Second housing bust on the way

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Originally Posted By: Gary Allan
While short term bargains are there in real estate, it's an assured loser starting somewhere in the next 10 years. Unless there's a massive increase in population, there will be too much housing available for those who seek it. The early boomers didn't have enough kids.
That is why the borders are wide open.
 
Around here, the housing prices are going down, but not as much as I expected. I think they will go down some more. For example, the house across the street sold for 80K in 2000, and they were asking 146K for it 6 months ago. Now they are asking 129K. According to the govt. inflation calculator, the house is worth less than 100K http://data.bls.gov/cgi-bin/cpicalc.pl. Traditionally, housing prices haven't outpaced inflation as a nationwide average, but this housing bubble kind of threw a monkey wrench in that. Some areas weren't affected by the bubble, others were (a lot). Basically, if something can go up 20% in a year, it can go down. And with a housing surplus, it can go down even more. I think the worst is yet to come. But on the positive side, I don't see any real benefit in high housing prices in the long term.
 
Originally Posted By: Steve S
That is why the borders are wide open.


That provided a ready source of "greater fools" to participate in the bubble. The only problem is, oddly enough, when they figured out they couldn't pay they just walked away from the mortgage.
 
All the more reason to stick with the 20%-30% down payment requirement for mortgages, and stop messing with "programs" and "incentives".
 
Originally Posted By: Kestas
All the more reason to stick with the 20%-30% down payment requirement for mortgages, and stop messing with "programs" and "incentives".


Also I propose taking away the mortgage interest deduction in your tax. This does not make sense, despite everyone is doing it.
 
That's a major cost redistribution modality. If that was ever instituted, it would be in conjunction with a tax relief upon interest revenues to the lenders. That is, it would end up being worse.

There was a proposal to tax electronic transfers of money. Naturally, it discounted "bulk" institutional money transfers ..making the most profitable also the most advantaged. It would bilk the PAYPAL user ..while favoring PAYPAL.
 
Originally Posted By: PandaBear
Originally Posted By: Kestas
All the more reason to stick with the 20%-30% down payment requirement for mortgages, and stop messing with "programs" and "incentives".


Also I propose taking away the mortgage interest deduction in your tax. This does not make sense, despite everyone is doing it.

Yes, the non-home ownership tax should be removed.
 
Originally Posted By: PandaBear
Originally Posted By: Kestas
All the more reason to stick with the 20%-30% down payment requirement for mortgages, and stop messing with "programs" and "incentives".


Also I propose taking away the mortgage interest deduction in your tax. This does not make sense, despite everyone is doing it.

In principle, I agree, except that it'll be another way for the federales to increase their wasteful budget. If we could do it in a way that wouldn't benefit the federales, I'd be all for it. It would probably lower the price of homes.
 
Tempest and Kestas,

How is this going to help the tax of the rest? I think most places in the world do not give you tax advantage for paying interest to finance an asset. This artificially prop up the real estate price of a region when people do not want to "waste it on taxes".

I never say that it should reduce taxes elsewhere to compensate for this increase in taxes (or even hint that there is an increase in taxes this way). The real estate value would drop, because fewer people would need a big debt as a tax shelter, and in the end it all balance out. As fair as the fair tax camp want.

Having a 35% deduction of your mortgage interest is equivalent to artificially inflate your property value by 35%, discourage savings, increase leverage that translate into risk and bubbles (that does not create real growth other than making land strapped area more expensive, and non-land strapped area over build).
 
PandaBear, I too agree with you.

One problem I see is that if this was to go into effect tomorrow, mortgageholders would get hit hard, and only the rest of the populace would benefit. Us mortgageholders would still be holding the full mortgage amount and lose the writeoff, but housing prices would go lower to the benefit of the new buyers. Presentday mortgageholders would suffer from this lag effect.

This mortgage deduction, and to a larger extent the entire tax code, is used as a tool for government (and society) to provide incentives and disincentives for personal actions that are financial. I assume mortgage deduction was put into the tax code as an incentive for people to become homeowners (or prop up housing prices as we are now discovering). Long term capital gains tax is in place to promote long term investing. There are incentives to have babies, drive hybrids, and save for retirement, plus a whole lot more. Sometimes I question the usefulness of the entire tax code.
 
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Sometimes I question the usefulness of the entire tax code.

It largely amounts to "carrot on a stick" centralized planning. It can also be used a weapon. Income tax needs to go away.
 
Kestas,

It won't be going away immediately. Whoever suggested it at the political level will be suicidal. The only remote possibility for it to work would be gradually phase it in (i.e. we will phase it out in 30 years), but do you really believe the US political climate would have a decision or plan that can be made for the next 30 years? People can hardly plan for more than 4 years, let alone 8. This is not just on a political level, but the entire population level. We are not a nation of planner.

The mortgage holder would be screwed too, when property value drop (the certain), people starts dumping their homes and let the bank foreclose them, and the drop in property tax means local government in trouble too.

It is the real elephant in the room, and a bee hives that no one wants to poke at.
 
Now I'm curious. Being a landlord, under your proposed scheme, would I still be allowed to deduct the interest I pay on my rental property on my taxes? Because, if I'm not, then I have to raise the rent to compensate for that loss.
 
But it's value should be less due to housing not being artificially inflated due to tax deductions making it a sensible way to avoid income tax while paying for a place that you need to have anyway. You'll still be competing in the same rental market against home ownership.
 
Originally Posted By: brianl703
Now I'm curious. Being a landlord, under your proposed scheme, would I still be allowed to deduct the interest I pay on my rental property on my taxes? Because, if I'm not, then I have to raise the rent to compensate for that loss.


Yes, because it is part of business expense, not a living expense. In general you can deduct business expense but not living expense.
 
Once you apply an exemption for commercial/rental ..there will be lots more rental to confound the issue.

btw-the transition could be handled in that all current mortgages get to deduct interest, while all written after a certain date will not be able to. That should make the changeover rather easy.
 
Originally Posted By: Gary Allan
Once you apply an exemption for commercial/rental ..there will be lots more rental to confound the issue.


It is not an exemption or exception. As a business entity any expense used to generate income is tax deductible (just like your computer or printer), but you can't do the same for living expense (just like you can't deduct your printer if you make your income from a 9-5 job).

A business that need sales expense may even deduct meals, entertainment, etc.

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btw-the transition could be handled in that all current mortgages get to deduct interest, while all written after a certain date will not be able to. That should make the changeover rather easy.


Until you realize that all of a sudden property price fall through the roof and you may need to sell your home before you finish paying off your mortgage. The only way around it is a hard 30 year limit that gradually phase out, for both new and existing owners. Then hopefully inflation will kick in and replace the current property value with fair value.

Anyhow, talk is cheap, our country is not capable of planning for more than 8 years, let alone 30.
 
Originally Posted By: PandaBear

Yes, because it is part of business expense, not a living expense. In general you can deduct business expense but not living expense.


Then that becomes a subsidy for landlords. Thank you.
 
Originally Posted By: PandaBear
(just like you can't deduct your printer if you make your income from a 9-5 job)


I do believe you can, so long as you only use that printer in connection with your 9-5 job. You can even deduct the space you use for work-at-home arrangements, so long as that space is ONLY used for work-at-home purposes.
 
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