"The article also points out what could be the beginning of a downward trend (if not a limited version of the much-hyped bursting of the housing bubble): because mortgage rates have creeped upward recently, houses are taking longer to sell and are selling for less."

 

Which gives rise to the question, "What will happen to all those 'lucky' homeowners when their creative-financing, adjustable mortgages creep up as well?"

Very interesting post.

For many of the 69% of Americans that own homes, the home is their golden ticket to middle class status. Though it's probably too early to identify firm trend lines, there's no question that the housing and mortgage data in the last few months has worried homeowners and policy makers alike.

I'm all for widespread homeownership, but I'm growing increasingly more convinced that the broad tax breaks for home ownership are trouble. To my mind, the problems are two-fold.

One is that by merging the credit with the taxation process makes taxation itself seem more complex than it is, when a good part of the complexity is actually applying for a government subsidy (in the form of a tax rebate). So any time rules are added to the application process for this rebate the effect is that doing your taxes is more onerous.

The second is that it distorts the overall investment market, bringing funds into real estate that might well be better off elsewhere. Everyone here has probably thought about the problem that asset bubbles in housing are especially damaging to an economy because they stretch across all income classes. I'm not an economist, but suspect that if middle-income people's assets were parked in a broader set of holdings, the economy would be less vulnerable to big disruptions like a housing bubble.

Similarly, rental markets could be improved by a reduction in the home ownership subsidy. Renting has fallen into disfavor lately as a trap for those who can't afford to buy. In an undistorted market, renting and buying ought to equal out in value - renting is consuming real estate as service rather than as a fixed asset, and there's a lot to be said for a subscription service to a house.

If the goal is to help people develop assets, we ought to do that in a neutral way, and provide structure that helps people make sensible choices about their risk portfolio.

the fact is, the mortgage deduction does nothing to make housing more affordable, because sellers are aware of the mortgage deduction, too!

in other words, your ability to afford a house is based on your after-tax cost of the house. if you're paying $2K/month in mortgage, and you're in a 25% bracket (i'm oversimplifying to keep the numbers simple), your after-tax cost is $1600.

if there were no mortgage deduction, you could still afford an after-tax cost of $1600.

What changes is the price of the house - crudely put, a monthly mortgage payment is roughly 1% of the mortgage value, so we're talking about a difference between the house costing $200K in a market where there is a mortgage deduction and $160K where there isn't.

and that's why removing the deduction is so problematic: because it has now become embedded into housing prices. if there were no deduction, prices would fall roughly 25% overnight, and no one in congress is going to vote for that no matter how much better it would make US economic policy.

Unfortunately, I have only my own parents to go on when I discuss mortgages (not fixing to have a house of my own until after graduate school) and there are several aspects of their own mortgage that are unusual in this day and age.
1) It's a 85,000 dollar, 4 bed, 2 bath, split level house with a 2 car garage. They live in Greater Minnesota and bought it in 1989.
2) They have a fixed rated mortgage and whenever the rates go down far enough they renegotiate a fixed rate.
3) They have never used the house mortgage for anything. I mean, they've never remortgaged it.
So my personal experience for these things is skewed. Perhaps when my SO and I buy a house, I'll understand more. So if I'm missing something, chalk it up to the vagaries of use.

Re: There are also other inherent costs of two wage earners, must notably daycare, that eat into family budgets.

Daycare is not an "inherent" cost of a two income couple, since it occasioned only when the couple has minor children.