Saturday, October 08, 2005

A "Pop-Button Issue"

We're introducing a new feature here at The Boy in the Big Housing Bubble called the "Pop-Button Issue." You've certainly heard of "hot-button issues," and this is similar. The "Pop Button" will be displayed beside any story detailing action, or addressing an issue, that is likely to contribute to the popping of the housing bubble.

Nothing could be better than to introduce this feature with the story in today's Los Angeles Times by David Streitfeld.

The story, headlined "Tax Reformers Eye Breaks for Housing," includes discussion about the possibility of changes in the tax code regarding mortgage-interest deductions for second homes. If this movement gets any real traction it could easily push the market that much closer to a pop. Second homes in the U.S. account for more than 3 percent of all housing units. U.S. Census data shows that in just 20 years, between 1980 and 2000, the number of second homes increased more than 100 percent to 3.6 million. And you can be sure that statistic has grown considerably in this hot market. No doubt, there are also many flippers, or speculators, claiming their investments as "second homes" with the expectation of turning them for a profit a year, or two later. If the tax deduction on those properties is reduced, or eliminated, that "second home" is going to become a lot less attractive, and far more financially burdensome than some owners are going to want to endure. And so, they'll flip, the market will flop, and profits will fly away.

Here's an excerpt from the story in the Los Angeles Times:
Just as the nation's housing boom appears to be slowing, debate is starting among policymakers about reining in one of the most sacred cows of American public policy: the mortgage-interest deduction and other generous tax benefits granted to homeowners.

A presidential commission on tax reform will take up the subject for the first time Tuesday. "Everything's on the table," said Charles Rossotti, a panel member who was commissioner of internal revenue from 1997 to 2002.

The mortgage-interest deduction saved homeowners $61.5 billion last year. No one expects the commission to recommend its elimination.

Instead, the panel may consider scaling back the deduction for mortgage interest on second homes or home-equity loans, and changing the deduction for property taxes, among other things.

The stakes in such a discussion are huge.

Changing the tax benefits for homeowners, even if done slowly, could cause short-term convulsions in the market as buyers recalculate what they can afford. The tumult could be most pronounced for homeowners in states with the highest home prices, such as California. In the long term, housing could become more affordable as some of the stimulus that has sent prices soaring is removed.

Any proposed shift would encounter strong and possibly overwhelming resistance. But with a rising federal budget deficit, the prospects for change are much greater than they've ever been, say those involved in the debate.
Find the entire story at this link.

— The Boy in the Big Housing Bubble