I get periodic emails from John Burns Real Estate Consulting.
Today’s email was particularly enlightening. I’ve reproduced it below and I recommend everyone sign up for it.
Tax Proposal Could Wipe Out Housing Market
Executive Summary
You may be aware that the Bush administration is proposing to eliminate the tax deduction on mortgages in excess of $227,000 to $412,000 (depending on metro area). The proposal also reduces the tax break on all mortgages to a 15% credit. While those of us who live in expensive housing markets initially believe that the odds of this passing are next to zero, especially under a Republican administration, we need to remind you of a couple of things:
1. The vast majority of Senators and Congressmen represent areas where their supporters have mortgages less than $227,000. The median existing home price of a home purchased last month was $220,000.
2. In 1986, Congress (under the Reagan administration) passed a tax reform bill that reversed tax benefits created in 1981 that encouraged apartment construction and investment. An 81% increase in multifamily construction from 1981 to 1985 was followed by an even steeper decline in construction.
3. In 1989, Congress passed the FIRREA Act, which effectively wiped out the capital to the home building industry and resulted in a 20% reduction in single-family construction in a 2 year period. A significant Congress-induced reduction in defense spending didn’t help either.
4. In 1997, Congress (under the Bush administration) passed a tax cut bill that encouraged investment in single-family residences. The law has created tremendous wealth for households and investors alike, and helped deplete the IRS coffers during a period when government spending is growing significantly. Since 1997, single-family construction is up 53%.
What would the passage of the proposed tax law due to the new home construction industry? For those who say “but the demographics for single-family housing are awesome,” we point out that those same demographics supported apartment construction in the 1980s when the younger Baby Boomers were graduating from college. The demographics and mortgage rate environment have been phenomenal, but they haven’t created a 53% increase in demand over an 8-year period.
Conclusions
A stable housing market is in the best interest of almost every household in the country. In the past, it has been elected officials that have created booms and busts. Let’s encourage the elected officials to leave the housing market alone or, at a minimum, implement changes over a long period of time instead of the immediate “phase in” of radical changes that has occurred in the past.