Double mortgage deductability! Good idea?

November 17th, 2008, 8:00 pm · 47 Comments · posted by Jon Lansner

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Your blogger’s job — despite what some of you think — is to simply toss out facts and ideas to stimulate debate. I do not think I have a perfect crystal ball or all the answers.

Anyway, this past weekend, I authored for the dead-tree edition of The Register a column with this recession-busting thesis …

This is my simple plan: Double the deductibility of mortgage payments. Yes, double. Right now the typical mortgage holder gets a $1 tax deduction for every $1 your pay in interest. Why not boost that to $2 of deductibility for each dollar of interest paid.

Want to read more? CLICK HERE!

Well, a surprise to me, this idea idea got some pretty good feedback. Samples from my mailbox:

“I have been very worried that there is no solution to what I expect to be a very long and painful recession. (The bailout is a debacle in it’s infancy.) This evening I feel very optimistic about your idea. This could be good for the country.”
“Sure would be a better strategy than bailing out the financial institutions. At least the deductions will flow directly down to the consumers, i.e., homeowners. And with the institutions gouging everyone with additional AND escalating charges, fines and what-nots for late or missed payments on their (credit cards,) John Q will never get out of debt.”
“Your proposal was absolutely brilliant!!! What better way to stimulate the economy and reward the working middle class by giving this group a direct tax break. I just don’t know how we can get Mr Paulson to listen to you.”
“Too bad our politicians can’t (or won’t) come up with such simple and effective remedies. If you ever decide to run for office, you’ve got my vote.”
“Great idea. A targeted solution! American psyche has a great sensitivity to taxes, all the way back to the Boston Tea Party.”
“How about a double deduction on the car loans, limited to the US (or NAFTA) content of the car, i.e. 40% US content = 2 x 40% (interest) deduction.”

What are your thoughts?

Would doubling the mortgage deduction help?

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shannon says:

November 17, 2008 at 8 pm

What about the renter sitting on the sidelines who refused to play this bubbly game?

A better idea, the banks can change 30 year loans into 50 year loans and make all interest rates a flat 5%. No more interest only options. Seconds can also be converted to 50 year loans at 5% with the first 5 years being silent.

chris says:

most renters don’t save anyway, hence the reason they rent and don’t have enough for a downpayment

Chris, Most homeowners haven’t saved anything. I have saved tons of money renting and so have all my neighbors. We are all hard working middle class families watching from the sidelines. I don’t want to have to subsidise someone elses problem. I also think it is absurd to be able to write off a HELOC when people just went out and blew all that money. The last thing I want to do is to subsidise someones vacation or God forbid a Humer.

rants says:

poor blogger he’ll try anything to save his home “equity”

Ive got an even better- just have the fed print up
enough money to give every man woman and child a
million dollars- then everyone will be rich– we can all
buy a house for cash- pay off our cars- pay off the kids
college tuition and still have money left over for a world
cruise.. damn was that easy or what…

dafox says:

rants, you’re late to the party. thats Paulson’s idea!

Gary Shandling says:

Why not have the government buy everyone a house? They can all have the same floorplan and be the same color.

tew says:

November 17, 2008 at 9 pm

The U.S. has several substantial structural issues. One is the low savings rate. Another is overinvestment in residential real estate. Both of these issues drive our current account deficit - we need to borrow for productive investment.

Doubling the interest rate deduction makes both problems worse - it encourages more borrowing for residential real estate. We need greater domestic savings to fund investment in tradeable items.

Ollie says:

November 17, 2008 at 10 pm

Hey baby boomers, you can try every trick in the book to try to reflate your precious bubbles. My answer, like many of my Gen X and Gen Y brethren, will still be the same - “No bid.” No bid on your STILL horrifically overpriced shacks, and no bid on your worthless stocks.

Lower your expectations, then lower your standard of living. That’s your only hope now, because as a group you failed your country. There was the greatest generation, and then there was you. They won a world war, you got high at Woodstock. Good job.

Have a nice retirement - just don’t expect me to fund it through leveraged purchases of your declining assets.

bulwark says:

Went to Costco today. First time I’ve ever had to drive around–every parking spot filled–and finally left. You know it was all borrowed money they were spending. Is it fair that we should subsidize these shopaholics with a federal bailout for $700 billion?

Eat it in the OC says:

So your saying we’d spread the risk around (in the form of subsidizing home values for knife catchers)? hmm..where have I heard that before? No thanks. I’ll take another 20% of home prices and get back to you.

Leak says:

Bad idea.
Reduce or eliminate capital gain tax is probably a better idea.

Republicans are TRAITORS says:

November 17, 2008 at 11 pm

Why don’t we get rid of the tax deduction. Not so long ago we could write off credit card debt, that was a bad idea and so is a mortgage tax deduciton. People get confused and think they save more than they do. Check your tax brackets, if you are a high wage earner you’ll get back 33%, that means 67% goes to someone else. If you paid cash for a house and maxed out your 401k then 100% goes to YOU. Even if you don’t pay cash for a house and buy one you can afford and still max out your 401k, 100% still goes to you.

Floridian says:

November 18, 2008 at 12 am

This economy needs to grow income. Living in South Florida I often think that Adjusting tax tables to local cost of living will help put money in everyones pocket. 150,000 in South Florida or Southern California equals about 115,000 in Tennessee. This would also move people out of the AMT brackets. It is that excessive coast of living and disparity in the tax code between expensive cost of living areas and middle america that is one of the reasons for liar loans and the pervasivenss of tax cheats. Hey Washingtonlets put some equality back in the system.

They above mentioned plan only benefits those that have over extended in the housing market. Adusting the tax tables to variations in the cost of living puts money in everyones pocket.

Bill says:

November 18, 2008 at 1 am

Let me get this straight, you want to reward the liar loans and unqualified dead beats with another tax exemption, while knowing the state and federal government deficits are skyrocketing?

How are you going to give them tax breaks when they aren’t even paying their mortgage payments or property taxes?

Jon, you’re drowning this pig in lipstick.

Call me crazy, but what if we go back to the same rules and regulations that have worked for the last 70 years.

What would happen if banks start using real incomes to qualify people for ownership again?

What would happen if prices were to come back down to actual incomes?

Is that such a bad thing?

Trying to accommodate unqualified borrowers by putting a record tax burden on your kid’s and grandkids future is not fair to them.

david says:

November 18, 2008 at 2 am

The last thing the real estate “market” needs is more government subsidies which is exactly what further tax deductions represent. Right now it is not a market at all rather a series of government interventions which don’t permit the true market pricing and efficient allocation of capital. Real estate is already the recipient of some of the largest government subsidies. This will only further distort the market.

Chris says:

November 18, 2008 at 5 am

I think there are many potential objections to this proposal, but the best one is pragmatic - it will scare away the wise first time buyer.

Why? The deduction is a seller subsidy. It will tend to make prices higher than they would otherwise be. So, if it gets taken away, it will cause prices to fall. Unless you can convince first-time buyers that the subsidy is permanent (for the next 50 years or so), then the first time buyer ‘pays’ for the subsidy when it goes away. That is, if the subsidy props up the home price by $50,000 now, the first time buyer pays the extra $50,000, then the home price will have $50,000 in downward pressure when the subsidy goes away in 10 or 15 years.

It would be hard to convince me that a 2x deduction on mortgage interest in sustainable in the long term. To a first-time buyer, it is a risk. It would make more more reluctant to purchase, not more likely to.

As for making the subsidy permanent, when proposing such a policy you should ask “outside the current crisis, is investment in residential housing worth 2x more than, say, investment in education or productivity improving technology?” If not, then be careful proposing a policy that will further distort long-term incentives in order to resolve a short-term crisis.

mav says:

November 18, 2008 at 6 am

great idea, how do you get out of a global recession caused by spending driven by debt and tax incentives…..

you lower taxes….. and take on more debt…. sign China and the rest of the world up…. they are in ! …. they are ready to write the check now….

let’s make it $3 for every $1….. it’s not like this tax money funds any jobs or budgets…… John you did it, you are an alchemist…. creating something from nothing……

Marcia says:

Nice try Jon. You are correct in that what needs to happen is to “expand” the purchasing activities of consumers. There is only one way to do this…lower prices permanently.

You will see this effect when consumers actually get to spend more because of the falling gas prices. How will this show up? Fewer foreclosures. Of course these are now masked by the government intervention. It will be very hard to cancel out the “noise” in the numbers created by the government.

The problem with your idea is that it raises prices artificially by lowering tax payments. This will cause a temporary stimulas, but, like any highly addictive drug, how do you get off it?

If prices were allowed to fall to their natural level, this would be the best stimulus of all. As an example, just notice the change in the volume of sales in the least expensive areas of OC. Sales volumes have been going through the roof!

So let’s please stop with the price supports! They are just making this whole mess worse! Look at how long Japan has been stagnating! For years due to their insistence on using price supports.

Please go back to your econ 1A class, dust off those old supply-demand graphs and see where we are. Until prices are allowed to get back to equalibrium, you will see no increase in volume. As prices are allowed to fall, volumes increase.

The tax idea acts like a decrease in prices, but is still another form of price fixing, since the minute you take the tax deduction away, prices will fall once again.

bubba says:

well, not such a bad idea given that many homeowners are now underwater and are paying interest on a portion of their deby that exceeds the value of their home!

it may provide a disincentive to being foreclosed on in these situations if they can still make payments.

of course, a government fiat changing all these ARMs into 30 year 6.5%s (or whatever the going rate is) could also get some people out of how water, although not the basket cases who bought $500K homes on $25K incomes. they need to lose those homes.

Marcia & Chris, you guys are nuts….. Lansner nailed this one….

how could either of you suggest that Housing is an uproductive asset class…….. that leads to nothing long term except debt….

anything we can do to direct money away from industrial investments like manufacturing and education should absolutely be done……. we can’t build america on hard work, savings and investment…… america is built on spending money we borrow from industrious nations…

Kay says:

November 18, 2008 at 7 am

This is a great idea. Send the idea to Mr. Paulson, the Congress, and the House, and everyone else involved in the so-called “bailout.”

Crystal Balls says:

November 18, 2008 at 8 am

Ridiculously bad idea. The mortgate deduction was part of the problem in the first place, as it inflated home values beyond their inherent value.

NationalBubble.com says:

# Crystal Balls Says: “The mortgate deduction was part of the problem in the first place, as it inflated home values beyond their inherent value.”

Crystal Balls, I think this is the first time I agree with you.

Jon,

Do you want to make it more affordable for the average family to afford an OC home? I have an idea.
Let the housing market correct itself so home prices come down to levels where an average OC family with two solid incomes can afford a starter home without exotic mortgages. What a concept, ah??
You are starting to see higher sales in some areas where prices have come down to reasonable levels. That should show you that the free market works.

shockg says:

:”Let the housing market correct itself so home prices come down to levels where an average OC family with two solid incomes can afford a starter home without exotic mortgages. What a concept, ah??”

What do you consider two solid incomes? (2) $70k incomes is very common and that family can easily afford a starter home with a conventional 30 yr mortgage.

not buying it says:

November 18, 2008 at 9 am

Maybe doubling the first year interest deduction for first time home buyers. Let it expire in 2010.

This will encourage people to get into the market now because that 2X deduction gets removed in a year. They have to buy from now and until the end of 2009.

That is the most sensible use of such incentive.

Whether anyone likes it or not - the first time home buyer is what this county RE market needs.

NBI, then in 2011 you will be bailing out the people who never planned for it to expire….

…. if we have learned anything from this…… the american public has a very short time horizon when it comes to debt and spending….

In this economy, do we really want families relying on two incomes to afford housing? I would say let it come down to 1 income stability so that we have real affordability.

Buy Houses Now! says:

November 18, 2008 at 10 am

I’m not an economist, but taxing people to pay them to take on more massive debt doesn’t seem like it will end well.

greg says:

November 18, 2008 at 11 am

I like the idea with the added feature that it reduces by 10-20 percent each year till it gets to zero. This way it could help stabilize the situation but long term it shows people that debt is not going to help them.

November 18, 2008 at 12 pm

# shockg Says: “What do you consider two solid incomes? (2) $70k incomes is very common and that family can easily afford a starter home with a conventional 30 yr mortgage.”

The average family in OC DOES NOT make 2 x 70K = $140K/ year

According to census.gov,

Orange County, California
Median household income, 2004 $58,605

http://quickfacts.census.gov/qfd/states/06/06059.html

a family making the medium income in OC 58K and putting 50K down payment and getting a 30 year fixed mortgage can only afford a 252K home
according to bankrate

http://www.bankrate.com/brm/calc/newhouse/calculator.asp

Liar Loan says:

Bubble-

You’re using income data outdated by inflation.

LL, when are you going to start believing in the realities of deflation?

November 18, 2008 at 1 pm

I guess when my purchasing power increases across the board not due to pay raises.

http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp

Right now, we’re still experiencing close to 5% annual inflation. Rants used to criticize government statistics for understating inflation. Are you going to tell me they’re making up inflation numbers now?

they have always been making up the numbers, they understated it over the past 10 years….. and yes, without question they are now overstating it….

gas will be in the $1.xx per gallon soon… a tax break for the unemployed lllooolll@ribsplitter

Lower energy prices will help save jobs. If I lived in Venezuala or Russia then I’d be worried.

November 18, 2008 at 2 pm

LL, i am telling you without question…. that $1 this year buys me more of just about anything than $1 last year…..

you want to talk equities, housing, wheat, rice, cotton, GOLD, you name it…. a $1 buys more this year than last year…. that is a fact

real inflation over the past 10 years was on the verge of hyper inlfation levels…. and now we are seeing deflation…

# Liar Loan Says: “You’re using income data outdated by inflation.”

My data is from 2004. How much do you think salaries in OC have increased since 2004? 10%, 20%

I don’t think so but let’s assume that the medium income in OC right now is 20% higher so instead of 58K is 69K

You still wouldn’t be able to afford a starter home in OC with a household income of 69K.

Liar Loan Says: “I guess when my purchasing power increases across the board not due to pay raises.”

well, your largest expense in life (a home) is indeed going down in value and it will keep going down for at least another year.

November 18, 2008 at 3 pm

That would raise your starter home by 20%, bringing it to 300k. Many starter homes can be had for that amount. And no, a waterfront mansion in Newport is not typical for the average OC family.

November 18, 2008 at 6 pm

starter home for 300K, where?
santa ana? garden grove?

I’m talking about a decent area. At least HB, Lake Forest..

And by the way, your calculations assume that the family doesn’t have any other debt. No car loans, no credit card debt. How many buyers do you know with no debt at all?
The average family in OC certainly has some debt.

George Williams says:

November 19, 2008 at 12 am

Doubling the mortgage deduction does not increase the affordability, which is the crux of the issue when it comes to Orange County real estate.

Congress wrongly believes that artifical support of prices is necessary: this is another misguided attempt to manipulate a market and is simply forestalling the inevitable.

November 19, 2008 at 9 am

My definition of a starter home is a condo or townhome. These can be had in Huntington for under 300k.

My family has no debt other than a 0% car loan that we choose not to payoff. It would be interesting to know the non-mortgage debt of the average OC household.

marketbuy says:

November 19, 2008 at 3 pm

Our states and Federal are already running at a deficit. Any more tax incentives will drive our government to the poor house….

wunsacon says:

November 28, 2008 at 12 am

Gee, we need more incentive to build housing and take dollars (in real terms) from something that the free market (which factors in consumer preferences) would otherwise find more useful?

Take no advice from the McMansion Industrial Complex!

Robert says:

December 7, 2008 at 6 am

Doubling the mortgage interest write-off is a poor idea.

The exchange of work in the form of money for goods and services is based upon trust. This economic problem stems from the violation of this trust. The money and other trades goods and services have value based on the willingness of others to trade/work for them. Printing money with work/product behind it devalues the money/work of everyone. The system freezes when trust or confidence leaves. This is what has happened. It has happened because of fraud and deception and theft. This is the cause of the freezing of the credit markets. People (and banks) do not willingly loan money to those who will not pay it back with a return. Why should they?

Increasing debt of the government or consumer is the problem and NOT the solution. As the debt increases the confidence that it will be repaid with a return reduces. The willingness to make long term loans erodes too.

The solution is simple … reduce debt by faithfully repaying your obligations and put in place road blocks to future fraud and debt. Here are some steps to take:

- Reduce the cost and size of government. Government is an overhead.

- Trim the fat from all levels of government, but try to do it slowly to reduce the shock. Take the Department of Education for example. It is now a multi-billion dollar bureaucracy. It came into being in the last 50 years. It doesn’t need to exist.Start by lowering the salaries by 2% a month. This will give people a chance to move to other jobs without being laid off. Of course their will be arguing, but all unnecessary government funding and programs must be trimmed. Take the give aways to other countries and entities like Planned Parenthood. Eliminate them. This reduces govt debt and increases confidence.

- Get the gov’t out of business. Get rid of Fannie and Freddie etc…

- Help citizens lower their debt.

- Reward and encourage those who live responsibly and take away all incentives to do otherwise.

- Eliminate the interest write-off slowly. Start by eliminating or reducing the interest write-off for all non-owner occupied homes. To make it less of a shock eliminate it for more than 4 homes and reduce it by 50% for homes 2-4 annually. The write-off encourages debt and we should be discouraging debt and encouraging savings.

- Replace Social Security and Medicare by allowing people to opt for interest-free use restricted savings accounts.

- NO ONE should be allowed to receive more from Social Security or Medicare than they have contributed plus the returns realized on those contributions.

- Allow people to move their contributions and returns on them to the interest-free use restricted savings accounts.

- Prosecute all fraud and deception vigorously. The first goal is to get back what has been lost, the next is to reward the victims with at least a 20% penalty levied against the perpetrator(s) which goes to the victim and all the costs of prosecution + 20%. The financial repercussions of committing fraud will be an excellent deterrent.

- Buy 100% American made

- Make the cost of homeland security for imports fall on the imports in tarrifs to pay for the cost of that security and add 5% to fund the modernization and enhancement of security.

- Implement the Fair Tax and eliminate the entire current tax structure with all of its problems, costs, and loopholes. The greatest tax should be at the local level and then the county and then the state and finally the federal. Let the states collect it and the Fed collect if from the states. Say goodbye to the IRS as we know it and all the taxation overhead that produces nothing. Say goodbye to the cost and angst of doing our taxes and the trauma of April 15th. This lowers the cost of government in the budget and in the time of the people.

- Public works… build national infrastructure.

Water: Some portions of the country experience drought while other experience floods. Build a national water system that transports and saves water throughout the nation. A national water transportation system if you will. Fresh water is a fundamental national resource and security issue.

Energy: Build a national energy system. The southwest has abundant solar and wind energy. Invest in making each American building and home energy independent. Subsidize with loans the addition of solar power generation to each home built. DO NOT do this for energy companies. The goal is to make each American less energy dependent and more independent and NOT more dependent on the gov’t of companies. Gov’t subsidized loans to build a national energy sharing/transportation grid would be useful.

Production thrives on low energy and resource costs and low transportation costs.

- Stop the flow of American dollars to the OPEC countries. Expand alternative fuels outward from their sources (ethanol in the growing areas like Iowa) and LNG. Require the building of multi-fuel engines (gasoline, diesel, ethanol, bio-diesel, LNG, Hydrogen) that power electro-motive engines using electricity. electric personal transportation vehicles with solar panels on the roofs and dash and read deck will help.

There is so much more… the principles are to conserve/save and optimize and cut overhead and reduce costs.

Doubling the mortgage interest write-off is short sighted and encourages debt. It will only prolong the agony like the current bailout policies are doing. They help only the financial institutions that were a cause of this problem. Slow and complete elimination of the interest subsidizing interest write-off is the solution.

Slice	Price	Ch.	Sold	Ch.
House	$500,000	+18%	1,833	+11%
Condo	$290,000	+7%	881	+22%
New	$617,500	+24%	171	-17%
All OC	$435,000	+10%	2,885	+12%

Orange County Register