Free Money for Homeowners
Uncle Sam wants you to own your own home. Politicians of both major parties agree: home owners make good citizens. People who own their own homes have a stake in their neighborhoods. They care about private property and property value. And when people own their own homes, the government doesn’t have to get involved in landlord tenant disputes. For these and other reasons the government is giving out billions of dollars to encourage U.S. citizens to own a home.
Too bad you have to go deeply into debt to get your share of the money! Unfortunately the government encourages home ownership primarily by making mortgage interest tax deductible. Pay off your home, and you lose the tax deduction. Once you truly own your home, the government loses interest.
So people go deeply into debt, and go bankrupt en masse when the economy heads south. Small hiccups become major recessions. Meanwhile, the mortgage deduction provides no incentive for the poor to become homeowners, because the standard deduction exceeds any likely set of itemized deductions for those with low incomes. Encouraging the poor to own homes by lowering down payments and credit standards has been ruinous to the banking system.
There has to be a better way to encourage home ownership, and there is: free money for homeowners. Instead of paying people to have a mortgage, pay them for owning their own home regardless of debt levels. Do this and we can reduce dangerous debt levels and do a better job of encouraging the poor to own their own homes.
How Much Free Money?
Let us try to roughly match what the home mortgage deduction is worth today for a typical family. The median price of a home is currently (last quarter 2010) around $170,000. For simplicity’s sake let us round down to a nice even $150,000. Interest rates are currently about 5%. Throw in property tax and we bump up to 6%. Multiply $150,000 by 6% and we get a $9000 deduction. With a 28% marginal tax rate we are looking at a tax savings of roughly $2500.
Of course, half the homes are worth more than the median value, and if we round down too much we might send some yuppies into bankruptcy. So let us round up to $3000, but then divide by two since a great many [most?] single family homes have two adults. (Once again, these are illustrative numbers! Discuss with your friendly politicians what numbers you would like to see, and they, in turn can consult with the relevant government bureaucrats to determine what the government can afford.)
For families living in a McMansion with a beach house on the side both mortgaged to the hilt, a switch from mortgage interest deduction to free money for homeowners would be a tax hike. On the up side for said families, the free money – such as it is – would continue after the mortgage is paid off. On the third hand, if we merge the income and payroll taxes together and give a generous helping of free money for everyone, then members of the professional class still get a net tax cut. But the tax incentive to load up on mansions and beach houses will be gone. Prices will likely drop, or at least not recover to bubble values. Oh well, maybe those without a beach house, like your humble writer, can get in on the action…
Free money for homeowners is more valuable to the poor. Currently the mortgage deduction plus other common deductions (state income tax, property tax) is less than the standard deduction for low income homeowners. The mortgage interest deduction does little if anything to encourage the poor to own homes. Indeed, it may make them worse off as it encourages the well off to buy larger homes, thereby driving up property values. Have a fixed per adult citizen benefit gives more incentive to the poor than to the upper classes to own a home.
No more McMansion incentive. If you have the money and want to put it into a large home, by all means do so. But if you would rather save the money, use it for a nice vacation or spend it on a fancy car, you should be able to do so without taking a tax hit. Environmentalists will appreciate the reduced suburban sprawl and vacation home proliferation. The economy could use more investment in productive activities.
A more stable economy. Debt destabilizes. When people have equity in their homes and money in the bank, unemployment equals sabbatical instead of financial crisis. When people use less leverage, home prices stabilize. When banks require more than 3% down, banks can survive some foreclosures, which brings us to the next subject:
Money for a Down Payment
The biggest challenge for the poor is putting together enough money for a down payment. If we simply give free money just to homeowners, then many poor people will be locked out of this important government benefit. On the other hand, creating special programs to help people own a home with little or no money down has been a financial disaster.
A simple solution would be to provide free money for a down payment. The $8000 tax credit for first time home buyers (which has since expired) is a good model. But instead of having a definition of “first time home buyer” we could simply allow people to carry forward unused homeowners’ stipend. If the stipend is $1500/year and you rent for 5 years, you could use the $7500 foregone money as a down payment when you do opt to buy.
The carry over provision does need to be limited if we want it to encourage home ownership. If you could carry over 30 years worth of unused credits, you could use them to buy a home after renting for 30 years, and then sell the home to pocket the cash. Somewhere from 5 to 7 years carry over should suffice to allow a couple to put down a 20% down payment on a starter home in a poor neighborhood without saving any money on their own.
We can make the American dream of home ownership available to low income workers without putting the financial system at risk.