Let me tell you how it will be, There’s one for you, nineteen for me, ‘Cos I’m the Taxman,
Tax policy and its relationship to housing is a big topic. This post will not be a comprehensive treatise on the subject. I will look at several areas of tax policy and see what incentives they create and how changes in these areas would impact housing prices. This includes three broad areas: ownership taxes and subsidies, debt subsidies, and appreciation taxes.
Ownership taxes and subsidies include property taxes, special tax levies, and the impact of proposition 13.
Debt subsidies include the home mortgage interest deduction and its relationship to the personal exemption.
Appreciation taxes are capital gains and income taxes from the profitable sale of residential real estate.
Ownership Taxes and Subsidies
Property taxes have long been a source of local government tax revenues. Real property cannot be moved out of a government's jurisdiction, and values can be estimated by an appraisal, so it is a convenient item to tax. In most states, local governments add up the cost of running the government and divide by the total property value in the jurisdiction to establish a millage tax rate. California is forced to do things differently by Proposition 13 which effectively limits the appraised value and total tax revenue from real property. Local governments are forced to find revenue from other sources. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases.
Proposition 13 tends to limit move-up trading because it requires owners to increase their property tax bill, sometimes dramatically. There are basis transfers and ways around this problem for certain people who qualify, but there is a documented tendency among California home owners to stay in their homes because they end up trapped there by the tax savings. This Wikipedia article has a good discussion of the impact of Proposition 13.
Many people who bought at the peak are seeing property tax relief as prices fall. Most do not realize that their property tax bills will rise with appraised values until they hit their purchase price. They are not locked in to the new lower tax basis. New buyers who enter at lower prices are. For instance, say a peak buyer paid $1,000,000 in 2006. In 2011, his tax basis has been reduced to $500,000 with the surrounding property values. A 2011 buyer who pays $500,000 also shares this $500,000 tax basis. However, as property values rise back to $1,000,000, the peak buyer is going to be reassessed every year until his cap is hit at $1,000,000 plus annual allowed increases. The buyer at $500,000 will not face these same increases in property tax. Timing Does Matter.
Proposition 13 opponents point to the deterioration of California's public schools since its passage as a big reason it should be repealed. However, since our property prices are so volatile, repealing proposition 13 is very unlikely. If we could reduce volatility in the housing market, the impact of Proposition 13 would be negligible, and there would be no need to repeal or reform it. That being said, there is one reform I believe would bring some fairness to this tax. Right now, the yearly allowed increases are less than wage and price inflation. If the escalator in Proposition 13 were tied to the Consumer Price Index, much of the subsidy given to long-term homeowners would be reduced, and tax revenues would better match inflation.
Mello Roos taxes are paid to service and retire development bonds taken out by the original land developer. These taxes come out of a potential buyers money available for a payment, so Mello Roos depress housing prices. One good strategy is to buy in a neighborhood where Mello Roos payments are about to end. The other potential buyers bidding on these properties will all be limited in their loan amounts by the Mello Roos payments, so imminent expiration will not have much impact on pricing. However, your future buyer will not face these payments, and when they do expire, you will see an increase in property value.
Debt Subsidies
Debt subsidies, in particular the home mortgage interest deduction, are seen as a great benefit to home ownership. The benefit is widely overestimated and misunderstood.
First, people fail to understand that to obtain a debt subsidy, you must have debt. You must be making an interest payment on this debt in order to qualify, and you get to reduce your tax burden by a small percentage of the interest amount. In short, you are paying a dollar to save a quarter. There are people who actually seek to maximize their interest payments in order to increase this subsidy. This is really, really foolish. Anyone out there who believes it is a good idea to spend $1 to receive $0.25 in return, please send me as much money as you wish, and I promise to send back 25% of it.
Realtors try to con people with the "throwing your money away on rent" argument. Homeowners buy into the fallacy. Interest is the rent on money. You throw away money on interest just like you throw it away on rent. In fact, people who overpay for housing throw away more money on interest than renters do to obtain the same property, even after the tax subsidy. The only argument one can make for paying extra interest is if you are receiving a return on that investment through property appreciation. We all see how that is turning out.
The main reason the benefits of the home mortgage interest deduction are overestimated is because people forget they must give up the standard deduction in order to obtain it. This is one area where tax policy can have hidden and indirect impact on housing. Changes in the standard deduction greatly impact the benefit of the home mortgage interest deduction. As the standard deduction is increased, the positive impact of the HMID is decreased. In fact, if the standard deduction were doubled, the average American holding a $150,000 mortgage probably would not bother itemizing to obtain the HMID because it would be of no tax benefit at all. This would certainly simplify people's tax returns. A higher standard deduction is also a boon to renters who do not have the option of obtaining the HMID.
When we set up the RentVsOwnulator, we put in a 25% tax benefit from the HMID. Some people have commented that this is too small a number. It is not. Several people have run the calculations both with and without the HMID, and the net difference is only 25% even at the highest tax brackets. Basically, if you want to figure out your real tax benefit, take your highest marginal tax rate and subtract 10%. That will be a much closer estimate to reality. This reduction is caused by losing the standard deduction.
Another facet to the HMID is the cap level. Currently mortgages up to $1,000,000 are eligible for the deduction. Does anyone think this is right? Do you realize you as a taxpayer are subsidizing $1,000,000 mortgages? When the GSEs were set up, they established a conforming loan limit. The reason they did this is because they are mandated to subsidize mid and low income housing. Why is the limit on the HMID any higher than the conforming loan limit from the GSEs? Why are we subsidizing high income borrowers?
If we were to reduce the HMID cap level to $500,000 and adjust it by the CPI going forward, we are still subsidizing relatively high income borrowers ($500,000 is still almost triple the median home price in the US). A reduction in this cap would have the same impact as the lower GSE conforming limit is having: it would lower prices at the high end by eliminating the subsidies.
IMO, the government has no place in subsidizing house prices that are well above the median. One can argue that the government should not be subsidizing anything in housing, but the low and middle income subsidies are here to stay. If we raise the standard deduction and lower the HMID caps, we can greatly reduce the impact of the HMID and the cost we pay for it as taxpayers. This would have the effect of lowering prices on more expensive homes, but it would help stabilize the lower end of the market. That is what the market needs right now.
In a post last week, we examined a proposal from John Burns to subsidize housing further by temporarily doubling the HMID. The problem I have with this is the same one I have with all temporary subsidies: how do you end them? Anyone who buys under temporary terms will be hurt when the subsidies are removed. This will cause everyone involved to lobby Congress to make them permanent. Permanently increasing housing subsidies will only make the problem worse at taxpayer expense. In the short term, the Burns' proposal probably would help stabilize the housing market. If it were not capped it would be a huge tax break for people with large mortgages. It might even ignite another unsustainable rally and postpone the crash temporarily. None of this benefits the housing market long term.
Appreciation Taxes
Should five per cent appear too small, Be thankful I don’t take it all.
A couple of weeks ago, I was contacted by an author named Bill McKim. He has written a pamphlet titled The Financial Crisis of 2008. In it he makes one simple, yet far-reaching proposal that would eliminate volatility in California's residential real estate market: Tax capital gains due to irrational exuberance at a 100% rate. I must admit, that certainly would do it.
Our current system of calculating and enforcing taxes on property appreciation are a big part of the problem, and reform here is necessary. In short, gains on the sale of a primary residence are largely untaxed (there are complicated rules I will not go into here). There is no other asset class that receives such a generous government subsidy. If you sell most any other asset class for a profit, and you will be paying either personal income taxes or capital gains taxes depending on how long you owned the asset. With housing, most people either qualify for the tax break, or they claim they do and don't get caught.
For most very long-term homeowners, much of the gain they recognize when they sell their houses is due to inflation. Taxing capital gains caused by inflation actually hurts the long term homeowner. A homeowner who sells after 30 years may not see any gain in value beyond inflation. The money returned to them has the same buying power as when it was put in to the asset. For the government to take a percentage of this inflation-induced gain is to rob the long-term homeowner of buying power. This is a valid reason not to tax capital gains on housing.
Unfortunately, when the Congress looked for a method of overcoming the tax problem of capital gains on long-term home ownership, the method they chose was deeply flawed. They simply put in a large tax break without regard to ownership period. It becomes a huge tax break for property flippers. Rather than benefiting long-term homeowners and encouraging that behavior, the government ends up encouraging frequent property turnover.
The solution to this tax problem is simple. Adjust the purchase price tax basis by the Consumer Price Index. Long-term homeowners would see a significant adjustment in the tax basis of their home while flippers would not.
The next issue is how much to tax the gain itself. Bill McKim proposes that the government should take it all. This would remove all incentive to buy for appreciation, and it would stop irrational exuberance in its tracks. That is probably not a tax policy that would ever get implemented. However, the idea is sound. Once the basis is adjusted for inflation, the tax rate on gains will greatly impact buyers and sellers. The higher the tax rate on capital gains, the less people will seek them, and the lower the market price volatility will be.
Another way to encourage long-term home ownership is to provide a lower capital gains tax rate only to long-term homeowners. For instance, a person who buys and sells a property and holds it for less than 3 years could be taxed at higher personal income tax rates. People who hold a property for more than 3 years would be taxed at lower capital gains tax rates. This would greatly inhibit the mindless flipping done by people who do not improve property.
Tax policy is complicated, and its impact on housing is important. The tax policies of The Great Housing Bubble contributed to its inflation, and there are many proposals to use tax policy to ease its deflation. There are some proposals I believe would be helpful, and some that would not. Now is a good time to take a hard look at the incentives these tax policies create and ask ourselves if the subsidies we provide as a society are providing us with the benefits we seek.
Today's featured property is a small apartment condo. It is also a 2003 rollback (almost).
On the day I was born The nurses all gathered 'round And they gazed in wide wonder At the joy they had found The head nurse spoke up Said "leave this one alone" She could tell right away That I was bad to the bone
No particular theme for this weekend's post. Sometimes you just want a little testosterone rush...
I know some of you have been waiting for some sponsored posts. We have still been looking for the right property. Quite honestly, prices are still too high, and there are not many truly good deals in the marketplace.
In a normal real estate market (i.e. anywhere other than California), there are two types of properties: 1. Those properties desirable for owner-occupants that trade near rental parity, and 2. Those undesirable properties that trade at prices where cashflow investors can obtain a 10% - 12% return on their downpayment investment. Those are the properties we are looking for.
Right now in the market, there are many properties trading at or below rental parity. These are not hard to find. However, there are no desirable properties trading at rental parity, and the undesirable ones have not fallen far enough below rental parity to be a good rental investment. That only leaves one kind of "investment" property available: the speculative bet with positive cashflow.
One of the least intelligent investment decisions people made during the bubble was paying so much for their speculative bets that the property could not generate enough cashflow to cover the cost of ownership. An investment that consumes more cash than it generates is what Robert Kiyosaki calls an "alligator." It is a great method for losing a lot of money. Our current crop of floplords is finding this out right now.
Prices in many markets are low enough that properties at least do not lose money each month, and some even generate a positive cashflow. The rate of return on these properties is very small, and you can probably earn as much money from a high-yield CD as you can from some of these rentals. However, if there is another bubble, you could make money on appreciation, and in the meantime, you can hold these properties indefinitely waiting for prices to go up.
Personally, I think properties that do not cashflow enough to be a valid investment without appreciation is a foolish way to invest. But then again, I have every confidence my fellow Californian's will create another real estate bubble if given the chance. The bet an "investor" in these properties is making is that the lenders will be stupid enough to loosen credit and create another unsustainable Ponzi Scheme that will cost them a trillion dollars. I just don't see that happening again soon.
We may put up some sponsored posts of properties in this grey area that have positive cashflow and are candidates for future appreciation. It may be a while before we see cap rates in excess of 8%, and with interest rates being very low, it may be a very long time before we see 10% to 12% cap rates in residential real estate. Despite how much prices have crashed in many areas, they are still too high.
There are some properties that are trading at prices that are so low that they do make sense as rentals. However, they are in such undesirable neighborhoods that it may be difficult to keep them rented. We do not want to profile these properties because we do not want to suggest a property that would require the buyer to be a slumlord.
And just so I am not accused of only profiling really awful properties...
35756 Trevino Beaumont,
CA92223: $492,000 new in 2006, asking $122,850 today. That is a property just over 2 years old (December 2006 to January 2009) selling at a 75% discount.
I may add some more properties to the list this weekend. I only looked for 10 minutes on Redfin to find these. Look in any fringe market, and you will see devastation that is almost hard to imagine. Many almost-new houses are selling for less than their replacement costs
Here is some fan mail I received this morning:
"
Roberts assumes too much without any knowledge of the facts.
Like most writers, he takes facts from the garbage can of other writers and
feeds it to the ignorant masses. I am a realtor and this makes me mad. Nothing
could be farther from the truth. A realtor, unlike a writer, has to research the
market in order to place a value on a listing that sells. A home that is
overpriced gets shown with other houses in the same price range. The average
buyer looks a 10 homes before choosing one among them. An overpriced home would
not show well among the 10 other homes the buyer has examined.
A realtor can earn more money by pricing a house low. All
top agents will attest to this. A well price or home will sell twice as fast.
The real estate agent can sell twice as many homes per year by pricing his
listings at a fair price. Only a pen head writer would not have discovered this
fact if he were researching for the truth instead of hoping for a
Pulitzer."
Does anyone else think I am factually challenged?
I must have something left in my Reservoir of Schadenfreude because winding up a realtor does not upset me. I wish I knew what this message was in response to so I could comment further.
It must be very difficult to sell a really undesirable property. It must be very difficult to admit to yourself that you are the bagholder. You were the greater fool. You were the one who paid a King's Ransom for a piece of crap nobody else wants. This is even more difficult when it is a short sale, and the lender is not willing to lower the price enough for you to sell it. The reality of your folly must be hard to ignore when you can't get rid of it.
Today's featured property is a large home on a big lot in Irvine. One would think this combination would be an easy sell. Apparently it is not.
You have to love this realtor comment: "Needs some TLC such as carpet, paint (inside & out),remodeling, landscaping, etc., but very nice neighborhood."
Translation, "OMG, this is a POS. Well, it is in Irvine..."
The truth about real estate is that most people will buy and sell due to life's circumstances. If a family wants to own a home for stability and security because they have small children or if a baby is on the way, they are not concerned with whether or not they are properly timing the real estate cycle. Unfortunately, the real estate cycle moves independantly of our life cycle.
We've only just begun to live, White lace and promises A kiss for luck and we're on our way.
The innocent people who got caught up in the housing bubble -- and there are many buyers who were not motivated by greed -- are paying an hefty price for their own bad timing. Look at what a difference a few years makes.
Let's say you graduated college in 1994. You were probably a bit bummed because the California economy was not doing that well, but if you found a job, you could begin your life. People in that circumstance might have been ready for marriage shortly thereafter, and they probably bought a house between 1997 and 2000. These people, assuming they did not abuse their HELOCs, are not going to lose their homes in foreclosure.
Now look at the circumstances of someone who graduated in 2001. They should not have been ready to buy until perhaps 2008, but with innovations in home mortgage finance, they were able to enter the real estate market early. They were "pulled forward" into 2004, 2005 or 2006. These are not real estate experts (although some probably thought they were), they are just 20-somethings who were given an opportunity to own a home with little sacrifice or saving on their part. Why would they have turned this opportunity down?
Well, the people who were graduating in 1994 are doing OK whereas those who graduated in 2001 or later are totally screwed.
Is this right? Should the real estate cycle really be allowed to have such a capricious impact on people's lives? Does anyone think this system works?
The housing bubble is having an enormous impact on the health of individuals, families and entire
communities. As
with any mass delusion, it is difficult to see beyond the comforting
fallacies to understand the deeper truth; however, it is essential to
do so because the cost in emotional and financial terms of getting
caught up in the mania is very high. Foreclosure and bankruptcy are bad
for individuals, bad for families, and bad for society.
So much of life ahead We'll find a place where there's room to grow,
When I saw the listing photos for today's featured property, I couldn't help but feel compassion for the innocent. (Do you think this means I have emptied my Reservoir of Schadenfreude?) When you see the first photo, your eye cannot help but be draw to the wedding photo on the wall over the fireplace (followed by the bottle on the counter...) Then when you see the kitchen photo, you see all the pictures on the refrigerator. There is another photo with a picture of the happy couple near the TV. (This is horrible staging, BTW).
This couple, this family, is watching their future get destroyed by the housing bubble.
Now before we break out the violins, this was a 100% financing deal, and they owners are not losing any of their money, but their dreams of climbing the property ladder are gone, their credit score will plummet, and they will be shut out of the housing market for the foreseeable future. All because their life cycle lead them to buy at the worst possible time in the housing cycle.
Before the home sits out too long You must flip it
When somethings going wrong You must flip it
When you buy as a flipper, you are a fool. Your task is to find someone more foolish than yourself to buy you out before prices crash. There are bagholders for every price crash. Someone has to own the asset while it declines in value. The trick to flipping is not to be that someone.
Speculative flipping only works when prices are rising. There are a few people who manage to make a few bucks buying at foreclosure auctions and quickly selling before the declining prices take them underwater, but these people are the exception rather than the rule. Most people who made money flipping during the bubble simply bought property, waited for a while, then sold it to some greater fool. That method does not work when prices are falling.
Despite the total collapse of pricing at the bottom of the market and the obvious signs of an impending market implosion, some people chose to buy real estate as speculative flips in recent years. I have already profiled a couple who have changed their minds and are trying to get out, but it is the ones who actually price the property to make a profit I find most interesting. They really believe there is someone out there who is even more stupid than they are.
Today's featured property is one such flipper. I know the penthouse is supposed to be nice, but is the premium really $900,000 or worse yet $1,575,000? Should people really pay $1,000/SF when properties in the same building are selling for less than $400/SF?
Here at the blog we joke about the "analysis" put out there by some of the local realtors. Most of this is thinly-veiled, self-serving bull$hit, or utterly incompetent nonsense. In either case, the purveyors of this information are not widely respected in the world of land development where those with deep pockets often pay large fees for good information. However, there are a number of very good market forecasters who are respected in big-money land development, and these consultants are well paid for the analyses they provide.
There are four main market consulting firms in Southern California that provide detailed market studies for residential land development projects. These are Market Profiles, Real Estate Economics, The Concord Group, and John Burns Consulting. I have met with the principals of all four of these firms at one time or another. They are all highly reputed in the industry.
I recently had a meeting with John Burns just to network and find out what he is seeing in our industry. We ended up sitting and talking for almost 2 hours. He shared with me his proposal for Unlocking the Housing Market Recovery (PDF warning). It is a great report. Over the course of several posts, I intend to revisit many of his proposals to see what the IHB community thinks about it.
The core of his proposal is as follows (from the executive summary):
The U.S. is undoubtedly in the worst financial and economic crisis since the 1930s. Home prices are falling rapidly across the nation, which has resulted in more than $2 trillion in losses in the last two years. The declining stock market has wiped out trillions more. These tremendous losses have created a vicious downward spiral that requires government intervention to avoid a 1930s-style economic collapse. This problem is affecting both Wall Street and Main Street.
There has been a lot of rhetoric and not a lot of facts about the current economic and financial crisis. In this report, we use facts to assess the current situation and provide our recommendations to save the U.S. economy from collapse.
To stabilize home prices, we believe Congress needs to do four things in conjunction with the Federal Reserve and US Treasury Department. Some of our recommendations have already been accomplished, but many of them have not.
1. Stabilize The Banking System - Save local businesses by saving the local employers’ bank.
Continuing insuring deposits up to $250,000 and unlimited amounts in payroll accounts
Close all poorly managed and undercapitalized banks ASAP
Keep lending money to stabilize the best and largest banks
Properly dispose of bad loans, RTC-style, instead of the way it is currently being done
Finance new banks to create competition for good loans
Continue supporting commercial paper liquidity
Continue liquidity guarantees on new bank debt
2. Stimulate Job Growth - Bring more jobs to the economy with short-term stimulus and smart government spending.
Fund infrastructure projects to create jobs
Stimulate short-term spending while recognizing that long-term saving is also needed
Allow companies to utilize their current losses to recapture taxes paid over the last 4 years so they can keep enough cash in the bank to meet payroll
Create government–backed initiatives to help banks lend
3. Stimulate Responsible Home Buying – Stop home price declines by stimulating home buying by responsible individuals, to bring demand and supply back into balance.
Keep mortgage rates low
Keep Fannie and Freddie lending and FHA insuring
Temporarily provide a down payment match to all home buyers
Temporarily double the mortgage interest rate deductions for all homeowners
4. Support responsible loan modifications – Stop home price declines by helping keep responsible people in their homes.
Provide financial incentives for loan servicing firms to modify loans
Create a vehicle to buy loans that have been responsibly modified
There you have it. There is much more detail in the report: Unlocking the Housing Market Recovery (PDF warning). I am not going to bias the comments with any of my own commentary at this time. As I mentioned previously, I intend to revisit some of these proposals.
Just for giggles, lets look at a property offered for sale at 37% off its peak purchase price.
I guess Im always hoping that youll end this reign But its my destiny to be the king of pain
Now let me ask you something: Have you ever felt that you weren't responsible for the things that you do?
I do not like government paternalism. When Ronald Reagan came to power and began our 25 year experiment with government deregulation, I thought it was a good idea. It used to really annoy me when I would see paternalistic politicians who believed they knew what was good for me and for society, and that their ideas of right and wrong should be legislated. Government intrusions into the lives of citizens should be kept to a minimum, and citizens should have the right to make their own decisions and live with the consequences.
Well, maybe not.
I used to believe all of that, but based on what I have witnessed during The Great Housing Bubble, I see good reasons to bring back a little government paternalism.
First, people are not willing to accept the consequences of their actions. People want the right to do what they want and obtain the benefits of their decisions when things go well, but as soon as things go badly, they want the government to bail them out. This goes for individuals, organizations, and entire industries. I have yet to see anyone step forward and say, "I screwed up, and I don't think the government should do anything about it." If gains are privatized and losses are collectivized, then there needs to be a paternalistic government regulator looking out for the collective interest. This means regulation and unpopular restrictions of the choices of individuals and organizations.
Second, even if people were willing to accept the consequences of their actions, sometimes these consequences have impacts on others who had nothing to do with the original decision. If every homedebtor accepted foreclosure, and if every lender accepted the losses without pleading for a government bailout, the economic consequences of their foolishness would still have enormous impacts on all of us who did not participate in the transaction. When people accepting responsibility for their actions still causes excessive collateral damage, then the activity should be regulated to save the rest of us.
Day after day on this blog, I profile properties where the borrowers have spent themselves out of their homes. There is a fascinating, "train wreck" quality to these stories. There are lessons to be learned about managing personal finances in general and mortgage debt in particular. However, most people will not learn these lessons. If given the chance, people will abuse their HELOCs, and lenders will extend the credit to people to allow them to do so. Without restrictions on mortgage equity withdrawal, people will spend their houses and lose their homes.
This conclusion is inescapable. The hundreds of properties I have profiled have clearly demonstrated this phenomenon is not isolated. The hundreds of thousands of foreclosures caused by refinancing and HELOC abuse are a testament to the depth and scope of the problem. If we do not change the system, we will see a repeat of this problem.
Some people are spenders, and some are savers. No amount of education is going to change that. Many of the outrageously pretentious spenders obsessed with conspicuous consumption are not going away. As I pointed out in Southern California's Cultural Pathology, we have many spenders in our midst. These people will spend and spend until their creditors cut them off. Many are dealing with the painful reality of credit contraction right now. If these people were suffering in isolation and not asking for government handouts, I would be inclined to leave the system alone; however, these people are not suffering alone, and they are begging for the government to give them some of my money to support their foolish ways. This is where I draw a line.
Regulating mortgage equity withdrawal would not be a difficult endeavor. The only problem would be the resistance from individuals who want to spend this money and from the lenders who want this business. That will be some significant resistance. It would take something like a million foreclosures and an economic catastrophe similar to the Great Depression caused by this behavior to provide the political will to make this happen. Well... it looks like the political will might be there.
I would ban all forms of cash-out refinancing except for reverse mortgages and home improvement projects with certain restrictions.
There is no good reason for people to increase their mortgages to fuel consumer spending. Anyone who makes this argument because of the economic benefit of mortgage equity withdrawal obviously has not been paying attention to the fallout of The Great Housing Bubble.
Many will argue that cash-out refinancing to fund businesses is a good thing. Tell that to all the failed business owners who are also losing their houses. I believe it is much better to encourage new business start-ups to find capital from other sources. This will prevent a great many dreamers who do not have a viable business plan from doing something stupid that costs them their family home.
I don't have an opinion about reverse mortgages. I do see where retirees whose home equity is their primary savings would want a method of accessing this savings. Given the power of the AARP, banning reverse mortgages is probably politically untenable. Perhaps we have to wait until the baby boomers get evicted in large numbers due to these loans before they will be reformed.
Anyone who builds their own house has gone to the bank for a construction loan. These loans require the borrower to provide receipts and other proof of construction progress before the bank will release the funds. There is no reason that HELOCs for home improvement cannot be done the same way. This ensures that the money is only loaned for property improvements. I would also limit this to 50% to 75% of the actual cost. Home improvement projects do not add value on a dollar for dollar basis despite the BS you see on HGTV.
Short of an outright ban on mortgage equity withdrawal -- which I think is necessary to really solve the problem -- I would propose limiting the home mortgage interest deduction to purchase money mortgages plus approved home improvement projects. If people did not get a tax break by adding to their mortgage, they might be much less likely to do so. If they want the HMID on a HELOC, they would need to go through the construction loan process as outlined above. Years ago, Congress eliminated the deduction for interest on credit card debt. When the lending industry created HELOCs and allowed people to consolidate debts, they effectively eliminated the prohibition on deducting credit card interest. Basically, with HELOCs, all interest can be deducted through loan consolidation. This must stop.
As a society, we have created a system that strongly encourages a borrow-and-spend mentality. Saving in all its forms are punished while borrowing is strongly subsidized and encouraged. The credit orgy of the 00s saw this system taken to its ultimate extreme. The result was a vicious credit crunch, a collapse in asset values, and an economic downturn second in severity only to the Great Depression. Obviously, something needs to change. A little paternalism in the mortgage market is one of a number of necessary regulatory reforms, and despite the idealism of my youth, I now support these reforms.
Today's featured property was purchased in 1991. The owner is losing the home in a short sale. Any ideas how that might have happened?
