Owning your own home has always been an integral part of the American Dream. For as long as I can remember, it has ranked right up there with motherhood and apple pie. So, it was stunning to see a federal tax overhaul that has taken direct aim at two pillars of home ownership. They are the property tax deduction and the mortgage interest deduction.
Many of the issues that have put home ownership under pressure are structural and related to the aftermath of a massive financial crisis. Lending practices have loosened somewhat. However, the gig economy, high student debt and job insecurity have all played a role in driving people away from ownership and into the rental market.
Today, one would think that our representatives would be trying to increase home ownership rates. It was only last year when home ownership rates dipped to a 50-year-low. Although that number has recovered ( up 1% ) it would still behoove Congress and the President to be thinking in terms of increasing ownership rates. However, the opposite appears to be happening.
This is particularly true of middle class owners in states with high property values, and property taxes. Here is a summary of what is currently on the table in Congress:
The mortgage interest deduction:
First in the cross-hairs was the mortgage interest deduction. The House version of the bill would cap that deduction for a loan of $500,000. The Senate’s version would keep the cap at $1 million, but would eliminate deductions for refinancing unless they are directly tied to home improvement.
A $500,000 loan is not a big loan in high-end markets. In lower Westchester, White Plains is one of the more affordable markets, and the median home price today is over $600,000. For neighboring communities, it is much higher. Stipulating how the money from refinancing can be spent, makes tapping the equity in your home for things like medical expenses (which can be emergency issues) more problematic.
The property tax deduction:
Capping that deduction at $10,000 as suggested in both versions of the bill, is very thin gruel even for middle class homeowners in states like New York, California, Illinois etc.
The point here is that Congress was perfectly willing to take straight aim at home ownership. This is something, that although toyed with in the past, was always quickly taken off the table.
So, what gives?
It could be as simple as the fact that the corporate and high income tax cuts will explode the deficit to the point where they had no place else to go for financial cover. These last bastions of middle class solvency had to end in order to secure the other tax cuts they had planned.
Or…is something different afoot…
Since the beginning of the mortgage meltdown of 2008, the very concept of homeownership has been cast in an increasingly dubious light. Just a quick Google search with the follow phrase “is owning a home a good investment” produced results that were largely negative or neutral. There was only one link that had a truly positive outlook.
The number of detractors is quite amazing since it flies in the face of strong historical data. Home ownership is directly linked to wealth accumulation. In the long run, owning a home has beaten renting time and again. And if history doesn’t provide strong enough evidence, soaring rents that are displacing tenants right and left should.
Proclaiming that renting is the greatest thing since sliced bread works only during slumps like the one we had following the crash. Once the market picks up, those nice low crisis-driven rents shoot higher leaving tenants scrambling for less expensive digs. Only owning your own place can stabilize the expense of keeping a roof over your head. Yes, taxes can rise and so can general upkeep. However, the crazy roller coaster ride we see routinely in rental markets are rare for homeowners.
Nationwide, inflation adjusted rents have increased 64% between 1960-2010. And everyone knows what has happened to rents since 2010. They’ve gone through the roof. In 1960, the percent of cost-burdened renters was 24%, in 2014 it was 49%. That number is only getting worse as the housing “crisis” forces more and more people to move further from work and family. The bottom line here is that over time, renting will eat you alive. This is particularly true in a world where incomes are stagnant or declining.
Two groups come immediately to mind: Wall Street and big developers.
I know, I know, some of you are now saying that I have really gone off the rails, but hear me out.
While the banks made out like bandits with liar loans during the bubble, it was Wall Street that got on the gravy train after the crash. Firms like Blackstone started scarfing up foreclosure properties like they were going out of style, converting them into rentals in massive numbers.
This has literally turned the rental market on its head. Prior to the financial crisis, the rentals had been dominated by mom and pop landlords. Now after spending over $25 billion on more than 150,000 homes, the rental market is dominated by institutional investors. These include private-equity firms like Blackstone, as well as REIT’s and hedge funds.
Back in the pre-housing crisis days, condos in varying price ranges were springing up everywhere in New York and throughout the nation.
Today, developers are ignoring the crying need for new reasonably priced condo inventory while building nothing but luxury rentals. Don’t even get me started on moderately priced rentals. Municipalities are engaged in massive arm-twisting/tooth-pulling tactics to force minuscule percentages of affordable inventory out of developers.
This is doing nothing to help boomers downsize or millennials take their first baby steps into homeownership. In fact, it is gumming up the works. Seniors in my neck of the woods are stuck in their 3000+ sf homes. Many are aching to get out from under, but given what rents have been doing, they don’t want to rent – and I don’t blame them a bit. They have been waiting and waiting for new inventory that suits their needs to come on market. After half a decade of waiting, it’s obvious that it’s just not happening.
This is not merely a local issue. You see it in the literature everywhere. There are articles galore regarding boomers who refuse to sell their homes to millennials (or anyone for that matter) effectively locking new the new generation out of the housing market. Who can blame them? They have no place else to go except the sky-high rental market that keeps getting ever more expensive.
The reasons given for the endless stream of luxury rentals and the lack of affordable buying opportunities, vary from region to region. In Seattle blame is pinned on high quality insurance standards and lower profitability. In Colorado blame is being laid on a construction defect law that developers find draconian. In Westchester, there is some condo development, but only in the $1 million+ range which isn’t suitable to first-time buyers nor to the majority of downsizing seniors.
According to Thomas J. Sugrue, Professor of Social and Cultural Analysis and History at NYU:
The aftermath of the 2008 housing crisis provided (many) opportunities for profit and plunder … real estate investors … swept into communities ravaged by foreclosures, gobbling up apartments and modest homes at bargain prices. After minimal repairs and cosmetic renovations, they reap substantial profits by charging high rents, issuing exorbitant penalties for late payments or technical violations of lease terms, and slapping tenants with lawsuits and steep legal fees if they cannot pay up.
In other words, a great deal of developer money is vested in the high-end rental market. It behooves those with such an investment to encourage the lifestyle that goes with renting. Whether that makes economic sense for individuals over the long haul is beside the point.
courtesy of Kheng Ho Toh © 123RF.com
A great deal of money has been invested in the luxury rental market by developers and Wall Street. They have deep pockets and can be very generous with their political donations. It should surprise no one that any version of this tax bill is a dream come true for them.
Many seniors who have been clinging to their homes in regions with high property taxes will be forced to sell. This will push them into the very rental markets they were trying stay away from. It will also free up properties for developers and Wall Street to scarf up as additional rental inventory.
It is probably no coincidence that the biggest impact would be in highly desirable areas where land is scarce and prices are high. Sky-high rentals in areas like NYC, LA, SF are the norm and would result in very high returns.
So, homeownership was wonderful while the 1% could make money off of liar loans and negative amortization products. While the market was geared to making money from home ownership, we were told to worship at the temple of the “ownership society”. Once the elite learned to pull in the big bucks through the rental market, they are now trying to convince people that owning their own home is suddenly a fools game. As Dana Carvey used to say when he played the Church Lady, “How convenient!”
© 2017 – RGHicks – https://thewestchesterview.com – All rights reserved.
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