There is almost no limit to the amount of conflicting advice being offered these days. The editors of the New York Times are appalled by the state of the housing market:
…over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.
Even a recent drop in foreclosure filings isn’t a reason for optimism. April was the seventh straight decline in monthly filings — which include notices of default, auction and bank repossessions — according to RealtyTrac, a real estate data provider. But the decline appears to be largely the result of banks slowing the foreclosure process in order to keep properties off the market until prices recover. The catch is that prices are unlikely to recover as long as millions of foreclosures are imminent.
This isn’t just bad news for homeowners. Selling and building of houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse.
Since the problems in housing are not self-curing, a government fix is in order.
Unfortunately, their prescription—more regulation and compliance—is unlikely to improve the housing market. At best it will prevent things from getting worse.
As I understand it we currently have a ten year overhang in the inventory of housing. Will preventing new properties from coming on the market reduce that? I don’t think so.
Whether we should continue to subsidize the housing market is an interesting question. IMO we should not. However, whatever we do we cannot reinflate the housing bubble and I don’t think we should even try. It already represents an enormous misallocation of capital and the solution to that is to cut the losses and remove the barriers that prevent the capital from flowing to more productive sectors of the economy.
In contrast with the editors of the NYT Donald Marron believes that we need to stop subsidizing housing (among other things):
Hundreds of billions of dollars of spending are disguised as tax cuts.
It’s not hard to see why. Voters like tax cuts more than spending increases. Politicians understand that, so they convert spending into tax breaks.
The ethanol tax credit is a perfect example. Fuel producers qualify for a 45-cent tax credit for each gallon of ethanol they blend into gasoline. Blenders calculate their income taxes like other businesses, then deduct the value of the credit before they send their check to the Internal Revenue Service (IRS).
The ethanol subsidy thus looks like a tax cut, but it’s really government spending in disguise. The Department of Energy could accomplish the same thing by sending out subsidy checks. The same is true for dozens of other tax provisions, such as the business credit for research and development and personal tax breaks for mortgage interest, health insurance, and charitable giving.
Here are the highest valued tax expenditures in the individual income tax:
| Item | Value ($B) |
| Exclusion of employer contribution for medical insurance | 137.7 |
| Net exclusion of contributions and earnings for retirement plans | 126.8 |
| Deductibility of Mortgage interest on owner-occupied homes | 92.4 |
| Lower tax rates on long-term capital gains | 83.7 |
Those four items account for more than half of the total. There are other possible targets (child credit, charitable contributions, state and local taxes, etc.) but those four are the big ticket items. The ethanol subsidy, weighing in at under $10 billion is small potatoes by comparison. Please note: I support eliminating the ethanol subsidy but we need to have realistic expectations of what it would accomplish.
Just for the record I favor eliminating all of those tax expenditures AKA deductions with the exception of lower tax rates for long-term capital gains. However, doing so will have secondary effects we should acknowledge and one of those secondary effects will be to depress the housing market even farther.
WTF?
When there is an over supply the market “fixes itself” by having the price drop until the market clears.
Trying to stop that merely delays the pain and shifts it around from homeowners to taxpayers (granted largely one in the same, but not entirely–i.e. there cold very well be a wealth transfer from non-homeowners to homeowners).
Somebody slap those morons.
Then why do it now? Why not wait till later when the housing market is in an upswing and could possibly handle a phased in removal of the mortgage interest deduction? And would you balance it with a larger standard deduction–i.e. are you trying to backdoor a tax increase? I can’t see any reason to do these things now.
On reason to phase out the home mortgage deduction right now is that we might be at a low for number of people claiming the deduction. It may be politically easier to reduce it when people are pessimistic about the value of homes, then during an upswing.
A full list of all tax expenditures at link, table 17-1–17-4. Pretty amazing how many there are. A lot of the smaller ones which are just special interests grants could be done away with now. I agree with Steve, I would wait for better times to initiate the others, especially the mortgage one.
http://www.whitehouse.gov/omb/budget/Supplemental/
Steve
Heh. Well, as an employer, I don’t get the first two exemptions, I pay. And since I don’t have a mortgage, I don’t get the third. Starting to get the picture as to why I, and so many small business owners, have a problem with the tax code? The exemptions ain’t for those who employ people….. Weird policy.
As for cap gains. That’s a bizarre tax on which I’ve commented so many times…….
The nation’s – in particular the left’s – ability to shoot its dirk off never ceases to amaze.
It will be a decade before the housing market straightens itself out; it isn’t bouncing right back.
This issue is very much like the marginal rates one: if you wait until there’s no risk of slowing the non-existent recovery, you continue the distortions that are among the factors crippling the economy.
Well that is a political argument not an economic one. A similar one can be made for raising income taxes, less people are now in those brackets so less people to squawk (and fewer votes going to the other guy if I do it), but I don’t think now is the time to be raising income taxes, which by the same logic a wealth tax that forces people out of their homes? If it is true that housing is a major factor in the economic cycle such a move would be decidedly contractionary.
And how many years do you think it would be before it bounces back if you get rid of the deduction? Without the deduction I’m selling my house or failing that walking away. I don’t think I’d be alone.
These distortions have been there for decades. I don’t think our current bubble is attributable to the mortgage deduction. I might have played a very minor role, but by and large I think we can all point to other factors that many of us could agree on. Are you really arguing that the problems in our economy go back decades? I’m talking back to the 1950s and 1960s, not just 20 or so years. More like the entire post WWII period. One big cluster fuck in terms of policies?
If that is the case, the that is an extremely strong argument for no more cluster fucks–i.e. no more government policies.
I don’t believe your making that argument Dave. I really don’t believe you are arguing for a tax increase right now.
“It will be a decade before the housing market straightens itself out; it isn’t bouncing right back.”
For what its worth, Gary Shilling is thinking about 5 years, and I recently spent time with a fairly prominent Chief Investment Officer who has it at about 4 years. A decade? Could be. In any event, its a very very long time from the perspective of the unemployed.