Tag Archives: NAR

The Mortgage Interest Tax Deduction Sacred Cow

Yesterday at 3:30 pm MST I received an email with an all-ready-to-roll call-to-action campaign designed to blitz Washington DC with the sound of reason. The cause at hand: the mortgage interest tax deduction was on the fiscal responsibility chopping block. Sparing you the details of how to turn into a human robo-phone, here’s the pitch to call:

“I’m disappointed that anyone in Congress — or on a Presidential Commission — would even suggest limits to the Mortgage Interest Deduction. Mortgage interest has been deductible for nearly 100 years, and the proposed changes will affect all 75 million home owners in the United States. We must act now to make sure the MID is not changed.

“Ever since the Deficit Commission announced its conclusions, the news media have been buzzing about the report. And what do they emphasize? Proposals to limit or even eliminate the Mortgage Interest Deduction. I’m concerned because all this does is scare the public — and potential buyers — away from the housing market. The last thing the housing industry needs right now (and for the foreseeable future) is another bucket of ice water to be thrown on the market. People who hear these news reports don’t differentiate between a proposal and a done deal. They just know that a tax provision they actually understand and rely on is under siege. This is just unacceptable.”

Well, what is this proposal that will “affect all 75 million home owners in the United States?” It would roll back the mortgage interest tax deduction for non-primary residence loans, home equity loans, and mortgages in excess of… $500,000.

This fashionable 59 year-old Frenchman could get a job emailing me. But that would be work. And he's not doing that again in 11 months.

Yep, $500,000 primary residence loans still get a mortgage tax deduction. Last I checked, that’s the MAJORITY of mortgages in the United States and the SUPER MAJORITY of mortgages presently being issued in the present market. What is so incredibly disappointing is that this is exactly the type of  hyperbole from the real estate industry that got America into the real estate mess 4 years ago (“buy now or be shut out forever”… rue those words and please learn from them!). Instead of focusing on the really central issues effecting real estate markets (uh, like trust, hoped-for futures, job creation), or even better, taking a position of fiscally responsible leadership, the NAR argument is essentially “don’t throw coldwater on the already unenthusiastic.” It’s like saying “stop reporting negative economic news, even if it’s true.” Instead, an email blitz equivalent of French Pensioners complaining that they can’t retire until their 62 shows up in 1.1 million inboxes.

If the consumer really knew the costs and the ins-&-outs of the mortgage interest tax deduction, seeing it used to carve up the deficit might actually make consumers enthusiastic.

Your over $500,000 Mortgage Interest Deduction? That's right. It's Toasted.

The reason for this post is twofold. One, I need a creative outlet to vent my frustration that NAR is such an enormously powerful lobbying organization and this is how it blows it’s trust asset with the public: by whining about a sacred cow that is projected to cost the American public $131 billion in 2012. I for one think that strategy will backfire in building consumer trust for a profession that requires huge amounts of trust. The second reason is that your mortgage interest tax deduction is probably safe, and that MID annually costs our government about what each year cost in Iraq. The seven-year commitment in Iraq cost $751 billion. Those quick on your toes can figure out that the mortgage tax deduction costs more on an annual basis then the most expensive war operation ever mounted in world history. Simpson and Bowles are intellectually bankrupt NOT to suggest cutting the MID. The budget for all of HUD in 2011 is around $45 billion. As far as fiscal responsibility, the MID is the fatted cow. With a phased-in implementation, this is one of the most logical line items in the government’s budget to attack.

Thus the phone blitzkrieg on Washington from the special interest group I have membership in.

The argument that it will dampen sales is 1.) dumb and 2.) false. NAR’s own data proves it is false. Last year, 47% of all buyers were first-time buyers. The average age of a first-time buyer was 30 years old. These are young pups on their third or fourth career already. Think about that for a second. The average 30 year-old is on their 3rd full career. Seven years out of college, three major work changes. Now, when polled how long they thought they would live in their home they responded on average, that they planned on 10 years of life in that home. Ten years is bordering on an eternal length of time for any 30-something. Does this tell us that the 30-something has eyes focused on only the now, or just as much on the future? The future is just as important to this 30-year old, and a bankrupt nation impacts that future pretty significantly. In today’s market, they are 47% of all buyers, and, less than 1% of them had mortgages over $500,000. The majority of repeat buyers expected to live in their home 15 years. Less than 5% obtained mortgages in excess of $500,000. Sounds like that market isn’t drying up anytime soon.

The reason people are not buying homes is because they do not see the future clearly. Another name for this is: fear. I am not so cynically wrapped up in my profession to think that the average consumer equates some rich person’s loss of their mortgage interest tax deduction to the same kind of fear that surrounds their job, their career, their kid’s school district, their ineffective city government, or the rat-infested foreclosed home next door. We are at the point where the economic ideas to buy can not get any better: Colorado Springs is down 17% from peak, home buyers today have 28% more money leverage due to interest rate declines then they did at the peak of the blistering market in June 2006. That means buyers have 45% more power, have desperate sellers in some cases and 4800 single family homes to choose from during the low-tide of inventory known as December. That’s the economics of the situation. The data says buying is logical. The reason people are not buying is not illogical. It is fear. What keeps people from buying are the broken fundamentals of the economy: trust, a clearer future, job creation. Actions that get the country going in the right direction help everyone. Without getting political, a fair-shake rebuilds trust. Slashing the national debt improves the future. Trust and future give employers reasons to hire.

Okay, but it throws icewater on the high-end recovery, at least in the short-term, right? Again, not necessarily true. There is math and then there is dumb math. Buying a house and paying interest on a debt to obtain a $0.30 on the dollar tax credit is stupid. It doesn’t make any fiscal sense. “Hi, I paid $40,000 in mortgage debt this year. I could have paid $30,000. But I paid $40,000. So give me my $12,000 in tax credit.” Yeah, it’s nice, and it is a benefit of homeownership, but that above math doesn’t make sense. Counseling people to defend their right to participate in dumb math sounds a bit, um, well, devious is not the right word, but not exactly above board. It sort of reminds me of the first episodes of Mad Men when they’re working on the Pall Mall account and can no longer advertise that they are healthful tobacco products and come up with “it’s toasted.” That’s why the over $500,000 mortgages will be exempt. Cut those numbers in half: still valid. The majority of Americans with mortgages have less than $500,000 mortgages. Since this is in the proposal phase, I’d be willing to bet that they also account for the pricey Northeast, CA and WA and make corresponding adjustments for conforming loan limits just as jumbo loans are $417,001 in CO, but over $700,000 in these pricey areas.

But the icing on the cake is this: the rich are coming back on their own, and to prove they don’t give a rip about the mortgage interest deduction (or perhaps they’re rich because they’re smart and they see the numbered days for the MID), they’re paying cash. Crazy market stat: at the end of the hyped-up financing run in 2007, there were 27 million dollar MLS sales in the PPAR MLS in 3rd quarter. Six of those were cash. This was the last quarter of easy, stupid, money, adjustable, interest-only, piggyback 2nds on everything died a quick, ruthless death in September, 2007 and Jumbo loan rates went up 2% overnight shutting down the market for cheap cash on McMansions. Interestingly, unemployment locally then was around 4%. Third quarter of 2010 saw 12 million dollar MLS sales in the PPAR MLS and how many were cash? Seven. That’s only one more than than the same quarter three years prior, but on a percentage basis was twice as large. Unemployment now locally is over 9%. Anecdotal information, a colleague at Selley Group builds high-end homes, with an average price of over $700,000. He has seven contracts over $700,000 in the last 90 days… everyone of them cash.  My point is: there is no mortgage interest deduction for any of these cash buyers… because there’s no mortgage. If NAR wanted to get the high-end really rolling, a “cash is sexy” campaign might be more effective than browbeating about the possible demise of the MID.

The only way out of this economic mess is if consumer activity begins to churn on it’s own two feet, if everyone acts cooperatively to help the big three goals of economic activity get a move-on (trust, clearer future, job creation), and those that are in a position of influence and education use their gifts accordingly. Encouraging dumb math as a way out of the recession when it favors only your profession doesn’t help. If anyone should be freaking out about the Simpson-Bowles recommendations it’s the accounting profession. Hand in hand with the MID ideas are lowering the tax rates and creating only three tax brackets so that lucrative deductions can be removed from returns. Yeah, common sense ideas like simplifying the tax code and not spending money in order to get it back on deduction (hmmm, is there a pattern here?) is prevalent in these bipartisan brainstorms. Thoughtfully examining the proposals en masse might be a service to ourselves and our constituents.

But I admit… it would be fun to prance around in Che Guevara t-shirts waving red flags with slogans painted on our pants.

Will the Tax Credit be revived?

Jay Thompson, Real Estate Blogging Rockstar has a brilliant (as usual) post today. Jay asked the question “Will the Homebuyer tax credit return? Should it?”

It might surprise some that I don’t think it should. I am for select government intervention. I am for select forms of stimulus. I am for bread on my own table. But I don’t think the tax credit is the right route for aiding the recently sorrowful market.

In our market, the first wave of the credit did draw down inventories beautifully. We had active listing inventories down to a number within 1% of January 1, 2006 on January 1, 2010. But since that time we’ve had a 53% increase in listings. The first wave worked; the 2nd wave created a false excitement / illusion of success that undid all the good of the first wave.

The credit here essentially worked too well. It gave sellers the perception that selling was easy again, or at least getting easy. Because the market had returned to balance (we were at just over 6 months of inventory January 1st) sellers voluntarily came rushing back into the market who had sat on the sideline, that “other shadow inventory”. Some of this was logical: the chance of a seller successfully selling was 47% in 2007 and 2008 in our market. Last year ended at 53.6%. That isn’t a 6.6% gain… that’s a 14% gain in probability. Last year’s uptick in probability of sale must be seen as the motivation behind so many sellers electing to return to the market this year. But now… through July of this year, the odds of a home selling were at only 44%. The tax credit can be applauded for the first improvement and ridiculed for the later developments.

Giving people cash doesn’t help them make good decisions. The savings on a $200,000 loan at 4.25% versus 5.25% are $43,000 over the life of a 30 year loan; in other words, the mortgage market today provides a buying opportunity that is significantly better than last year. The value of 30 year interest savings if 5 times that of the tax credit. The monthly payment difference is 8 – 11% lower now than it was one year ago. There is more inventory to choose from. But it is so much easier for a consumer to think short-term and “get $8000 with tax return”.

One of the major costs of market tinkering is the sacrifice of trust and good will. NAR lobbied relentlessly for the tax credits (including requests for the tax credit to be $15,000, not $8000) and real estate agents and mortgage brokers insisted that rates would skyrocket later this year once the Feds stopped buying treasuries. “Better lock in now, because rates will be at 6% by year’s end” stimulated the March/April rush on the market, the premature buying panic that got people in a.) under the tax credit deadline but also b.) ahead of the presumed upward trend on interest rates. Well rates today are six tenths of a percent LOWER, not higher than they were in the Spring. I tremble to think what future goodwill could be traded for more short-term spikes in sales due to renewed lobbying efforts. It is all reminiscent of “buy now or be priced out of the market forever”, another notorious industry statement from 2005.

A concerted effort among brokers to properly educate their clients and consumers on home-ownership and personal finance WILL NOT remedy the market quickly (because that’s all we’re interested in these days, isn’t it, the quick fix?); but it would go great lengths to helping the market make a durable and sustainable recovery. It would help restore some semblance of professionalism. It would increase the individual broker’s permission asset. We can look to the outside for help… or alternately… we in the biz can be the help ourselves.

Each month when I publish the Stat Pack, I start with “The Rules”. The Rules…don’t…change. Here they are:


Mmm...Devil's Food.

A new tax credit doesn’t necessarily violate the rules… but you’re supposed to eat your dinner before your cake, and the tax credit is just the butter-cream icing on top of the cake. Better butter-cream doesn’t make anyone, or anything, any healthier.

What you Focus on Expands: Lousy Data Collection Proves Nothing

It isn’t simply right-brain holistic woo-woo Tony Robbins-loving people that can channel energy into a result.

REALTORS can do it.

HOA’s can do it.

As proof in the new Que, Economists can do it, too.

Take a look at this photo.

If you have access to a pen and pencil (it doesn’t work well on an iPad), scratch out one of these for yourself.

Take a length of twine, maybe 18″ long and tie a lightweight metal washer to it. Prop your elbow up on a table and suspend the washer over the crossed lines in the middle of the diagram, and feel free to use your fingers to stabilize it for a moment. Then focus on only the washer.

Start thinking in your mind:

1. 3. 1. 3. 1. 3.

What just happened?

Now tell the washer “stop. Stop. Stop.”


Now start thinking in your mind, focusing on the washer, “2. 4. 2. 4. 2. 4.”

Now tell the washer “stop. Stop. Stop.”

Tell it to go “1, 2, 3, 4, 1, 2, 3, 4…” Tell it to go in reverse.

It obeys. Brain energy can move the washer. Four year olds can do this. What you focus on expands.

I say all of this because an issue of economic concern has arisen in Colorado Springs: A Public Perception of Renewable Energy. The results of the survey were just published in Southern Colorado Economic Forum’s Que, Volume 8, No 4, 2010, and it concludes: people don’t want renewable energy and won’t pay for it. Upon closer examination, I question their findings under the same premise as a washer, some twine and a numeric pie sketch: what you focus on expands. The demographic sought to answer these questions was overwhelmingly older (almost half over 60) and overwhelmingly wealthy (just under 70% made more than $125,000.

Here is a graphic that shows the age breakdown: “The greatest proportion of responses were obtained from people who are over 60 (60-64, 24.6% and 65 or older 21.8%). Young adults were not part of the target audience. Homeowners were targeted.”

Young adults are not homeowners? Why did the tax credit work? What is especially amazing is the disconnect between “homeowners” and “homebuyers”. According to the National Association of REALTORS Profile of Home Buyers and Sellers, only 17% of all buyers in 2008 through 2009 (latest data that is available) were older than 55 years old. But 46.4% of the respondents were over 60 for this survey… AND… considered the proper target audience? As far as who owns a home, perhaps the better question about whether or not people will pay for renewable energy are people thinking about paying for a home: in other words, not homeowners, but homebuyers.

In 2008/09, the same number of people 18 to 24 bought homes as were 65 to 74 (6%). In fact, 62% of all buyers were under 44, with one in three (34%) 25 to 34. In the Que’s Renewable Energy study, one in four respondents was born between 1945 and 1950. These people were definitely likely homeowners; but they were not likely homebuyers. Correspondingly, they can form answers in a theoretical bubble: they probably won’t be impacted by the answers like a majority of a population whose answers went unsolicited.

Yet what did the survey want to know? Questions that effect homebuyers just as much (if not more) than homeowners.

  • Are wind farms aesthetic?
  • Would you buy a house with solar panels?
  • Would you pay a premium for a house with solar panels?
  • Would you install renewable energy on your home?

These are all questions that are valid of an audience or segment that:

  1. is planning on buying a home in the next 3 to 5 years
  2. might need to buy a home in the next 5 to 10 years
  3. is concerned about resource use for the next 30 to 50 years and
  4. would be an end-user benefactor/opponent of such resources/expenses

My problem with this might come across as intolerant, youthfully naive, even punkish. I can live that. But 60 years and older with a household income of over $125,000 at least needs to be defended as the target audience for something as audacious and planning intensive as renewable energy use. Would not a far better demographic  have been the individuals that at least would theoretically pay for it, not even willingly, but as utility subscribers of the future?

We are two decades away from a society that claims half the energy use from non-fossil fuels… at the earliest. That 46% of the audience over 60 years old is very likely concerned with their daily expenses, and rightly so. Ask their opinion of any municipal infrastructure improvement, and you will probably see a pattern of answers at least somewhat similar to how they answered about renewable energy. Almost 70% of the respondents made more than $125,000 a year (69.6%), clearly a number that does not match at all with the voting demographic patterns of El Paso County. Similarly, it does not represent the majority of homebuyers, nor does it represent even the majority of homeowners. Here is a breakdown of home income among buyers in 2008/09:

So to see that only 43.6% would “maybe” pay a premium for renewable energy and 34.5% said that they would not… well… let’s consider the audience. These same individuals statistically speaking probably would not favor increased taxes: they have more to lose. They probably would be less likely to approve school construction expenditures: they don’t have elementary or secondary-aged children.

The survey makes a statement that says “a naive expectation suggested well-educated, high-income homeowners would be willing to pay more for renewable energy.” Anyone with any insight into human behaviors, even Freakeconomics-lovers, understands the fallacy of that statement. There is a big difference between well-educated, high income homeowners that are over 60 and those that are under 50, and especially those that are under 40. Are their fewer high-income, high-educated homeowners under 40 than above 60? Yes. But if the defense of the question being asked is really “does renewable energy improve public perceptions about property and property values”… don’t ask a homeowner. Ask a buyer. In this case, the 92% of the audience (93% in the West) that was younger than 65. Perhaps the answers would be the same. Nothing says they must be different. But to isolate the audience as neatly as this survey leaves a lot of the validity of the answers, and how well they truly represent public opinion, in question.

Afterall… what you focus on, expands.