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Special-Interest Politics: Real-Estate Lobby Edition

Richard Rubin of the Wall Street Journal tweeted this quote from Doug Holtz-Eakin this week.

I assumed that Holtz-Eakin wasn’t talking about the tax provisions that allow businesses to deduct their business costs from their tax base, such as accelerated depreciation, or the ones that are meant avoid the double taxation of income, such as the deferral of taxes on non-repatriated business income earned (and taxed) overseas.

On the other hand, that quote made me think of the furor from the real-estate industry to the announcement that the Republicans’ tax framework plans to double the standard deduction. Why? Because while the mortgage-interest deduction was preserved in the plan, it would mean fewer taxpayers using the deduction. The Wall Street Journal reported this a few days ago:

One goal of the GOP framework is to simplify the tax code by eliminating preferences that distort economic behavior. Most itemized deductions other than mortgage interest and charitable contributions would be nixed. But the individual standard deduction would increase to $12,000 from $6,350 ($24,000 for married couples) to reduce taxes for most Americans.

The Realtors are upset because they say this middle-class tax cut would make fewer taxpayers use the mortgage-interest deduction. The National Association of Realtors trashed the framework in a statement, saying it “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase” and ensure “that only the top 5 percent of Americans have have the opportunity to benefit from the mortgage interest deduction.”

There is so much wrong there that I don’t know where to start. First, notice the entitlement mentality on display here. It is true that for years government has taken it upon itself to prop up homeownership — with various degrees of success. Yet that doesn’t mean that this is a good idea or even within the proper scope of the role of government. So to the extent that the framework removes some of these distortions, it is a good thing.

Moving to a system where fewer people itemize is also a good thing. Tax simplification doesn’t simply bring more fairness to the tax code — it increases efficiency, and it saves taxpayers money and time by reducing their compliance costs.

Third, this quote implies that everyone benefits today and that losing this deduction would mean higher taxes for taxpayers. Wrong. Today, roughly a third of taxpayers itemize and claim the deduction. From MarketWatch:

In 2018, 35.4 million households are expected to claim itemized deductions for mortgage interest, according to a study released in May by the National Association of Realtors and auditing firm PwC. Comparatively, the report estimated that 40.7 million taxpayers will report itemized deductions in 2018 for property taxes. (The U.S. Census Bureau estimates that there are roughly 117 million households in the U.S., which would mean that just under a third claim the mortgage interest deduction).

This is a good read, too. Research has shown that the mortgage-interest deduction mostly benefits higher-income earners. This is from Mark Calabria back in January 2017 (he was at the White House):

Fully 75 percent of federal dollars — including tax expenditures — used to subsidize housing goes to high-income households through the mortgage interest deduction and other homeownership tax benefits. Seven million households with incomes of $200,000 or more receive a larger share of these resources than the 55 million households with incomes of $50,000 or less, even though lower-income families are far more likely to struggle to afford housing. Half of all homeowners receive no tax benefit from the mortgage interest deduction, and almost all of the tax break goes to households with incomes above $100,000. At the same time, only one in four of the poorest households that are eligible for housing assistance get the help they need because of chronic underfunding.

In addition, like most subsidies, the mortgage-interest deduction artificially inflates the price of homes. That means that homeowners don’t really benefit from it because, though they do sell their homes at higher prices than they would be worth without the subsidy, they also have to buy over-priced homes.

And as Jeff Dorman explains in this piece over at Forbes, the claims that the deduction, by encouraging homeownership, has a positive impact on the economy is dubious:

Yet, thanks to a new study out based on Danish data, many people are now wondering if there is anything positive about this tax break. While the debate is not settled, right now the answer appears to be no. The mortgage interest deduction is nothing more than rent seeking on behalf of the real estate industry. It confers no benefit to society as a whole.

What the new study by economists Jonathan Gruber, Amalie Jensen, and Henrik Kleven showed, at least in Denmark, is that the mortgage interest deduction did not boost home ownership rates, only prices and the amount of money that people borrowed when they bought houses. The official rationale for a tax code that favors debt related to houses is that home ownership creates benefits to society because it makes people feel more invested in their communities and should thus be encouraged. If the mortgage interest deduction only increases mortgage debt and home prices, not home ownership, then it is a failed policy and its repeal should be considered.

MarketWatch adds:

At the same time, the tax break doesn’t seem to incentivize homeownership a whole lot. Government data show that the homeownership rate in Canada (69%) is actually slightly higher than in the U.S. (63.7%), despite the fact that the Canadian tax code doesn’t include any deduction for mortgage interest paid. And rental households obviously don’t see the tax benefit, since they don’t have access to it. “It’s not clear that the U.S. has had a boon of homeownership because of the mortgage interest tax deduction,” Chacón said.

These results are consistent with the findings of many other studies, such as this one by my colleagues Jason Fichtner and Jacob Feldman. See this very recent study’s findings:

We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.

There is so much more out there on the issue. While I have my issues with the doubling of the standard deduction (mostly I don’t like that it kicks more people off the tax rolls), I recognize that it will bring very needed simplification to the tax code. The furor of the real-estate lobby is evidence of that. Their criticism should be ignored for the benefit of all.

Realtors Go on $11 Million Lobbying Spree

Washington’s most powerful trade associations spent more than $30 million on lobbying in the third quarter as Congress ramped up efforts to overhaul of the U.S. tax code.

Real estate groups were among those spending heavily, according to lobbying disclosures released Friday for the three months ending Sept. 30. The National Association of Realtors, routinely among Washington’s biggest spenders, doled out $11.1 million during the period. The National Association of Real Estate Investment Trusts spent $1.23 million, a record for the group.

The White House and Republican congressional leaders released a framework for overhauling taxes on Sept. 27, three days before the end of the quarter. Several groups have said they lobbied tax-writers during the months leading up to the release, including an effort that succeeded in killing a proposed levy on imports. Trump has said the legislation will be “the largest tax cuts in U.S. history.”

The Realtors have been fighting to preserve the federal deduction for mortgage interest. While the proposed tax framework would retain “tax incentives for home mortgage interest,” the NAR is concerned that another measure — a proposed increase in the standard deduction — would render the mortgage deduction less valuable to many homeowners.

US home sales ticked up in September as Houston recovers

U.S. home sales rose slightly last month as the Houston housing market quickly recovered from Hurricane Harvey. Still, a shortage of available homes is thwarting many would-be buyers and limiting sales.

The National Association of Realtors said Friday existing home sales increased 0.7 percent to a seasonally adjusted annual rate of 5.39 million. That’s the first increase after three months of declines.

Yet sales have fallen 1.5 percent from a year ago, the first year-over-year decline since July 2016. That’s because so few homes are for sale, particularly at lower prices. Buyers have bid up housing costs: The median home price rose to $245,100, up 4.2 percent from a year ago. That’s faster than wage gains.

“It’s simply impossible to sell more homes when the number of homes for sale keeps falling,” said Svenja Gudell, chief economist for housing data provider Zillow. “And the parts of the market most in need of more homes for sale, the low-to-middle segments, are also those experiencing the biggest inventory shortfalls.”

Home construction has been slowed by a shortage of available workers, developers say. Home construction fell 4.7 percent last month, partly because of the hurricanes. And many home owners are reluctant to sell with so few other houses available, creating a vicious cycle.

New construction may slow even more in the coming months, keeping inventories low, the Realtors said. Construction workers — and building materials such as lumber — are being diverted to repair and rebuilding work in the aftermath of the storms and the wildfires in California. That should slow new home building and limit the number of homes for sale.

Employers are hiring and mortgage rates remain low, which typically would lift sales. But the number of affordable homes available is falling sharply, according to data from real estate brokerage Redfin. It calculates that the number of newly-listed homes for less than $260,000 plunged 14.9 percent last month from a year ago. New listings priced between $260,000 and $470,000 fell 4.7 percent.

Only homes priced above $470,000 — the most expensive one-third of the market — saw listings actually increase, by 2.3 percent.

The number of homes for sale sank 6.4 percent from 12 months ago to 1.9 million homes, the fewest in any September since the Realtors began tracking the number in 2001.

In Houston, sales rose 4 percent from a year ago after plunging 25 percent in August. Lawrence Yun, chief economist for the Realtors’ group, said some of that gain may reflect investors purchasing damaged properties.

In Florida, Hurricane Irma sharply lowered sales last month, which were 22 percent lower than a year ago, the Realtors said.

Sales fell more than 15 percent from a year earlier in Miami, Fort Lauderdale, Jacksonville, Orlando and Tampa, according Redfin. Sales in Miami plunged 38.4 percent.

“The housing market is running on fumes due to low inventory,” said Redfin chief economist Nela Richardson. “The inventory shortage is most severe for affordable homes. There has not been an increase in homes priced under $260,000 in two years.”

Bob McVey of Georgetown named Delaware Realtor of the Year

The price of liberty is eternal vigilance.

North Bay fire victims to face construction worker shortage – KGO

Homeowners who lost their homes in the North Bay wildfires may find it difficult to locate construction workers to rebuild their fire-leveled houses.

That’s one of the issues raised by the chief economist of the National Association of Realtors, who spoke to ABC7 News after giving a presentation to the Santa Clara County Association of Realtors 2017 conference in Santa Clara on Thursday.

Lawrence Yun, Ph.D., says construction workers from across the country, including California, have been lured away by bonuses offered to help with massive hurricane reconstruction in Florida and Texas.

“With other regions of the country also facing a large shortage of construction workers,” Yun said, “I think this rebuilding activity will be a multi-year… it may be three, four years out before there’s some normalcy in the real estate market in the Santa Rosa region.”

TAKE ACTION: How you can help victims of the North Bay fires

Dr. Yun says there also will be some short-term concerns about missed mortgage payments because of homeowners who have lost their jobs as a result of businesses destroyed in the North Bay fires.

San Jose mortgage broker Pam Foley suggested, “maybe they can create forbearance on the loan, which postpones the payments or postpones collection of the payments, but they should start that conversation as soon as possible just so the lender’s aware.”

Several real estate firms were busy soliciting donations at their booths at the real estate conference to help fire victims. Some of the victims are real estate colleagues.

Doug Goss and Jim Myrick at Keller Williams Bay Area Estates in San Jose and Los Gatos said they knew of seven Santa Rosa area realtors who lost their homes.

Keller Williams also sent a load of emergency supplies to help their colleagues.

Associates at an Alain Pinel office have raised $24,000 so far. The vice president of the Santa Clara County Assn. of Realtors, Anne Hansen, has made a rental property she co-owns available gratis to an elderly couple who lost their North Bay home to fire.

“I mean you’re homeless, where are you going to go? And you’re in your 80’s, and you’re breathing all that smoke. So they can stay as long as they want, really,” said Hansend.

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