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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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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.

Got a really fucked computer?  Get it repaired online at support.com

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Homeownership – So Many Chores, So Little Time

Posted in Stories with tags , , , , , , , , , , , , on April 15, 2009 by marcitz

See one of the problems with homelownership is that not only do you have to cover the mortgage but you also have to clean the roof, flush the pipes, paint the walls and, of course, you have to “Mow the Lawn”

Well at least that last part isn’t so bad…

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Rearranging Deck Chairs on the Peninsula

Posted in Stories with tags , , , , , , , , , , , , , , , , , , on March 29, 2009 by marcitz

With a good week on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.

To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic.  This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away.  Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom.  The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief.  Strike up the band!
 
 
Here is why we are in for that second more hellish ride straight to the bottom.  In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America. There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation).  We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up? 
 

Also as any real estate agent will tell you “location, location, location”.  Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula.  Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year.  Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median.  That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median).  Its only a matter of time before it finally hits here.

My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs.  This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010.  Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
 
Impossible you say?  Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble.  Really??  Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.

housing-vs-nasdaq1

Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market).  For a detailed analysis of these myths please point your browser here.

Got a really fucked computer?  Get it repaired online at support.com

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Obama Administration Says NO to Bankruptcy Loan Modifications

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 15, 2009 by marcitz

So Congress has been trying to push a law that will allow bankruptcy judges to modify the terms of mortgages including reducing interest rates and “cramming-down” loan principal.  Many have opposed this because it violates contract law.  The highly justified fear is that if the government can just violate any contract at will then contracts of any kind (past, present or future) will no longer have any value.   Up until this morning the Obama administration has signaled that it supports these in-bankruptcy modifications.  That all changed on the Sunday morning talk show circuit when Larry Summers, head of President Obama’s National Economic Council, came out in strong defense of contract law.

According the the New York Times:

Mr. Summers, who also appeared on CBS’s “Face the Nation” suggested, however, that the government’s ability to require…scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts.”

Ok, now for a little truth telling.  Dr. Summers was actually talking about the bonuses being given to AIG employees but isn’t the sentiment the same?  After all, last time I checked a mortgage is a contract and by Dr. Summers own admission the government cannot “abrogate” them yet that is what congress wants to do. 

As an invisible renter I am sure you are thrilled because you want your shot to buy a house at a fair price and by NOT allowing in-bankruptcy loan modifications you will get your chance.  So please don’t forget to call and email Dr. Summers to thank him for his support of contract law (I just talked with his office) and for signaling that the Obama administration will now veto any in-bankruptcy loan modification legislation that Congress may propose.

Dr. Lawrence Summers  

Or is that not what he meant to say…

P.S.  See how the New York Times also seems to have come out against housing bailouts in this analysis of an article by Joe Nocera.

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Is Wells Fargo Playing Games? – Tell Us Your Scam Story…

Posted in Stories with tags , , , , , , , , , , on March 11, 2009 by marcitz

So talking to a friend the other day who is one of the lucky ones thanks, potentially, to some good old-fashioned game playing on the part of his mortgage appraiser.  Seems that he bought a house 3 years ago and was ready to refinance it so he called in Wells Fargo.  This is where it gets strange.

Apparently the only house that they could find to comp against his house for the appraisal was HIS house based on its purchase price from 3 years before.  What’s cool is that his house, even given all the stuff going on in the macro economy, hadn’t lost any value in the past three years based on that comp (neat trick!). 

Of course given the increase in houses on the market how is this possible that his house was the only comp they could use?  Afterall, not to far away there were many houses for sale (and many foreclosures) that were used as comps when he first bought his house (of course they weren’t in foreclosure then).  Turns out that Wells decided to “tighten-up” the radius from when he had bought his house 3 years before so, one might guess, the foreclosures wouldn’t be included in the appraisal and then they couldn’t give him the loan. (another neat trick!)

But why would they want to give him a loan that exceeded the true value of the house?  Well because (just like over the past few years) they weren’t going to keep it and if they didn’t get the appraisal they wouldn’t get the loan origination business.  Sure enough he said that they weren’t and that it was immediately going to Fannie Mae because he had a conforming loan. VOILA!

Well its nice to know in these crazy times that some things never change. 

So have you heard a recent story of financial “magic” (spelled “s-c-a-m”)?  If so please share it here because you, as a taxpayer, just bought my friends house.  He’s a responsible and talented guy and will make good on his loan but there are many out there that probably got the same treatment and may not be so responsible.

ARE YOU A RENTER - STOP  THEY NEW YORK TIMES FROM HURTING YOU

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