Mortgage interest deduction (infographic from keepingcurrentmatters.com)
The mortgage interest deduction seems to be the everyone’s lovable fiscal scapegoat. The mortgage interest deduction was almost abolished in 2010 as a means of increasing revenue after the recession. And then again in 2012 it’s elimination was considered to increase revenue lost through sequestration. This time the mortgage interest deduction is in Congress’ sights as a means of tax reform.
The mortgage interest deduction is a remnant of consumer interest deductions that were allowed when income tax was first collected. It wasn’t until the 1980’s when most consumer interest deductions, such as credit card and auto loan interest, were eliminated (to reduce budget deficits after a deep recession). The mortgage interest deduction survived in a limited form, which implemented a cap on the amount of an individual’s deductions.
The mortgage interest deduction is again embattled. Reporting by AP’s Marcy Gordon reveals the divide in eradicating the MID (GOP eyes popular tax breaks to finance overhaul; apnews.com, September 18, 2017). The MID is viewed by some as a middle-class mainstay that is a political hot potato. While others see the MIS as an antiquated subsidy that can be removed as part of a major tax plan. However, the likelihood of totally abolishing the MID is slim because of the political fallout. More likely to occur is something akin to what happened in the 1980’s, which was a narrowed version that limited deductions. Speaker of the House, Paul Ryan hinted that the current $1million cap could be further reduced, by saying “We could change that limit — I suppose.”
Over the decades, the mortgage interest deduction has been criticized by some as poor economic policy. Those who argue against the mortgage interest deduction claim that it doesn’t increase homeownership. They also claim that the MID is a subsidy that artificially inflates home prices, and is used mostly by the wealthy. Additionally, the enticement of receiving a MID at the end of the year is used to encourage home buyers to buy homes that they really can’t afford. A recent study by Jonathon Gruber (known to many as the architect of Obamacare), et al, produced results that mimics the assertions of the mortgage interest deduction critics’ (Do People Respond to the Mortgage Interest Deduction? Quasi-Experimental Evidence from Denmark; National Bureau of Economic Research, Inc; Working Paper 23600, July 2017).
Proponents of the mortgage interest deduction, such as the National Association of Realtors, and the National Association of Home Builders, claim that the MID encourages homeownership and makes it affordable for many.
As a witness in the September 13th Senate Finance Committee Hearing on Individual Tax Reform, Iona Harris (chair of NAR’s Federal Taxation Committee) testified that limiting or abolishing the mortgage interest deduction could actually have the unintended consequence of increasing taxes on millions of “middle class homeowners,” while “putting the value of their homes at risk.”
Ms. Harris stated:
“…it is estimated that American homeowners already pay well over 80 percent of all federal income taxes… 53 percent of individuals claiming the itemized deduction for real estate taxes in 2014 earned less than $100,000.”
And recapped the outcome of the 1980’s mortgage interest deduction reduction:
“…When Congress last undertook major tax reform in 1986, it eliminated or significantly changed a large swath of tax provisions, including major real estate provisions, in order to lower rates, only to increase those rates just five years later in 1991…Most of the eliminated tax provisions never returned and in the case of real estate, a major recession followed.”
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
Homeownership and the American Dream (from SolomonMcCown.com and bulldogreporter.com)
Homeownership wasn’t always part of the American Dream. The American Dream originated as a concept about increasing one’s quality of life, which was well established before the Country’s independence from Britain. John Kenneth White and Sandra L. Hanson discussed the history of the American Dream in the introduction to their edited collection “The American Dream in the 21st Century” (2011; Temple University Press). They describe the American Dream as being fundamental to the Declaration of Independence. But the, the idiom “American Dream” was not in our lexicon until the twentieth century. Although James Truslow Adams has been credited for the phrase “American Dream;” White and Hanson attribute its first use to Walter Lippmann, who used it in his 1914 book “Drift and Mastery.” Adams’ 1931 work “The Epic of America” was the first widely accepted promotion of the phrase “American Dream.”
Homeownership most likely became a part of the American Dream as the middle class developed and rose in economic prominence. However, it probably wasn’t until the 1930’s when homeownership and American Dream were associated; when the Federal Housing Authority was established to make owning a home affordable. Before the FHA, buying a home meant signing up for a short term mortgage with a high down payment; which made renting the only option for most.
Homeownership can also be gauged by the health of the middle class. As the Amercican middle class fares, so does homeownership. This is evident from the effects of a recession; when the middle class takes the brunt of an economic downturn, homeowner rates typically suffer as a result.
Homeownership Rates (from census.gov)
Homeownership rates have steadily decreased from a peak approaching 70 percent just before the housing crash, to the current rate of 63.5 percent (census.gov). From the Census October 27th press release:
“National vacancy rates in the third quarter 2016 were 6.8 percent for rental housing and 1.8 percent for homeowner housing. The rental vacancy rate of 6.8 percent was 0.5 percentage points (+/-0.4 percentage points) lower than the rate in the third quarter 2015 and not statistically different from the rate in the second quarter 2016. The homeowner vacancy rate of 1.8 percent was not statistically different from the third quarter 2015 or second quarter 2016 rates.
The homeownership rate of 63.5 percent was not statistically different from the rate in the third quarter 2015 (63.7 percent) and 0.6 percentage points (+/-0.4 percentage points) higher than the rate in the second quarter 2016.”
The decline has been attributed to shrinking middle class, changing demographics, and the residual economic malaise of the Great Recession. Although the declining homeownership rate seems as if it is a recent phenomenon, it’s actually cyclical. Anthony DePalma reported for the New York Times about the declining homeownership rate in the post-recession climate of the 1980’s (IN THE NATION; Why Owning a Home Is the American Dream; nytimes.com; September 11, 1988).
The recent research of the future of homeownership by Spader, McCue, and Herbert projected three scenarios (Homeowner Households and the U.S. Homeownership Rate: Tenure Projections for 2015-2035; Joint Center for Housing Studies of Harvard; working paper, 2016). The low scenario is that homeownership rates continue to decline to a rate of 60.6 percent through the year 2020. The high scenario is that homeownership rates will once again increase through the year 2025 and peak around 65 percent. However, they also provide for a scenario where homeownership rates stabilize and maintain at current levels:
“The base scenario, which holds homeownership rates constant at their 2015 levels, shows that projected changes in the demographic composition of U.S. households by age, race/ethnicity, and family type will largely offset one another, affecting the homeownership rate only minimally through 2035. Under this scenario, projected household growth will add 8.9 million homeowner households and 4.7 million renter households by 2025, and 15.7 million homeowner households and 9.4 million renter households by 2035. Alternatively, the low and high scenarios produce a range for the national homeownership rate of 60.7 percent to 64.8 percent by 2035, resulting in different levels of growth in homeowner and renter households.”
They concede that the trajectory of homeownership is complex, stating:
“… the homeownership rate’s actual trajectory will depend on how quickly the foreclosure backlog clears, how many foreclosed households reenter homeownership, and whether young households’ slowed rates of homeownership entry persist in future years. Additionally, any major changes in the broader economy, housing finance system, or households’ attitudes toward homeownership may also influence future homeownership rates to the extent that they alter households’ demand or access to homeownership…”
Home owners are more inclined to maintain their homes and neighborhoods, as well as being invested in protecting their home and community; which may account for lower incidences of reported crime. Besides stabilizing communities, many of these benefits may also account for positively affecting home values.
The benefits of homeownership have been well documented and discussed by Research Economist Selma Hepp for the National Association of Realtors®:
“In addition to tangible financial benefits, research has shown that homeownership brings substantial social benefits for families, communities, and the country as a whole. Because of these societal benefits, policy makers have promoted homeownership through a number of channels. Homeownership has been an essential element of the American Dream for decades and continues to be so even today. Some of the documented social benefits include:
Increased charitable activity
Civic participation in both local community and national issues (including voting)
Greater awareness of the political process
Higher incidence of membership in voluntary organizations and church attendance
Greater social capital generated
Greater attachment to the neighborhood and neighbors
Lower teen pregnancy by children’s living in owned homes
Higher student test scores by children’s living in owned homes
Higher rate of high school graduation thereby higher earnings
Children more likely to participate in organized activities and have less television screen time
Homeowners take on a greater responsibility such as home maintenance and acquiring the financial skills to handle mortgage payments and those skills transfer to their children
Lower teenage delinquencies
General increase in positive outlook to life
Homeowners reported higher life satisfaction, higher self-esteem, happiness, and higher perceived control over their lives
Better health outcomes, better physical and psychological health
Tremendous wealth gains for homeowners under normal housing market conditions (outside of the terrible bubble/bust housing years)
Homeowners not only experience a significant increase in housing satisfaction, but also obtain a higher satisfaction even in the same home in which they resided as renters
Family financial situation and housing tenure during childhood and adulthood, impacted one’s self-rated health (in particular, the socioeconomic disadvantaged indicated by not being able to save any money or not owning or purchasing a home are less likely to self-rate their health as excellent or very good).
Less likely to become crime victims
Homeowners better maintain their homes, and high quality structures also raise mental health -renter-occupied housing appreciates less than owner-occupied housing
Housing prices are higher in high-ownership neighborhoods
Maintenance behavior of individual homeowners is influenced by those of their neighbors”
As the American Dream continues to evolve, so does the goal for homeownership. Although many have not been recently swayed by benefits, the cycle may once again reveal the true value of homeownership.
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
CoreLogic’s (corlogic.com) latest monthly foreclosure report indicated a continued downward trend. In fact, July’s national foreclosure inventory rate of 0.91% was the 57th consecutive month (almost 5 years) with a lower number of foreclosures nationwide. Even the current 2.9% national rate of home owners considered “seriously delinquent” is also lower from last July. (Maryland’s foreclosure inventory and seriously delinquent rates are higher than the national average at 1.2% and 4.1% respectively.) All thanks to mortgage modification and foreclosure alternatives.
Frank Nothaft, chief economist at CoreLogic, contributed the decline of foreclosure inventory to a combination of loan modification, foreclosures, and a strong housing market. Additionally, he stated that “The U.S. Treasury’s making home affordable program has contributed to the decline through permanent modifications, forbearance and foreclosure alternatives which have assisted 2.5 million home owners with first mortgages at risk since 2009.”
In the immediate aftershock of the foreclosure and subsequent financial crises, which began almost nine years ago, the government stepped in to help out at risk home owners. The rollout of HAFA, HARP, and HAMP was bumpy and it took time for the programs to work efficiently. Of course, these programs were not intended to continue on forever, and in fact were supposed to end several years ago. Fortunately, Congress, the Treasury and the FHFA have recognized the need for continued assistance and extended the programs. Providing foreclosure alternatives and mortgage modification reduces vacant homes, bolsters communities, and helps maintain a healthy housing market.
Although these mortgage assistance programs were intended to be temporary, it’s clear that a permanent solution is necessary. The notion that a foreclosure crisis won’t or can’t happen again is naïve. Historically, housing downturns and recessions are cyclical. And when an economic decline occurs, a home owner assistance program should be available to provide borrowers with alternatives to foreclosure.
The Federal Housing Finance Agency (FHFA.gov) announced in an August 25th press release that HARP will be extended through September 2017. But that will be the end of Home Affordable Refinance Program (HARP) as we know it, because a new program is slated to begin October 2017. The new program is to be a streamlined version that will also allow those whose mortgages exceed Fannie and Freddie’s loan limits to refinance.
FHFA stated that specifics for the HARP replacement will be released as the rollout date approaches. However, it is anticipated that the program will not require a minimum credit score; will not place limits on the borrower’s debt-to-income ratio; nor will it limit the mortgage to a maximum loan-to-value. And unlike many refinance programs, an appraisal may not be required. And improving from the HARP program, there won’t be cut off dates, and borrowers can use the program multiple times.
The Home Affordable Modification Program (HAMP) unfortunately is slated to conclude at the end of the year without a viable replacement. However, the Mortgage Bankers Association have stepped in to create a streamlined solution to fill the gap. A September 23rd press release (MBA.org) announced its successor to HAMP: “One Mod: Principles for Post-HAMP Loan Modifications.”
J. David Motley, CMB Vice-Chairman of the Mortgage Bankers Association, stated, “With Treasury’s HAMP program soon coming to an end, we all recognized that investors, borrowers, and servicers need a replacement program that provides clarity and simplicity to homeowners experiencing difficulty maintaining their mortgage payments…One Mod could meet that challenge by providing affordable and sustainable payment structures that improve the likelihood of success for participating borrowers.“
Original published at https://dankrell.com/blog/2016/09/30/mortgage-modification-future/
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
The playwright Oscar Wilde must have been fond of the idiom “nowadays people know the price of everything and the value of nothing,” because he used it in back to back works; first in The Picture of Dorian Gray, and then a variation in Lady Windermere’s Fan. Today, corrupted forms of Wilde’s phrase are wrongly attributed or misquoted – but the point is well made. More psychologist then poet, Wilde seemed to characterize a core consumer behavioral trait of seeking short term gain vs long term value – which applies to home owner savvy!
Consumers in the 19th century were much like consumers today, such that they sought out to get a bargain; often times overlooking the costs from which it comes by. And what may have been in Wilde’s time a conflation of price and value, is still common today – especially for home owners. While many home owners pride themselves on their frugality in home maintenance, they don’t realize the consequences of their poor choices when it comes time to sell their home. Home owner savvy is also knowing about value.
Today’s home owner’s frugality comes honestly as a result of the great recession. A McKinsey Global Institute consumer sentiment survey from a year and half ago sums it up in the title: America the frugal: US Consumer Sentiment Survey (Martinez, Motiwala, and Sher; mckinsey.com; December 2014). Martinez, Motiwala, and Sher wrote in their economic analysis that “…Multiple years of austerity have left consumers with altered views about spending. Almost 40 percent say they will probably never go back to their prerecession approach to buying…”
While looking to spend less on maintenance and home repairs, home owners often ignore the effects of their thriftiness on the long term maintenance costs of their home. Trying to spend less often means becoming reactive to maintenance issues, instead of proactive. Reactive maintenance typically means that the plumbing, electrical, or roof issue the owner is repairing, may have been an ongoing problem that may have also affected other systems of the home. However, proactive home maintenance is an ongoing process that can prevent minor problems from becoming costly major issues and is home owner savvy.
John Riha invoked Ben Franklin’s “An ounce of prevention is worth a pound of cure” when writing about home maintenance and house values (How Much Value Does Regular Maintenance Add to Your Home?; houselogic.com). He repeats a common theme that regular preventative maintenance doesn’t only save you money down the line, but can add to a home’s sale price. Riha quotes University of Connecticut and Syracuse University studies that implies the value of a regularly maintained home may increase by 1% a year!
Riha recommends a “proactive maintenance strategy” to help stay on top of necessary repairs and system replacements. He suggests saving 1% to 3% of a home’s cost for regular maintenance. To help keep it “interesting,” he suggests repairing and updating one room per year. If you are unsure where to begin, a home inspection may help identify areas of immediate concern; as well as develop a regular maintenance schedule. Also, keeping records of ongoing repairs and upgrades will cement in a home buyer’s mind the amount of care you had for your home.
Home owner savvy is not necessarily about being frugal with home maintenance, which is also not about knowing the price of everything; but in reality, diminish the value of their home. Regular home maintenance can not only keep you comfortable and safe through the year, it may help you sell your home faster and for more!
Original published at https://dankrell.com/blog/2016/06/17/home-owner-savvy/
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
Since my last installment of How your Home is Making You Sick, the Centers for Disease Control and Prevention (CDC) has released and revised their analysis of certain types of Chinese laminate flooring. The initial release was found to have used an incorrect value for ceiling height, which calculated airborne concentration estimates about “3 times lower than they should have been.”
The increased interest in health concerns over certain types of Chinese laminate flooring was due in part to an exposé by CBS’ 60 Minutes (which aired March 1st, 2015) that investigated California home owners’ claims that certain types of laminate flooring sold by Lumber Liquidators was making them sick. The investigation alleged that the Chinese laminate flooring sold by Lumber Liquidators did not meet California Air Resources Board standards for formaldehyde emissions in wood flooring. Lumber Liquidators questioned the testing methodology and results (Lumber Liquidators; cbcnews.com; August 16th, 2015).
In a May 2015 press release, Lumber Liquidators stated that “Initial results of the indoor air quality testing program for certain laminate flooring customers – conducted by independent, accredited laboratories – indicate that over 97% of customers’ homes were within the protective guidelines established by the World Health Organization for formaldehyde levels in indoor air.” However, sales of the products in question were discontinued; and company has offered air quality test kits for those who have purchased laminate flooring from the company.
from “Laminate Flooring Test Results – Health Issues and Solutions” (cdc.gov)
Since the 60 Minutes exposé, the US Consumer Product Safety Commission (CSPC) tested samples of Chinese laminate flooring and along with the CDC issued “Laminate Flooring Test Results – Health Issues and Solutions”. The consumer handout states that formaldehyde is found in many home products; and levels typically decrease after 2 years of installation. Recommendations in reducing health risks are also listed (cdc.gov/nceh/laminateflooring/docs/nceh-atsdr_laminate-flooring.pdf).
The February 10th CDC press release initial reported analysis conducted by the Agency for Toxic Substances and Disease Registry (ATSDR) and the Centers for Disease Control and Prevention’s (CDC) National Center for Environmental Health (NCEH) of the CSPC data “…found that formaldehyde levels observed in select laminate wood flooring products could cause short-term irritation for people in general and in some cases exacerbate asthma. The risk of cancer associated with long-term exposure to the observed formaldehyde levels is considered extremely small…” (ATSDR and CDC Analysis Finds Possible Health Effects Associated with Formaldehyde in Select Laminate Flooring; cdc.gov).
However, a correction to the analysis was made several days later indicated that that although “the final results are not yet available,” the estimated conclusions are to be close to these: Exposure to the range of modeled levels of formaldehyde in indoor air could cause increased symptoms and other respiratory issues for people with asthma and COPD; Exposure to the lowest modeled levels of formaldehyde could result in eye, nose, and throat irritation for anyone; and The estimated risk of cancer is 6-30 cases per 100,000 people (increased from the initial “Low risk of cancer” 2-9 cases per 100,000 people). The CDC cautions that these revised results are “very conservative” and “the calculated risk is likely lower than our modeled estimate.”
Even though the results are revised, the CDC states that their recommendations will likely remain the same – “we strongly stress taking steps to reduce exposures, which should alleviate respiratory and eye, nose and throat irritation.”
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
