Home ownership, anti-renter bias, and the subprime mortgage phenomenon
Greg Mankiw has a quick but interesting post on one of the least sensical sacred cows in the Internal Revenue Code: the substantial anti-renter discrimination.
Subprime lending has been so profitable in part because people have pursued home ownership even when it was financially unwise to do so, and have taken out highly risky loans as means to that end. The tax code systematizes that problem for many families seeking a firm grip on middle class existence.
I don't expect anyone in a position of authority to recommend fixing the problem, but it's worth considering in the context of the current crisis.
Advertisement
Mankiw's thesis is that home ownership increases unemployment, because it's an impediment to workers moving to where the jobs are. He does throw in a silly, unsupported claim that the tax code "discriminates against renters."
In point of fact rents are cheaper than ownership costs (where comparable housing is available) partly because identical costs produce a larger tax benefit for the landlord than for the home owner, and the landlord can, thus, offer the identical product at a lower cost.
As an aside we can note that lower income homeowners who take out subprime mortgages get very little tax benefits; their Schedule A deductions have to go over $10,600 before they get a penny of tax benefit, and even then, they get only 25 cents on the dollar if even that much.
March 21, 2007 12:01 AM | Reply | Permalink
Some of these 'Exploding ARM' mortgages had teaser rates so low that it was unlikely that the middle income borrowers were paying enough interest to take them above the standard deduction. No I think that a lot of these subprime loans were snapped up by the borrowers because their teaser rates were so low that it was cheaper than renting and the down payment requirements so minimal that not a lot was at risk. Of course defaulting will trash their credit rating, but their credit rating already was trash.
I think that this is a lot simpler than folks are trying to make it. A subset of lenders allowed their greed to get beyond good business judgement. It happens frequently when there is a boom in home prices. Fortunately unlike the last time it happened we aren't having to bail out a bunch of Savings and Loans.
==================
D Raymond
Host of Spin Cycle Radio and Now You Know on KSAK
March 21, 2007 12:31 AM | Reply | Permalink
e: their Schedule A deductions have to go over $10,600 before they get a penny of tax benefit
The standard deduction (for single persons) is about half that.
Re: Some of these 'Exploding ARM' mortgages had teaser rates so low that it was unlikely that the middle income borrowers were paying enough interest to take them above the standard deduction.
That depends on the size of the loan. In my are even "cheap" houses are well north of 200k.
Re; No I think that a lot of these subprime loans were snapped up by the borrowers because their teaser rates were so low that it was cheaper than renting
In some places, maybe. But in inflated housing markets this is not the case: the house payments even at the teaser rates (and don't forget tax and insurance escrows) were still well above the average (house) rent. Indeed, the fact that rents and house payments have gotten so far out of sync is a clear sign that something is amiss sincet he two tend to be roughly comparable in normal housing markets.
Re: A subset of lenders allowed their greed to get beyond good business judgement.
And also a subset of borrowers. Let's not forget the role that speculators looking to flip properties have played in the debacle.
March 21, 2007 9:25 AM | Reply | Permalink
I think that these subprime loans were snapped up by the borrowers because the value of the house would inevitably go up.
But realize, the existance of the subprime loans enabled house prices to rise more than they would otherwise. Positive feedback.
March 21, 2007 11:14 AM | Reply | Permalink
In the 1970's I was a student in Toronto. I was renting. There was a renter's credit that was about 20 or 25% of the rent -- this was in effect a tax credit for paying the property tax. As economists tell us, the cost of the property tax in rental properties is borne by the tenants, as the landlord passes it on them. I think that this was a provincial (i.e. Ontario) tax credit, not a national one, though I'm not certain.
I have no idea if there is still such a credit in any province in Canada, or even if there are renter's credits in any states in the USA.
One argument for renters credits is fairness. You could even argue that it promotes responsible homeownership, if you use the money to save up for a downpayment.
What are the arguments against it? Any significant unintended or unforeseen consequences?
March 21, 2007 2:57 PM | Reply | Permalink
As economists tell us, the cost of the property tax in rental properties is borne by the tenants . . . .
But very, very indirectly.
Landlords don't pass their costs through to tenants. In the absence of governmental regulation, tenants pay what landords charge, and landlords charge the maximum rent the market will support.
The landlord's sole question is whether the rents he can charge result in a return on his investment in rental property equal to or greater than the return (adjusted for risk) he can earn on other types of investment.
March 21, 2007 5:10 PM | Reply | Permalink
Re: I have no idea if there is still such a credit in any province in Canada, or even if there are renter's credits in any states in the USA.
Here in Florida property tax reform is a very hot topic and even the GOP is willing to conisder a Dem proposal to include some sort of renters tax credit in the final package.
March 21, 2007 6:29 PM | Reply | Permalink
David25,
Inspired by your question, I looked it up and I see that
Wisconsin's homestead credit is still in effect which among other things gives a property tax credit to "low & moderate income" renters.
The state's FAQ's are here for those who want more info.
As a grad student in Wisconsin with a bunch of part time jobs in the 70's, I remember learning about the homestead credit and thinking it was manna from heaven. I didn't think of myself as paying property taxes, but I got them refunded anyhow. I must admit that it's not like I calculated it before I would figure how much rent I could afford to pay nor do I think many others who got it did either. It was just like a low income subsidy, really like a gift or grant.
Those were the days when we also had a credit (or deduction? don't remember which, only remember I could take it and it made a big difference) for state sales tax paid on Federal--there was a standard deduction but someone taught me to keep receipts and it always turned out to be more than the standard with adding it to the deduction for state income tax paid...and then there was the deduction for credit card interest payments. (Not a side effect incentive for high credit card rates back then because most states regulated the cards, had those quaint things called usury laws.)
Whether good or bad, seems to me there were a lot more tax perks for low income single people in those days. Now, the emphasis is all on those with dependents--earned income credit is only for those with dependents, child care credits are common--but if you're low income without kids, you get zip. Seems to me that the development of the phenomenom of students who are not dependents who are flooded with credit cards started happening around the same time--not exactly a conspiracy, but certainly related somehow.
P.S. Back then, it was also to one's benefit as a student to be dropped as a dependent from your parents tax form ASAP because much of the aid for state university was needs based targeted to very low levels of income without much allowance for how many kids the family had or was supporting. Invariably you'd get much more aid not being a dependent than what your parents could get off their taxes.
March 21, 2007 9:59 PM | Reply | Permalink
It's not necessary to repeal the mortgage interest deduction. Just double the standard deduction. Then, 95% of taxpayers could file the short form and the tax bill would be irrelevant to the "rent or own" decision.
March 22, 2007 6:38 AM | Reply | Permalink
Yep.
The real question is why these Warren Reports boys have such a "jones" on with this subprime lending thing. They've yet to explain themselves.
March 22, 2007 6:56 AM | Reply | Permalink