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Thursday, September 20, 2018

More than a Home for the Holidays

I’ve been thinking a lot about the tax reform since it passed late last year.  There are a couple of things I want to say, one of which is to highlight homeownership as a savings mechanism—homeownership begins with a down payment and then continues with monthly payments for decades.  This point has not been made much, although I think it’s an important reason to have tax support for homeownership, such as the mortgage interest deduction and the SALT deduction.

Homeownership might as well be a 401(k), except that people do not ignore it—its best feature and the very reason tax policy undercutting it poses a problem.  In fact, more people own homes than save significantly for retirement, probably because they cannot afford to do both.  And, just as we incentivize retirement saving in the tax code, so should we incentivize homeownership if that is people’s preferred savings method.

I make this point in my forthcoming U. of Miami Law Review article, along with the full argument for not curtailing tax homeownership benefits too severely.  You can read it here if interested.

Posted by Margaret Ryznar on September 20, 2018 at 04:54 AM | Permalink


Thanks for all these great comments.

I agree that expensive homeownership is not something that we should be encouraging as a public policy matter--but the reality is that it's how people are spending their money. They put way too much of their money in homeownership to the point that it's their greatest asset. In practice, this means it's their primary savings vehicle in life. The differing regulation of stocks/pensions and homeownership is an interesting distinction.

As for the economics of these tax subsidies--house prices are just shooting up now due to continued low mortgage rates and huge need for affordable houses, despite curtailment of the tax benefits. It's such an odd and somewhat frustrating market, but it is also very local. However, to avoid all of the economic distortions of an itemized deduction, some people have proposed a credit, an above-the-line deduction, or a one-time grant or loan assistance to help with upfront costs. I wouldn't be against considering this.

Posted by: Margaret Ryznar | Sep 22, 2018 4:10:23 AM

I'm pretty skeptical of this argument. First, I'm doubtful that we should encourage people to save through a highly-leveraged non-diversified investment. Not all savings vehicles are created equal. Second, even if we want to encourage saving through homeownership, the mortgage interest deduction doesn't encourage saving (i.e., equity). It encourages non-saving because it subsidizes the debt portion of homeownership. If you actually pay off your mortgage balance, rather than just keep taking equity out through refinancing every few years, you lose the tax benefit.

Posted by: TJ | Sep 20, 2018 10:42:01 PM

The role of tax deductions for mortgage interest and property taxes in increasing the proportion of households who own is almost certainly slim to nonexistent. Canada provides neither deduction in their income tax. As of ten years ago, the US had about four percentage points higher in homeownership rate than Canada. I haven't been able to find updated statistics in a quick search but I don't believe that the decline in homeownership here over the past decade has been matched up north.

The main effect of these subsidies is to increase the sales prices of housing, which would offset the tax benefits, especially for moderate income households.

Posted by: PaulB | Sep 20, 2018 11:33:03 AM

Interesting Margaret . I couldn't read everything right now . But I was wondering , about that assertion of yours , that both are saving tools . I am not so sure , that one could claim it , from the macro economy perspective . This is mainly because of the very fact , that regulation is very different in both cases . While prices of homes , can and cause actually quite often bubbles and troubles , yet , very hard to supervise and regulate it , yet , the pension issue , is more easily inspected and regulated . Correct , many times , financial institutions ( holding or managing pension funds ) are investing in stock markets and alike dangerous investments , but yet , easily regulated . Prices of home , this is bit out of control ( see the subprime crisis , or in china , south-east Asia at the time , inthe 90's ) .

Also , the homes , represent , immediate need for a couple or person . As such, the long term perspective or thinking , is naturally delayed and neglected . Finally , a person may reach retirement age , and find himself helpless in terms of income . That is creating sometimes huge burden on families and social security or social institutions . That is why , there are states , where saving to pension , is simply statutory demand or obligation .


Posted by: El roam | Sep 20, 2018 10:56:07 AM

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