Third Whammy - Obama Mortgage Deduction Cap / Reduction

forgot the link:

http://www.usnews.com/money/blogs/the-home-front/2009/02/26/mortgage-interest-deduction-on-the-chopping-block.html

http://online.wsj.com/article/SB123559630127675581.html?mod=todays_us_page_one

and, of course... who complains... the REALTORS!

http://articles.latimes.com/2009/mar/14/business/fi-deduct14

They should eliminate it altogether for second homes, boats, RVs. But those all have their own trade lobbies.

agreed. Not sure why those things need subsidies.

Of course, if this passes, imagine the consequences on the NYC market. I figure almost the entire buyer pool for NYC gets hit, no? (its TWO tax brackets).

"They should eliminate it altogether for second homes, boats, RVs. But those all have their own trade lobbies."

cannot agree more! voters should have gotten rid of lobbies long time ago, why not making them illegal?

So based on the above, how do you think it will affect the RE market,
What is the % of home price decline do you think we should expect?

I think this is actually the second whammy (4.6% increase in top marginal rate being the first). Being taxed at 36-39.6% and only taking itemized deductions at 28% is going to hit A LOT of people in NYC. The other Obama whammy cited in the "double whammy" thread was taxing private equity carry as ordinary income. That is a bigger step-up in the applicable rate but only applies to a relatively small number of people, so I'd rank it third in impact. The marginal rates and reduced deductions have to affect affordability across most of the market, including rentals.

I think this can be calculated somewhat, but thats more of a long-term effect. Short term, the panic/illiquidity factor might lead to an inefficient move toward equilibrium.

But wouldn't it AOTHBE require a reduction equal to the reduction in deduction? So, 9% differential at the high end and 5% at the lower end.

We know that not all buyers would be affected, especially those at the top end who might pay cash. But for the middle of the road ones, maybe we are talking a 5-9% effect.

sideline, totally agreed.

There are so many major moves at play, its going to be tough guessing in advance how they will interplay. But each by itself could be substantial.

Except for the fact that something being in Obama's proposal does not mean that it will ultimately happen that way. I think the mortgage interest deduction will end up with no change, but time will tell.

I'm not sure why everybody is worked up about this. The vast majority of people earning between 200-500k in NYC already pay the AMT. The AMT rate is 28% so there's no consequences for most NYC residents of the Obama proposal. In fact, it actually makes things more fair because somebody earning 250k in Kansas (probably not subject to the AMT) will only be able to deduct the same amount we can.

That is not correct mytwocents. Even if hit by the AMT, if your AGI is 300k you deduct your first 50k in mortgage interest payments currently in NYC at 44% (33 fed and 11 state/city). So, 44% of the interest you pay on your mortgage is paid by Uncle Sam. This is a big help to anyone in this salary range who is a buyer in NYC and lowering the amount that this family can deduct will have to effect how much of a mortgage they can take out. When the Fed rate hits 36% this amount moves up to 47%. Now, does losing 8% of the deductibility change a lot, who knows, but it has an effect.

though isn't mortgage interest AMT-deductible as well?

"Except for the fact that something being in Obama's proposal does not mean that it will ultimately happen that way."

Well, of course, but does that mean we can't look at the implications until it actually happens?

Pretty smart. We're in a popped housing bubble and we're removing incentives to own homes.
Economy is in bad shape so we raise taxes. Smart.

somewhereelse- yes, that's my point. When you are subject to AMT, your marginal rate is 28% so limiting the mortgage interest deduction to 28% would not affect you because that's all you were writing off anyhow. It makes no difference what the "normal" tax rates are.

mktmaker- I couldn't understand your response. First, the fed gov doesn't give you a 44% deduction. The fed gov allows you to write off the interest from your federal income. Separately, NY and NYC permit you to write off your interest. There's no indication that NY and NYC are proposing a separate mortgage interest deduction limitation. Second, your numerical example already presupposes that you are not paying AMT because you can never pay a 33% AMT rate. If you were subject to AMT, you would be paying 28 so you are indifferent to the proposal.

> We're in a popped housing bubble and we're removing incentives to own homes.

Lets see... we just saw a bubble pop, and your suggestion is to keep the things that created the bubble (which costs us lots)? Really?

"somewhereelse- yes, that's my point. When you are subject to AMT, your marginal rate is 28% so limiting the mortgage interest deduction to 28% would not affect you because that's all you were writing off anyhow. It makes no difference what the "normal" tax rates are. "

m2c, good point, I missed that. I have for some reason been able to avoid AMT (knock on wood), but used to get screwed in other places... so I'm not used to making that calculation.

>> Lets see... we just saw a bubble pop, and your suggestion is to keep the things that created the bubble (which costs us lots)? Really?

Let's see, your suggestion is to further de-incentive home ownership and saving to further push the country towards economic collapse?

"de-incentive home ownership and saving"

since when those 2 go together? you bought into the "forced" savings argument? the less people have to waste on inflated housing costs, the more they can save. stopping incentives for people to load on debt is smart and needed. remember that when the debt goes sour it's the economy and the tax payer that takes the hit.

so yes, it's smart to de-leverage housing and to stop giving incentives for people to use debt to buy secondary homes, RVs and the like discretionary income.

If you change the game right now, you could further push more people into foreclosure and get crisis part deux. There must be many people hanging on by a thread, not to mention the 10% (err 20%) unemployed or temporarily seasonally employed.

Do you truly think this law is needed to de-incentive people to load up on debt right now?
How many people do you hear talking about leveraging to buy real estate right now? I just see bears saying "don't buy! don't buy!"

Instead of trying to make things worse, perhaps our government elected officials should learn how to budget more than one year (election) in advance and save.

This idea has been floated dozens of times and it never gains traction. Earlier on, during the 1960s, the proposed approach came from the other direction: a plan to impute income to homeowners tied to the value of the home (whether financed or not). Remember, until 1986, all consumer interest was deductible - the mortgage interest deduction was carved out of the 1886 tax reforms. Shortly thereafter, the $1MM cap was imposed, but home equity lines were added.

It would be interesting to see the fallout. Not only would the market for new mortgages fall dramatically, people would be rethinking their allocation of funds. If you are going to increase my taxes and make mortgage payments after tax, you basically would need a 10% return in another investment to replicate the return in paying off your mortgage. And, if mortgage rates were 10%, you would be a fool to invest anywhere else but in reducing debt.

"trying to make things worse"?

the bad thing was to create the housing bubble and to let it run it's course. it's done aifamm, move on.

people figure out that buying more house than what they should have is only a money pitt and not the road to riches. a coherent tax policy that doesn't give incentives to make stupid financial decisions is key. especially when the taxpayer that doesn't make the stupid financial decision is at risk when the game ends.

> How many people do you hear talking about leveraging to buy real estate right now?
hello!?! do you know what the FHA is?

Considering Bush Jr gave a speech citing record home ownership in the US during his term, this affects a lot of people.

>> aifamm.. I don't give a crap about ppl that can't hold on. It's like letting in a kid into a super smart school.... if the kid continually fails the exams..
I think it's more like changing the exam during the middle of an exam after you've answered half the questions.

>>the bad thing was to create the housing bubble and to let it run it's course. it's done aifamm, move on.
Right. Move on, figure out a way to make jobs. Stop figuring ways to tax ppl more just to get by. Does this taxation solve anything? So how about we not print more money and instead leave taxes the way they are. Use money and politicians to create something of value.

Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Ronald Reagan

In summary, Obama stop changing the game and try to actually do what you said. REAL change. Not this BS posturing, scapegoating and temporary bandaid fixes with taxation.

uf aifamm... i don't know where you are coming from but ... just in case.

this "feels" to you like a tax increase. in reality is to stop providing people a tax benefit on a stupid decision. that's all. if the costly consequences of the stupid decisions were born just by the stupid decision makers... then i see your point.

priority 1 is to protect responsible tax payers, priority 2 is not to give tax incentives for people to live like in a casino. over leveraged for a chance to get that tax free gravy and ... paying less taxes meanwhile...

get it?

"Well, of course, but does that mean we can't look at the implications until it actually happens?"

Debating potential implications is always good. But it is important to realize the slant with which you chose to begin the discussion:

"wow, not sure how we let this one sail by...The mortgage deduction is being scaled back"

Taking a piece of information and twisting it started from the beginning.

At this point Obama needs some Ridlin, The guys changing too much. The only constant in his proposal is change. Everything he does cancels something else out. Sounds like confusion run amok

net net, the way I see it: "stop providing people a tax benefit" = tax increase
It's just a clever way to not say "tax increase".

>> priority 1 is to protect responsible tax payers
In what way does this protect responsible tax payers? How do you know that responsible tax payers are not taking on MORE burden? I read this as: "Let's tax the rich more because they have more (and thus drive them away)"

If this was to PREVENT over leveraging, it would be for all future loans. It is clearly taxation.

I wouldn't mind so much if the money stayed in NY instead of going to North Dakota, New Mexico, Mississippi, Alaska, West Virginia, Montana, Alabama, South Dakota and Arkansas. I'd rather not subsidize a group of people that think the earth is 4,000 years old and don't realize what a crock of s**t the Tea Party is.

"But it is important to realize the slant with which you chose to begin the discussion"

It is important to note the slant by which you misquoted me.

You left out the ENTIRE MIDDLE, which *clearly* says - "Under the Obama proposal".

Sheesh.

"Taking a piece of information and twisting it"

pot, kettle

> "de-incentive home ownership and saving"

> since when those 2 go together? you bought into the "forced" savings argument?

Agreed, this is BAD logic.

The deduction doesn't incent home ownership anymore... because the deductions are BUILT INTO THE PRICE now! Whatever deduction you get is offset by the increased pricing.

> the less people have to waste on inflated housing costs, the more they can save.

Yup. Force savings into a money loser isn't something to brag about.

> so yes, it's smart to de-leverage housing and to stop giving incentives for people to use debt to
> buy secondary homes, RVs and the like discretionary income.

Yup.

"pot, kettle"

Not so much, but good try! You use it so much you seem to have lost any sense of credibility or accuracy with it at this point.

I'm not sure why using it correctly so often would make me *less* credible.

Its easy, I get so much slam dunk material.

pretty funny, though.

Uh...yeah...sure. Try not to hurt get hurt patting yourself on the back. If you need to self-validate so much there are better ways (and you could also be more accurate for a change).

It’s ironic that we all assume that home loans should be subsidized (tax deductible). We used to think that all consumer loans should be tax deductible. This is totally absurd and limiting the deduction is a step in the right direction. Like it or not, fellow republicans, taxes must be raise and spending must be cut to get out of this financial mess.

>> taxes must be raise and spending must be cut to get out of this financial mess.
I think it's more likely that we will inflate our problems away.
Steal stealthily rather than directly. The increased taxes don't even put a dent in the problem so it's all posturing that "we're doing something".

"Uh...yeah...sure. Try not to hurt get hurt patting yourself on the back. If you need to self-validate so much there are better ways (and you could also be more accurate for a change)."

Not self-validating, just replying to nonsense accusations from folks with an ax to grind.

Why so bitter? You lose all your money this week?

"It’s ironic that we all assume that home loans should be subsidized (tax deductible). We used to think that all consumer loans should be tax deductible. This is totally absurd and limiting the deduction is a step in the right direction. Like it or not, fellow republicans, taxes must be raise and spending must be cut to get out of this financial mess. "

exactly. the government needs to get out of the business of promotion of certain industries.

"Not self-validating, just replying to nonsense accusations from folks with an ax to grind.

Why so bitter? You lose all your money this week?"

There is your twist and redirection. You assume that anyone who disagrees with you is making accusations. You call other people bitter and assume they lost money this week, neither of which is true. You personally inject yourself into every post. It's always, "I was right" or "Like I said" or "I called this" or "Let me tell you". Yes, it's all about you.

Gotta work..have fun with it.

"I think it's more likely that we will inflate our problems away. "

aifamm, this is what the gov's policies aim at. there are several reasons why it is not working and imho it will not work. one is that prices got too much out of whack with incomes. so it will revert to normal. but the FED doesn't like wage inflation either (which will be needed if you want home prices to find a floor)...

it's dangerous to try to reinflate. the FED acts as if they can control were inflation is going but it cannot. if it shows in food and energy, then f*cked up homeowners will have a roof on their heads but no $ to put gas on the car.

my guess is that the asset deflation continues (obama only succeeds slowing it down), wages stagnate (due to persistent high unemployment), and food, energy and health/education continue to rise.

how much can you inflate anyway? what's the amount of $ printing that doesn't give you 15% or more of inflation? money printing will also be needed if USA cannot finance the deficits coming from entitlements (SS and medicare) which are huge and persistent. money printing is a single-bullet weapon. if you do it to sustain housing and you do it too much, you cannot use it a few years later for the entitlements imho.

"You assume that anyone who disagrees with you is making accusations"

No, I didn't assume... I read your... accusations.