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Does It Make Sense To Subsidize Housing Industry?
Old 08-23-2011, 01:37 PM   #1
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Does It Make Sense To Subsidize Housing Industry?

No Need for QE3: Fed-Speak Enough to Keep Rates Low, Says Axel Merk | Daily Ticker - Yahoo! Finance

NYU finance professor argues that housing subsidies of all kinds harm the country.

Clearly, housing subsidies help the wealthy at expense of the poor and also future generations.

Ha
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Old 08-23-2011, 02:38 PM   #2
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HA,
The link doesn't relate to housing or housing subsidies. But, I agree with you--the government shouldn't be subsidizing home ownership.
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Old 08-23-2011, 02:44 PM   #3
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Originally Posted by samclem View Post
HA,
The link doesn't relate to housing or housing subsidies. But, I agree with you--the government shouldn't be subsidizing home ownership.
here is what happened. There are a series of interviews at this site, I captured the link when I was watching the one about housing subsidies, but appwarently it is not specific.

I don't know how to get the right link.

Thanks for pointing out the problem, I should have tried it before posting.

Ha
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Old 08-23-2011, 02:51 PM   #4
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I'm of the view that housing subsidies don't actually benefit homeowners, but lenders instead.

The subsidy allows buyers to afford more house, so they demand more house, which raises the price of houses. Ultimately, the buyer isn't really getting 'more house', but the same house they would have had at a higher price. The buyer of that that higher priced house needs a larger loan, which he can afford because of the subsidy. Those higher financing costs accrue to the benefit of lenders.
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Old 08-23-2011, 03:13 PM   #5
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What you refer to are called tax expenditures in Washington-speak, specifically housing tax expenditures.

This year the interest deduction will cost the feds ~$100B. Add in property tax and exclusion of profits on the sale of housing and you get to ~$133B.

Over a decade that amounts to more than $1.5T in lost revinue after the borrowing costs to carry all that debt are included.
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Old 08-23-2011, 03:25 PM   #6
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Originally Posted by haha View Post
here is what happened. There are a series of interviews at this site, I captured the link when I was watching the one about housing subsidies, but appwarently it is not specific.

I don't know how to get the right link.

Thanks for pointing out the problem, I should have tried it before posting.

Ha
Is this the article? Housing Fix: End the Government

Quote:
NYU finance professor Viral Acharya writes in his new book Guaranteed to Failthat the only way to fix the housing market is to end government subsidies like the mortgage interest tax deduction.

The less told story on such subsidies is what they have done to generate more demand and push up prices, he says. "One the one hand you are actually getting all your subsidies, but you are actually paying more for the property you would have liked to consume," says Acharya. "Therefore the real subsidy goes only [to those] at the very top. It is for people who are buying a second house. It is for people who are buying more land than they would otherwise."
It is a good point. Whether the deduction continues is likely to be discussed over the next few years. My guess.... they will not do anything to change the rules till the housing market gets back on its feet.

Then, if there is serious talk about the debt and deficit... I would expect they will consider capping the deduction somehow with a lifetime cap on the amount and number of homes/properties.
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Old 08-23-2011, 03:27 PM   #7
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What you refer to are called tax expenditures in Washington-speak . . .
Yep, gotta love the lingo and the inference--that the money was really Washington's and they "lost" or "expended" it by leaving it with taxpayers who earned it.

The dishonest use of language should be called out at every turn.
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Old 08-23-2011, 03:44 PM   #8
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Yep, gotta love the lingo and the inference--that the money was really Washington's and they "lost" or "expended" it by leaving it with taxpayers who earned it.

The dishonest use of language should be called out at every turn.
It's not that the money is "Washington's and they 'expended' it by leaving with taxpayers who earned it" it's that these tax deductions are economically indistinquisable from direct cash payments (i.e. spending programs).
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Old 08-23-2011, 03:52 PM   #9
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103 million dollars to subsidize Internet connections for people who live in rural areas. What is that about?
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Old 08-23-2011, 04:01 PM   #10
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Is this the article? Housing Fix: End the Government
I may not agree with housing subsidies, and I can think of several good reasons for getting rid of them; but one of those reasons isn't . . .

Quote:
More bad news on the housing front today, as the housing market can't seem to find a bottom.

New-home sales fell in July by 0.7% to the lowest point since February, the Commerce Department said Tuesday. Sales for June were also revised downward to negative 2.9% from the previously reported decrease of 1%.
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Old 08-23-2011, 04:06 PM   #11
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Is this the article? Housing Fix: End the Government
Yes that is it. Thanks.

Ha
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Old 08-23-2011, 04:09 PM   #12
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I'm of the view that housing subsidies don't actually benefit homeowners, but lenders instead.

The subsidy allows buyers to afford more house, so they demand more house, which raises the price of houses. Ultimately, the buyer isn't really getting 'more house', but the same house they would have had at a higher price. The buyer of that that higher priced house needs a larger loan, which he can afford because of the subsidy. Those higher financing costs accrue to the benefit of lenders.
+1

For the significant majority of buyers, it's not the price they are really concerned about, it's the effective after-tax monthly payment. And to the extent that low interest rates and the mortgage interest deduction decrease the effective monthly payment for a home at any given sale price, sales driven by monthly payments will simply skew the market to inflate the prices of homes whose "true prices" in the absence of the mortgage interest deduction and the Fed's War on Savers would be considerably lower, say 1/4 to 1/3 lower in some cases.

But unfortunately this is the *worst* time to get rid of the deduction -- a time when the market is already depressed. Better would have been to do it in a strong housing market and strong economy, phasing it out over a period of (say) 10 years so that existing mortgage holders would still get the deduction, next year's buyers would get 90% of it, and so on. I tend to think an "all in" and all-at-once elimination would be too devastating to the market.
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Old 08-23-2011, 04:25 PM   #13
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It's not that the money is "Washington's and they 'expended' it by leaving with taxpayers who earned it" it's that these tax deductions are economically indistinquisable from direct cash payments (i.e. spending programs).
Where does that logic end? Is every dollar not sent to DC indistinguishable from cash payments? Why isn't failure to raise all tax rates by 5% a "tax expenditure?" We've got perfectly good words that describe what we're talking about accurately. "Tax deduction" is understood. "Tax credit" is understood. "Government spending" is understood. "Tax expenditure" is abominable newspeak.
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Old 08-23-2011, 04:29 PM   #14
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But unfortunately this is the *worst* time to get rid of the deduction -- a time when the market is already depressed.
Maybe not. A 10% haircut on a formerly $250K house will be $5000 less now that they house is worth only $200K. "Ak-sen-shoe-ate the positive . . ."
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Old 08-23-2011, 04:33 PM   #15
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Why isn't failure to raise all tax rates by 5% a "tax expenditure?"
Because in one case we're talking about a specific benefit to specific individuals for the purpose of advancing specific policy goals and in the other case we're not. One is a government program while the other is general revenue raising.
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Old 08-23-2011, 04:53 PM   #16
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Getting back to housing, this subsidy skews behaviour in an unproductive way, but there is no easy way to remove it.

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But unfortunately this is the *worst* time to get rid of the deduction -- a time when the market is already depressed. Better would have been to do it in a strong housing market and strong economy, phasing it out over a period of (say) 10 years so that existing mortgage holders would still get the deduction, next year's buyers would get 90% of it, and so on. I tend to think an "all in" and all-at-once elimination would be too devastating to the market.
Phase out over 10 years seems reasonable. It might pull forward some activity, which is probably not a bad thing right now, and might help a bit with the high number of unsold new homes.

It would also spur the building of more multi-family housing, which should lower the overall cost of living options of middle and lower income families.
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Old 08-23-2011, 06:38 PM   #17
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Where does that logic end? Is every dollar not sent to DC indistinguishable from cash payments? Why isn't failure to raise all tax rates by 5% a "tax expenditure?" We've got perfectly good words that describe what we're talking about accurately. "Tax deduction" is understood. "Tax credit" is understood. "Government spending" is understood. "Tax expenditure" is abominable newspeak.
No any money that you retain is a tax expenditure. You only think the money is/was yours. If you complain again, we just may take it all. How could you be so greedy !

We have people and programs that we have deemed more deserving of that money than you. But we appreciate your effort to further help along those efforts.

- Keep up the good work.
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Old 08-23-2011, 06:58 PM   #18
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We need a "strawman" emoticon.

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Old 08-23-2011, 08:16 PM   #19
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Why isn't failure to raise all tax rates by 5% a "tax expenditure?"
Actually, I've been arguing this for years. If taxes aren't covering spending...

But I digress.
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Old 08-23-2011, 09:03 PM   #20
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We need a "strawman" emoticon.
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