November 4, 2017

What Crony Capitalism Looks Like

A weekend topic starting with an opinion piece by Peter J. Wallison & Edward J. Pinto at Real Clear Politics. “Two powerful lobbying groups that advertise themselves as helping Americans buy homes have announced that they will oppose the Republican tax plan. Their reason? Because it will lower housing costs. Seldom have any denizens of “the Swamp” shown their true colors quite so flagrantly.”

“For years, the National Association of Realtors and the National Association of Home Builders were strong supporters of Fannie Mae and Freddie Mac, two government-backed mortgage companies, because (they argued) the government subsidies these firms received would create affordable housing for the middle class. That was their stated reason. The real rationale, as they have now made clear, is that Fannie and Freddie’s policies drove up housing prices, thereby increasing their members’ profits.”

“When the Republican tax plan made them choose between helping the middle class to buy homes and reducing their members’ profits, they chose profits. Doubling the standard IRS deduction while reducing or eliminating deductions for state and local taxes would discourage would-be homebuyers from purchasing more expensive homes. Since both the Realtors and the builders earn more from selling bigger homes amid rising prices, they simply oppose any tax plan that does not help inflate housing costs.”

“The same thing is true for the state and local tax deduction, which applies to local property taxes. If this deduction is reduced, homebuyers will not take into account the ’savings’ they would receive from deducting large state and local taxes on a bigger home. This will also reduce their spending on the home, and this too will mean less profit for the Realtors and homebuilders.”

“The Realtors and homebuilders, however, did wonderfully well in the booming market before 2007, profiting from the unprecedented rise in housing prices. They want this market back, and since government housing policies haven’t changed since the financial crisis—the crisis was blamed on the banks rather than housing policies—they are on the way to getting what they want. If you want to know what crony capitalism looks like, this is it.”

“The Realtors and homebuilders are afraid that the GOP tax plan will have the effect of stabilizing housing prices. Although this would be an obvious benefit for young homebuyers trying to purchase their first—or second—homes, it’s wholly undesirable for the builders and real estate agents. All of which raises one central question, which should be in the minds of all Americans—including members of Congress—when they consider the coming tax debate: Whose side are these people on?”

From CNN Money. “President Trump argues the GOP tax overhaul will ‘create tremendous success for companies.’ Yet some of America’s most powerful business alliances are already trying to kill the bill. Toll Brothers, KB Home and other builders tumbled this week because the tax bill would limit key tax breaks that favor homebuyers. Specifically, the legislation calls for capping the mortgage interest deduction at $500,000 instead of $1 million. It would also limit the deduction for state and local property taxes at $10,000.”

“The fear, at least in the housing industry, is that these tax breaks could sap demand for pricey homes, especially in expensive markets. Many of those markets, such as San Francisco and Manhattan, are in high-tax states. That’s a problem because the GOP tax plan would eliminate state income tax deductions altogether.”

“The GOP proposal to cap the mortgage interest deduction is also riling up the vast real estate industry. Echoing the arguments made by the home builders, the National Association of Realtors complained that the plan ‘threatens home values and takes money straight from the pockets of homeowners.’ The concern for realtors is that a slowdown in housing could hurt their income or even employment prospects. The National Association of Home Builders warned the GOP tax plan ’slams the middle class’ by hurting home values.”

The Mercury News in California. “‘It’ll have the worst impact on the Bay Area of any place in the country, because housing prices are so high,’ said Nela Richardson, chief economist for real estate brokerage Redfin. Overall, she said, the tax plan pinches upper-middle class families. ‘There’s no good news for the Bay Area,’ she said.”

“Jeff Bell, realtor and chair of the Silicon Valley Association of Realtors legislative action committee, said the tax plan could make a challenging market even harder for first-time home buyers. The association estimated that the cut in mortgage deductions would cost a Santa Clara County homeowner with an $800,000 mortgage on a $1 million home about $4,800 a year. Existing mortgages are not affected. But Bell said the tax proposal would encourage homeowners to stay put, limiting the number of homes for sale in an already-tight market. That, in turn, could lead to more bidding wars for single-family homes, he said.”

The Union Tribune in California. “While a reduction in tax benefits to homeownership might, on the surface, seem like a reason prices would move lower that might not be the case here, said Steve Thomas of Reports on Housing. He said low housing inventory should continue to create high demand — and high prices — despite any reduction in tax advantage.”

“‘(The tax plan) could strip a little bit of the demand, but we need to see a lot more of it stripped away, and supply to start to rise, before prices to go the other way,’ he said. ‘So, I don’t think it will have an immediate impact. But, it could push things in that direction a little sooner.’”

From Boston Magazine in Massachusetts. “If approved, the rewritten tax code would do big things for big business, moderate amounts for the middle class, and damage to those relying on certain mortgage deductions. That third category, according to the Boston Globe, comprises many of Massachusetts’ wealthy home buyers, who would be negatively affected by the proposed cap to the amount of loan interest and property tax deductions they can leverage.”

“Charlie Nilsen, the national director of residential lending at Boston Private Bank, told the Globe that there’s hardly ‘any good news in this for the housing market in Boston.’”

“Massachusetts’ Democratic lawmakers were swift to condemn the bill, which Republicans aim to rush to President Trump before Christmas. Sen. Elizabeth Warren told PBS News Hour on Thursday that the proposal contains ‘$2 trillion in giveaways to giant corporations.’ She went on to assail the GOP talking point that giving businesses a break brings jobs and higher wages to average Americans, calling it ‘the big lie that the Republicans have been selling now for decades.’”

From “For those who do itemize, the proposal allows current homeowners to continue deducting interest paid on mortgages up to $1 million, but caps that amount at $500,000 for any future mortgages. Only around 5 percent of mortgages obtained between 2013 to 2015 were more than $500,000, according to the National Low Income Housing Coalition.”

“However, only those households with total itemized deductions above the proposed standard deduction amounts would benefit from the mortgage interest deduction. And even under the GOP’s old ‘Unified Framework’ plan — which didn’t propose any changes to the mortgage interest deduction — the Tax Policy Center estimated that only about 4 percent of all households would continue to find it more beneficial to itemize and claim the deduction. That’s down from about 21 percent who write off mortgage debt under current law, the TPC says.”

From the Washington Post. “Of the many changes to the U.S. tax code proposed in House Republicans’ plan released this week, few are proving to be as contentious as the cut to the mortgage interest deduction (MID). But the rhetoric about ‘middle-class families’ is largely at odds with the reality of who actually owns half-million dollar homes in the U.S.”

“Nationwide, only about 6 percent of new mortgages are valued at over $500,000, according to a report by the United for Homes campaign, a group that advocates for reforming the MID and making housing more affordable for low-income families. That figure is based on an analysis of mortgages issued in the United States between 2013 and 2015. If your mortgage is over $500,000, in other words, you’re already in the top tier of American homeowners.”

“But the fraction of households affected by the proposed MID change is significantly smaller than the 6 percent figure would seem to suggest. Nationwide, approximately 63.9 percent of families own their own homes according to the latest census data. And data from the Census and independent research firms indicate that about 65 percent of homeowners currently owe at least some money on their mortgages.”

“So in a very back-of-the-envelope fashion, we can say the following: roughly 42 percent of American families (or 65 percent of the 63.9 percent who are homeowners) are currently paying off a mortgage. If 6 percent of them have a mortgage over $500,000, that means that approximately 2.5 percent of Americans are currently paying mortgages on homes valued at $500,000 or more.”

“If half-million dollar homes account for a small portion of the mortgage market, in other words, they affect an even smaller share of the total U.S. population. And that share of the population is likely to be fairly well-off: if you can afford a down payment and monthly payments on an $600,000 house, for instance, you’re not exactly struggling financially.”

“‘There is no policy rationale for the federal government to continue to subsidize mortgages of more than $500,000,’ said the National Low-Income Housing Coalition in a 2015 report. ‘Certainly the few people who can afford to borrow more than $500,000 in home mortgages can afford to pay more in taxes.’”

“Further compounding the issue, the mortgage interest deduction is one of the reasons why home prices across the country are so expensive to begin with. A working paper published earlier this year by economists at MIT, Princeton and the University of Copenhagen concluded that mortgage interest deduction induces homeowners to ‘buy larger and more expensive houses.’”

“That paper also found that the MID has ‘a precisely estimated zero effect’ on the rate of homeownership — people who can afford to buy a house will do so regardless of whether or not a mortgage interest deduction is in place. It’s hard to square those findings and the overall modest impacts of the GOP proposal’s mortgage interest change with the apocalyptic rhetoric coming from its opponents.”