bubble.

|10.11.05 @ 10:26PM|#

I'm sorry, but I have to differ on one point. There is no excuse in the world good enough to justify the pernicious AMT. Unjust taxes such as the AMT, which penalize people for gains THEY HAVEN'T EVEN RECEIVED, are the stuff of which bomb-throwing revolutionaries are made. Tea, harbor, Boston, you know the drill.

If the media and politicians could ever get past this syntactic subterfuge of "paying for tax cuts" or "offsetting tax reductions", we might make some progress. All of the current discourse seems to be oriented around the premise that the state is entitled to our earnings prior to our receipt of them.

|10.11.05 @ 10:35PM|#

Let's not get all shrieking hysterical here. Capping the mortgage interest deduction for loans over $350k is not going to crater the real estate market.

I live in one of the most expensive real estate markets in the country. $350k gets you a lot of house.

Now, growing the deficit when it's already huge, and causing interest rates to go to early 80s levels - THAT could crater the real estate market.

|10.11.05 @ 10:41PM|#

It does shine an interesting light on how Bush people see the world. Make sure members of the lucky sperm club don't have to inherit a slightly smaller vast fortune, and make up the difference by raising the taxes of middle class people who buy homes in blue states.

Nicholas D. Rosen|10.11.05 @ 10:53PM|#

I'm not in favor of making the tax code more complicated, but let's not speak as if pumping up the real estate bubble were a splendid idea. One thing to keep in mind is that the real estate bubble is primarily a land bubble; it isn't the price of bricks or the pay of construction workers that accounts for 20%+ annual increases in housing prices in my area (the DC suburbs).

What happens, typically, is that the price of land rises until people can't afford to build homes or factories; then you get a d/e/p/r/e/s/s/i/o/n/ -- that is, recession, and at last the price of land falls to the point where economic growth can resume.

If we just taxed the value of land, instead of buildings, land would be used efficiently, and bubbles wouldn't happen on this scale. Failing that, at least the tax code shouldn't do special favors for the owners of million dollar homes (which are liekly to be largely land value, remember).

alkali|10.11.05 @ 10:57PM|#

The article says:

The panel may compensate wealthier Americans who lose some of those benefits [mortgage deduction, employer deductibility of health benefits] by reducing or repealing taxes on investment income.

The merits aside, this is really a strange claim. People, even high-income sorts, who have big ol' mortgages and who get their health insurance from their employer generally do not have giant investment portfolios sitting around. Cutting taxes on investment income will do nothing to "compensate" those taxpayers.

|10.11.05 @ 10:58PM|#

The mortgage interest deduction is the most economically ineffecient and regresive tax shelters one can imagine. You want to know why people don't save in this country. It is because the best way to dodge taxes is to tie your money up in a home. Why save and pay money on nonindexed captial gaines and interest when you can buy a home, and be able to write off the interest on your taxes and as long as you reinvest in a larger house, something you need and can use, never have to pay capital gains taxes on it. Meanwhile trillions of dollars in money that could be productively used elswhere are sitting useless in the form of home equity. As painful as it would be to end, it would in the long run make tremendous sense the somehow ween the country off of the tax, it would be a lot better in the long run. There are few if any economic arguments for keeping it beyond the pain of getting rid of it. To bad economic literacy is apparently not a requirement to work at Reason.

|10.11.05 @ 11:02PM|#

Nicholas,

Not to derail the thread or anything, but you may be on to something here. If we simply taxed the land then it would seem to me that no particular business improvement is going to guarantee increased tax revenue, therefore the recent SC landgrab would quickly founder.

Hmm, I might have had too much Chardonay...

|10.11.05 @ 11:06PM|#

Umm Joe, around here 350k buys you a two bedroom mobile home property, check realtor.com for zip code 93012.

Anyways, such a tax proposal would be a disaster to the real estate market that is already slowing down. Of course, I think the whole idea of a tax on property is wrong.

|10.11.05 @ 11:12PM|#

joe- I also live in one of the most expensive markets in the country. 350k gets you an 800 sq. foot house with no yard to speak of, in a marginal neighborhood. It might get you a decent condo, but that's a different animal.

That cap is like the income tax- no accounting for variance in cost of living around the country. If you take a solidly middle class wage in Memphis and translate it to San Diego, you end up in a higher federal tax bracket.

I personally think the effect of the mortgage deduction is a little overated. It's like a nice bonus, but for me it's never made the difference between buying a house or not, or buying a significantly higher priced house.

|10.11.05 @ 11:22PM|#

John it would really help if you'd read the post before making sweeping claims about literacy. To spell it out, I would be in favor of the repeal of the mortgage interest deduction tomorrow were it replaced by a flat tax. This proposal DOES NOT DO THAT.

It is nothing more than a continuation of the Pease limitation gimmickery that kept ALL the distortionary deductions, but just phased them out once you made "too much" money. That is the worst of all possible tax codes -- complex and with high marginal rates on your most productive people.

Same bad formula here -- same inane deductions, same complexity, in fact more, and even higher effective marginal tax rates. How in the world that could be spun as reform escapes me.

I wish I could rad.

|10.11.05 @ 11:51PM|#

I'm not sure I understand the appeal of a flat tax. Flat taxes address the rate but you still have the fundamental problem of defining the items that are included in income.

The tax rules for exempting gain on sales of a primary residence after 2 years of occupancy have done much more for promoting the housing boom than the mortgage deduction.

|10.12.05 @ 12:03AM|#

I've always wondered about something, joe.

You extol the virtues of the high-density, mixed-use neighborhood, and that's cool. I live in East Lakeview, Chicago, and it's craptacular. I can walk everywhere. It's fantastic for someone my age.

But, you know, people don't stay 25 forever. What of the people who have strong preferences for things like a large yard, or a workshop in their basement, or a garage where they can actually work on their car, etc? I personally miss the last.. people park right on each other's asses here, I can't even get to my hood.

America is a nation of putterers, and brownstones/row houses/high-rises don't lend themselves to puttering at all.

|10.12.05 @ 12:45AM|#

The mortgage interest deduction is inefficient (as in "why should the government subsidize homeowners). Getting rid of the deduction all at once, however, would be impossible.

Remember, the standard deduction has gone up a lot in recent years. Based on my mortgage and local taxes, I don't break the standard deduction until I have a mortgage of a little less than $200,000. (People in high tax states with high interest loans would be lower, people in Texas with low interest loans would be lower.) This means that with this new limit, the most I could receive the interest deduction on is $150,000 of the mortgage.

That said, I doubt this will fly. I have friends and relatives in several large midwestern and southern metro areas, and $350,000 is too low for anything that can fit a family in a decent school district. So I can't imagine how horrible the prices are in places where the housing markets are way overpriced. I would expect a lot of vocal opposition. It would be a better use of their time to come up with comprehensive reform, rather than the cut and paste reforms we've seen throughout the Bush presidency.

|10.12.05 @ 12:50AM|#

[threadjack!] joe, where you looking to buy? I figured a genius cityplanner like you would want to stay urban, but the only place $350k gets you a "lot of house" is in the far outer burbs, like AA County or Prince William, where a lack of zoning and bureaucracy has made more land available (and consequently lowered prices...)

[/threadjack]

I, like joe and some others, live in da DC area (Rockville, on Metro, but not with the good service that stops at Grosvenor).

$400k no longer gets you a 3-bed townhouse in a slightly older community. RVille has historically lagged surrounding (planned!) communities, figure 150% of the Rville purchase for a similar house in Gaithersburg, say, 200% for Bethesda. You go to VA, same type of property is at least $100k more. Still ain't Cali, but...

|10.12.05 @ 12:53AM|#

If the media and politicians could ever get past this syntactic subterfuge of "paying for tax cuts" or "offsetting tax reductions", we might make some progress.

We won't make progress because a) the IRS considers that it is entitled to maintaining its staffing level which would probably drop if we drastically simplified the tax code, and b) people like joe would scream like stuck pigs if we ever got close to an actually fairer tax scheme.

Squeeling pigs always sell newspapers faster than some dry old lecture on economic theory.

America is a nation of putterers, and brownstones/row houses/high-rises don't lend themselves to puttering at all.

joe is way too busy squeeling to putter.

|10.12.05 @ 1:21AM|#

I'd just as soon not get all ad hominem, but I don't understand people who immediately assume that anyone who respects property must be "Bush people." From my perspective, this President has done little better than FDR for fiscal responsibility.

I do feel strongly that repealing the unjust AMT is necessary, though I don't think the current proposal is the answer. In the early 90s,I had more than a few colleagues who were talented, but young and inexperienced with government incursions. They worked their butts off to build companies and then found themselves flat broke after having to write tax checks based on unrealized gains on their stocks.

Funny, I didn't see the government writing them (or me for that matter) checks in return after the value of those shares tanked.

Ron Hardin|10.12.05 @ 1:54AM|#

The flat tax is FICA. Just raise the rates, make it applicalble to all income, eliminate the cap, and you don't need the IRS.

|10.12.05 @ 2:21AM|#

>I live in one of the most expensive real estate markets in the country. $350k gets you a lot of house.

Then be glad you don't live in most parts of California or NY City, where $350k might buy you an outhouse. In California, dropping the cap to $350k doesn't soak the rich; it soaks *everybody*, since the statewide median house price his higher than that.

|10.12.05 @ 6:00AM|#

Capping deductible mortgage interest on loans as low as $350,000 -- down from the current $1 million -- will make real estate more expensive to own, and hence, less attractive

Or--more likely--it will make the price of real estate go down, tus making it cheaper to own and hence, more attractive. Why is a writer for a libertarian magazine griping that the government might change things so that the tax code no longer artificially props up a segment of the market? Between the tax write-offs and the government's backing of mortgages gleaned from unscrupulous lenders who offer loans to bad credit risks for no money down, it's no wonder prices have soared into the stratosphere. Prices have to come down sooner or later, particularly in the overheated markets mentioned earlier on this thread, because the market can't maintain the current situation where you have to be outright rich to afford a place. I feel sorry for those of you living in places like Southern California or the DC suburbs--based on housing prices there, you'd think the average salary was well above six figures, yet that certainly isn't the case.

(Though Joe made a very good point--reducing the estate taxes on the Paris Hiltons of the country while increasing taxes on the working middle class is a pretty scummy thing to do.)

|10.12.05 @ 7:39AM|#

I'm going with a conspiracy theory on this one. Most of the states that voted against Bush had large urban areas and thus, higher prices for property. In the Puget Sound area $350K will get you a house, but that cuts deeply into the "Middle Class" area.

Now, in states such as New Mexico (which, strangely enough, actually went republican in 2004) I know for a fact you can get a mansion with acreage for less than $350K. So he's repaying the rich for their support, he's bolstering his image in the cheaper red states, and he's bitch-slapping the urbanites for voting against him.

Seems like a win-win from his perspective...

|10.12.05 @ 7:43AM|#

I live in one of the most expensive real estate markets in the country. $350k gets you a lot of house.

HAHAHAHAHAHA!

**sniff** (wipes eyes)

OK, seriously, here are the results for all the homes in my ZIP code at Realtor.com for up to $350,000. Twenty-four properties, all rowhomes or condos, only two over 1,200 sq ft, most of them between 800-980 sq ft.

I honestly don't know where you live, joe, but if $350,000 there gets you "a lot of house," I suspect it isn't even in the top five most expensive markets.

|10.12.05 @ 8:03AM|#

Here is a recent (Oct. 10) article at CNN/Money ranking the top real estate ZIP codes, sortable by median price and 5-yr. price change. joe, if you do live in Massachusetts, which was my understanding, you aren't anywhere close under either of those criteria.

|10.12.05 @ 8:20AM|#

Yeah, I'm going to pile on joe as well: If $350K "gets you a lot of house", you are not "in one of the most expensive real estate markets in the country". I am "in one of the most expensive real estate markets in the country". $350K gets you a modest one-bedroom apartment. TWICE that amount doesn't get you "a lot of house".

I am going to side with joe on one thing, though, which is the mixed-use issue that Steven Crane brings up. I grew up in a mixed-use neighborhood and now live in one, and I've lived in very "segregated" towns without them. I never understood why some people react to the term "mixed use" as if you were talking about introducing the plague. For my money, all non-mixed-use gets you is vast swathes of commercial property which turns into a wasteland after dark, and vast swathes of residential property which feel like a ghost town because there's no reason for anyone to ever be out on the street. It feeds into the "must have a car" nature of much of the country too, since it pretty much guarantees nothing will be within walking distance. Hey, if you want to live in one of those endless tracts of houses, go ahead, but I think they make for a neighborhood of lower quality.

|10.12.05 @ 8:32AM|#

My father recently bought a house and now you can help drive up the value by purchasing a nice house in the same neighborhood. Before you turn up your nose at the NASCAR bumper stickers and illiterate kids chewing Wonder bread with their mouths open, check out how much house you can get for less than the price of a closet in your neighborhood.

|10.12.05 @ 8:34AM|#

A friend of mine and his wife just bought a veritable palace, on multiple acres of land, down in North Carolina, and are now in the process of selling their old house in Framingham, Massachusetts (the suburbs-of-Boston part of the state, presumably not too far from where Joe is). Right now they're asking just under $400,000; they've priced it "low" because they want it to sell quickly.

It's a nice house, a pretty Victorian with some cool architectural features, but not a mansion by any means. And not what I'd call "a lot of house." They got it for a normal price a few years ago and are glad to be unloading it now, before the bubble bursts and takes a lot of the house's value with it.

|10.12.05 @ 8:57AM|#

I live in one of the most expensive real estate markets in the country. $350k gets you a lot of house.

I don't know if the real estate market will crater, but joe's credibility just did.

|10.12.05 @ 9:02AM|#

The Economist had a great profile on the housing bubble a couple months ago. Among other good points, they opined that at least the much-maligned tech bubble left us with a large capital stock of cheap tech infrastructure as a base for future growth.

The housing bubble will leave us with a big pile of McMansions that are good for...what? I guess it's a jobs program for people whose skill level caps out at pulling a trigger (on a framing nailer, I mean).

|10.12.05 @ 9:08AM|#

Kinda off topic but yeah, I constantly hear from out-of-towners how much house they can buy here in North Carolina. You should have seen a friend of mine's face when he moved from Berkley, California. He was estactic, picking all the options he could for his new house.

It's not like that everywhere in NC. Absolutely tiny properties along the beaches are going for a million, downtown condos are starting to get up there and I'm secretly crossing my fingers for the bubble to burst here in Chapel Hill (the place where you can buy twice as much house if you just leave it).

Garth|10.12.05 @ 9:10AM|#

Please don't mention how cheap it is to live here in New Mexico - it might lead to you people moving here and ruining it.

Seriously though taxation should be some thing like this:

Tax = ((gross received income from all sources) - (savings as defined by deferred consumption not appreciation on assets) - ($20,000 * (# adults)) - ($10,000 * (#dependant children))) * 30%

So a family of four making $100,000 and saving $25,000 would pay $4,500 in income tax. If they saved $30,000 they would pay $3,000 and if they saved nothing they would pay $12,000. There would still have to be a payroll deduction and refund system to make it work. Such a system would reward and encourage savings. It would be politically popular given its progressive nature for most of the economic spectrum. And it would be rather simple.

Aside for the deduction per person, there would be no deductions loopholes etc...though I suppose you could have charitable donations count towards your savings total....

|10.12.05 @ 9:20AM|#

I have to agree--four years ago, $350K got you a modest but livable sized house in Northern Virginia. Now it gets you a 1000 sq foot attached rowhouse on a tenth-acre lot if you're lucky. This is even true in DC, in neighborhoods that feature no unbarred windows. So it's not the superrich who are affected, it's damn near everybody, including people who've never even met a Republican.

But as somebody priced out of the market, I'd be happy to see this. It would help bring the distortion down. It's not as good as a flat tax, but until we can get our tax system as modernized as Eastern Europe's, this is the best we can expect. /me mutters about so-called "progressives" hanging on to 19th century ideas

Dave W.|10.12.05 @ 9:21AM|#

Every business knows that flat pricing is a bad strategy. The good business practice is to segment the market, and to then charge each segment as much as it will bear, without regard to what the other segments are paying.

It is good when gov't runs like a business in this regard.

|10.12.05 @ 9:33AM|#

dead elvis, "It might get you a decent condo, but that's a different animal."

Oh, no! Not a CONDO! Oh my GOD! While Abu Ghraib was upsetting, the idea of Americans living in townhouses is going to keep me up at night!

Steven Crane, I've got a yard, a swing set, a basement, three treets, room for a garage if I want to add one, and four bedrooms. My street is all single family homes, and the gross density is about 10 units per acre. It's also a hell of a lot better for There are a lot of options between Tokyo highrises and Westchester sprawl. You just have a be a little smart about design, rather than throwing land and money at the problem. By making the deduction unlimited (or $1 million, which is 99% of 'unlimited'), the government isn't just subsidizing homeownership, it's subsidizing wasteful design.

|10.12.05 @ 9:38AM|#

Threadjacker, first, I live in Massachusetts.

Second, one of the reasons home prices are as high as you complain about is that government interventions, including but not limited to the mortgage deduction, vasty increase the share of housing built at the luxury level, including the gobbling up of land for large lots.

In my regional market, one of the most expensive in the country, the average single family home price is $400,000. Assume 10% down, the proposal would still allow the deducation of almost 90% of the loan.

Wow, lotta spoiled brats on this thread.

|10.12.05 @ 9:38AM|#

Oh, no! Not a CONDO! Oh my GOD! While Abu Ghraib was upsetting, the idea of Americans living in townhouses is going to keep me up at night!

Oh, come on, Joe. You know damned well what point DE was making--the cost of housing in America has increased far, far beyond the rate of inflation. Which in turn hurts those poor people you care about so much.

|10.12.05 @ 9:46AM|#

Wait a minute, Joe:

I live in one of the most expensive real estate markets in the country. $350k gets you a lot of house.

In my regional market, one of the most expensive in the country, the average single family home price is $400,000

So does $350K get you "a lot of house" or "less than the average house"? Based upon my friend in Framingham, I'd say $350K gets you "not much," in that part of Massachusetts.

MP|10.12.05 @ 9:47AM|#

The mortgage interest deduction, combined with the capital gains exclusion, is the largest market distortion introduced by the US Tax Code. It's an abomination and should be scrapped (optimally, along with the rest of tax code). joe is dead on.

|10.12.05 @ 9:48AM|#

Lotta spoiled brats. Brats who want the nanny state to pay for their puttering, and their segregation from people who work for a living.

Oh my god - neighbors! I might hear them! Waaaaaaaaaaaahhhhhhh!

FYI, capping the deduction at $350k doesn't mean you can't take any deduction if you have a $351,000 loan. Based on some of the posts, there seems to be some confusion.

|10.12.05 @ 9:49AM|#

I agree with Joe and MP on this: lose the interest deduction.

Also, make the government stop guaranteeing loans--that way lenders will be less likely to loan money to bad credit risks, which has played a HUGE role in driving prices so artificially high.

Oh, and lose public housing, too. In fact, get the government the hell out of the real-estate market altogether!

|10.12.05 @ 9:49AM|#

Wouldn't a cap like that just encourage people to live farther out where the 350K gets them "more house"? I don't know about cratering, but it sure sounds like it would create more exurban sprawl.

I'm sure joe will come along and correct me and extol the virtues of living in East Boston and Revere.

|10.12.05 @ 9:50AM|#

Jennifer, assuming 10% down, a $350,000 loan gets you 97% of the average house.

|10.12.05 @ 9:52AM|#

Phil, my city alone has three zip codes. Very, very few people are forced to buy in a zip code. A better definition of "local real estate market" is Metropolitan Statistical Area, which would cover a city and the towns within a 45 minute drive around it.

|10.12.05 @ 9:52AM|#

Joe, it's been gray and rainy for days now. Is the weather getting you down? I ask because usually your arguments are better than "Oh, [strawman argument] boo-hoo-hoo! What a bunch of brats! Waaaaa--let me insult people for things they didn't say!"

|10.12.05 @ 9:55AM|#

Jennifer, assuming 10% down, a $350,000 loan gets you 97% of the average house.

Firstly, I wouldn't call 97% of the average "a lot of house;" I'd call it "three percent below average." Also, ignoring the fact that a 10% down payment is foolish and wasteful (because you have to buy the bank a mortgage-insurance policy for anything below 20), I just did a search on Realtor.com for the Framingham area and $350K can get me a small, cramped piece of shit built well over a century ago.

|10.12.05 @ 9:56AM|#

Jennifer, "I agree with Joe and MP on this: lose the interest deduction." Let's not go overboard here. At the bottom of the market, the home mortgage deduction is the difference between throwing your money down the rent hole and building up equity for a lot of families.

Russ D, "Wouldn't a cap like that just encourage people to live farther out where the 350K gets them "more house"? I don't know about cratering, but it sure sounds like it would create more exurban sprawl." That's an interesting point. I can the centrifugal force you describe competing with a centripetal force, as the construction market becomes less "top heavy," and begins to produce more moderate-cost homes. You can't just assume that construction and development practices would stay the same.

|10.12.05 @ 9:57AM|#

Jennifer,

People acting as if being able to play Lord of the Manor is a human right get me down.

|10.12.05 @ 9:59AM|#

I won't kick joe in the balls on his comment, like most everyone else here has, because as I'm sure he lives here in the Boston area he already knows he goofed. I mean, $350k won't even buy a decent single-family home in Brockton, joe.

But I'm guessing that more than a few of you folks rent. As a mortgage underwriter, and a homeowner, I can say that the whole mortgage deduction thing, coupled with deduction of local property taxes, is pretty significant to most people. When you realize that on a standard 30 year mortgage, 75% of your payment in the first three years is tax deductable, that's a pretty big incentive to most buyers, especially newbies. Compare that against rent payments that are often higher than a mortgage and guess what?? It makes sense.

As to the government's involvement, it's because of what every municipal leader has discovered since the Romans built Londinium: owners pay better taxes, keep the place up, stay in the community longer, and don't riot in their hood. Not when they own the hood. Just compare a condo project occupied mostly by owners versus renters. Big difference.

As to the proposal, it sucks. Eliminate the mortgage deduction and go with a flat tax, fine, but otherwise it's sheer stupidity.

|10.12.05 @ 10:00AM|#

Jennifer, by "a lot of house," I didn't mean it would get you a mansion. I meant, it would cover a lot of your housing needs. You could get a perfectly decent place, in most places, for $350,000. (Why only the Framingham area? Why not Worcester, or - you might want to sit down - a townhouse?) Or, you could buy a bigger place, and pay a little extra for mortage interest.

|10.12.05 @ 10:01AM|#

A better definition of "local real estate market" is Metropolitan Statistical Area, which would cover a city and the towns within a 45 minute drive around it.

Great! If you want to go with Washington, DC as my MSA or DMA, That gets you even less, on average, for your $350k. A lot less.

I rent a 1,056 sq ft, 2 BR, 2BA apartment in Fairfax. Suffice to say that, if the ownership converted the whole complex to condos, $350k would not buy that unit. Up the street from my office in Arlington, $300k will get you a new studio of around 800 sq ft in a high rise.

R C Dean|10.12.05 @ 10:02AM|#

I wanted to pile on joe, but I feel kind of bad for him now. Not that bad, though.

I live in Dallas, in an older (pre-war) mixed-use neighborhood that is solid but not fashionable. Our house is around 1700 square feet on your typical city lot, and is worth somewhere north of $300K. Pretty modest, and totally typical for our neighborhood. I would call it just enough house, not 'a lot' of house.

You go into the northern burbs, and $350K doesn't even buy you a lot. People in the city are buying houses for that much money just to tear them down.

Knocking the deduction down that far would gut the market, no question. The kind of dumbass tax reform I can do without.

MP|10.12.05 @ 10:02AM|#

At the bottom of the market, the home mortgage deduction is the difference between throwing your money down the rent hole and building up equity for a lot of families.

Ah...you just can't resist the temptation of enacting social policy via the tax code, can you? The path to destruction.

|10.12.05 @ 10:02AM|#

"I mean, $350k won't even buy a decent single-family home in Brockton, joe."

Sure it will - unless you've got an inflated definition of "decent," that includes "huge," "new," and "with enough land to raise cattle."

|10.12.05 @ 10:03AM|#

The mortgage interest deduction, combined with the capital gains exclusion, is the largest market distortion introduced by the US Tax Code.

Taxation also distorts the market, ya dumbass. Sorry about the name-calling, but you can't honestly assume that subsidies distort the market but taxes don't.

|10.12.05 @ 10:05AM|#

MP, you want to see destruction? Lower the owner-occupancy rate in a neighborhood from 60% to 20%.

|10.12.05 @ 10:09AM|#

"I mean, $350k won't even buy a decent single-family home in Brockton, joe."

Sure it will - unless you've got an inflated definition of "decent," that includes "huge," "new," and "with enough land to raise cattle."

i.e., any definition of "decent" that differs from joe's.

|10.12.05 @ 10:09AM|#

Why NOT get rid of the mortgage deduction altogether? You claim it would make real housing costs go up, but no--everybody would be in the same boat, so prices overall would have to go down a bit, lest the sellers find no capable buyers. Also, losing the deduction might make foolish people less likely to buy more house than they can afford. Why the HELL is it considered a good idea to pay a dollar in interest to a bank, so you can pay a quarter less tax to the government?

rent payments that are often higher than a mortgage

That used to be the case, before the housing bubble. One reason that many economists (including those who write for The Economist) think there's a bubble is that the price to buy a house has skyrocketed these past few years, but rents have remained almost unchanged.

Why only the Framingham area? Why not Worcester, or - you might want to sit down - a townhouse?

Framingham just because I did a quickie search; I'm not actually looking for a house there. And I, personally, would not buy a townhouse. Too expensive, actually, when you factor in things like condo fees (which ALWAYS have the possibility of going up even if you have a fixed-rate mortgage). And where I live, they don't keep their value as well as a house. My plan is to buy a multifamily and let my renters pay my mortgage. (And none of this ten-percent-down ARM bullshit, either. Twenty percent minimum, fixed-rate ONLY.)

|10.12.05 @ 10:10AM|#

I'm currently living in a very inexpensive starter house in KY, where houses are cheap anyway. $350K around here is a lot of house. I can triple my house and not be anywhere close to $350K. I'm hoping to capitalize on a bursting bubble when I, George Jefferson like, start movin' on up.

Still, I can't help but notice how many people run their credit to the limit to get the most house humanly possible. Those folks are going feel some pain as interest rates rise.

gaius marius|10.12.05 @ 10:11AM|#

$350k gets you a lot of house.

not in chicago, it doesn't, mr joe. the place i live in is a condo, 3br, in a fringe neighborhood, and it's more than that.

and you should try california or florida, where the housing bubble is truly centered. $350k isn't entry level.

|10.12.05 @ 10:13AM|#

Sure it will - unless you've got an inflated definition of "decent," that includes "huge," "new," and "with enough land to raise cattle."

Ah, now you're getting to the heart of it. The old "shoulda coulda" angle of homeownership, the kind that outfits like NACA and Acorn spout. I'm not talking about moral economy here, joe, I'm talking about the reality of what is actually available in the MLS. Try buying a SF for less, I dare you.

I was involved in two transactions here recently, and one was a resale at $359,900 for a 3 bed shabhut, the other for a $495,000 SF with just enough room to walk the dog. BTW, I run my mortgage business here in SE Mass, so I know what I'm talking about.

|10.12.05 @ 10:14AM|#

unless you've got an inflated definition of "decent," that includes "huge," "new," and "with enough land to raise cattle.

What the fuck is up with you and the strawmen today, Joe?

|10.12.05 @ 10:14AM|#

I'm sure joe will come along and correct me and extol the virtues of living in East Boston and Revere.

Or Allston/Brighton by BC. Hey, if you can hear your drunk frat boy neighbors at 3:00am and they're keeping you up, you're just a whiner that wants to be Lord of the Manor.

|10.12.05 @ 10:14AM|#

Sure it will - unless you've got an inflated definition of "decent," that includes "huge," "new," and "with enough land to raise cattle."

Ah, now you're getting to the heart of it. The old "shoulda coulda" angle of homeownership, the kind that outfits like NACA and Acorn spout. I'm not talking about moral economy here, joe, I'm talking about the reality of what is actually available in the MLS. Try buying a SF for less, I dare you.

I was involved in two transactions here recently, and one was a resale at $359,900 for a 3 bed shabhut, the other for a $495,000 SF with just enough room to walk the dog. BTW, I run my mortgage business here in SE Mass, so I know what I'm talking about.

|10.12.05 @ 10:16AM|#

Continuing what JD was alluding to, the mortgage interest expense deduction has been a drag on overall prosperity in this country by putting too much space between us.
I'm a renter in protest of this deduction.

The extent to which the real estate bubble has been caused by the mortgage interest expense deduction is the best reason to get rid of it completely. Let the chips fall where they may.

|10.12.05 @ 10:18AM|#

As a renter, I have a hard time understanding why my rent doesn't qualify me for a tax break.

Hey, here's an idea: Cut everybody's taxes and phase out all tax breaks for people making mortgage payments. Make it revenue neutral, and stop stacking the deck in favor of those who were able to put away a down payment.

|10.12.05 @ 10:18AM|#

Let's recall, kiddies, my comment "$350k will buy you a lot of house" is neither a statement that it will cover the cost of your dream home, nor even all of your housing costs. It was a refutation of the assertion that this change would cause the real estate market to "crater."

Houses in suburbs are being built at over $350,000 levels because they are in demand. They are being built at very low densities, with three car garages, granite welcome mats, brushed nickel light switches, etc etc. By reducing, slightly, what people are willing to pay for homes, the biggest changes in the market would be to switch to slightly less costly homes. The house vs. townhouse debate is actually a fairly extreme response, which would effect considerable numbers of people only in a few real estate markets - more common would be the construction of single family subdivisions with 10-20% more house lots, since as someone mentioned above, it is the land prices that the bubble is driving up, not bricks and nails. This would mean that a developer who would have otherwise constructed a project with 10 houses, each with 20,000 sq ft lots, would build a 12 house project, each with 16,000 square foot lots, combined with a slightly smaller package of extras. Two car garage instead of three, 1800 square feet of space instead of 2000.

|10.12.05 @ 10:18AM|#

You can't just assume that construction and development practices would stay the same.

But what comes first, the development practices or the snob zoning (to use your term)?

MP|10.12.05 @ 10:18AM|#

you want to see destruction?

By "destruction", I was referring to the slippery slope of tax tweaks that leads to the convoluted tax code we have today. If you want to help poor people, get them off the tax roles. The Flat Tax is calling you joe...embrace it...forsake the corrupting power of the tax code tweak...come into the light.

Taxation also distorts the market, ya dumbass.

Show me how a flat tax that includes both income and capital gains distorts the market anywhere near to the degree that this current mess does.

|10.12.05 @ 10:20AM|#

I'm a renter in protest of this deduction.

Your landlord will be pleased to know that you will, of course, COMPLETELY understand his reasons for increasing your rent, as his costs to maintain your home increase and his numbers suddenly don't work out.

M1EK|10.12.05 @ 10:26AM|#

"You know damned well what point DE was making--the cost of housing in America has increased far, far beyond the rate of inflation. Which in turn hurts those poor people you care about so much."

Not really. The poor people he cares about so much are (at least the vast majority are) renting, not owning, and rents haven't risen at anywhere near the same rate as have purchase prices for homes.

(which is, of course, part of the reason many are sure we're in a bubble - the disconnect between purchase price and rent).

And of course the renters get jack squat from the mortgage interest deduction. Oh, and don't forget the poor who manage to own cheap houses - they get nothing too, because the interest doesn't bring them above the standard deduction.

M1EK|10.12.05 @ 10:29AM|#

"Your landlord will be pleased to know that you will, of course, COMPLETELY understand his reasons for increasing your rent, as his costs to maintain your home increase and his numbers suddenly don't work out."

I'm a landlord, and this is baloney. I charge what the market will bear, and the increase in my property taxes the last few years has not been (able to be) passed on in rent.

Over the long run, landlord costs eventually sorta trickle down to rent, maybe. But it's a very indirect relationship. A much more likely scenario is that I have to sell my unit for less than I would like, and then the new owner doesn't need as much rent to cover expenses.

fyodor|10.12.05 @ 10:31AM|#

Taxation also distorts the market

Yeah, and so does death! :-)

|10.12.05 @ 10:31AM|#

"i.e., any definition of "decent" that differs from joe's."

Hey Phil, you fascist statist, you're the one who wants the government to subsidize your definition of decent here. You want enough land to raise cattle? You should be willing to pay for it.

Jennifer,

Good for you on the multifamily idea. If you're willing to fix the toilet at 1AM, you can set youself up quite nicely.

"What the fuck is up with you and the strawmen today, Joe?" No, seriously, to spend $350,000 on a house in Brockton, you'd be getting quite a place.

I think the mortgage deduction is useful for the purpose it was originally intended - to allow renters to become homeowners. There are considerable benefits to this, from both the pov of helping working people get ahead, and for the stability of neighborhoods. But above that point, it just means that upper middle class homeowners become the owners of slightly more expensive houses. Oh, and it juices the profits of construction and real estate companies.

As far as "people buying more house than they can afford," there's no reason to expect that people would extend themselves any less. Likely, the same shares of the population would still sign up for the same monthly payments.

gaius, you can't go by state. Chico and the San Francisco burbs are very different. So are Gainsville and Venice, FLA.

cdunlea, I DID by a single family house for less, just last year. And my folks live in SE Mass, so I am aware of the rise in home prices. I didn't say $350k would cover the cost of exactly what you wanted to buy - I said it would cover a lot of it.

|10.12.05 @ 10:33AM|#

Jennifer:

I do not know how to be any clearer: I want the mortgage interest deduction to GO AWAY. Lowering the cap on it to $350K (hmmm, just below Fannie jumbo mortgage definition) is not a step in that direction.

What it IS a step toward is permanently higher marginal effective taxes rate while incidently wiping out billions in home valuations.

|10.12.05 @ 10:34AM|#

Oh, and don't forget the poor who manage to own cheap houses - they get nothing too, because the interest doesn't bring them above the standard deduction.

You're kidding, right? You know this, because you prepare their taxes? Because most "poor people" I know living in Mattapan, Dot, Providence and Brockton buy three family homes to offset the very high mortgage payments. I'd say you get a pretty substantial deduction when your monthly interest payment is in the $1400-$1500 range, X 12, plus the personal allowances.

Also, home ownership in the country hit an all-time high of 69% in 2002.

It's good to know what you're talking about.

M1EK|10.12.05 @ 10:35AM|#

"At the bottom of the market, the home mortgage deduction is the difference between throwing your money down the rent hole and building up equity for a lot of families."

At the bottom of the market, those families get essentially no benefit from the interest deducation. The condo I bought in '97 for $96K wouldn't have saved me one dollar in Federal taxes if the property taxes weren't so high in Texas and especially Austin.

Even if I had only put 5% down, in a state where schools weren't funded purely out of property taxes, I probably wouldn't have surpassed the standard deduction.

|10.12.05 @ 10:35AM|#

It occurred to me--the people who admit the distorting effects of taxation but don't want to see the mortgage deduction go because of the short-term effects it would have are very, very similar to the people who admit that Social Security is not sustainable but don't want to do anything about it because that would hurt those who depend upon it now.

Look--either we let the government keep distorting the real estate market forever, or we try to stop it. If we stop it, we have two choices: do it now and deal with the short-term consequences, or put it off until LATER, and let LATER generations deal with the short-term consequences. And since later generations will already have to deal with paying off our national debt, plus they'll never see a dime of all the money they put into Social Security, the LEAST we can do for them is fix the clusterfuck housing market now.

gaius marius|10.12.05 @ 10:35AM|#

in KY

lots of things are cheap in kentucky, mr ligon. i went on vacation there a couple years ago and was amazed. third-world pricing, i thought. :)

the thing about the housing bubble that few understand is that it isn't demand-driven -- which makes mr taylor's scary tax reform less scary. in the end, consumers are idiots driven by the blows of advertising and status. they would hang themselves with debt (and have) without blinking an eye or understanding how they're committing financial suicide.

the bubble is expanding because the yield curve has been *very* steep (thanks to the fed) for years now, and lenders can, under these circumstances, borrow cheaply on the short-term and lend long-term to collect excess yield -- what is known as the carry trade. debt has skyrocketed in the american banking system less because consumers are crazy -- for they're always crazy -- but because banks are accomodating their insanity by throwing money at them. one of the steepest and longest-maintained differentials between short and long rates even attempted (in the aftermath of the stock bubble crash) has subsequently infected the financial system with titanic amounts of debt because it was VERY profitable for creditors for a long time -- financial sector profits have NEVER been higher, thanks to the magnitude of the carry trade.

the bubble then is not local and real-estate-market-driven so much as national (international, in fact) and banking-driven. in fact, it isn't even housing specific -- high-yield instruments of all kinds, notoriously emerging markets debt, have been BOOMING for the last few years.

the bust will be, consequently, international and halting lending across the spectrum as poor creidts come back to haunt banks which are in dire need of raising asset-to-debt ratios in an environment of deflating assets (similarly to japan's asset bubble deflation of the 1990s).

the hazard to the bubble then is not tapping out the consumer -- a false ceiling, really, as creditors can continue to make arrangements to allow poorer and poorer debtors into the system -- but in making such lending unprofitable by raising short rates close to long rates. this is known as flattening the yield curve -- or, in the extreme case, inverting the curve by raising short yields over long yields.

there are a number of possible government responses to this situation -- most likely would be to help the banks through a radical inflation of the dollar to quietly and de facto default on dollar-denominated debt by destroying its worth in real terms. but it's hard to say what may happen -- responses under duress are not always rational. one thing's for sure: in REAL terms, asset prices will decline severely as the huge carry trade is forced to unwind.

M1EK|10.12.05 @ 10:37AM|#

cdunlea,

Somebody who can pay a mortgage with $1500/month interest is NOT POOR, by any reasonable definition of the word "POOR".

|10.12.05 @ 10:40AM|#

I didn't say $350k would cover the cost of exactly what you wanted to buy - I said it would cover a lot of it.

Okay, agreed. But the problem really is A) availability of housing in a close range, and b) the ability to come up with the cash difference, or C) qualify for the 100% financing needed to cover the difference.

One solution on the original issue might be to do what the FHA does; go county by county. The FHA loan limit is very different in, say, Suffolk County than it is in Hampshire county, for obvious reasons. The cap could be different too, and the Govt' already collect the data for the FHA.

M1EK|10.12.05 @ 10:40AM|#

"I think the mortgage deduction is useful for the purpose it was originally intended - to allow renters to become homeowners. There are considerable benefits to this, from both the pov of helping working people get ahead, and for the stability of neighborhoods."

Except that in most parts of the country, even here in Austin (most expensive large market in Texas), the entry-level homes are cheap enough that it is unlikely that the mortgage interest deduction helps these families much at all (doesn't bring them much above the standard deduction even with our high property tax load).

|10.12.05 @ 10:40AM|#

To add to what Gaius said, I read an article just yesterday which said this isn't a "housing" bubble so much as it is a "credit" bubble--too many lenders lending too much money to people who are too high-risk. And then all this extra money results in housing inflation. Tax deduction or no, once these people realize they bit off more than they could chew, and start foreclosing, things will even out a bit.

|10.12.05 @ 10:41AM|#

Hey Phil, you fascist statist, you're the one who wants the government to subsidize your definition of decent here.

Please quote me one sentence -- hell, one fucking WORD -- where I spoke in support of ANY mortgage interest deduction AT ALL, let alone the current level of deduction. ONE. FUCKING. SENTENCE. If you cannot find one -- which you cannot, because I didn't OFFER one -- I will accept your apology, which you will of course try to weasel out of giving because you're a fucking prick who is complete, utterly incapable of discussing anything without putting words in people's mouths.

You also can't defend the idea that people may have a definition of "decent" that differs from yours bus otherwise incorporates NONE of the criteria you spewed at Jennifer, because, again, you can never argue with ideas that people actually HOLD, you have to make them up to put yourself on the side of the angels.

Christ, what a prick. Grade-A prime asshole, you are.

|10.12.05 @ 10:43AM|#

You don't even KNOW what my definition of decent IS, joe, because you didn't have the courtesy to ASK me, and simply made it up instead.

gaius marius|10.12.05 @ 10:43AM|#

Houses in suburbs are being built at over $350,000 levels because they are in demand.

why, though? because banks are throwing money at consumers in the carry trade.

i agree with you, mr joe -- this tax cap won't stop anyone. while there is certainly a consumer mania at work, the key component to the system has been bank profitability in making mortgages even to very sorry debtors that they have reduced odds of collecting on.

besides what i said above, the development of mortgage-backed securities -- by which banks making loans do not hold the loans on their balance sheets and are therefore encouraged to take irresponsible credit risks -- has made banks unaccountable in lending practices.

the upshot is that trillions of very low-grade credit has been put out into the system (no one knows where) where it will hide outside of the banking regulations put in place in the aftermath of the great depression. many of these debt holders will be highly leveraged in an effort to magnify gains on diminishing yield spreads.

when they start to default, the shock waves -- with the debt levels as high as they are throughout the system -- will be enough to precipitate catastrophe in the financial sector. you heard it here.

|10.12.05 @ 10:44AM|#

Somebody who can pay a mortgage with $1500/month interest is NOT POOR, by any reasonable definition of the word "POOR"

Really? Meet my immigrant client from Haiti, who work three (3) jobs wiping old peoples' asses at various nursing homes. Got the paystubs with hours worked to prove she's on the go 60 hours a week. She gets by on the rents. Her debt ratio is 58% of income. Her house, worth $592,000 by licensed appraiser, is about 100 years old and run-down in the ghetto.

I guess you can only aspire to that level of affluence, eh?

|10.12.05 @ 10:45AM|#

Russ D, "But what comes first, the development practices or the snob zoning (to use your term)?"

Now THAT'S a good question. (Although snob zoning isn't my term). There's a lot of chicken and egg there. But snob zoning drives up the per-unit land cost of housing. This requires builders to aim for a higher price point. Buyers at this price level expect certain things, and the builders respond by tricking out the houses with commercial ovens and such.

The home mortgage deduction makes people more willing to put up with the increase in housing costs caused by snob zoning. I would expect that this change would increase the pressure to do something about it.

|10.12.05 @ 10:45AM|#

MP,

I never claimed a flat tax would distort the market. But the proposal doesn't call for that. Getting rid of the subsidies without flattening the taxation is the worst of both worlds.

joe,

Your example is exactly what I'm talking about. If you can get the 2000 sf house instead of the 1800 sf house by just driving another 8 miles ("just a ten minute drive!") many people will opt for the extra drive to get the house they want.

gaius marius|10.12.05 @ 10:46AM|#

too many lenders lending too much money to people who are too high-risk. And then all this extra money results in housing inflation. Tax deduction or no, once these people realize they bit off more than they could chew, and start foreclosing, things will even out a bit.

absolutely, ms jennifer -- but the "evening out" from imbalances this magnificent is likely to be a very hard landing (perhaps even the 'd'-word, if mother treasury doesn't start printing greenbacks willy-nilly -- which is almost surely will).

|10.12.05 @ 10:48AM|#

I can say, gm, that lenders have definitely been tightening up on credit standards very recently, because such a problem DOES exist in the industry.

gaius marius|10.12.05 @ 10:48AM|#

I guess you can only aspire to that level of affluence, eh?

it's debtors like her, mr cdunlea, that will suffer most.

|10.12.05 @ 10:49AM|#

"The poor people he cares about so much are (at least the vast majority are) renting, not owning, and rents haven't risen at anywhere near the same rate as have purchase prices for homes."

In my region's housing market, rents have become very soft, because a significant number of people who would have been renters have been able to buy homes, even during this wacky bubble, because of the low interest rates. Condo projects are going up all over the place for this market. These units are generally well below the $350k cutoff.

Of course, I feel bad for those people, since living in a townhouse is the equivalent of imprisonment at Abu Ghraib. Or some would claim.

|10.12.05 @ 10:49AM|#

It's par for the course for joe: troll a snarky, condescending, unsubstantied comment early on in the thread, get questioned on it, then personally attack anyone who called him on it. (Ya ever wonder why liberals find it hard to attract libertarian allies?)

Anyways, $350K does get a nice sized house where I live - Columbia, SC but the bubble is catching up here (it has hit Charleston hard - follow this show for more). Lots of out-of-state investment, people moving in, it's getting worse - and we don't earn shit in income down here.

Still trying to figure how W is helping us red-staters out on this one, though. (rolleyes)

gaius marius|10.12.05 @ 10:51AM|#

I can say, gm, that lenders have definitely been tightening up on credit standards very recently, because such a problem DOES exist in the industry.

the yield curve has sharply flattened in recent months -- it's becoming far less profitable to make mortgages, especially to the type of debtor they're seeing now as they dredge the bottom with interest-only and 1-year arms to speculators and the borderline-impoverished.

that's all credit standards are now, mr cdunlea -- a justification to contract lending in a less-profitable environment.

|10.12.05 @ 10:52AM|#

living in a townhouse is the equivalent of imprisonment at Abu Ghraib. Or some would claim.

The only one who claimed that here was you, Joe. Seriously--what's with the strawmen?

gaius marius|10.12.05 @ 10:54AM|#

In my region's housing market, rents have become very soft, because a significant number of people who would have been renters have been able to buy homes, even during this wacky bubble, because of the low interest rates.

in conclusion, my advice to you all: sell your homes immediately (not six months from now, but IMMEDIATELY) and find a place to rent.

|10.12.05 @ 10:55AM|#

it's debtors like her, mr cdunlea, that will suffer most.

Doubtful, g. marius. Her credit rating is higher than the national average as reported by Fair Isaac, and she pays her bills on time. Her apartments are never vacant, and there is no slack in Boston rentals. All three-family housing in NE is legal nonconforming, so they ain't making any more of it, but we're at capacity here. Oh, she also banks most of the money from one job to her IRA and lives frugally.

I said she was poor, not that she has bad spending habits

gaius marius|10.12.05 @ 11:01AM|#

I said she was poor, not that she has bad spending habits

ah, i reread your initial description -- debt at 58% of INCOME is a nice place to be. you're right about that, mr cdunlea -- wish there were more like her.

|10.12.05 @ 11:01AM|#

The only one who claimed that here was you, Joe. Seriously--what's with the strawmen?

He has to argue that way, Jennifer. Otherwise, he'll have to argue with opinions that people actually HAVE, and that wouldn't allow him to stand mightily atop Mount Moral Highground, master of all he surveys.

For the record, my idea of "decent" is very similar to what I rented in Cleveland*: A two-family side-by-side duplex built in 1914, on a 5,000 sq ft lot, with living spaces of 1240 and 1300 sq ft. Nice, dense residential neighborhood within walking distance of Lake Erie, retail and other shopping, an assload of restaurants, etc. Not far from the Shoreway into the city, nor from I-90, but not right on them, either.

*Lakewood, in any case, which is the near suburb on the West Side. You can walk straight down Detroit Ave. -- which was our closest intersection -- across the Main Ave. bridge into downtown.

|10.12.05 @ 11:03AM|#

it's becoming far less profitable to make mortgages, especially to the type of debtor they're seeing now

Absolutely untrue, g. marius. Foreclosures are simply a calculated risk inherent in the rates the investor charges. The neg am stuff, which you are actually referring to, have credit standards considerably higher than general subprime, which is almost always amortizing.

The other reason it's a good time to make mortgages now is that the 10 yr bond is going up, and quickly. That means all mortgages, fixed and adjustables, are good investments for the servicing lender because prepay speeds (the rate they get paid off due to refinance) are dropping out of the picture. Lenders do not make money on the yield curve, but on the estimately life of the loan; and by industry predictions we're going to get back to the 5-7 year standard we had before 2000.

|10.12.05 @ 11:05AM|#

"most "poor people" I know living in Mattapan, Dot, Providence and Brockton buy three family homes"

As a mortgage broker, the segment of poor people you come into contact with are not representative of most poor people. A little less with the solipsism, please.

M1EK, "At the bottom of the market, those families get essentially no benefit from the interest deducation. The condo I bought in '97 for $96K wouldn't have saved me one dollar in Federal taxes if the property taxes weren't so high in Texas and especially Austin."

OK, ok, not the very bottom of the buyer's market. But along a certain margin, particularly for families that need a bigger place than a one bedroom condo. (Shock and awe as libertoids who think I want everyone to live in the Sears Tower read that sentence.)

And while it might not make much of a difference in your market, I assure you that it would throughout the northeast, upper midwest, and west coast.

Jennifer, "Look--either we let the government keep distorting the real estate market forever, or we try to stop it." Or, we recognize that there are two countervailing forces, and try to muddle through to a happy medium. I know Hit & Run isn't exactly Happymediumland, but such a strategy has been known to work.

cd, setting the cap county-by-county is an interesting idea, but I wouldn't expect it last past the howls of "Why are those blue staters getting all the breaks?" Also, I'd expect the availability of housing (your A) at different levels to change based on a change in mortgage deduction policy.

Phil,

Yawn.

|10.12.05 @ 11:09AM|#

That guy, Gaius. He smart.

|10.12.05 @ 11:10AM|#

"the yield curve has sharply flattened in recent months "

Possibly the most important, and most underreported, economic news in the last year. Heck, drop the economic adjective. Anyone know what preceded all of the major recessions and depressions for the last one hundred years?

Hint - it has something to do with the yield curve.

Know what else has correlated real well with subsequent recessions? Global shortages of natural resources at the same time that the yield curve phenomenon is seen.

If we have a cold winter, next summer's economy is gonna be real ugly.

|10.12.05 @ 11:11AM|#

Or, we recognize that there are two countervailing forces, and try to muddle through to a happy medium

Oh, God, no! Living with a happy medium is worse than being in Abu Ghraib!

(I want y'all to remember what I said here, the next time anybody wants to accuse me of being uncharitable.)

|10.12.05 @ 11:12AM|#

Russ D,

"Your example is exactly what I'm talking about. If you can get the 2000 sf house instead of the 1800 sf house by just driving another 8 miles ("just a ten minute drive!") many people will opt for the extra drive to get the house they want."

Some would. My point is, with developers all hitting the 2000 square foot price point, everyone who needs to go a little cheaper has to go further out. If developers change their practices as I describe (and if suburbs change their zoning to allow less expensive housing), some buyers will continue further out, and some will buy something more modest closer in, because the second option would become more available.

cd, "All three-family housing in NE is legal nonconforming, so they ain't making any more of it, but we're at capacity here." Not all of it. There are three families (side by side mostly, for firecode reasons, but still) going up all over my town. Look to the cities - they're leading the way.

gaius, cd's rental property owner will likely be just fine, even under your scenario. People who lose their homes would need rental housing.

Phil,

Yawn.

gaius marius|10.12.05 @ 11:14AM|#

which you are actually referring to

no no, mr cdunlea -- i'm talking about how banks get money to lend with. it has nothing to do with who they ultimately lend to.

the carry trader raises capital by borrowing it at the 30-day rate -- and then lends it at the 30-year rate, which has been considerably higher. the trader reaps the difference.

prepayments and neg am affect their return, but the basis of profitability is in the yield differential. and it isn't necessarily the banks and mortgage makers that do this -- but within the system, this is how credit is expanded and the velocity of money increased. when it becomes unprofitable, mortgage makers are going to find their access to capital shut off.

profitability declines as the 10-year and 30-year rate approaches the 30-day rate.

|10.12.05 @ 11:18AM|#

The mortgage deduction amounts to about 1-2 years worth of appreciation. It's hard to see how the market would be much different without it. Remove the deduction, and you're paying the same amount on your mortgage you would have been had you waited two years to buy, and gotten no deduction. The years go buy, the prices keep going up, and the rate at which people buy homes keeps going with it.

In other words, why is the market two years down the road so much different than the one we would have today were there no deduction? A little different, sure, but not radically so.

gaius marius|10.12.05 @ 11:20AM|#

gaius, cd's rental property owner will likely be just fine, even under your scenario. People who lose their homes would need rental housing.

people who lose homes will be bankrupted -- losing everything, including access to credit. but i think you misunderstand the scope of the problem.

i'm talking about a contraction in lending of the kind we certainly haven't seen since 1972-74, and possibly since 1929-33 -- or greater, if you can imagine. it won't just affect homeowners. it means capital shutoffs for commerical lenders, financial ventures, personal deb -- the whole gamut. the levels of debt in the system dwarf, even on a real basis, anything that was imagined in the great depression. greenspan keeps harping on flexibility because that's his only hope -- if the system proves not as flexible as he hopes, it's hard to overestimate the magnitude of what awaits us.

|10.12.05 @ 11:21AM|#

Phil,

Yawn.

So, in your words, "You got nothin'." Right? C'mon, joe, quote me back my extensive support of an uncapped mortgage interest deduction.

You're sooooooooo sure of what I want, it should be easy. Otherwise, you wouldn't have said it, right? I mean, heaven forbid you get caught arguing with The Phil In Your Head rather than with me; only other people do that.

Dazzle me. Blow me away. Embarrass me.

Let's see it.

If you can find it, I will make a $250 contribution to the charity of your choice today, a promise witnessed here by all these posters and editors. I also will promise to never post at H&R again out of shame. If you CAN'T find it, you have to promise not to post here for 14 consecutive days.

Come on, smart guy. Here's your big chance.

|10.12.05 @ 11:25AM|#

Actually, ignoring you is working out pretty well for. Would you mind swearing a few more times?

|10.12.05 @ 11:31AM|#

Not at all. You find that quote yet? The one where I said I wanted the government to subsidize my dream house on an outrageously large lot? No? Huh. I wonder why.

PS: "Ignoring" someone does not consist of making shit up and putting it in people's mouths. That's actually more properly referred to as "lying." Which I guess makes you a liar in addition to all the aforementioned. Why don't you just grow a pair, be a man and admit I never said it?

quasibill: U.S. Forecasts Warmer Than Normal Winter.

|10.12.05 @ 11:32AM|#

In other words, Joe, you can't refute Phil's points so you "yawn" and ignore them? Between that and the excessive strawmen, I think maybe you're just some uber-right-wng asshole posting under an alias to make Joe look like an idiot today. Who are you really? Dynamist? Billy Ray?

|10.12.05 @ 11:40AM|#

I'll sweeten the pot, Joey Joe-Joe Junior Shabadoo: If you simply step up, be a man, and admit both:

1) I never claimed any support for the mortgage interest deduction,nor claimed "[I'm] the one who wants the government to subsidize [my] definition of decent here.", and

2) nobody on this thread claimed anything even close in spirit to "a townhome is worse than Abu Ghraib,"

and then apologize for both, I'll make a $50 donation to the charity of your choice, and post the confirmation to this very thread.

It's win-win.

M1EK|10.12.05 @ 11:41AM|#

"OK, ok, not the very bottom of the buyer's market. But along a certain margin, particularly for families that need a bigger place than a one bedroom condo."

In most markets in this country, one can get a 3-bedroom detached house for less than $150K if one lives in a crappy exurb.

In most of those states, the interest deduction on that $142K loan isn't going to bring that family much above the standard deduction (after the first year's boost due to points).

|10.12.05 @ 11:42AM|#

Jennifer,

I don't know what Phil's points are. I stopped reading them when he freaked out, and started swearing and using ALL CAPS.

BTW, "strawman" is not defined as "an unflattering restatement of another's argument." The point was raised by several posters that a smaller house, an attached dwelling, or a house on a city lot was not an appropriate dwelling for an American to live in. So I mocked it.

M1EK|10.12.05 @ 11:44AM|#

"Really? Meet my immigrant client from Haiti, who work three (3) jobs wiping old peoples' asses at various nursing homes. Got the paystubs with hours worked to prove she's on the go 60 hours a week. She gets by on the rents. Her debt ratio is 58% of income. Her house, worth $592,000 by licensed appraiser, is about 100 years old and run-down in the ghetto."

Good lord, do you get it yet? POOR PEOPLE GENERALLY DON'T OWN HOMES. If she had enough money to qualify for a down payment on a house like that, even at a 3% down loan, SHE AIN'T POOR.

|10.12.05 @ 11:47AM|#

I don't know what Phil's points are. I stopped reading them when he freaked out, and started swearing and using ALL CAPS.

You stopped reading them long before that, right about the point that you made something up that I never said and then attributed it to me.

|10.12.05 @ 11:47AM|#

There are three families (side by side mostly, for firecode reasons, but still) going up all over my town

I don't know what town that is, joe, but it ain't Boston, Providence, Brockton, Lowell, Lawrence, Springfield, Holyoke, Worcester or any other place with grandfathered housing. There are some multi-units being built elsewhere, but after dealing with the acquisition of enough land for side-by-sides, and then the zoning issues, it's easier to convert the deed to condo trusts. In 11 years I've dealt with exactly 1 new 2-unit home, in Springfield. Everything else is grandfathered.

|10.12.05 @ 11:48AM|#

Joe, the way you've been acting on this thread, itt's impossible to tell where your "mocking" ends and "actual arguments" begin.

When you accused people who don't want to live in a townhouse of wanting to be "lords of the manor," was that mocking or debating? What about when you insisted that the people here defined 'decent' as "big enough to raise cattle?" Mocking or sincere?

MP|10.12.05 @ 11:50AM|#

U.S. Forecasts Warmer Than Normal Winter.

Best news I've seen in a while.

|10.12.05 @ 11:52AM|#

but the basis of profitability is in the yield differential

Plus servicing retention/release fees, and interest on the warehouse. Coupled with increased production capacity due to automated everything, from marketing to origination to underwriting to delivery to servicin, and the savings that come from that, the "carry traders", or investors as they are known, are doing fine. DLJ, Merrill and the small players like the Winter Group are having a day in the sun right now.

|10.12.05 @ 11:54AM|#

Good lord, do you get it yet? POOR PEOPLE GENERALLY DON'T OWN HOMES. If she had enough money to qualify for a down payment on a house like that, even at a 3% down loan, SHE AIN'T POOR.

She got 100% financing. You can get 100% now with a 580 FICO, or a 620 if you "state" your income. Wake up.

|10.12.05 @ 11:56AM|#

cd, I didn't get that you were talking exclusively about rentals. You are correct, they are all being built as condos. The only new rental housing coming onto the market is in large projects, or the renovation of old houses into apartments.

Jennifer, both were mocking, in the service of a sincere point.

|10.12.05 @ 11:59AM|#

cd, we believe you, there are programs to help poor people buy homes.

Nonetheless, the overwhelming majority of them do not own their own homes.

|10.12.05 @ 11:59AM|#

The point was raised by several posters that a smaller house, an attached dwelling, or a house on a city lot was not an appropriate dwelling for an American to live in.

Certainly not by me, yet you mocked me anyway. All I said is that a condo is different. My implication is that it might not be for everyone- for example, my wife and I are musicians (noise), we have a dog, and might want to have kids. Suddenly even a tiny patch of yard is looking mighty attractive. And I don't relish the idea of paying hundreds of dollars a month on top of the mortgage, while enjoying the privelege of dealing with association meetings. We're well aware we might end up in one anyway. A town home would be fine, and an 800 sq. ft. house will be fine; I knew all this when we moved here.

|10.12.05 @ 12:01PM|#

The point was raised by several posters that a smaller house, an attached dwelling, or a house on a city lot was not an appropriate dwelling for an American to live in.

Certainly not by me, yet you mocked me anyway. All I said is that a condo is different. My implication is that it might not be for everyone- for example, my wife and I are musicians (noise), we have a dog, and might want to have kids. Suddenly even a tiny patch of yard is looking mighty attractive. And I don't relish the idea of paying hundreds of dollars a month on top of the mortgage, while enjoying the privelege of dealing with association meetings. We're well aware we might end up in one anyway. A town home would be fine, and an 800 sq. ft. house will be fine; I knew all this when we moved here.

|10.12.05 @ 12:02PM|#

cd, I didn't get that you were talking exclusively about rentals.

Well, I was speaking about two and three unit houses, even if they are owner-occupied. Most "ethnic" communities are buying these houses in droves. These houses, in our old neighborhoods, are generally grandfathered, and I don't know of any comparable units being built in, say, Hanover.

M1EK|10.12.05 @ 12:05PM|#

"nobody on this thread claimed anything even close in spirit to "a townhome is worse than Abu Ghraib"

hyperbole, but I got the same impression. Most commenters here dismiss the idea of multi-family housing as not worth consideration when these topics come up, yet rationally it has to be utilized as metropolitan areas can't magically create more land.

|10.12.05 @ 12:11PM|#

my wife and I are musicians

That's exactly what makes me wary of townhomes; I'm a musician as well, and I practice loud. I also have a rather outsized Surround Sound system. I don't want to piss off any neighbors; heck, right now, living in an apartment, I worry that I'm being too loud, even with the Surround on like 8, or my guitar amp on 1.

Outside of that, hell, I don't care. My father's got a beautiful end-unit townhome in Frederick, MD. I'd take it any day of the week.

|10.12.05 @ 12:16PM|#

OK, elvis, I mocked when I should have argued.

There are many varieties of condos that are perfectly serviceable for families. There are four bedroom townhomes with their own yards. There are campuses of two families that are laid out like individual homes on individual lots.

The point I didn't make very well was that too many people assume that "condo" means "no space, no privacy, no yard."

Also, as I've learned, once you factor in homeowners insurance (typically covered by your condo fee), maintenance, and utilities (higher in a freestanding home), losing the condo fee is a false savings.

M1EK|10.12.05 @ 12:16PM|#

"nobody on this thread claimed anything even close in spirit to "a townhome is worse than Abu Ghraib"

hyperbole, but I got the same impression. Most commenters here dismiss the idea of multi-family housing as not worth consideration when these topics come up, yet rationally it has to be utilized as metropolitan areas can't magically create more land.

|10.12.05 @ 12:17PM|#

Most commenters here dismiss the idea of multi-family housing as not worth consideration when these topics come up

Maybe, maybe not; I wouldn't go so far as to say "most commenters." In either case, perhaps joe should restrict his hyperbole for those who actually simply dismiss the notion out of hand, rather than those who try to argue that the minuses -- for them, as buyers -- outweigh the pluses.

M1EK|10.12.05 @ 12:19PM|#

"She got 100% financing. You can get 100% now with a 580 FICO, or a 620 if you "state" your income. Wake up."

So now your anectdotal person is not only 'poor' by a very stretched definition of the term, but an idiot?

M1EK|10.12.05 @ 12:21PM|#

"She got 100% financing. You can get 100% now with a 580 FICO, or a 620 if you "state" your income. Wake up."

So now your anectdotal person is not only 'poor' by a very stretched definition of the term, but an idiot?

And you helped her overexpose herself like this?

Shameful.

|10.12.05 @ 12:22PM|#

cd, "I was speaking about two and three unit houses, even if they are owner-occupied."

There are a lot two and three families being built, with each unit being sold as condos. But as far as traditional "two- or three-deckahs," whether the owner lives in one of the units or not, yeah, you're right, they don't build many of those anymore. Sometimes you get "in-law apartments" added to single family homes, but stupid snob zoning laws often forbid the collection of rent on the second unit.

M1EK|10.12.05 @ 12:24PM|#

"Also, as I've learned, once you factor in homeowners insurance (typically covered by your condo fee), maintenance, and utilities (higher in a freestanding home), losing the condo fee is a false savings."

True in my case - condo fee on our building is $138/month; don't have to pay water or garbage (which on my not much bigger house are running $40/month); don't have to pay homeowners' insurance for outside of building (perhaps 3/4 of my current $100/month); winter gas usage much higher in house since I don't live above girls who like their winter heat at 75 degrees anymore; electric usage much higher due to A/C losses on sides which I didn't incur in condo.

|10.12.05 @ 12:27PM|#

M1EK, given the sale price of three deckahs in, er, undervalued historic urban neighborhoods, and the fact that she's collecting rent on two of the units, you shouldn't jump to the conclusion that she's so out of pocket. I wouldn't be surprised if the rentals covered her whole mortgage.

"Most commenters here dismiss the idea of multi-family housing as not worth consideration when these topics come up, yet rationally it has to be utilized as metropolitan areas can't magically create more land." Well, they can always just keep building further out and adding highway lanes. Sinces jobs are being added further out too, there's no downside!

And on the off chance this does produce gridlock in built up areas, we can always take some buildings in undervalued historic neighborhoods to widen the roads. Any other solution, you're intruding on the property rights of landowners.

|10.12.05 @ 12:28PM|#

That's exactly what makes me wary of townhomes; I'm a musician as well, and I practice loud. I also have a rather outsized Surround Sound system. I don't want to piss off any neighbors

Gasp! Your avoidance of condos is based on a desire to avoid annoying people? Impossible! You're a goddamned snobbish lord-of-the-manor would-be cattle-baron piece of crap, do you know that, Phil?

Oh, and I'll bet you think going without a Surround Sound system is worse than being in Abu Ghraib, too.

(Am I being sarcastic, resorting to a strawman, or mocking in pursuit of a valid point? In true Joe fashion, the answer will vary based upon how other posters respond. Whatever the answer is, though, rest assured that I'm right and you're a fucking snob.)

|10.12.05 @ 12:43PM|#

I hear my neighbors more in the house I just bought than I did in the condo I sold.

See my above comments about people jumping to false conclusions about condos. Some of them even use two layers of paperboard for interior walls.

|10.12.05 @ 12:44PM|#

Jennifer, not being able to crank my amp to 11 whenever I want is so terrible that I'd rather be disemboweled by a family of rabid weasels. It's that bad.

|10.12.05 @ 12:52PM|#

Here's the general neighborhood I used to live in, Jennifer, and where my wife and I hope to move back to in a few years when we're sick of the DC area. I can't decide how many head of cattle to have there, or whether I should just build a NASCAR track or something on the land instead.

|10.12.05 @ 1:06PM|#

Wow! Housing issues do seem to get people's tempers up, don't they?

I'm so glad I let professionals make all my financial decisions.

gaius marius|10.12.05 @ 1:16PM|#

the "carry traders", or investors as they are known, are doing fine.

they have, mr cdunlea -- and they will continue to try to do so, which is why they'll start unwinding their carry trade positions (if they haven't already). that spells credit contraction.

DLJ, Merrill and the small players like the Winter Group are having a day in the sun right now.

the credit bubble operates on a vastly greater scale than these folks. the carry trade is the basic inhale/exhale of the fiat currency economies of the west. there's nothing it doesn't affect.

Larry A|10.12.05 @ 1:28PM|#

Actually, this isn't a tax break on large homes, and capping it won't make the rich folks Joe's after pay higher taxes. The tax break is on mortgage interest. If it's eliminated the wealthy can simply move investment capital around and pay off their home loan.

|10.12.05 @ 1:38PM|#

Phil, if you and your wife had one fucking shred of decency you'd use all that space to allow your overworked peasant servants to build homes for themselves.

You suck. And trying to have a decent conversation with you is worse than being in Abu Ghraib.

R C Dean|10.12.05 @ 1:42PM|#

Ouch, Larry. Too true.

I know several people who refi'ed in recent years because their cash out gave them a sweet after-tax arbitrage opportunity. If the tax breaks goes, they run the numbers, and maybe pay down their loan if it makes sense.

As always, the truly wealthy will find a way to stay ahead of the tax-man, income tax will remain utterly irrelevant to the truly poor, and the middle class will take it on the chin.

Thus always with tax reform, and one of the very few remaining issues where Bush could claim some libertarian cred goes up in smoke.

|10.12.05 @ 1:47PM|#

RC--

Is it true that in Texas, property tax is based on the size of the lot rather than the quality of what's built on it? Somebody told me that once, when we were watching some movie set in Texas and I expressed amazement at the sight of non-wealthy people living in these enormous homes that were extremely close together.

M1EK|10.12.05 @ 2:26PM|#

"Is it true that in Texas, property tax is based on the size of the lot rather than the quality of what's built on it"

No. The land is appraised based on theoretical market value (my small lot is worth more than most of the exurban Republicans' big lots around here, and probably on this very thread as well). The building is appraised seperately as "improvements".

|10.12.05 @ 2:35PM|#

There's some truth in what Larry A and RC are saying, and the truly wealthy can just pay off their loans, but let's keep in mind the facts here: this would raise taxes on people who have mortgages - not home values, but loan amounts - of $350,000-$1,000,000. Some of the people at the very bottom of that range could qualify as middle class, but how many of you could get an $800,000 home loan?

"the rich folks Joe's after" Actually, I've already said this tax break is only worthwhile to the extent that it helps turn renters into owners. That's pretty much the bottom fringe of the middle class and below. To the extent it simply helps people who'd buy a 10 year old home get a new one, or a new four bedroom home get a five bedroom, I don't see it as worth the budget hit.

JSF|10.12.05 @ 2:49PM|#

Is it true that in Texas, property tax is based on the size of the lot rather than the quality of what's built on it?

I'm a RE appraiser in San Antonio. Both the lot and the improvements are assessed at "market value" but are often fairly arbitrary (usually lower, but often higher). A lot of square footage mistakes and other errors, too.

Each year, the State audits the valuations and withholds State education funding to the school districts where the assessed value is less than 95% of the selling price of a sample of sales in the district, so the County Appraisal Districts are caught between the proverbial rock and hard place between the thousands of owners successfully protesting their valuations and the State.

JSF

gaius marius|10.12.05 @ 3:18PM|#

how many of you could get an $800,000 home loan?

you haven't tried to get a loan recently, mr joe, have you?

i have a single pal, heavily burdened with grad school loans, pharmacist, good credit history, who was shopping for a 2bed-2bath in a good chicago neighborhood. prices started at $440,000.

his banker told him to buy whatever he wanted -- they'd finance whatever he chose to get under a million.

i don't know where you live, mr joe, but the housing bubble has gone much farther than you seem to want to believe.

|10.12.05 @ 3:23PM|#

I have some confusion about the existing cap. Is the cap an annual cap or is it a "life of the loan" cap? Because a 300K 30-year loan at 7% is gonna be over $350K in interest over the life of the loan and a 300K loan seems like solid middle-class territory to me, in some markets I'm sure the middle class is commonly doing 400K mortgages. So the proposal to end your interest deduction instead of making you pay the AMT ultimately means nothing to the individual taxpayer because his tax goes up either way. In fact it becomes an advantage to people who took out loans before home prices went up.

I know I'm just a cynic, but when it comes to tax proposals the bottom line is the government wants more money not less.

|10.12.05 @ 3:58PM|#

jc, the cap is on the size of the loan, not on the amount of interest.

|10.12.05 @ 4:29PM|#

Question for the tax-experts:

IF there was a limit of 350K loan amount, what stops a creative lender from "lending" 700K to someone, but, taking only a 350K note back, at, say 12% interest, netting the same income. i.e. 350K @ 12% vs. 700K @ 6%. Then, have an iron-clad 'prepayment' penalty of 350K.

R C Dean|10.12.05 @ 5:22PM|#

Heywood, my friend - THAT is a business plan.

|10.12.05 @ 6:22PM|#

IF there was a limit of 350K loan amount, what stops a creative lender from "lending" 700K to someone, but, taking only a 350K note back, at, say 12% interest, netting the same income. i.e. 350K @ 12% vs. 700K @ 6%. Then, have an iron-clad 'prepayment' penalty of 350K.

Many, many different problems. You have the fact that most loans are sold either to Fannie or Freddie, which are govt-sponsored, so no, I don't think they'll put up with that. And in the event of a foreclosure, the lender can only get the amount of the lien back at auction, and cannot get prepayment penalties--that's not part of the lien, but the note, which the buyer at auction never signed. Then there's the interest; a prepay of $350,000 does nothing for the lender, who sees no interest of it, but has to pay interest to provide that money. Finally, state laws have HUGE problems with prepayments already; that's 50 states with 50 different issues.

|10.12.05 @ 6:27PM|#

From the all-knowing M1EK in Texas, commenting on a homeowner in Boston:

So now your anectdotal person is not only 'poor' by a very stretched definition of the term, but an idiot?

She's an "idiot" who saved up over $98,000 in an IRA while working those jobs. Her credit rating is a 758, something you statistically are not likely to have. And as I refinance her to reduce her rate to 6.1%, she's borrowing $471,000 on a house now worth, a year after she bought it, $592,000.

Doesn't sound like an idiot to me. But it does show me that you like to talk out your ass every so often.

|10.12.05 @ 6:31PM|#

his banker told him to buy whatever he wanted -- they'd finance whatever he chose to get under a million.

You got it, g. marius. No ratio loans allow you to get whatever you want. Of course, those of us with the common sense to pay our bills on time will only borrow what we can afford to pay back; only the dipshits with lousy credit will take that bait. THOSE are the junk loans the lender's gonna own inside a year.

|10.12.05 @ 7:46PM|#

cdunlea:

I dont' actually see the need for any of this wild financing, as I am sure the proposal will die before it gets anywhere.

But, don't understimate the ingenuity of the financial community. There are plenty of complicated, yet, commonly used instruments out there. In my example, the lender is getting 12%, so they ARE being compensated for the amount they are 'out of pocket'.

I know there are 'details' of how you will track the current balance as principal is paid off. But, someone can come up with a method where half of each principal payment goes to the "note" amount, and half to lower the prepayment penalty.

If there is any place where a prepayment penalty is not allowed, how about the lender gives you a 1st mortgage of 350K at 12% and then a 2nd mortgage of 350K interest free? No prepayment penalty needed. The homeowner would never payoff the 2nd, as they would be left with a 350K loan at 12%. And the holder of the 2nd would need to sign off on any "new" lender to go in the first position if the homeowner tried to refi the 1st note. The lender would simply not give permission.

The main point is that to have a cap on the amount financed and not the amount deducted, or the rate of interest will cause the 'loopholes' to be found, you can count on it.

HJ

|10.12.05 @ 9:34PM|#

Speaking of housing issues, I hope everyone is following the best newspaper comic strip since Li'l Abner, For Better or for Worse.

|10.13.05 @ 1:48AM|#

I hope everyone is following the best newspaper comic strip since Li'l Abner, For Better or for Worse.

Why, did something humorous happen that happens universally to parents everywhere?

Or is Weed involved? ;) Heh heh. We all know how *that* character got named.

M1EK|10.13.05 @ 9:46AM|#

"She's an "idiot" who saved up over $98,000 in an IRA while working those jobs. Her credit rating is a 758, something you statistically are not likely to have. And as I refinance her to reduce her rate to 6.1%, she's borrowing $471,000 on a house now worth, a year after she bought it, $592,000."

And what happens if the rental market crashes, since you signed her to a loan she can't possibly afford?

Hint: I am a landlord. The rent I could charge for my condominium ranged from $1600 the year I bought it (and still lived in it; the $1600 was what somebody nextdoor was paying in rent on the same unit) to $1000 a few years ago (after I moved to our house and started renting it out); back up to $1150 this year. So what happens to your client if rents drop by 40% and don't recover for a decade?

I don't remember my exact credit rating but the mortgage guys were surprised how high it was. Who cares, if you end up going bankrupt a couple years from now because you overextended yourself?

gaius marius|10.13.05 @ 10:33AM|#

And as I refinance her to reduce her rate to 6.1%, she's borrowing $471,000 on a house now worth, a year after she bought it, $592,000."

mr cdunlea, you misrepresented her situation above. you said her debt was 58% of her income -- is her income $812,000?

her credit rating doesn't matter a jot, nor will many of ours, no matter how hardworking she may be. mr m1ek is right -- she's potentially in a shitload of trouble if the government doesn't bail out debtors with inflation. those properties -- all properties, but especially rental units owned for investment -- are going to crater in real terms once the financing bubble pops. john templeton has estimated a 90% decline in real property values is what we have in store.

leverage in a non-inflationary environment of asset depreciation/lending contraction is lethal. she wouldn't make it.

|10.13.05 @ 11:00AM|#

I don't understand--if you're frugal enough to save almost $100,000 on a low salary, and if you KNOW you'll never be likely to get a job that pays more than a dollar or so over minimum wage, why in the WORLD would you stay in Boston? It's a nice city but insanely overpriced. If I were her, I'd've taken my money to some Midwestern city where you can live very well on minimum wage jobs--if you also own an apartment building outright, and collect rents from it besides.

|10.13.05 @ 11:03AM|#

Gaius, do you have a link to that Templeton prophecy? I found many of his interviews on Google, but not the one you referenced.

gaius marius|10.13.05 @ 11:42AM|#

ms jennifer, he made the comment in his annual interview with john flaherty for equities magazine in 2003. it's referred to here and elsewhere on the net, but the interview itself (which i read when it was contemporary) is subscription-only. you get a very good idea of templeton's views, however, from this outline.

fwiw, templeton is massively bearish on the american and japanese markets, which he began actively shorting this year (wise old owl that he is). he's one of the greatest contrarian investors ever to live, of course.

|10.13.05 @ 12:02PM|#

"And what happens if the rental market crashes, since you signed her to a loan she can't possibly afford?"

I think you're missing an important point here - over the last few years, low interest rates for mortgages have softened the rental market, by allowing people to move into the homeowners' market. If real estate values decline, people can't afford their homes (or can't afford to buy a home when they move) will go back into the rental market. Anything short of an outright economic depression will result in higher, not lower, rental income for cdunlea's Haitian landlady.

gaius, 90%. Geddoutahere. I suppose we should all buy gold too, because we'll need a wheelbarrow full of twenties to buy a loaf of bread.

gaius marius|10.13.05 @ 12:17PM|#

Anything short of an outright economic depression

an important qualifier, mr joe.

I suppose we should all buy gold too

don't know about you all, but i've been making a killing. i would not at all be surprised to see anything dollar-demoninated, supply-constrained and unleveraged multiply in dollar terms over the next decade, though only time will tell. the only way to avoid deflationary depression in the credit unwinding that's set up for us is for the united states treasury to destroy the value of the dollar, effecting a partial default on american debt by inflating its value to a managable level. it's the same game played by emerging market economies when they become debt-ridden -- only we've managed to put it off for much longer because we borrow in our own currency.

the problem with housing, of course, is that it's massively leveraged -- in real terms, it will plummet, even if in nominal terms it is made to remain stable or even appreciates over the next decade thanks to treasury and federal reserve policy vis-a-vis the currency.

this is a very old story with many iterations in economic history.

|10.16.05 @ 12:48PM|#

The downfall of real estate will have nothing to do with the proposed tax reductions. It has been purely cheap credit that has formed this bubble and the removal of this credit is what will crater real estate as we know it. There is absolutely nothing anyone can do to stop it and the sooner the crash, the lesser the damage, although there will surely be much damage.

|10.16.05 @ 12:51PM|#

Newly abundant liquidity can readily disappear - alan Greenspan