Housing on Fire

I have spent a lifetime playing the cyclical market for screw machines. And I still screw up.

By focusing on the BIG PICTURE – unemployment, Europe’s recession, the fiscal cliff, the 2012 election, oil prices – I’ve missed one of the most significant swings in the domestic economy. Housing. Sometimes you miss the newspaper on your doorstep. Housing in a lot of American markets is rebounding strong. Builders cannot find enough lots in locations where transportation is good, schools work and people feel safe to walk around.

The place to make money in real estate is Phoenix. It’s also the place to lose it. It is the yo-yo of domestic housing. Phoenix always seems to go crazy on the upside and the down. Three years ago they were giving houses away in Arizona. Today you can’t find a lot and prices are up 20 percent year to year.

If Phoenix is a yo-yo, Las Vegas is a boomerang. The huge oversupply of good lots is gone. Prices are moving up smartly after the recession nosedive. In Atlanta there is still a glut of lots – where people do not want to live, but in the desirable areas prices are bouncing up rapidly.

In housing, the national statistics are poor indicators. Like politics, housing is a local, granular story. Check pickup truck sales for a good look at housing – and what’s happening to Home Depot’s stock.

If housing is getting hot and cars are at 14.4 million for 2012, what does this mean for 2013?

The stock market is spooked by the Washington tax vs. spending argument and what it might mean for dividend recipients. Meanwhile, Warren Buffet has been buying Deere and Wells Fargo stock. Agriculture, construction machinery, mortgages – maybe he knows something. He just bought a furniture retailer too.

The picture within the picture is this. Two of the most important pieces of the domestic economy that affect manufacturing, cars and homes, are rebounding nicely. Product is coming back to America from China and Europe. Money is cheap. Savings returns stink. Unemployment, though bad for the country and devastating to individuals, is a wash for business today. There is less demand, but the labor market has a little slack.

When we always focus on the negative we miss the Phoenix rising from the ashes.

Questions: Should the country get rid of the Mortgage Interest tax deduction?

Is the deduction “welfare for the rich”?

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26 thoughts on “Housing on Fire

  1. AvatarKen

    The sudden growth of housing in America is NONSENSE, it ain’t happening.
    They boarded up many homes and bulldozed many more when all of this thing came crashing down.
    There are many homes setting empty.
    Never a better time to buy construction equipment as it’s going to auction.
    No way the housing market is coming back unless it’s for cheap, urban dwelling government issued pieces of crap homes to live in while you use the LINK PHONE and LINK CARD. No way

  2. AvatarNick Bloom

    … and anytime ANYTHING is on fire… get as far away from it as possible. SELL! Booms are the surest way to busts.

  3. AvatarJosh Weaver

    Does being a homeowner make me rich now? I don’t think so. I think we should keep the deduction. If there is any question of coddling the rich then put a limit on it. I agree that if you have a half a million dollar home you probably don’t need the deduction as you’re doing just fine but there are plenty of us in the <$100,000 home market who would be hurt by removing the deduction altogether. I believe we should encourage home OWNERSHIP. I think providing incentives for owning a home are wonderful and I think being a home owner can make you a better person. What we SHOULDN'T be encouraging is making a profit in the housing market. We shouldn't be encouraging house flipping or housing as an appreciating investment. Homes should hold their value and buying a home to rent it out is one thing, but they shouldn't be traded like commodities. THAT is where it all went wrong.

  4. AvatarJim Whitney

    I don’t consider myself rich, but if I was not able to deduct the interest on my mortgages I would be completely screwed. The lending industry would be decimated because buying a home without the advantage of the deduction would drastically reduce the number of buyers to only those few who could afford to pay their mortgage with after tax dollars. Any housing recovery that might be happening would be killed by this. Instead of finding ways to take more tax money from us the focus should be enitrely on how to operate on what they already take from us (which is a gigantic chunk of the GDP) and not a penny more.

  5. AvatarS Jones

    NOOOOO Getting rid of mortgage interest is yet another tax on the middle class…. The rich can buy their houses outright and pay no interest, the poor do not have the means to own a home they rent…This ONLY hurts the middle class. If you want to get rid of a deduction lets start with chartible contributions a donation shousd be that, a donation, not a tax shelter.

  6. AvatarBruskie

    No way! The mortgage interest deductions entirely needed for the middle class to help with home ownership. I’m not claiming it is absolulty needed for most of the middle class to be able to buy housing, but it is a great help for housing and the rest of the economy. When my wife and I get the benefit from the deduction at tax time we always splurge on something nice. Vacation, furniture, auto or appliances, this greatly helps the overall economy. The rich could and would simply pay outright for a home if the deduction was not offered. What shouldn’t be allowed are deductions on 2nd and 3rd homes. That is the real “welfare for the rich”!

  7. AvatarKelly

    Remove the deduction. Remove ALL deductions. They’re just another way the tax system is corrupted for select groups and to manipulate society in a certain direction.
    Get the government out of the markets because bubbles are created by the government.
    The interest deduction for housing isn’t welfare for the rich but for the non-rich. When you’re in the 1% like me you get a little thing called AMT, which invalidates something as small as the housing deduction.
    Everyone who makes any kind of income should pay their “fair share”, meaning if my taxes are 62% then so are everyone else’s.

  8. AvatarDavid Katz

    We have to make big changes in the US Government’s Income/Spending dynamic. These are are going to be very painful, no doubt about it. And we have to stop avoiding it. Losing home interest deduction seems like it would produce pain that is broadly felt and is fairly commensurate with income. Most rich people still finance their homes, even if they all don’t. It would have a downward price pressure on homes, but I don’t know how much. I have never heard of anyone figuring their interest tax deduction benefit into the value of the house or in figuring the payment they could afford. Plus, this would be a small way of simplifying tax returns.

  9. AvatarJosh Weaver

    “Everyone who makes any kind of income should pay their “fair share”, meaning if my taxes are 62% then so are everyone else’s.”

    Sorry Kelly, not how it works. You see, every person has a base level of expenses. Every person working needs food, shelter, clothing, transportation etc. This is part of the reason that lower income people pay a lower percentage in taxes, because a higher percentage of their income MUST go toward everyday necessities. The other reason is that if you pay a higher tax rate than low income people is because you’ve eaten a bigger piece of the collective pie. When you eat a larger slice of pie, you pay a higher price. And don’t even start on how you earned your pie with absolutely no help from the government because it’s an ignorant thing to say.

  10. AvatarTed Roberts

    I think the mortgage deduction should be limited to an amount about the price of an average home. The mortgage deduction has led the US to invest too much in unproductive
    assets (large homes) and not enough in productive assets (stocks, bonds, startups…).

  11. AvatarJim Bradshaw

    The mortgage deduction is just another government boon doggle as seen by the comments above. Let’s the lender’s decide who is credit worthy when they are putting their own money on the line. Real Estate Agents and Banks are the only ones gaining by this deduction as Agents and Banks sell and resell loans and homes, time and time again to profit off yet another government back Ponzi scheme.

    I didn’t vote for Mitt Romney, but his idea to cap all deductions to some limit should be the idea that finally stops the runaway tax finagaling that requires expensive tax advising and tax lawyering.

    Put the money back into making things and stop rewarding the “Financial Serivces” industury for finding new ways to steal money from the middle class, where if they win, they gain and if they lose the government picks up the tab. BTW when is the government going to break up the large banks so we never have to hear that TOO BIG TO FAIL bullshirt again.

  12. AvatarGregs90vet

    I have a lot to vent about! This past election should be re-named the new “Halloween.” They gave away a LOT of FREE stuff, as Mitt said. I would like to see a graduated deduction for our mortgages, charitable contributions, medical deductions, capital gains, and estate taxes, based on total income for the year (as explained later). Contributions to Medicare and Medicaid should not have an upper limit, or cutoff; pay into them all year long. Income should not just include working wages, but also ANY investment income or inheritances. COMPLETLY CLOSE ALL “loopholes” that reduce tax liability. Then maybe we could have a flat tax. If that happens, then all deductions would cease. There would be a lot of good arguments for and against, but in a few years we would come to live with it, and begin paying down our enormous debt. Our government needs to live within its means. Cut the “pork”, have line item vetos. I realize disaster, security, and military costs will always be an issue as far as how to pay for them, but that’s another issue. To help the country, I would be willing to take a small, say 1/4%, reduction in SS income every year, for 5 years, then another 1/4% reduction for the next 5 years, etc., along w/ a corresponding increase in SS taxes for EVERYONE that files a tax return. Some formula like this could be used to let the SS fund catch up to payouts. I dunno. Itzamess!
    Whether or not Mr. Buffet said the following, it sounds like good advice!

    Warren Buffett, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:

    “I could end the deficit in 5 minutes,” he told CNBC. “You just
    pass a law that says that anytime there is a deficit of more
    than 3% of GDP, all sitting members of Congress are ineligible
    for re-election.

    The 26th amendment (granting the right to vote for 18 year-olds)
    took only 3 months & 8 days to be ratified! Why? Simple!
    The people demanded it. That was in 1971 – before computers, e-mail,
    cell phones, etc.

    Of the 27 amendments to the Constitution, seven (7) took one (1) year
    or less to become the law of the land – all because of public pressure.

    Warren Buffet is asking each addressee to forward this email to
    a minimum of twenty people on their address list; in turn ask
    each of those to do likewise.

    In three days, most people in The United States of America will
    have the message. This is one idea that really should be passed

    Congressional Reform Act of 2012

    1. No Tenure / No Pension.

    A Congressman/woman collects a salary while in office and receives no
    pay when they’re out of office.

    2. Congress (past, present & future) participates in Social

    All funds in the Congressional retirement fund move to the
    Social Security system immediately. All future funds flow into
    the Social Security system, and Congress participates with the
    American people. It may not be used for any other purpose.

    3. Congress can purchase their own retirement plan, just as all
    Americans do.

    4. Congress will no longer vote themselves a pay raise.
    Congressional pay will rise by the lower of CPI or 3%.

    5. Congress loses their current health care system and
    participates in the same health care system as the American people.

    6. Congress must equally abide by all laws they impose on the
    American people.

    7. All contracts with past and present Congressmen/women are void
    effective 12/1/12. The American people did not make this
    contract with Congressmen/women.

    Congress made all these contracts for themselves. Serving in
    Congress is an honor, not a career. The Founding Fathers
    envisioned citizen legislators, so ours should serve their
    term(s), then go home and back to work.

    If each person contacts a minimum of twenty people then it will
    only take three days for most people (in the U.S. ) to receive
    the message. Don’t you think it’s time?


    If you agree, pass it on. If not, delete.
    You are one of my 20+ – Please keep it going, and thanks

  13. AvatarJim Goerges

    There ya go again! Why is everything slanted to the rich? Why is that ok to do? What is your definition of rich? Does everyone have the right to be rich? It’s great to have some jobs finally in the construction arena, yet everyone is blaming the rich, I am getting sick of your slant. Instead why don’t we talk about American rights? Why aren’t we talking about legislation that will kill jobs and change the constitution. Why aren’t you bringing up UN TREATY that will make gun legislation global and OBAMA hasn’t wasted a day in office on this subject. Do you realize SOCIALISM is does make the rich poorer? Do you realize it makes the poor poorer too? Why are we going down this road?

  14. AvatarGARY GOINS

    I am happy that Elizabeth Warren will be in Washington to jerk the bankers chain. The deduction is not an option for most miiddle class families. How much do the parasite’s need.

  15. AvatarVal Zanchuk

    Robust levels of home ownership without interest deductions exist all over the world. The loss of the interest deduction would tend to drive buyers to long term ownership for the purpose of actually living in the home, not looking at it as some sort of vast investment opportunity. This would also keep ownership in the hands of those who can afford it and reduce the market for risky mortgages for unqualified buyers. However, if this happens, there needs to be a better pool of rental homes and apartments for those unable to afford to buy. This may not happen soon, so any reduction in the interest deduction should be phased in gradually.

  16. AvatarJohn "Jack" Frost

    I don’t think we will have any choice. Obama said a couple of years ago there are two deduction that have to be cancelled. The Mortgage Interest and Charitable Donations. I think he will keep his word, that is why I plan to send him all the requests I get from charitable organizations for assistance. Housing on fire. Now that is an apt description of new construction. Beams and and framing made from “fat wood” that burns so fast that with the fire department just minutes away, you may be able to save the chimney. The tenements being built now have sprinkler systems. This is necessary by construction code but just good sense if you have undocumented tenants in your building. The high rise just down the street set aside for immigrants (taxpayer funded) gets a daily visit from the fire department.

  17. AvatarKelly

    Hey Josh Weaver, why don’t you tell me how it does work?

    First, your “base level of expenses”.

    This isn’t even a point. Where I live in California an income of 150k will have the average family of 4 barely scraping by (same as north east coast) but in MANY other areas of the country just 50k will get the same job done nicely. Who then decides what “base level” is? What’s next, federally legislating what “base level” is?

    Second, your “collective pie” and how much of it I may have eaten.

    I make good money but I also spend good money. Take away my money and there’s less demand for services and the things those who make less money provide. When I go out to eat people benefit from this. When I buy something people benefit from it. I could be like many, driving a 15 year old car and paying my 50.00 in annual registration but instead I drive a new car and pay 1300.00 in annual registration. My car is more fuel efficient, pollutes less and is much less likely to break down and impact the commute time of others on the road. The sales tax alone I paid when purchasing my car was 16,335.00 and this was passed to the state when I bought it.Those not purchasing cars contributed nothing. Those purchasing average cars (35k) paid only 2,887.00. Since I chose the best house I could afford the property taxes I pay are higher by a factor of 3 than the average home buyer. More construction people spent more time building my house and so made more money from it. These people then were contributors to the state instead of draining the funds.

    Third, let’s talk about how I’ve “earned my pie”.

    Who, exactly do you think has funded the roads and bridges I drive on? I’m pretty sure this is the lame example you’ll site.
    I funded them. In fact I have probably funded more of the infrastructure than any crowd of 30 “average” citizens. In the last year alone my taxes 397,908.00 on income of 589k have paid equal to 23 people at the medial income level. Looked at another way, it would take the “average” person 23 years to contribute what I do EVERY year. In the last 8 years I’ve paid nearly 2 million dollars in taxes. So you’re wrong because I DID build it.

    I started at the bottom and worked my way to here. When my peers were going out or spending time with their families I was working. I spent years working 120 hour weeks as an employee (at times working 2 jobs), only to work MORE as a shop owner. I’ve had to sign personal guarantees on equipment I financed and if I fail for any reason they get my house and my 6k in savings. I haven’t asked the government for a nickel and never will.
    I made the choice to work and live my life this way and my peers way back then did the same. They should NOT be entitled to what I’ve earned and letting them believe they are (or passing unfair laws to make it so) does nothing to help them.

    In my opinion they were lazy and are entitled to nothing they haven’t earned.
    In their opinion they were “unlucky” and I was “lucky” and they should have some of what I’ve worked for because they “NEED” it.


  18. AvatarKim

    Just yesterday the LA Times ran an article “Lesson Learned?” about home buyers getting their second or third chance to buy a home at a low rate in spite of having foreclosed just a few years ago. Some borrowers admitted their own guilt in their misfortunes for trying to live beyond their means, and their surprise that they could have yet another chance. Some lenders are even keep tabs to know exactly when the foreclosure will be removed from the record so they can pursue these clients again. I do have to wonder if the borrowers, lenders and our own goverment have learned their lessons. The rates are great, so a pick up in home buying is understandable – but reading articles like this one makes me cringe at the future and wonder if we’ve have learned anything.

  19. AvatarJim Goerges

    In our business we look at sales, cost of manufacturing, overhead and profit. We all look at every aspect to trim and make more efficient. In our government, nothing is looked at, yet a majority of Americans think more money should be taken from the rich, thus Lloyd’s comment. Why don’t we start looking at where the money is spent. For an example on rent payments in Ramsey County in Minneapolis, it is amazing what is happening with our tax dollars. Please review this segment from Judge Judy’s show. Tell me why we should be paying this? Please review! http://www.youtube.com/watch?v=DL-a-r7iJIU&sns=em, I think we need to see how our dollars are being spent before we pay any more money.

  20. AvatarBill

    @Josh Weaver

    Your opinion comes from a VERY small sample of the world. I live in northern California where the county I live in has a MEDIAN home price of $562,000. I dare you to tell about 2/3 of the people in that county that they are “rich” and shouldn’t have any problem going without the mortgage interest deduction. Can you afford to have $2425 a month ($29,111 a year) in house payment added to your taxable income and still live in your house? (This assumes 4% interest, 20% down payment ($112,400!) and 90+% of the 1st year being interest)

    I would bet not. Just like I would bet the people in this county would also have a problem with that. Believe it or not Josh, the rest of the country thinks if you can survive living in <$100,000 house, you should probably afford the mortgage deduction to removed, since your payment is only about $600/month. See how that works?

    I agree with Kelly, no deductions for anything, all income is income regardless of it's source, all income taxed at the same percentage. Fire 95% of the IRS and be done with it. That way no one can hide from the income they make from Romney to the crack addict in the ghetto.

  21. AvatarBeen Around

    I think Real Estate is still in a huge bubble. It is overpriced and investors who made big money before the fall were operating on inflated values and are going for a second dip with a lot of new players entering the game who missed out on huge profits. A real Estate Agent is supposed to work for your best interests yet all I have met look out for number one not giving even full disclosure for closing. With persons who are ultra wealthy the deductions they receive are a big boon for them whereas a small home owner is not benefited much. I do not think they need it yet they take it and I feel it should be lower for them. Some who receive a tax break believe it is found money and they rely on less and less taxes and guess where it goes mostly? Not into investment in their company or employees but right into their pockets. Often they just add it to their investment portfolio. Making money on money is all the rage. My father a small successful business man now passed away would put a tax cut straight into his pocket and not into labor or silly little things like incentives or investment in better employees. He believed he did not need to do those things. Just my opinion. Money if allowed to work in a capitalist system should be allowed to incentivise people because otherwise you have les innovation and the desire for employees to make you money because they a lot of times do not even get raises unless they move on to someone who does respect talent these are the companies who will grow and thrive and not ones who really do not even like to give raises out of principle because it means a bigger bonus for management.

  22. AvatarMike Richards

    Run your tax calculations without the mortgage deduction. Then run with. Not a huge difference. It is just enough to perpuate the myth that a mortgage is a GOOD thing.

  23. AvatarDan Richter

    @ Kelly…Amen. Class warfare will get us nowhere.
    @ Josh Weaver – Everyone needs to have some skin in the game. Of course if you’re in a <100K house, which wouldn't buy a shack in many places, you're probably in a very low tax bracket and your deduction doesn't amount to much anyway and you probably pay very little, if any federal income tax. The government doesn't build anything…it only facilitates the transfer of wealth. I did build my business without help from the government and I hope to be as financially successful as Kelly. Business owners before me "paid it forward" for the roads bridges, etc. that allow us to operate. For now I work 7 days/week, drive junk, and barely see my kids. And when I "make it" all you want to do is take it and give it to someone to sit on their a%$ and talk on their Obamaphone in their subsidized housing eating filet mignon bought with their (in)dependence card.
    @ Mike Richards…I'm sure you're correct, unless the deduction got you into a lower bracket. The housing market would go through an adjustment period, but would be just fine in the end.
    @ Been Around…Who are you to say what one does with that money. If you don't take care of your employees, they do move on and you lose talent you've invested in. Maybe for some jobs that's fine…others its not. It's a free market.

    The majority current budget deficit comes from baseline budgeting. Most people don't realize that the 2009 stimulus is now part of the annual budget. Go back to the 2008 budget and the deficit is nearly wiped out. Unfortunatey, one place I agree (oh how I shutter to say this) with Obama. is blaming Bush. He inherited a balanced budget and with both houses of Congress, spent too much. In 2000, the CBO projected (ok, time to sit because your going to laugh so hard – or cry) that the Federal Debt would be PAID OFF by 2010. Instead we had $13T in debt (now $16T and rising). I guarantee if a few of us sat down over a couple beers tonight that we could balance the Federal Budget.

    As far as the mortgage interest deduction, I say get rid of it. Get rid of Farm subsidies, Get rid of depreciation (don't panic Lloyd…We'll still buy machines as long as we think they make us money) get rid of all deductions, loopholes, subsidies, etc. Go to a flat tax with one (1) deduction per person/dependent to cover the baseline expenses or a 17% national sales tax, which would immediately eliminate any underground economy. If you spend it, you get taxed on it. Fire the IRS.

    Now when it comes to rental properties, interest is a business expense, not a deduction and its included on the P&L. You pay taxes on the "P" and carryover the "L".

    On 2nd and third homes, if you rent them out part of the year, it's a business and you deduct the interest from your profit (loss). We would have to decide what percentage of renting it constitutes it as a business. I would just put the home in the name of an LLC and then rent it from myself for the time I want to use it. Or not rent it at all and not worry about running it as a business. Those are the types of details that would still need to be worked out.

  24. AvatarLaker Netman

    All the comments so far are very interesting, as it clearly shows the widely disparate frame of reference we come from when comparing and analyzing wealth.
    However, everyone is talking around the two largest issues when discussing the cost and risk of our deficit (which ultimately dictates “buying power”; something more subtle and telling than income, and which has diminished substantially year-over-year for decades now). The first issue is directly derived from August 15, 1971. Nixon ends U.S. participation in Bretton-Woods. I strongly encourage everyone to read up on this event. That single act has dictated the last 40+ years of cancerous economic growth in the U.S. and abroad. Labeled as “prosperity” by governments. Which segues to the second issue: Globalization. Labor markets, and the manufacturing that (literally) goes with them drives not only the employment market, but the distribution of wealth globally. The global trade in-balance is real, serious and ironically nearly impossible to fix without catastrophic consequences economically for both exporter and importer.
    Lastly for good measure, wiki Fiat Currency. Understanding what it is and how the Fed handles debt (bond sales) should give everyone a pretty good chill down their spine. A Phoenix indeed!


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