Middle Class Homeowners: BEWARE (plus POLITICAL landscaping)

[berni_mccoy]

President *'s tax assessement group convened yesterday after reviewing ways to change the tax system in order to pay for the unbridled spending the administration has engaged in.

One of the ways they recommend changing the system is to lower the cap on mortgages that can take advantage of the tax incentive. As of today, if you have borrowed under 1 million dollars to purchase your home, you can deduct the interest paid against your income. If Bush heeds his panels advice however, that cap will be reduced to $300,000.

This will DRAMATICALLY change the housing market, through a ripple of events that will go something like this:

1. In the vast majority of markets even modest housing is over $300,000 for a single family home. In MA, a 2 bedroom house can easily run $300,000 and 3 bedroom houses are commonly $500,000+. Now that there is no tax advantage, the market of first-time home buyers will be severely reduced. Another reduction of buyers in the market will be people relocating from rural to more populated areas. First-time home buyers are the drivers of the housing market (http://www.buildingonline.com/news/viewnews.pl?id=3591)

2. The drop in buyers in the market will dramatically affect pricing, somewhere between 30-40% immediate price correction, especially on existing homes.

3. Existing homeowners who have less than 20% equity will now be in a NEGATIVE EQUITY situation. The value of the house will be less than the outstanding mortgage by as much as 20%. Some mortgages MAY have clauses for NEGATIVE EQUITY situations. Be sure to read your mortgage agreement (like paying value difference). .

4. Bankruptcy for the home-owner may not be possible with the new stricter bankruptcy laws that will be effective. They may be straddled with a large debt for the remainder of their working lives (can you say 'serf' or 'indentured servant'?).

5. Those with capital will be able to buy into the housing market at a greatly reduced cost (foreclosures). Landlords will pop-up like dandelions and the renting market will heat up as people turn to renting vs. homeownership (whatever happened to 'ownership society').

6. Many of the middle-class still wanting home ownership will begin seeking work and housing in more rural areas and a migration will occur from densley populated areas (blue-regions) to more rural areas (red-regions). This is the beginning of redistricting through economics.

The moral of the story: reduce your debt-load NOW. Increase your equity stake in your house as much as you can. I have no doubt this change in the tax code is coming. We need to be prepared for this very likely scenario.

[displacedtexan]

1. Didn't this happen in the late 80's/early 90's (Bush I years)?

Not the mortgage tax credit thing, but people's houses worth less than they were paying for them?

That was disastrous.

[Blue_In_AK]

14. Yes, that's when I bought my home...

...at a greatly reduced price. It was a foreclosure. Best thing I ever did (even though I was forced into it because my landlady had been foreclosed on and I had to move), because now it's worth twice what I paid for it.

[MissB]

25. That is when our first home was purchased too

And we sold it two years ago for nearly 7x the price. Seven times. Yeah, the first few years were rough with the higher interest rate, but it has allowed us to buy a bit more land with our new (old) home.

It was a great time to buy, if one could swing it. We lucked out because our area ended up appreciating rapidly in the late 90's/early 00's.

[Blue_In_AK]

36. SEVEN TIMES???

Wow, you must live in California. :)

[MissB]

37. No, not there.

Wrong state. Try just a bit farther north. :D

Yeah, it was nearly seven times (from the 50k range to nearly 370k). It also sold the day after its open house. We were thrilled. And shocked.

[BlueEyedSon]

2. I seriously doubt they will get any traction with the mortgage deduction

changes

[eyesroll]

3. This doesn't sound right:

"3. Existing homeowners who have less than 20% equity will now be in a serious financial situation. The value of the house will be less than the outstanding mortgage by as much as 20%. On a $300,000 that means the borrower may have to pay the bank $60,000 immediately to keep the house (much depends on the home-owners current financial situation). If they can not pay the difference, the "

OK, I understand if you're upside down on your house (you owe more than it's worth), it's not a good thing.

But I don't think the bank can call the difference due immediately -- the loan is contingent upon the value of the home at the time of purchase, and whether it goes up or down, that's still what the borrower owes. They still have to make those $x-a-month payments.

This does happen from time to time absent a correction -- if you let your home fall into disrepair or the neighborhood goes to hell, or you're underinsured/uninsured and your garage burns down, lowering the value of your property by thousands of dollars. People do end up owing more than their houses are worth. But I don't think the bank can change the terms of the loan and foreclose.

Yes, if a homeowner tries to sell in this situation, they're screwed.

[SW FL Dem]

5. I agree

I was about to post the same thing. You can own more on your house than it is worth. As long as you make your payments, the bank can't foreclose just because they are undersecured.

[tsuki]

8. They can do anything the fine prints says they can do. eom

[eyesroll]

9. Yes, but in what mortgage contract would one might find:

"Should the value of the property, as determined by an independent appraiser, fall below that of the outstanding balance of the loan at any time, the lender shall immediately make due the difference."

I actually did read all of my documents for every loan I've taken out, and I've never seen that. I've only seen "borrower must have insurance" and "borrower must make a good-faith effort to maintain the property in good repair so it may retain its value."

Nope. Not there.I suppose the fact that it's not there now doesn't preclude its presence in future lending contracts -- but I don't see it happening.

[mattclearing]

4. How much time do you think we have before this starts to happen?

Rough estimate, just out of curiosity.

[berni_mccoy]

22. Maybe 2008... depends on two things

1. If the tax change is adopted by Congress
2. When it becomes effective.

It won't be effective next year for certain (law would already have to be in place). Earliest is 2008.

[RevolutionStartsNow]

30. Which means I ought to spend the next couple of years...

frantically paying down my mortgage.

Now that's probably a good idea anyway, and I'm not too worried about the housing prices bursting in my area because I don't plan to move out of my house for many many years if ever.

But I'd hate to lose that deduction, and I don't want my house to be worth less than what I owe.

I just don't see how they can pass this, as it's so clearly a tax increase for many people.

[eyesroll]

6. Also:

The "vast majority" of markets do NOT require $300,000 or more for a modest single-family house. I couldn't find the info for new construction, but here's the lowdown on existing homes (which are more likely to be "modest" anyway):


Single-family home sales increased 1.9 percent to a record seasonally adjusted annual rate of 6.35 million in August from 6.23 million in June, and were 6.9 percent above the 5.94 million-unit level in August 2004. The median single-family home price was $219,400 in August, up 16.2 percent from a year ago.

Regionally, total existing-home sales in the West rose 5.6 percent to a pace of 1.69 million units in August, and were 8.3 percent higher than August 2004. The median existing-home price in the West was $322,000, up 20.1 percent from a year ago.

Existing-home sales in the Midwest increased 1.9 percent to a record annual sales rate of 1.64 million in August, and were 6.5 percent higher than a year earlier. The median price in the Midwest was $176,000, which was 11.4 percent higher than August 2004.

Total existing-home sales in the Northeast rose 1.7 percent to an annual pace of 1.21 million in August, and were 8.0 percent above August 2004. The median price in the Northeast was $254,000, up 16.5 percent from a year ago.

Existing-home sales in the South slipped 0.4 in August to a level of 2.74 million, but were 7.5 percent higher than a year earlier. The median price in the South was $189,000, up 9.9 percent from August 2004.


http://www.realtor.org/publicaffairsweb.nsf/Pages/EHS0905

[BeTheChange]

10. A good deal of markets do tho..

And speculators are setting the hot markets, picking them dry at 250-400k and then moving on to the next. This is saturating the numbers when you have cities like Boston, NYC, SF, LA, etc...

I started calling realtors to find one to represent us an buying a house, fearing that we would get priced out of our market in the next 6-9 months.. two of them told me to wait.. the market was just about to flip to buyers. You'd think they would want to make their Christmas commission.

[eyesroll]

12. I'm not saying some markets don't.

There are quite a few places where housing is out of control. But many places aren't, and surely not "the vast majority."

The OP, I think, is allowing a good message ("cutting the mortgage deduction is a bad thing") get diluted by inaccurate and hyperbolic supporting information.

[BeTheChange]

34. True. nt

[BlueStateBlue]

32. What area are you in? n/t

[BeTheChange]

35. Pac NW...

Western Washington.. anywhere from Hoodsport to Snohomish to BC.

[berni_mccoy]

17. This reinforces the point on political landscaping...

Finding a decent house for a family of four in NH/MA would be very difficult to do for under $300,000 and still be within a reasonable commuting distance to the major industries.

I live in the Northeast and I can tell you the 254,000 median figure is just that, a median. A house that price would sell within hours in the current housing market. Most of the houses for single family homes targeting the middle class are above that price.

[eyesroll]

19. But still, by its definition, "median" means half of the houses cost

less, and half cost more. Thus, the "vast majority" do not cost more than $300,000.

I see what you're saying, but I tend to be picky about accuracy.

[hippiegranny]

23. you obviously don't live in Phoenix

because the market here absolutely has squeezed first time homebuyers out of buying anything but a dump in the worst parts of town.

[eyesroll]

26. Again. "Vast majority."

Whether it applies to your situation or not (and if it does, I'm sorry for the squeeze you're in), it does not apply to the "vast majority" of cases. *That* was my argument; the fact that some people (many people) aren't affected by it was not.

[LSK]

7. i dont understand # 3?

"3. Existing homeowners who have less than 20% equity will now be in a serious financial situation. The value of the house will be less than the outstanding mortgage by as much as 20%. On a $300,000 that means the borrower may have to pay the bank $60,000 immediately to keep the house (much depends on the home-owners current financial situation). If they can not pay the difference, the bank may be able to foreclose the house."

Why would the bank immediately demand $60,000???

[berni_mccoy]

20. Depends on the contract

But think about someone who has that much negative equity. What are they going to be able to buy on credit? It's like having $60,000 debt and nothing to show for it. And if the homeowner needs to sell *shudder*, they'll end up oweing $60,000 to the bank... it puts the bank in a much higher risk situation, one they may have protected themselves with a contractual clause.

[LSK]

29. i can kinda see your point

But as long as the people can keep up with mortgage payments and dont have to sell, it will not hurt them. Many people who buy brand new cars fall into the same negative equity situation on a smaller scale.

[berni_mccoy]

11. I've corrected and clarified #3 based on feedback.

[eyesroll]

13. Much better, thanks!

I admit I'm not familiar with the wording of sub-prime mortgage contracts, which may be more punative for negative equity. My standard mortgage contract just stipulated we needed to take steps to avoid the situation (insurance, upkeep).

[lildreamer316]

15. I'm confused; you have a contradiction:

#1:"Another reduction of buyers in the market will be people relocating from rural to more populated areas."

#6:"a migration will occur from densley populated areas (blue-regions) to more rural areas (red-regions)"

I'm sure I just missed something....help?

[berni_mccoy]

18. It's not a contradiction

#1 Less people will move from rural to suburbs/urban
#6 More people will move from suburbs/urban to rural.

both points indicate the following trend:
rural (lower cost housing) <===population==== suburbs/urban (higher cost housing)

[onenote]

16. a few relevant facts

First, the mortgage deduction only is relevant if you itemize deductions...and only around 30 percent of taxpayers itemize. Moreover, while there is no formal definition of "middle class" a commmon rule of thumb is that is encompasses those with incomes between approximately 200 percent of the federal poverty threshold and those of the nation's top five percent income earners--roughly $25,000 to $100,000 a year. Finally, under current tax law, as soon as you're adjusted gross income hits $142,700, limits kick in on the amount of the deduction that you otherwise would be entitled to claim.

What these numbers suggest to me is that there are a lot of "middle class" taxpayers who don't have mortgages large enough to warrant itemizing their deductions and a change in the limit is going to be irrelevant to them. Also, that the true "middle class" isn't going around buying houses with $350,000 mortgages in big numbers. And finally, that the "upper middle class" already is getting pinched on their deductions because of the limits that kick in.

onenote

[pitohui]

24. ah someone actually familiar w. tax law

this statement is the reality, nice summary--

What these numbers suggest to me is that there are a lot of "middle class" taxpayers who don't have mortgages large enough to warrant itemizing their deductions and a change in the limit is going to be irrelevant to them. Also, that the true "middle class" isn't going around buying houses with $350,000 mortgages in big numbers. And finally, that the "upper middle class" already is getting pinched on their deductions because of the limits that kick in.

[pitohui]

21. i find this hard to believe

In the vast majority of markets even modest housing is over $300,000 for a single family home.

if the premise is untrue, then what's the point of reading the entire argument? move outta boston & manhattan & join the real world

[SoCalDem]

27. Don't forget us marooned Californiacs..check these prices

These are in my town.. (not anywhere near the beach or anything cool)



http://images.google.com/imgres?imgurl=&imgrefurl=http://www2.helpusell.com/ValueRealtyPerris/&h=133&w=200&sz=11&tbnid=mZVjGyD0qE8J:&tbnh=65&tbnw=99&hl=en&start=15&prev=/images%3Fq%3Dmoreno%2Bvalley%2Bhome%2Bsale%26svnum%3D10%26hl%3Den%26lr%3D

[BlueStateBlue]

33. You get a lot more for the $ than I would here in northern NJ

[LSK]

28. and Chicago, LA, SF, DC and most places that have jobs

Most of the best job markets are in big cities. And most of the housing markets in those cities are going nuts. I can see an average 3 br home in those cities costing over $300k. Its a catch 22, move to the jobs, but you cant afford to live there.

[lapislzi]

31. Another horrifying specter: Interest-only mortgages

When you buy a home, hardly anything comes off the principal in the first few years--it's all frontloaded to interest payments. But you have the satisfaction at least of chipping away at the principal even if it's $100, $200 a month.

Interest-only mortgages don't touch the principal. I don't know if they are predicated upon the assumption that the homeowner will one day be able to afford a higher monthly payment, or if a balloon payment at the end of the term is involved. Either way, it seems like a very scary way to go.