We’re entering a very precarious time. A newly christened president and congress have clearly stated their intent to enact sweeping tax reforms — and they appear to have the fidelity, mandate and majorities to pull it off. The prospect for change is exhilarating — both exciting and terrifying.
Tax policy is one very real way government can directly influence the economy. Among other things, tax policy allocates resources and thus can encourage or impede certain economic production and certain economic behavior. By its very nature, tax policy picks economic winners and losers.
This debate will touch many, if not all, of the economic inputs necessary for a robust housing and real estate market. Important issues to be addressed include the deductibility of mortgage interest and state and local taxes; the securitization of mortgages through Fannie Mae and
Freddie Mac and the availability of a 30-year fixed-rate mortgage product; the tax treatment of capital gains; commercial exchanges; and rates and brackets of personal and corporate income taxes. These policies in turn will impact long-term interest rates, job growth, wages, labor markets and consumer confidence.
But as we debate the theories and intricacies of tax and related public policies, we — policymakers, lawmakers, academics, industry leaders and regular citizens — should always stay focused on the true impact of these tax policies on American workers and families. That is after all where the rubber meets the road.
Sounds simple, right? But it’s not. Most Democrats and Republicans agree that homeownership is desirable, but they differ on the tax policies that will best get us there. Tax theories are fine, but the impact of these policies could have a profound impact on homeowners and would-be homeowners across the country. Get it right, and the economy and families win. Get it wrong, and both will suffer.
As this debate begins in earnest, policymakers will have to understand the numbers behind the numbers as they design their tax reform packages. And as an industry, we need to help them make the right decisions. Here’s an example.
By nearly all measures, the housing industry has recovered from the Great Recession. But that recovery doesn’t include everyone everywhere. The recovery is uneven. Take homeownership rates, which have fallen to just 63.5 percent from a peak of 69 percent in 2004. According to a recent study by the Pew Research Center, the homeownership rate for white households is down 5 percent. But for African American households, the rate is down 16 percent. Similarly, for households ages 65 years and older, the homeownership rate has dropped 3 percent, but for younger households under the age of 35 years, the rate has fallen 18 percent.
Home prices are also up, which is good news for those homeowners, but not so good news for first-time homebuyers, particularly certain groups of would-be buyers. In particular, younger and minority buyers are being increasingly excluded from the ownership market. So while the macro numbers look good for the housing market generally, such numbers mask the significant challenges to homeownership facing certain segments of society.
The Pew study also showed 72 percent of renters still aspire to buy a home in the future; in fact, seven out of 10 renters say they want to own a home. However, mortgage applications — particularly for African Americans and Hispanics, are down significantly. Home loan applications were down 45 percent from 2004 to 2015, but applications from black families were down 77 percent, and for Hispanic families, applications were down 76 percent.
New laws passed during the Great Recession were intended to strengthen banks, avoid excessive Wall Street profits, improve the creditworthiness of borrowers and enhance consumer protections. While these laws may have been well intended and may have even accomplished their stated purposes, they also combined to make getting home loans harder and have certainly contributed to lower homeownership rates. And at the same time, higher debt — student debt and otherwise, increasing rents, and relatively low job and wage growth, have also raised higher barriers to homeownership, particularly among young adults, certain minority groups, lower income families and unmarried households. Tax reform policies, like the regulatory and economic policies of the past seven to eight years, will have side effects that must be understood and mitigated if they are to have the intended positive impact on American families and the American economy.
I was fortunate enough to speak with the chief economist of one of the largest banks in the world at a small dinner in Madison not long ago, and I asked him about the mortgage interest deduction (MID) in the context of tax reform. He had a simple but profound answer. He said the MID subsidizes homeownership, and if you subsidize something, you get more of it — and when you take that subsidy away, you get less of it. Some economists contend limiting the MID will hurt all homeowners because housing is one market, and reducing the value of one segment hurts all segments — even arguing values could drop 10 to 15 percent.
In the coming months, the National Association of REALTORS® and numerous other sources will be publicizing studies and forecasts about the impact various tax reform proposals could have on the real estate market. It will be difficult for the average American — and many REALTORS® for that matter — to figure out who’s right and wrong. But as we debate, we should focus less on tax theories, partisan politics, political philosophy, and biased think-tank scenarios, and more on how these policies impact real American families. That is after all where the rubber meets the road.