Friday, October 14, 2005

Impact of the proposed mortgage interest deduction changes on N.J. real estate

I'd like to discuss the impact on the proposed mortgage interest changes on the local real estate market. I'd prefer more of a discussion format this time, since I'm getting tired of typing up monologues that sound like ranting and raving.


Here are a few reference articles:

http://seattlepi.nwsource.com/local/244579_mortgagededuct14.html

"But President Bush's tax-advisory commission is considering a new limit on the deduction: the maximum mortgage the Federal Housing Administration will insure -- $305,900 in Seattle. That amount varies around the country, with a maximum of $312,895 in areas with very high housing costs, such as San Francisco, and a national average of $244,000."

http://www.detnews.com/2005/realestate/0510/14/A07-348553.htm

"At a time when the National Association of Realtors estimates the median home price at $268,000, the $1 million maximum on mortgages whose entire interest costs are deductible affects relatively few home buyers nationwide. The story is different in California, where the median is $569,000, according to the California Association of Realtors. "

http://www.latimes.com/business/la-fi-taxbreak8oct08,0,1112971.story?coll=la-home-headlines

"A sudden drop in the ceiling "would reduce home values, mortgage lending and home building at the top end of the housing market," the study's authors acknowledged. Their solution: Phase it in gradually. "

http://www.newsday.com/business/ny-bztax4465613oct12,0,3051357.story?coll=ny-business-headlines

"The tax code change would reduce the amount of interest homeowners can deduct on their taxes - a major driver of the local housing market. Currently, one can deduct the interest on mortgages of up to $1 million. The tax panel is looking at lowering that amount to around $300,000, which would leave many homeowners with a larger tax bill and could dampen the housing boom."

http://www.marketwatch.com/news/story.asp?guid=%7B7FD4BBE3-08FD-473E-B4EC-A50128EF0A18%7D&siteid=google

"Such a proposal might introduce risk aversion "soon," Hassett said. "Perhaps as soon as Nov. 1," the deadline for Bush's tax advisory panel to submit its recommendations to the Treasury Department."

http://yahoo.smartmoney.com/bn/index.cfm?story=20051012120304&afl=yahoo

"That could mean dropping the existing $1 million ceiling on the interest deduction to as low as $172,632, or the FHA's single-family insurance ceiling in low-cost communities. The single-family limit for high cost communities is $312,895. "



I do stand behind reducing the mortgage interest deduction limits to reasonable levels. There is absolutely no reason for the level it's currently set at. This deduction has backfired by helping to push real estate prices higher. Therein lies the problem, the deduction was enacted to help with middle class homeownership, however, by pushing home prices higher, it's had an entirely opposite effect. I wouldn't mind seeing the mortgage interest deduction limited to the primary residence either.

Some of the articles propose possible new caps, let's take a look at those caps in reference to the median home prices/salaries/tax rates across Northern NJ to see where and whom will feel the impact short term, and discuss the possible effects in the long term.

Caveat Emptor,
-grim

12 Comments:

Blogger Richie said...

I agree; it should be limited to the primary residence only. The only "people" trying to fight this effort is....

THE BUIDLERS

Builders vow to save home loan tax break

They're afraid of the falling prices of their POS homes. No offense, I know many builders, but they do quality work. When you look at these "mass" developers like Toll Brothers, K. Hovnanian, etc, they use the cheapest materials they can find (ie: scrap board plywood) instead of material that will hold up over the years. The result? Poor insulation, below-average settling, etc. That leads to a higher cost of home ownership.

Just to give you an example of poor quality, I do work for a company who does property management for Condos/Apartments/Townhome organizations. They will not TOUCH a property if it hasn't been in existance for 7 years. They say in the first 7 years, all the tenants do is complain about the problems they have.

-Richie

10/14/2005 07:39:00 AM  
Anonymous Anonymous said...

TIMBERRRRRRRRRRRRR!

Anyone remember RE LP's in 1986 tax law. Killed the industry.

The RE industry has been leeching for to long. Gov't should give more incvnetivers to save and invest not build a stinkin 2nd 3rd or $1 million home. What competitive advantage does our country get from this activity?

10/14/2005 08:20:00 AM  
Anonymous Anonymous said...

Condos IMO will drop at least 50%. DO NOT BUY A CONDO NOW.


No link is available for this from newsletter writer Richard Russell. "Maybe the biggest business in Las Vegas is selling condos in projected or newly constructed high-rise buildings. I'll let you in on a secret, I'm not a big fan of condos."

"In fact, here are my thoughts and predictions regarding the whole national condo scene. When you buy a condo what are you buying? Well, instead of renting an apartment, you now own an apartment, and you pay the financing charge to the bank or mortgage company, and you pay the upkeep to the real estate company. And above all, you hope the price of your condo goes up."

"Here's my prediction. Within five years or less the condo situation will collapse, condo-owners will see the value of their condos heading towards zero, and they will be able to rent a similar condo for far less than the cost of carrying the condo that they 'own.'"

"As condo prices collapse, 'condos for rent' will cover the landscape. Tens of thousands of condos will be offered 'if you will just take over the mortgage payments and upkeep charges.' In other words, condos will change hands for zip, nothing. if the new owner will simply take over the cost of carrying the damn condo."

"In all, the whole condo rage will be seen as a period of madness. People who paid today's high prices for condos will wonder how the devil they can get out of their ill-considered commitments. My definition of a condo; 'A chunk of debt surrounded by an expensive apartment that could be rented for a lot less.'"

10/14/2005 11:15:00 AM  
Blogger Richie said...

I've never understood the benefits of owning a condo..

You pay a monthly maintenance fee, I'm guessing it's not less then $100 per month, upwards of $300-thousands for "prestigious" properties. Mind you, they don't reduce this rate if they have no work do to (ie: snows less this year as compared to last).

You're still paying all the property taxes.

You must pray you don't live next to an arsonist. Condo's are packed so tightly, that even if one goes up in flames, it puts the whole community at risk.

Everything looks the same on the exterior; I can only imagine how confusing this can be when you're trying to find home...

Condo associates have zero tax liability, all the tax liabilities fall on the condo owner(s).

I dunno, I guess if you don't want any property to take care of, it's nice, but you're still paying for it monthly.. Not to mention your neighbors can probably let you know if you got lucky last night.

Seems cheaper to rent a nice apartment! You get everything included above, at a fraction of the cost!

-Richie

10/14/2005 01:51:00 PM  
Blogger grim said...

Last gasp effort by the lenders to keep the party going.

Banks, anxious to keep the real estate boom going, up typical mortgage loan limits.

I'm a little disappointed with the guess at the 400k limit, I would have expected much much more. I had originally thought that the lenders would have spiked the punchbowl with the 40-year fixed by this point, but I guess that was a tough one to swallow.

40-Year Fixed-Rate Mortgage

You can only inject so much liquidity into the market before nobody cares anymore. The fools have bought it all up, no sense opening up another bottle, everyone is drunk and passed out. Only thing left to do is wait for the hangover.

-grim

10/15/2005 10:31:00 AM  
Anonymous Anonymous said...

OCTOBER 17, the big hangover begins.

HAHAHAHAHAHAHAHAAHAHAHA

10/15/2005 11:26:00 AM  
Blogger Richie said...

How many crazy people are there that are falling for this "low payment" 40 year plan? I've read many articles where they say the math just isn't there.

For example; let's take a $300k loan over 30 years:

Interest over that period is: $347515
making the cost $647515

For 40 years:
Interest: $492307
making the cost: $792307

So essentially; not only are you overpaying for the house; your overpaying your loan as well.

-richie

10/15/2005 12:23:00 PM  
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