David Leonhardt’s Don’t Fear the Bubble That Bursts [NYT] attempts to pop the housing bubble myth. Apparently, we need to chill out a little. He says:
Many people are unaware of a housing crash if they aren’t trying to sell their home, so why are we so uptight about it?
The high value of your home makes you feel good but its not liquid.
Potential victims of a sharp price decline are only about 10% of homeowners.
30% of the country rents and they are not significantly affected.
I love David Leonhardt’s articles on housing issues but this one seems to be a little too simplistic (or I am too simplistic).
He argues that removal of the mortgage interest tax deduction would be prudent since we don’t need to be motivated to buy into the American dream. However, this is not really fair since the Federal government has had this tax structure in place for years, GSE’s like Fannie Mae have pushed homeownership and this deduction is a core basis of value. I could imagine a 10% correction overnight in the housing market if this were enacted which would place many people in financial difficulty who are already highly leveraged. Plus the housing market generates jobs and income which I would speculate a loss in significant numbers, at least in the near term.
I also have issues with the stereotypes placed on brokers in this piece. The real estate brokers we have been speaking to for the past few years would feel a lot better about the real estate market if prices would level off or drop back down a bit. Concerns about affordibility losing traction with values mean less future income unless there is a correction in pricing. The reduction in the number of sales already appears to be happening.
I thought the article was excellent.
The main points:
1) The extreme run-up in housing prices hasn’t made me rich, it has made it less likely that my children will be able to live in Brooklyn, let alone Windsor Terrace, when they grow up. I’d prefer if housing costs returned to some relationship to income, at least outside Manhattan.
2) Housing prices have crashed before. Everyone seems to have forgotten, except those at the back end of the baby boom who bought condos/coops from those at the front end in the late 1980s.
3) The mortgage interest deduction is distorting decisions. It doesn’t help those on the bubble purchase homes, as intended, it subidizes the purchase of larger and more expensive homes that use more energy. To the extent that it reduces costs the borrower, this is offset by a higher price. It should be phased out, or replaced with a fixed-value credit.
Larry – good points – I also thought the article was excellent as well. I lived through the 1980’s and remember the correction vividly. As far as the mortgage rate deduction, I think the one way to be fair to the consumer if the public wants them eliminated is to have some sort of phase out period, say over 5-10 years, where it is not a shock to the economy. if you shock the economy, you lower tax receipts and possibly realize no gains from the savings seen from the elimination of the deduction.
I can’t get excited about the mortgage interest deduction. right now I pay more in RE Tax than I do in interest, because I have an old mortgage and high RE Tax. However, because of AMT, I get little benefit from the RE Tax deduction and both are cut back by the Sechedule A cutbacks. I really don’t care about the deductions which are more of an illusion. I really only care about the total bill.