Mortgage deductions

[aerieandy]

Been following the show in Washington, knowing eventually this will be on the block. I have mixed feelings about it but feel certain it will snuff a lot of small projects if it goes away.
The county I live in had a median price for homes in 2012 of 777,500. And the Average was 967,984. I'm not trying to be chicken little, any community that supports housing numbers like these has reserves for sure, but as a very small outfit I do what most of you would deem tiny jobs and I think when an HO takes a tax hit like that, the bathroom reno might take a back seat to other things.
Not interested in a political discussion, just interested in opinions on if the deduction gets cut and how it will effect your business.

Cheers,
Andy

[Lavrans]

Re: Mortgage deductions

Been following the show in Washington, knowing eventually this will be on the block. I have mixed feelings about it but feel certain it will snuff a lot of small projects if it goes away.
The county I live in had a median price for homes in 2012 of 777,500. And the Average was 967,984. I'm not trying to be chicken little, any community that supports housing numbers like these has reserves for sure, but as a very small outfit I do what most of you would deem tiny jobs and I think when an HO takes a tax hit like that, the bathroom reno might take a back seat to other things.
Not interested in a political discussion, just interested in opinions on if the deduction gets cut and how it will effect your business.

Cheers,
Andy

Won't affect mine much, especially after the fallout settles.

I'm thinking long term it would make homes more affordable to some people (house prices overall should drop as most homes prices are inflated because of the deduction), and that may make for more work. Also, more reno of smaller homes, as the SF bubble bursts.

[parkwest]

Re: Mortgage deductions

Taking more money from the people who earned it and giving it to bloated bureaucracies has ALWAYS stimulated the economy in all the places it has been tried before. Just look at the results of this policy in Cuba, N Korea, USSR, Eastern Europe pre-1989, etc.

Basic logic would tell you if your customer has less to spend, then they will be forced to spend less. Pretty simple, eh?

[aerieandy]

Re: Mortgage deductions

Lavrans,
My optimistic side feels the same way, Once the dust settles, it might be better. How much the deduction inflates prices, and how the market will correct is anybody's guess though. People have been talking about the SF bubble since damn near 1906, without land to expand onto I don't see it "popping" anytime soon, besides we just had a healthy correction.
The flip side of my attitude says that at Bay area prices, lots of people are barely hanging on to begin with ....
Aren't you mostly working on boats these days? If so that's an interesting niche for the topic. Whole nuther can of worms.

[Lavrans]

Re: Mortgage deductions

Lavrans,
My optimistic side feels the same way, Once the dust settles, it might be better. How much the deduction inflates prices, and how the market will correct is anybody's guess though. People have been talking about the SF bubble since damn near 1906, without land to expand onto I don't see it "popping" anytime soon, besides we just had a healthy correction.
The flip side of my attitude says that at Bay area prices, lots of people are barely hanging on to begin with ....
Aren't you mostly working on boats these days? If so that's an interesting niche for the topic. Whole nuther can of worms.

I'm working on houses and boats. I'll actually be in the Bay Area for several weeks next month...

Boats, and especially large yachts are certainly in the upper end of construction & cost, but still require a certain amount of efficiency. It's just that you're getting paid for quality over quantity.

The Bay area and a few other places are actually really good examples of inflation due to the MID, in my opinion. I think there are a lot of people in the Bay Area who are benefiting from the deduction- I bet they cut their "rent" costs in half by buying, and most are going to sell long before their payments make it to anything but a small fraction of the capital. That means they get to deduct their rent expenses, which renters can't do.

If the deduction goes away a lot of those people are going to lose their homes. The threat will cause many to try to sell to save money, the market will take a huge drop. I've read that some expect to see houses stabilize at around 50% of today's values.

[Overbuilders]

Re: Mortgage deductions

So a smart move (if the deduction is eliminated) would be to give your house back to the bank, rent for a 2-3 years until the dust settles and prices adjust, then qualify for the house you really wanted at a reduced price. Smokin!

[MarkMc]

Re: Mortgage deductions

If, if, if. Since there is no specific plan in play, let alone plans - the MID will not be the only thing that changes, Iwouldn't sell now and start smokin' just yet.

[Allan Edwards]

Re: Mortgage deductions

Andy:

The mortgage interest deduction isn’t that big of a tax savings. The talk about “limiting deductions” is aimed at the upper income taxpayers. You can only deduct interest on mortgages $1,000,000 and less, and there is a phase out for those with AGI over $166,000. And of course interest rates are low now, so the deduction is worth even less than previous years.

Let’s say you make $500,000 and have a $600,000 mortgage @ 4%, approx. deductible interest is $24,000. Say your deductions take you down to AGI of $466,000, you have to phase out approx. $3,000 in deduction, so now the interest you can deduct is $21,000. Remember the standard deduction is $12,000, so your mortgage interest incremental amount is $9,000. If you are in the 35% tax bracket, the home mortgage deduction only saves you about $3,000 in taxes.

I can’t see that small amount ($3,000) having much effect on homeowner decisions.

[LIHR50]

Re: Mortgage deductions

Allan,

I completely agree, the deduction is not a kings ransom but for some reason many believe it to be a huge savings.

IMO it's not going to affect home purchasing in the least one way or the other, and it's sure not going to affect the homes selling price.

[Lavrans]

Re: Mortgage deductions

Allan,

I completely agree, the deduction is not a kings ransom but for some reason many believe it to be a huge savings.

IMO it's not going to affect home purchasing in the least one way or the other, and it's sure not going to affect the homes selling price.

Most of a homes sales price is about perception, though, right? Yeah- so, that deduction is a pretty significant part of the sales pitch, and has been integral to the buying decisions of many, if not most, of the people who are buying the average home.

That's not the $1,000,000, but then, most of the market is made of homes that are under $200k, and for those people the mortgage interest deduction doesn't just translate to a few thousand in savings, it adds up to a couple grand of tax returns. It decides how nice of a home they can buy, and $150-200/month translates to a lot to those people. That's easily a $50K swing in price, and I'd bet the market reflects that fairly quickly.

[Allan Edwards]

Re: Mortgage deductions

Most of a homes sales price is about perception, though, right? Yeah- so, that deduction is a pretty significant part of the sales pitch, and has been integral to the buying decisions of many, if not most, of the people who are buying the average home.

That's not the $1,000,000, but then, most of the market is made of homes that are under $200k, and for those people the mortgage interest deduction doesn't just translate to a few thousand in savings, it adds up to a couple grand of tax returns. It decides how nice of a home they can buy, and $150-200/month translates to a lot to those people. That's easily a $50K swing in price, and I'd bet the market reflects that fairly quickly.

Lav

As your income decreases, the mortgage interest deduction is worth less, for 2 reasons. 1st, using your example of a $200k home or less, the interest paid is approx $6,000, depending on your interest rate. Might even be lower. The standard deduction is $12,000, so you might not even reach that, and if you do the value of the mortgage interest deduction is only that portion over $12,000 (which you get anyway). Very few in that income range will even deduct their interest.

2nd reason, say you exceed the $12,000 in all deductions, you are probably in a 15% or $25% bracket, so your tax savings are even less.

[LIHR50]

Re: Mortgage deductions

Lavrans,

There's no way I'm going to believe a tax deduction is why people can afford to purchase a home. It's a perk and nothing more, and if people feel they can afford a home because of that perk, or that perk pushes them into just enough money to purchase that home then in my opinion they can't afford the home. But the government could care less if they can afford it, they just want the sale to happen so all the leaches in the system can take a piece of that sale.

You're so right about perception, not concerning homes selling price, but the perception that people can afford something they can not because of a perceived perk that really has no meat on the bone.

[Lavrans]

Re: Mortgage deductions

Lavrans,

There's no way I'm going to believe a tax deduction is why people can afford to purchase a home. It's a perk and nothing more, and if people feel they can afford a home because of that perk, or that perk pushes them into just enough money to purchase that home then in my opinion they can't afford the home. But the government could care less if they can afford it, they just want the sale to happen so all the leaches in the system can take a piece of that sale.

You're so right about perception, not concerning homes selling price, but the perception that people can afford something they can not because of a perceived perk that really has no meat on the bone.

Perhaps I'm not being clear enough- I'm not saying it's going to stop people from buying a home, I am saying that it's going to affect what they can afford to buy. When I bought my house, that was one of the big selling points made by the RE agent, and the banks took that into account when looking at our income- how much would be freed up by the MID.

I don't really agree the government is what wants the sales- I think it's the banks and the RE agents who want the sales, and that's what's driven the costs up- they can get more sales at a higher dollar amount. It's much more important to have lots of high dollar sales than to have even 90% of the buyers making their payments on time. Average default (before the bubble) causing foreclosure proceedings was 3 months, and most of the homeowners keep making what payments they can during those proceedings (things have changed there).

Nobody points out what the foreclosure rate is- they all look at the percentage increase or the total number filed. Looking through the data, the peak of foreclosures seems have had around 1 in 530 homes in foreclosure.

That's pretty low. In fact, it's absurdly low- Americans who should have been walking away, weren't. If you're a business that means 1 in every 530 customers has stiffed you. Obviously, it's not the foreclosures that hurt the market in the first place- it was the affect on the market and perception of the market, combined with really bad business practices by the banks that multiplied those losses.

The same will be true if they really do eliminate the MID. What it really means has little real value, what it looks like means a lot. If it affects the total dollar amount of sales, that is much more of a problem than the total number of sales, or the quality of the sales.

Found some more- the peak was 4.3% of all mortgages delinquent enough to start foreclosure proceedings. Only a fraction of foreclosure proceedings end in foreclosure, so I'd say at worst they are looking at 2% foreclosure rates. Still not significant enough a figure to hurt a business that depends on mortgages- plenty to hurt one that uses the mortgages as an ante.

[Ted S.]

Re: Mortgage deductions

It's quite simple, really.

If they take my mortgage deduction away I'll just knock up my wife to even things out on tax day.

[Allan Edwards]

Re: Mortgage deductions

By the way, a family of 3 or 4 can make almost $100,000 and stay within the 15% tax bracket. So every $1,000 you can deduct over $12,200 only saves you $150 a year in taxes.

Also, what personal deductions can individuals really take these days? Mortgage interest, property taxes, charitable contributions,.... Since the standard deduction will be $12,200 in 2013, most people will not reach or exceed the standard deduction. So for most the mortgage deduction is either irrelevant or miniscule in its benefit.