Archive for mortgage income tax deduction

Mortgage Income Tax Deduction is JUST a Subsidy to Banks

Posted in Financial Literacy, Just the Facts, Uncategorized with tags , , , , on August 22, 2011 by marcitz

For years there has been a religious like devotion to the Mortgage Income Tax Deduction (MITD) and its benefit for the home buyer.  In stark economic truth it is actually bad for home buyers (twice) and great for banks.  This is further proof of how stacked the economy is in favor of the banks.  So the banks exploitation of society hasn’t been going on for 10 years, its been going on for over 60.  Here is the mathematical and social proof.

  • The MITD applies to interest only.
  • It allows a home buyer to pay more in monthly interest payments because they will get some of that back as part of MITD.
  • So consumers are willing to pay more interest which means they are willing to pay more for a house (because they can support a larger loan principle).
  • The interest goes to the bank who profits by the uptick in interest payments.
  • The buyer pays more for a house.
  • The taxpayer (who is also the home buyer) pays for that payment to the bank out of their own taxes (cause tax dollars are diverted to the MITD)

Its that simple and we’ve been falling for it since the end of World War II.

Here are some numbers:

  • Let’s say (without the MITD) the you have $2000 to spend on a mortgage per month you’ll buy a certain amount of house.
  • If you add the MITD you can now buy about $2500 of house (assuming you have 20% tax rate, not realisitic but makes the math simple for this exercise).
  • Your spend $2500 and you get $500 back with the MITD.  So what happens is a person is now willing to spend 25% more on the same house because they can afford 25% more in monthly INTEREST payments.  Since houses are basically bidding processes enough people compete such that the price goes up to absorb the entire deduction.
  • At the end of the day the person is no better off and actually is worse off because they scrape to find the extra $500 per month and then get relief at tax time with a big check the makes them whole (losing any interest they could have earned on that $500 in the interim and possibly incurring financing charges because they needed to get that $500 cash flow somehow in the interim, lets say through credit card debt.)
  • In the meantime the bank collected that $500 extra a month and they didn’t need to give it back. That came from the government (AKA the taxpayer).
  • Hence the buyer gets to pay more for a house and more for his taxes overall.

So next time you brag about your mortgage income tax deduction remember you just helped make a bank wealthier at your own personal expense (both as a buyer of house who paid more than you needed to and as a taxpayer who financed it).

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Rising Interest Rates Mean Falling Home Prices

Posted in Just the Facts with tags , , , , , , , , , on February 13, 2011 by marcitz

A recent broadcast on NPR called Buyers Face Gamble with Rising Mortgage Rates made it clear that buying a house now may be a very bad idea.  While they gave some very good points they missed some very key (and much more concerning) points.

While they pointed out that its dangerous to buy now because prices are due to fall another 10% but that threat existed  before interest rates rose.  With interest rates rising that will be a new and different reason to drive housing prices down leading to enhanced price decreases.  Afterall the logic is housing prices go up when interest rates fall because its cheaper to buy that house (you pay less on your mortgage purely because of interest rate) so you have more to bid in getting that house.  Well the same logic applies in the negative.  Prices go down when interest rates go up because people have to put more of their budget into servicing the mortgage debt and less into the principle so they get a smaller loan.

Oh and one other thing.  With rising interest rates those that have to refinance will be less able to do so for two reasons.  The comps will fall with enhanced falling prices (so they’ll get lower appraisals and won’t be able to refinance as much) and they will be less able to afford the refinance as well as the whole point of the refinance was to lower your monthly payments.  Bonus issue is with falling prices they’ll just be more foreclosures anyway.  The net of these two-plus issues is that foreclosure rates will increase again creating more supply providing the third impetus for housing price declines.

Don’t anyone let you believe the market turns around this year or in 2012.  We’ve got until 2013/2014 before anything long term happens (not these little short-term govt incentive inspired blips) and that won’t be spectacular.  Get into a mental place where a good housing market means flat growth.

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Your House “Value” Has NOT Changed

Posted in Just the Facts, Stories with tags , , , , , , , , , , on April 8, 2010 by marcitz

There is a mad rush to protect the American Dream of home ownership.   But its not under any threat because the “American Dream” value of that home hasn’t changed.  People buy homes because they want that American Dream.  The most commonly reasons people VALUE having a home are:

  • A place to call my own
  • A place to raise my children (schools, friends, etc…)
  • A place to plant a garden
  • Build up a nest egg for when I retire

Well last time I checked none of that has changed so why the panic and the rush to save people?   Granted your nest egg may be a little smaller but at least you won’t waste your money all those years on rent and over the long term this will recover, you just have to be in it for the long term.

Why do I bring this up?  Well its because I think we, in our rush to help the so-called “vicitms” of the housing crash, are confusing the issues in a detrimental way.  If you bought a house for the above (long-term) reasons then nothing has changed so you don’t NEED a bailout. If you bought it solely as a short-term investment then you are a SPECULATOR and DON’T DESERVE a bailout.  Often the former is used to justify the latter and that needs to stop.

From a recent New York Times article came this quote,  ”There is also the risk that more people will decide that they are so far underwater — that is, they owe so much more than their homes are worth — that it makes more sense to just walk away.”

True but is that right?  Look when you bought your house you clearly said “this asset gives me value for the price I paid for it” otherwise you wouldn’t have made the single most expensive purchase in your life.  For most home owners that value is that “sense of place” (see the list above) and regardless of underlying “pricing comps” that place (and related value)  is still very much the same (garden, kid’s school, etc…) .  If you can still afford the payments isn’t it providing the same value/sense of place regardless of the underlying price?  Also if you plan on being there for a long time (isn’t the main reason for homeownership “stability”) then short term price drops don’t really matter.   When you invest in a stock you don’t drop it the minute it dips.  

If you feel you should walk away then you are treating your house MOSTLY as a short-term investment and not as your long-term commitment to the “American Dream” so you can’t use those arguments in justifying help for those investors.  Oh and if you can’t afford the payments then you can’t afford the house so its better to get you into a living situation you can afford so you can start your discretionary consumer spending again (which is what the economy really needs). 

One additional argument is “well they lost their job”.  Unfortunately we all are at risk of that so when chosing your living situation you need to assume that is part of the model when calculating the purchase price of a house.   Renters also lose their jobs and none of them are clamoring for rental reductions.

Given that here’s another crazy solution.  Why not put less money into housing subsidies and more into supporting all unemployed people regardless of their chosen model for putting a roof over their head.  This current HAMP plan (especially the unemployment provisions) show that the government doesn’t want everyone to have a roof over their heads.  Just the homeowner.  IMHO housing (regardless of financial structure) should be a right in general, the financial form it takes (renting versus mortgaging) to obtain it should not matter.

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Economic Racism is Alive and Well at the New York Times

Posted in Just the Facts, Stories with tags , , , , , , , , , , , , , , on April 3, 2010 by marcitz

My love-hate relationship with the New York Times continues.  Recently an article deal entitled Help Paying Mortgages Elicits Anger (by Tara Siegel Bernard who can be emailed at tsbernard@nytimes.com)  tried to make the point that fairness isn’t important what needs to be done should just be about the greater good over the long term.  Unfortunately, because of the prevailing and irrational home ownership bias in this country all assumptions were based on just that, preserving home ownership even if its bad for the owners themselves.   In pulling apart the arguments in the piece I found a new way to look at this homeownership bias.  It is actually a form of “economic racism” that, in a post Civil Rights world, fills the racism void.

For me the AHA! moment was when I read this quote that was designed to defend government bailouts of homeowners –   “It (the fall in house prices) shouldn’t be something people should be punished for,” said Robert Shilller.

AHA! Having some one leave a house they couldn’t afford and instead live in some other, presumably more affordable rental property is PUNISHMENT!  There it is – that subtle nasty  undercurrent (“economic racism”) that “renting is bad” that fuels even Robert “Da Man” Shiller’s argument.  Ms Bernard even says  ”a government should consider the greater good over the long-term” in which she is implying that home ownership is the “greater good”.  Categorically it is NOT true as per these sources:

Don’t get me wrong.  I think home ownership is a fine tool for many people (those with enough means to support all the ancillary costs of home ownership in both money and time, those for whom mobility is not an issue) but renting is a fine tool for many others (those with less means, who need mobility, don’t have time/money for all the home ownership maintenance issues).  Neither one is categorically better all the time and their mix of appropriateness changes as prices in both markets ebb and flow.

Recently (in the New York Times) there was a great piece (the “love” in my “love/hate” relationship) that pointed out that Tea Party arguments against health care reform are really about racism and having to embrace a new world of Blacks, Latinos and Women .  I would like to argue that Ms. Bernard’s (and Dr. Shiller’s and most other “pro-housing”  arguments) are about fear of embracing a world of renting as opposed to owning.  Like white majority, homeownership has been the goal and desire of those in power over the past 80 – 100 years at least.   It may be time for a change that no one wants to embrace.   Not surprising it was our current President who was the first one  to try and  find a way to phase out the mortgage income tax deduction.

Unfortunately the “greater good over the long-term” is that everyone gets over their social security blanket (or economic racism)  that home-ownership is the only valid and right way of living (it’s the “white makes right” equivalent of modern US economics).  Unfortunately the only way to do that is to encourage people to try other forms of living to see that in many (but not all) cases those other ways are actually better but that is not what is happening.  If you have easy access to a mortgage hammer then everything becomes a home ownership nail and we’ll never know.  I HAVE A (different view of the American) DREAM!!!…

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Countdown to Renter’s New Year

Posted in Uncategorized with tags , , , , , , , , , , , on March 30, 2010 by marcitz

Well it’s almost the New Year for the Renter.

Today is Christmas in that the government will officially stop buying Mortgage Backed Securities allowing housing prices to resume their downward spiral towards reality and affordability. 

When this countdown timer reaches zero the government’s Home Buyers Tax Credit will expire at which point all renters should unite and scream “Happy Renter New Year!” that is unless we wake up hungover the next morning only to find out that the government has again taken away the punchbowl of renter justice.

Or are we going to be able to “Party Like Housing was Priced in 1999″?

Click to see the countdown timer

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Killing MORE Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , on May 4, 2009 by marcitz

So my last article on the myths of homeownership was so popular I decided to produce a sequel.  This is not so hard because there are so many.  Enjoy!

Myth #6 – Once you pay off your home you get to live in it for free

The theory goes you have 30 years of payments (lets assume you haven’t, like friends of mine, refinanced it over-and-over again pushing out the end of the loan).  After that you have no more payments.  With rent you will have payments every month forever.   The latter is true, the former notsomuch.  In fact there are many substantial ongoing payments you will encounter with your house including:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent both in its ongoing behavior and the fact that it can change and grow over time.  Here’s another thought to consider.  Property tax is a major source of school financing.  Given the “great recession” we are in (and will continue to be in for the next 2-5 years) other sources of funding are being cut making schools even more dependent on property taxes.  As school quality is a major contributor to housing values expect home owners to be extorted into paying increased property taxes to preserve their home values.
  • Maintenance also goes on forever and that is variable and unpredictable. So it also behaves like rent but much more violent in its swings.  I never got a bill from my landlord for $15,000.  As a homeowner its only a matter of time before you get that bill for a new roof ($15,000) or new pipes ($thousands).  Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.  Oh and if you live in New York City you are familiar with “maintenance payments” which are often substantial (in the thousands) and are paid monthly (like rent).

Myth #7 – At least your monthly payments are predictable and won’t go up like rent

Well this really depends on how you financed it. A very large percentage (and possibly the majority) of mortgages done in the past 8 years were adjustable-rate.   That could swing way above rent or way below depending on the interest rate environment.  Given the dramatically low interest rates that drove the housing bubble and there is really no where for your mortgage payment to go but up.  Combine this with the large amount of cash being pumped into the economy (which will lead to inflation) and you are looking at MASSIVE interest rate adjustment 2-5 years out meaning your “rent” is going to go up possibly 20-100% (my rent has never gone up more than 10% and that was during a boom and during a bust it actually went down).

So remember, homeowners and renters are not so different except for the massive loss in equity that ownership is currently providing. 

Please feel free to bust more housing myths in the comments section.

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Killing the Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , , , , on April 16, 2009 by marcitz

Recently I read an article in The Economist that had many incorrect assumptions that shows just how far the myth of homeownership has permeated society.  Here are some of the common myths and corrections along with actual articles from other sources to back up the key points.

Myth #1  - Home ownership encourages “forced savings” because home owners have to pay off their mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

Myth #2 – The mortgage income tax deduction is good for homeowners.

ABSOLUTELEY NOT!  It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained, good means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays).

Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)

Myth #3 – Homeowners benefit from many social advantages.

Sorry but  there are NONE and actually some social disadvantages, including worse sex.  Study after study done as recently as last January show that there is practically NO social benefit of homeowning vs. renting.  In fact home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, less racist, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don’t believe me check out these links:

Recently published study by Wharton  (Its a long academic study but just read the first paragraph)

The American McDream from the San Francisco Chronicle (renters have better sex, too)

Understanding how Obama’s Plan Hurts 100 MILLION US Citizens from watchingmarcitz.com (this shows how home bailout programs have a dark underbelly)

How the Crash Will Reshape America from The Atlantic (why renting is actually the answer to the problem we now face)

The Advantages of Renting from National Public Radio

Myth #4 – The market is finally finding a bottom

Take a lesson from the movie Titanic. The ship has just temporarily stabilized before its violent rush to the bottom as shown here.

Myth #5 – Once you pay off your mortgage your house is free (rent goes on forever)

Not exactly:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent (including changing from time-to-time)
  • Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
  • Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.

See more myths in this follow-up post.

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27 Comments »

RENTER ALERT – Stop the New York Times from Hurting You

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , , , , on March 6, 2009 by marcitz

Dear Invisible Renters,

The New York Times today published an editorial in which it supports a law winding its way though congress to force banks to cram-down (AKA reduce) the principle balances on home mortgages and we must stop it.  This is ridiculous for many reasons stated in a letter below you can send to key departments and people at the Times.  Addresses and a draft letter are below:

Dear New York Times,

Why are you making homes less affordable to 68% of your New York readers and neighbors, who are renters, by encouraging the cram-downs of mortgage principle?  This is bad for everyone in the long run:

  • For Renters this will hold housing at unrealistic and high levels longer making it impossible for us to become responsible homeowners if we so choose (feel free to continue renting anyway its a valid lifestyle choice no matter what society says)
  • For the New York Times - 68% of your New York City readership are renters and this action is an attack on the majority of your readers.
  • For the Economy  by keeping people in homes they can’t afford we’ll only prolong the agony as we have a continuous stream of higher than normal foreclosures over years as opposed to in one big (and yes painful) lump.  By getting it over quickly you will see buyers come back into the market because they know we’ve reached the real (not a weak unsustainable subsidized) bottom AND homes will be much more affordable.

Here are some other things you need to know:

  • Housing prices will continue to fall at least another 10-15 points (ask any economist).  So what does that mean if a house is reset to a lower level only to find its not the LOWEST level.  Will there be another cram down?  Won’t those people only default later (after having received the first, now unsuccessful cram-down) for the same reasons you are stating now?
  • Housing prices will get another kick in the pants in two years when interest rates have to start going up again (to combat inflation from all this money being printed and flushed down the economy) so this will only get worse and require more cram-downs. Remember people tell you to buy when interest rates are low so the flip side is…

Why trash contract law in this country to delay the inevitable. 

Thank you for listening

3 Comments »

Renters of the World UNITE!

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 1, 2009 by marcitz

Tell us a story about a Really Fucked Homeowner (RFHO)  (deadbeat neighbor, relative or something you read) who got in over their head and share it with others  so we can get rid of the pro homeowner bias in the United States.  Also please post this on other blogs and comments to articles. Read on to see why…

Homeownership is the “American Dream” – or is it YET another bubble?  I’m an invisible renter (politically, financially and socially all renters are) who decided it wasn’t part of my “American Dream” yet society continues to lionize the homeowner at the expense of the renter. 

How invisible are we?  When politicians says “lower house prices hurt us all” they forget the 100 million renters that they help.  Its time to wake up and realize that while homeownership is good for some its not good for all (same goes for high house prices) and public policy and perception needs to adapt to that harsh reality.   Oh and if homeownership is so great why not give renters a chance to try it out by letting prices fall to their natural level?

Why am I doing this?  Well to paraphrase Dean Vernon Wormer of Faber College – its time for someone to prick this bubble and that prick is ME! 

Welcome to ReallyFuckedHomeowner.com where we see the dark side of homeownership and the bright side to renting as an alternative lifestyle.    Please share your stories of a really fucked homeowner (RFHO) or feel free to rant about anti-renter government policies so we can get past anti-renter bias. 

Please NO names or specific addresses of the RFHOs.  Oh and don’t forget to let the government know how you feel.  Also please tell your renter friends (or even rational homeowner friends) about this site.

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