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How Homeownership Became the Engine of American Inequality

nytimes.com

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Re: How Homeownership Became the Engine of American Inequality

#31

Post by shados »

arielweisberg wrote: post #2

When I crunched the numbers for the mortgage interest deduction it really didn't seem that compelling. It replaces the standard deduction so the first 12,500$ in mortgage interest does nothing for you. After that it's just a minor reduction in taxable income and your tax burden is only reduced by a fraction of your mortgage interest. Not enough to cover the costs of maintaining a home and the tendency to consume more…

Any itemized deductions have to add up and pass the standard deduction. Thats normal, but they add up.

With that said, as a lot of people said, in high cost areas, it goes really quick, especially if you add municipal taxes which can also be deducted. So if you have 500 bucks a month in municipal taxes (which is kind of low in high cost areas), you're already halfway there. Add the interests (often half of your mortgage payments), and you're well beyond.

If you're in an area with million dollar houses being quite common (we are talking about the rich poor gap after all), you're talking about a 30-40k deduction easy, and even more for super rich.

One thing beyond that (any accountant in the crowd correct me if I'm wrong), the mortgage interest deduction for your primary residence is special in that it is one of the deductions that can be applied to AMT. So again, it helps the ultra rich.

I'm no 1%, but I am affected by AMT, and my place is in a high cost area, and this tax deduction is the only thing saving me from crapping my pants every year when I file my taxes.

Re: How Homeownership Became the Engine of American Inequality

#32

Post by at-fates-hands »

fixxer wrote: post #3
arielweisberg wrote: post #2

When I crunched the numbers for the mortgage interest deduction it really didn't seem that compelling. It replaces the standard deduction so the first 12,500$ in mortgage interest does nothing for you. After that it's just a minor reduction in taxable income and your tax burden is only reduced by a fraction of your mortgage interest. Not enough to cover the costs of maintaining a home and the tendency to consume more…

Sounds like we should increase it to make home ownership more attractive, resulting in greater civic engagement from the population ("skin in the game").

Isn't this kind of what happened in the 2008 collapse?

Laws were loosened to allow more people to get into more risky loans to get homes. It incentivized a lot of people to take on mortgages they normally wouldn't qualify for.

I'm not talking about low income earners either. I had several friends who are upper middle class earners who suddenly purchased mansions on the lake, only to lose their house months later when the market collapsed. I also had other friends who suddenly realized the value of their homes went through the roof and took out two or three loans against that value, only to take it in the shorts when the market collapsed. Sure, the low income folks were hit pretty hard, but the middle and upper middle class folks got hoodwinked as well.

While I agree, it would help, it feels like its the same huge mess that we just came out of.

Re: How Homeownership Became the Engine of American Inequality

#33

Post by frgtpsswrdlame »

kcorbitt wrote: post #25

So this article advocates for the removal of the mortgage interest tax deduction, because subsidizing home ownership leads to a larger economic divide between owners and renters. As a renter, I appreciate the intent, and I also appreciate any measure to simplify the tax code. That said, I also see compelling arguments in the deduction's favor. The sad truth is that most Americans are terrible at saving and in very po…

But most of the MID goes to benefit those who have plenty to save already. Also, I think looking at mortgages as a savings program is incredibly short-sighted. Mortgages are risky and the MID encourages people to overleverage.

Re: How Homeownership Became the Engine of American Inequality

#34

Post by dcdanko »

avelis wrote: post #23

I think I remember hearing something on Planet Money on if the MID was reformed or eliminated that house prices would drop basically across the board as an adjustment to that tax code change. Certain homeowners with a mortgage could, almost overnight, go underwater with their home and on the other end homes could become more affordable under a smaller price point.

Surely the MID would need to be slowly phased out or just capped?

Re: How Homeownership Became the Engine of American Inequality

#35

Post by shados »

DamnYuppie wrote: post #7

I don't know of anyone who bases a home purchase decision on the mortgage interest deduction. Seriously location, school district, cost of home, time to commute, yard size, cost of HOA are all more important to everyone I know. In fact it has never come up in conversations about home purchases with my peer group.

The renting vs buying choice is absolutely a common topic when people consider buying. Also, when comes time to see how much you can afford per month, it is absolutely part of the calculation. In SF, NYC, Boston, etc, it can make a difference of 1000+ a month when doing your budget in the range software engineers look at (which is not an uncommon case, obviously).

Re: How Homeownership Became the Engine of American Inequality

#36

Post by marze »

kcorbitt wrote: post #25

So this article advocates for the removal of the mortgage interest tax deduction, because subsidizing home ownership leads to a larger economic divide between owners and renters. As a renter, I appreciate the intent, and I also appreciate any measure to simplify the tax code. That said, I also see compelling arguments in the deduction's favor. The sad truth is that most Americans are terrible at saving and in very po…

The interest deduction benefits higher income people with more expensive houses. Like you say, it has no benefit to those paying -10k in interest.

Re: How Homeownership Became the Engine of American Inequality

#37

Post by Declanomous »

kcorbitt wrote: post #25

So this article advocates for the removal of the mortgage interest tax deduction, because subsidizing home ownership leads to a larger economic divide between owners and renters. As a renter, I appreciate the intent, and I also appreciate any measure to simplify the tax code. That said, I also see compelling arguments in the deduction's favor. The sad truth is that most Americans are terrible at saving and in very po…

Even if you have debt, you should be taking full advantage of your employer 401k match if one is available to you. In almost every case you will come out ahead even if you withdraw the money early.

So many of my coworkers do not contribute to their 401K at all, which is literally just leaving free money on the table.

Re: How Homeownership Became the Engine of American Inequality

#38

Post by ww520 »

shados wrote: post #31
arielweisberg wrote: post #2

When I crunched the numbers for the mortgage interest deduction it really didn't seem that compelling. It replaces the standard deduction so the first 12,500$ in mortgage interest does nothing for you. After that it's just a minor reduction in taxable income and your tax burden is only reduced by a fraction of your mortgage interest. Not enough to cover the costs of maintaining a home and the tendency to consume more…

Any itemized deductions have to add up and pass the standard deduction. Thats normal, but they add up. With that said, as a lot of people said, in high cost areas, it goes really quick, especially if you add municipal taxes which can also be deducted. So if you have 500 bucks a month in municipal taxes (which is kind of low in high cost areas), you're already halfway there. Add the interests (often half of your mortg…

500 dollars/month for municipal taxes? Can you elaborate on those? I might be missing these deduction in the past.

Re: How Homeownership Became the Engine of American Inequality

#39

Post by jakelarkin »

MID is a nice subsidy but one really can't speak to economic inequality in housing with calling out use of local zoning regulation as cause of artificially low supply. A lot more people would be able to afford a house or at least have cheaper rent if it werent for the shenanigans going on with development/zoning reviews.

Re: How Homeownership Became the Engine of American Inequality

#40

Post by refurb »

DamnYuppie wrote: post #7

I don't know of anyone who bases a home purchase decision on the mortgage interest deduction. Seriously location, school district, cost of home, time to commute, yard size, cost of HOA are all more important to everyone I know. In fact it has never come up in conversations about home purchases with my peer group.

Sure it does. Think of it this way....

Targeting an all in home payment (principle, interest, insurance, taxes) of 1/3 your $100K income, so $30K or $2,500 per month.

In a world with MID, the ~$1500 in interest payment each month can be paid with pre-tax money. Assume you're in the 30% bracket, that means an extra $450 each month. Now you can afford a mortgage that costs effectively $3000 per month, which comes out to another $50K to $75K in purchase price (rough estimate assuming 4% interest rate).

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