The Obama administration has proposed a number of new tax increases. The President deserves credit for recognizing that the ballooning federal deficit, resulting both directly and indirectly from the subprime mortgage crisis that preceded his election, must be addressed. It cannot be addressed by the needed budget cuts alone, and unfortunately some tax increases will be necessary. However, reducing tax system support of home ownership by cutting home mortgage interest and real estate tax deductions for high-income individuals and couples for housing is the wrong way to raise taxes.
Allowing the Bush tax cuts for high income individuals (over $250,000 per couple) makes more sense. At that income level those couples currently pay about 20% of their income in federal income taxes after deductions. Not that taxing people is a desirable goal, but the average total federal income tax currently paid by U.S. couples in that bracket is among the lowest in developed countries. While the wealthy owe President Bush their thanks for cutting their taxes by much more than they were cut for an average taxpayer, the expiration of the Bush tax cuts will only raise the effective tax rate on the wealthy to 22%. This should not cause an undue hardship on individuals at that income level, and they will still pay among the lowest federal income taxes compared to their peers in other countries. The new tax rates will also help home values and encourage home ownership in one respect, because the mortgage interest deduction will be worth more to high income individuals and couples at the higher tax rates.
While the expiration of the Bush tax cuts will raise the value of mortgage interest and real estate tax deductions for high income individuals, the Administration's proposal to cap those deductions for those high income individuals and couples is not a smart idea timing wise in the current weak real estate market. It is also unfair to those who had bought their home with the reasonable historical expectation that the mortgage interest and tax deduction would remain sacrosanct. Better revenue generation alternatives are to raise the capital gains rate on high income individuals after first giving them a reasonable time to dispose of fairly liquid capital assets, such as stocks and bonds. However, such capital gain tax increases should not be applied to residential real estate investments, whose values have dropped substantially in the current market, for the aforementioned reasons.
Home equity has historically been the single largest form of savings for most homeowners. With home values down dramatically, their savings rates at near all time lows, and their stock market and retirement plan investments devastated by irresponsible financial services sector practices, this is not the time to adopt any tax policies that would discourage home ownership.
Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD), today announced that the Federal Housing Administration will permit its lenders to allow home buyers to use the new $8,000 federal first time buyers tax credit for their down payment. The credit would otherwise not be available to the home buyer until they filed their next annual federal tax form. In some cases the home buyer would not otherwise have a large enough down payment to purchase the home. To get around that dilemma, HUD will allow FHA's approved lenders to provide buyers short-term bridge loans for up to the amount of the credit. This will enable home buyers to use the funds immediately if they are needed to complete the purchase. This is a wise decision that will help both home buyers and the recovery of the housing market, and is consistent with the intent of Congress in passing the home buyers tax credit.
The Ford Foundation and the MacArthur Foundation are going to invest $50 million in a new nonprofit effort to help municipalities buy foreclosed homes from financial institutions. The foundations hope that the National Community Stabilization Trust will stop or reduce declines in home values. They are optimistic that their investment will attract additional private capital because it will be securitized by the investments, and will also encourage similar efforts by others.
The Ford and MacArthur Foundations deserve the thanks of American homeowners for the creation of the Trust. Despite the substantial amounts of taxpayer money invested by the government to help mitigate the housing crisis, more is needed. These two foundation's worthy effort stands in marked contrast to the paltry or nonexistent efforts of most mortgage lenders who have failed to use the taxpayer money they have received to address the crisis that they created.
The GDP (Gross Domestic Product) has now declined in the last three quarters, the latest decline (6.1%) was greater than expected by most economists. Housing accounted for much of the decline. Business investment and state and local government spending also declined. So when is all this going to end?
On the plus side home prices are showing some signs of stabilizing, and the number of homes sold are finally increasing in many areas. Business inventories have also been drawn down substantially in most sectors, which will lead to more manufacturing activity in the future. Another positive is that most of the stimulus spending has either not yet occurred or had the chance to impact the marketplace. When it does there's a good chance that it, combined with some of the other positive economic factors, will put an end to our economic decline. That end may not signal the beginning of an extremely robust recovery, but it will be nice to see the economy moving forward again, more job openings, and a further recovery of the housing market.
President Obama announced the "Making Home Affordable" program on Wednesday, March 4, 2009. It will contribute to the housing recovery, but won't be a panacea because of its numerous restrictions. According to an analysis by Zillow, a real estate website, about 25% of homeowners nationwide will be eligible. Any step forward is a good step, so we should welcome it and also understand that more steps will likely be needed.
The program has two parts. The Home Affordable Refinance program will enable those who have an existing mortgage owned by Fannie Mae or Freddie Mac to refinance at lower rates. The Home Affordable Modification program provides incentives to lenders to help at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Homeowners can go to FinancialStability.gov to find out if they are eligible, and monitor the site to keep up with details as they become available.
Other parts of the housing crisis solution, such as federal bankruptcy reform legislation, are also in process. We are also optimistic that the Administration and Congress will be willing to take additional steps if they are needed.
We must find a way to reduce the inventory of unsold new and foreclosed homes before the housing market will stabilize. A 10% home buyers tax credit to offset home buyers very real fear of further price declines is the most logical way to approach the challenge. The economic stimulus bill included such a provision, limiting the credit to a maximum of $8,000 for first time buyers only.
Unfortunately, limiting the credit to first time buyers and to $8,000 is too restrictive to accomplish the task. It's modification could be done at a relatively modest cost, and should be considered as part of President Obama's budget plan.
The American Homeowners Grassroots
Alliance is a nonpartisan consumer advocacy organization dedicated to assisting
homeowners understand significant policy issues affecting homeowners and
homeownership, and helping them make their voices heard by state and federal
officials.
The American Homeowners Foundation is an
educational and research foundation providing information and tools to help
consumers make wiser decisions when they buy, sell, remodel, finance or invest
in homes.
