The enormity of this change has not been fully appreciated just yet.
The tax bill now becoming law will impact the housing market in a big way via four mechanisms that gut the government’s subsidies of homeownership:
- Nearly doubling the standard deduction (but wait…)
- Lowering the cap on the mortgage interest deduction for new purchase mortgages
- Capping the deduction for state and local taxes at $10,000
- Eliminating the deduction for interest on home-equity debt, such as HELOCs.
The Big Equalizer: The New Standard Deduction
Nearly doubling the standard deduction – from $6,350 for individuals and $12,700 for married couples filing jointly in 2017 to $12,000 and $24,000 respectively in 2018 – would be a simple way of giving many Americans an instant, massive, no-hassles tax cut.
But wait: The law also eliminates the personal exemption of $4,050 allowed for each family member. A married couple will see an increase in the standard deduction of $11,300 (compared to 2017). But it will lose $8,100 in personal exemptions. This whittles down the net increase in deductions to $3,200. For couples with kids, it gets more complicated.
But whatever this does, it moves all of the up-front deductions and exemptions into the calculus that taxpayers routinely make: Should they use the standard deduction or itemize?
In other words, can a married couple filing jointly come up with over $24,000 in deductible expenses, such as mortgage interest? If the answer is no, they will benefit from the new tax law by taking the standard deduction, instead of itemizing and deducting their mortgage interest. And they’ll come out ahead.
Currently, about 44% of US homes are worth enough to carry a mortgage whose interest would be large enough to surpass the old standard deduction, and thus would incentivize homeowners to take the mortgage interest deduction by itemizing, according to Zillow. With the new standard deduction, this proportion of homes drops to 14.4%.
This effectively guts one of the most widely touted government subsidies of homeownership. It levels the playing field between renting and owning. In fact, it’s a particularly big benefit for renters. It’s the great equalizer.
Since it benefits so many households and hurts none of them, it’s devilishly hard to argue against. Nevertheless, the immensely wealthy and powerful lobbying group, the National Association of Realtors – whose constituents make more money when homes churn often and when prices surge – has lobbyied fiercely against it. And it lost.
A Sucker Punch for Expensive Markets
The mortgage interest deduction was already limited to interest on mortgages of up to $1 million. This cap has now been lowered to $750,000, but the cap only applies to new purchase mortgages, not existing mortgages.
Most Americans won’t feel it. Their mortgages are not nearly big enough. Only about 4% of purchase mortgages made in 2017 exceeded $750,000, according to Attom Data Solutions, cited by the Wall Street Journal:
But a few regions would get hit hard. In Manhattan, for example, 64% of purchase mortgages made this year were for more than $750,000, according to Attom. In San Francisco, that proportion is 58%, and the surrounding counties of San Mateo, Marin and Santa Clara register between 44% and 55%.
Black Knight Inc., a mortgage data and technology firm, calculates there are about 684,000 active mortgages with current balances over $750,000. Black Knight estimates that about 107,000 loans expected to be made in 2018 would fall above the $750,000 cap.
So in many markets, the impact of this provision will be small. In expensive markets, the impact could be significant in various ways, including:
- Homeowners might stay put in order to maintain the deductibility of their original mortgage of up to $1 million.
- Buyers might want to pay less to keep the mortgage under the cap.
- Buyers might put down more money so the entire mortgage interest can be deducted.
The thing is, once debt loses its status as a tax benefit, it’s no longer such a great deal.
Might homebuyers already be reacting to the new law? This morning, the NAR announced that existing home sales in November jumped 3.8% year-over-year “and reached their strongest pace in almost 11 years.” Perhaps some people are trying to lock in the deductibility of mortgage interest under the old rules.
The Blow to High-Tax States
The new law caps deductions for state and local income, sales, and property taxes at $10,000. This is not going to impact everyone. According to CoreLogic cited by The Journal, the median property tax bill is about $1,740. Only three counties have median property tax bills above $10,000 – all of them in the New York City area. But state income and sales taxes are also part of the package.
So in high-priced markets with high property, income, and sales taxes, this is going to put a damper on the enthusiasm about the tax benefits of owning a home.
The Home as an ATM gets costlier
The Home Equity Line of Credit (HELOC) has long been touted as a way to draw money out of the home with a loan whose interest, unlike credit card interest, is deductible. Under the new tax law, the interest on home-equity debt is no longer deductible, which raises costs and makes them less attractive.
In total, at least 23 million fewer households will be motivated to buy a new home under the new law, Zillow figures. Others have different estimates. Whatever the final numbers, one thing is sure: the tax incentives of homeownership have been radically slashed.
There are some caveats.
Property speculation is not impacted by these tax deductions. It’s impacted by a mixed bag of factors, such as provisions in the new tax law that favor real estate investors, by interest rates which the Fed is currently trying to nudge up, and by expectations of price increases, which can curdle.
Buying by foreign non-resident investors is also not impacted by the new tax law but responds to other factors, such as current efforts by the US Treasury Department to crack down on money laundering in real estate and by Chinese authorities to crack down on capital outflows.
But households that want to buy a home to live in will weigh the tax situation that they’re in, along with their other needs and wants. They will make compromises, as they always do. Tax benefits are not the only reason for buying a home.
Nevertheless, the new tax law represents a momentous change for how housing will be promoted in the future. The relentless wisdom that buying a home is the smart tax-thing to do will no longer apply for most households. The new law also reduces or eliminates the highly touted tax benefits of debt. Over the years, this will gradually shape how homeownership is being perceived. And I think the enormity of this change has not been fully appreciated just yet.
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In flyover America, the changes will mean little to nothing, mostly nothing. In California where hovels cost $1 million, it will mean less because hovels wouldn’t cost $1 million if people were smart enough to care. Cult thinking must prevail, there’s no other explanation. Same with the East coast, but belonging to a different cult.
Some dumbbells think you make money by writing it off on your taxes. This thinking is the last bastion of the people who support government as social spending decider.
People living within their means without expecting government (aka me and my family and friends) to support their decisions …. How dare they???!!!
R is right next to “T”
. . . . and there is no edit function here.
Typos are not noreworthy .
The same people most likely to lose some deductions on that million dollar loan are probably people reaping benefits of more lax AMT and overall bracket cuts on the back end. Every study shows people in the $200k-$500k are likely to do well under this plan.
So before we laugh at this group like middle america is getting one over on them I wouldn’t buy it. They are still walking away with a fat tax break even if its source may be shifted away from their properties.
Complaining about Blue states getting screwed in this deal is overblown. And also confounded by the same people noting that high income earners will do very well. They don’t call them coastal elites for nothing.
Ranger,
The people in that income range may lose big time once you consider interest cost on the additional national debt that has to be paid with future taxes. The wage earners’ share of all future debt servicing just increased dramatically because the corporate share has been reduced permanently by 40%.
Unless your income is tied to corporate wealth, you just got back-stabbed.
I think this tax plan is more likely than not to be terrible and need correction after 8 years roll by. In the short term I think the debt will simply grow and people will see a tax break.
But yes either working people pay these taxes to make up the difference, we cut spending, or we inflate and keep growing the debt. The more money you make though, even if your main source is working, the more of your wealth is likely tied to corporate profits. Since you will have more investments.
Still I think its pretty clear any boost earnings will be temporary since the cash infusion when the cut is realized will become the new norm.
Note how the folks who get their daily high dissing “coastal elites” have nothing to say about massive farm subsidies, unaccounted trillions spent in DoD accounts and the massive transfers from blue states to red states.
I am surrounded by farmers and military contractors in flyover country who would be destitute without government handouts in various forms.
Interesting point, Idahopotato. I bet that some of them are even likely to attack welfare programs or anything that smells like “big gov”, not realising that they are the main recipients of government sponsored ” welfare” programs.
The mid-terms will be a wipeout. The democrats will crush the Pubs. Interesting that in my area, Daryl Issa almost got beat last time by some retired Marine… The Democrats seem to lack any good candidates, but I’m voting to throw any and all incumbents outta office.
Idaho Potato: I remember well a line in Mark Reisner’s tome
Cadillac Desert, in which he referred to “Mormon irrigators” who never saw a federal water project they didn’t like.
IdahoPotato,
I too love listening to all those Rugged Individualists beat their chests about the risk-taking they do, and why it justifies their riches.
Yes, the human capacity for self-deception is infinite.
Agreed. None of this amounts to any meaningful changes with regards to deciding whether or not to purchase a home. Central banks charge such low interest rates to mortgage borrowers that the interest costs are trivial compared to the actual principal being leveraged. The tax benefits mean nothing compared to tax free capital gains of 20% per year.
In order to allow new buyers to purchase homes but still inflate the price, to benefit current owners (wealth effect subsidy), central banks will need to keep lowering mortgage interest rates. When we reach the point where interest charged on a 30 year mortgage is 0% borrowers will owe about $33,000 per year on a typical $1,000,000 mortgage. After we reach that point mortgage interest rates will need to go negative or wage earners would need to earn more money – but in that case homes would only increase with wages and this would limit profit for speculators.
Central banks seem to want to provide the largest possible profits to speculators so I believe they will lend out mortgages at negative interest rates in the future. Speculators drive house prices and mortgage deductions don’t apply to them.
Conforming 30-year fixed rate mortgages were quoted today on average at 4.1%. That’s still low, but it’s higher than it was not long ago and will rise further. Dream on about a 0% 30-year mortgages.
If a mortgage rate was set a minimum 7%, people might think about living within their means and savers might actually stay neutral.
This period of ultra low interest rates has been a terrible experiment with long-trm effects as far as I’m concerned. Then again, I abhor debt.
I would bet Powell is already dreaming about negative mortgage rates. It is now up to the central banks to decide who gets charged what. Isn’t the Fed now the worlds largest mortgage lender? Can’t they charge whatever they want? Who would stop them?
Central banks already lend to governments at negative rates, so why not home buyers? If the balance sheet arithmetic works for government bonds it will also work for mortgage bonds. These days anything is possible – never say never (cause they will do whatever it takes). Central planners will do as they please, logic be damned they know better then us.
BTW I would suggest any bank that lends at negative rates would lose money and their balance sheet would blow-up. I submit this as proof positive evidence that the central banks are fabricating/printing money. In the past societies that printed money to pay the bills ran into difficulties – buckle up, things are getting interesting.
The blowing of the real estate bubble will be a boon for the banks, if they can keep it going, by design. There is a big difference in 3% on a $300,000 mortgage compared 3% on 750,000. However, the greed of these institutions will be their downfall as it always is. The problem is the collateral damage done to everyone else. I am also curious how much the taxpayer will be on the hook through Fannie and Freddy when the MBS market gets rebooted to version 2.0
I have a loan adjustable to the LIBOR 1-year. Heard the LIBOR is going away. What’s your latest intel?
There’s going to be a replacement for LIBOR in the US, called ARRC, which the Fed is putting together right now…
https://www.newyorkfed.org/arrc/index.html
I’m not sure how this will impact you. I only know for sure that your interest will not go away :-]
Great post. This sums up a lot of what I have been thinking. I often hear the argument that people don’t buy a house for the tax benefit. That may be true, but I think the tax benefit does influence how much a buyer would be willing to spend.
Without the deductibility of mortgage interest even in moderate priced markets where many homeowners would just qualify for the new higher standard deduction, people may not be as willing to get into bidding wars and pay a higher price (e.g. take on more debt.)
I think all SFH markets will be affected by a drop in home values. In Trump country and elsewhere
When I think about deductibility of mortgage interest my general thought is the government does that to put ordinary home owners on the same footing as landlords. Gonna be a cold day in hell when businesses aren’t allowed to deduct interest.
I suspect that the way around the reduction in the mortgage interest deduction is incorporation. Probably already the case, was reading a bit on high wealth IRS data; some very wealthy people don’t own a personal residence. Likely two things. They do, but it’s through ‘Smithers Family LLC’. And not owning a primary residence allows them to claim residency based solely for tax reasons. (Red States serving as tax havens for high wealth people from Blue States[1])
[1] I know of someone that’s doing this. Primary residence and business is incorporated in Nevada.
Shielding ownership in a trust or LLC is popular in Florida. They can hide the ownership and bypass estate laws. The downside is that they can’t homestead the property to avoid large real estate tax increases.
That’s done more to protect assets from creditors than to get a tax deduction on state taxes or mortgage interest.
I have mixed feelings about this bill. Having just closed a home at about $516k with 20% down in San Diego the net tax benefit is pretty much gone. I will be able to itemize still, but the deduction will add maybe $2k-$3k in write offs coming out to maybe an extra $500 a year.
That being said, since I have kids, my net taxes are thousands less than they would have been under the old plan. So yes I am now level with renters, but also I am $500 a month richer roughly than renting before, and about $200 a month better off than owning before. The majority of that benefit is coming simply from the 3% cut to all tax brackets which shouldn’t be discounted as a major if not temporary change.
On the higher income scale many of use get a fatter child tax credit back which we lost to income cutoffs of old and the AMT deduction phase out start has been raised significantly which should impact many in Cali and New York. It would be interesting to understand what impact that has on high earning families, which btw are all the people buying the million dollar homes and soaking up those tax breaks.
By giving renting families more money I wonder if this will help push up rent values even if property values stagnate. For a long time in California I feel like that relationship has been inverted.
I think long term people will get over the lost tax benefit. If the market prevails, as long as average household incomes grow, I think we will see prices continue to rise as the majority of why you by a home is not for tax write offs.
What would be really funny is that renters get a break, but now that the owners might not, they cant just bump rent to compensate and people should have more money to pay it. Net effect of the tax break then is a wash for homes.
At the end of the day there are so many variables it is probably impossible to predict the impact this will have moving forward.
The tax law changes in 1986 dis-allowed a tax deduction for interest paid on personal credit cards. Initially it was thought that the credit card companies would take it in the trousers, that people would stop deferring their payments and avoid carrying a balance and paying the exorbitant interest charges. You can tell by today’s debt levels that the tax deduction made little difference when people wanted to use their cards to buy debris.
Holy cow you could do that 0.o
“as long as average household incomes grow”. This is true.
This is partly done so that the supposed “cash overseas” which is never overseas in the first place can be brought home. Once that’s done, both of these things will occur: first they’ll give out dividends out of the wazoo and secondly they’ll use the cash pile for mergers and acquisitions thereby throwing people out of work.
The average income will continue to increase up till the end.
I’m an engineer who neither rents nor owns (I can’t afford either). I earn about 93k and deduct about 24k for 401k. The new tax bill increases my standard/personal deduction from 10,400 to 12,000. An extra 1600 deduction at 25% top rate (for me) equals a saving of 400 – big friggin deal!
This tax bill means increased deficits. Increased deficits mean increased inflation. Inflation is a tax on, not just my earnings, but also my entire life savings and an inflation tax is very hard to calculate and hard to plan for. I would rather be taxed up front on my earnings than be taxed through inflation. This all appears to benefit mostly wealthy speculators and rentiers. Someone tell me, how am I wrong?
Why am I, a lowly wage earner, taxed at a higher rate then wealthy property developers and hedge fund managers? One word – CORRUPTION!
You keep sending these jack asses back to congress because they receive money from lobbyist to run adds – STOP DOING THAT!
Yes, the tax code is corrupt, and making 93k in wages puts you in a higher bracket than hedge fund managers who’re taxed based on dividends, capital gains an carried interest.
There’s a fair amount of ‘Libertarian bashing’ in these comments, but since this subject is on the Tax Bill, try this Moderate Libertarian idea:
The first amount of a living wage, say $30,000 per year has no federal tax liability. After that, every dollar earned from wages, dividends, capital gains and carried interest is taxed at a flat 20% rate.
Perhaps a 25% flat tax is in order as the national debt has increased $1.0 trillion in the last thirteen months. David Stockman calculates that the FY 2019 federal spending will be $4.575 T, and this is 20% higher than the $3.85 T spent in FY 2016. He predicts that under the new tax bill, Uncle Sam will lose $280 B in revenue collection in FY 2019; collecting $3.40 T of the $4.575 T it will spend.
If the Fed continues its Quantitative Tightening as planned, Treasury Bonds will probably fall in value and rise in interest rates. This will make carrying the $21 T monkey on our backs even more expensive.
“The first amount of a living wage, say $30,000 per year has no federal tax liability. After that, every dollar earned from wages, dividends, capital gains and carried interest is taxed at a flat 20% rate.”
This would actually be fairly progressive in real terms. I’m not a libertarian but I could get behind that (I’m sure the rate would have to be played with to arrive at the desired tax revenue number).
Someone making $30k/year (lower class) would have a $0 bill and 0% rate.
Someone making $60k/year (middle class) would have a $6000 bill and 10% rate.
Someone making $120k/year (upper class) would have a $18000 bill and 15% rate.
Someone making $1mm/year (wealthy) would have a $194000 bill and 19.4% rate.
Of course, it would never happen. Something about job creators and fairness and socialism and bla bla bla.
Van, The maximum deduction for a 401k is 18k.
The maximum deduction for a 401k is 24,500 after you hit your 50’s – something for you youngsters get to look forward to!
Seems like a useless exercise in any case. Money I saved in my 401k 15 years ago is not worth a whole lot any more. The central banks keeps creating massive asset bubbles and we are all left trying to guess when it will pop. I guessed the bubble was ready to pop somewhere around S&P 1600 – I guessed wrong and was left holding a bag of ever more worthless currency. Gee, is now a great time to jump in with both feet and get fully invested as the S&P nears 2700 and is supposed to be a bargain because of the spiffy new tax law?
U.S. public companies last paid about $300 billion in annual taxes. The same companies are valued at around $27 trillion – that means in aggregate they are paying about 11% (if you factor in all the money losing dead weight zombies). No doubt for some companies this is a giant windfall, but for many more… meh.
Look at it another way: the 40% corporate tax cut multiplied by the $300 billion they last paid in taxes equals an annual savings of about $120 billion spread over $27 trillion equals and increase of .44% earning to price – a pe drop from 27 to 26.56 (still not a bargain in my book). Go ahead and listen to the raging bulls on TV but bear in mind they are not good at arithmetic.
hmmm Ranger,
It must be a pretty big postcard to figure out your taxes on. Wasn’t it supposed to be simpler for you guys? Postcard size? :-)
This tax code is absolutely not a simplification I agree. If anything they just encourage a bunch of additional people to find new ways to game the tax code. Guaranteed this thing is going to be riddle with new holes to exploit given the scope of the change.
My taxes are still simple considering I am the sole worker and I get a salary pay check. But I think they stopped talking about the stupid post card awhile ago. Clearly there has been little to know simplification unless we were just worried about upper middle income people itemizing.
good point you push up rents you push up home prices, and with services like AirBnB those rent increases do not have to wait for leases to expire to go into effect. The landlord will be the first one at the door for his share of the “tax” break.
“Eliminating the deduction for interest on home-equity debt, such as HELOCs.”
Tell me, it wasn’t true.
Tax reductions must be accounted for.
Without a corresponding reduction in spending, where will government find the additional revenue to make up for the tax loss?
The Fed is about to normalize their balance sheet by dumping $600 billions per year of bonds onto the market, while at the same time the Treasury will be attempting to float new debt on the market, in order to keep government funded! Insane.
Bond prices will plummet as interest rates rise, making the cost of borrowing expensive.
Tax reduction? Possibly very short term. Mostly this tax bill change is nothing more than rearranging the deck chairs on the Titanic.
Government is a financial slob. Expecting it to stop consuming relentlessly, stop protecting it’s friends, and not waste without remorse is not realistic.
The best you can do is demand your share and bully the slobs who run it to consider you more important then the crooks who normally tell the slobs what to do.
BTW, this is the crux of what is going on now in govt, overall. The tax bill is only a subset.
A banquet of consequences, this way comes.
When bond supply abounds, interest rates rise.
The cost of debt rises.
Margin debt is reduced by selling equities.
As selling gathers momentum, it becomes relentless.
Paper wealth simply vanishes. Capital comes under attack.
Real estate (both residential & commercial) is liquidated.
Prices plummet, except solid financial safe havens.
Both deflation and inflation are experienced.
This is what is being prepared, to be served in the very near future.
Wait for the rebound after the fed tries to unfuck it all
“This is what is being prepared, to be served in the very near future.”
Why?
Who benefits in the long run?
Isn’t this a very risky endeavor whos consequences could easily be uncontrollable?
Bye printing money. And that’s not a bad thing.
What IS bad, is cutting taxes in a way that goes mostly to the rich (who hoard money and don’t spend it) followed by cutting government spending that goes to lower income people, who don’t hoard money because they spend it.
That slows down the velocity of money and shrinks the economy.
If you want to stimulate the economy, the best thing to do is drastically increase government spending on things that benefit the vast majority of people – like universal healthcare, increasing and expanding Social Security, huge increases in public education spending, infrastructure with done by government (not the public-private partnership neo-liberal con that really means privatizing public assets) , and raise taxes drastically on the rich.
Super massive cuts in military spending – about 90% – would lead to a massive economic boom, too.
If I may .. in addition to your beneficial government spending list .. add ;
Massive spending on vastly overdue and desperately needed…
Infrastructure .. e.g. Bridges – Roads Airports – Power Grids – Sewers – Water supplies , storage and lines – etc – et al – ad infinitum .
Any one of which would provide more jobs and damn good incomes over the next ten years than all the coal mines and oil drilling/fracking combined
Careful there TJ. Deficits are anathema to the GOP and the rhetoric is never ending. They want a “balanced budget”, they say little understanding balanced budgets, ie, surpluses lead to recessions. Eating crow is not an option for the GOP [Dems too].
The “solution” is to spend anyway and don’t count it with the annual accounts. After all no budget factors in the bailout costs of 2008 -10, the overspend on the military [the budgeted $600Billion is just a token] and lastly all the disaster relief costs also aren’t budgeted for. So lets add infrastructure to the spend.
There’s a long list of other spending priorities too. As long as the needed resources are available for sale there will be minimal inflation. Inflation is not an argument against doing the work. Trump said we need to spend on infrastrucure when commenting on the derailed train in California. Take him up.
Canada and many other countries spend more than the US on “things that benefit the vast majority of people”, yet our economies don’t perform that much better, if at all. Many perform worse.
Those with extreme recency bias will point to our “best in G7” growth this year. But this is only one year. It’s not like we just discovered social spending. Countries like France spend much more than we do and their economies don’t do better than ours.
In “Canada and many other countries” do you see instances of:
People losing all they own because of medical debt?
Hordes of homeless people, even camping out in the shadows of the glittering towers of the rich?
High rates of illiteracy, in some areas Third-World levels of such?
Decreasing life expectancies?
Extremely restricted, in some places nearly non-exestent, access to birth control, pre-natal care, and education in this area?
I could go on … if I were still young I’d skedaddle for France than you very much.
Well, but people are doing better. Enjoy your debt-peonage, student loans and 100.000$ medical bills.
Are you conflating national “economies” with quality of life? Social spending is not necessarily related to economic benefit.
rx
“Canada and many other countries spend more than the US on “things that benefit the vast majority of people”, yet our economies don’t perform that much better, if at all. Many perform worse.”
Our GDP is growing faster. GDP is not the same as economy. And economic growth is not necessarily reflective of well-being.
You could have significantly stronger GDP growth than another country, and yet based on economic inequality, the average person in the lower growth economy could still be better off. If all the gains accrue to the top 1%, economic growth actually does very little to better the average person’s situation. Look at the US… real incomes have been stagnant for decades.
When you factor in things like healthcare, education, etc. GDP becomes even more meaningless.
Besides, our GDP per capita is not all that impressive, anyways. It’s about $55k. Most European countries are in the $40 – $65k range.
On the basis of quality of life, which should be the real measure of wellbeing, ALL of those countries like France, Norway, Sweden, Canada… they ALL outperform the US.
The US does produce a lot, but, we are largely a consumer nation more so than any other established Western country. If you want to have growth and a high GDP you need to produce and export a lot of stuff.
It seems that every country in our position eventually reaches an anemic economic growth rate. I don’t believe you will find much evidence that tax cuts are a magic bullet to “fix” that. The right tax code is a component for sure but if anyone thinks that a tax code change lazely drafted and signed in 40 days will fix this they are nuts.
We need to find new industries to pioneer and create products for if we want to create a new wave of jobs and growth. Because none of this is going to bring back manufacturing and factory jobs.
+10 and then some.
The rich can not really hoard money… What do you think they are doing? Putting it in their own safe? Or burring it in their ground Zero bunkers?
Most of the money is circulating in higher art values, higher mansion values, PE stripping and even VC endeavors.. Some of it is in stocks and bond funds.. Most of it is invested and as such much of it could just as easily disappear as not when the dominoes begin to fall.
timbers,
“If you want to stimulate the economy, the best thing to do is drastically increase government spending”
reply: Why not raise interest rates so people can earn interest income once again and spend freely on whatever they like? Of course, the people who profit from low rates via asset inflation and borrowed money schemes like stock buybacks would shriek and scream while presenting phony economic theories that all repeat endlessly why we need low rates or we will all die if they go away.
Why should government be the spender of first resort? That is a terrible idea.
“reply: Why not raise interest rates so people can earn interest income once again and spend freely on whatever they like?”
Most Americans don’t have enough savings to make higher interest rates worth squat.
I’ve pointed this out to you numerous times. You continue to ignore it and believe that higher interest rates are some magical bullet for the lower and middle class American.
Please stop doing that. Get it through your head. Higher interest rates will have a negligible effect on the average American’s income, and in many cases, due to debt, will actually have a negative effect. I don’t care about your personal situation; it’s irrelevant to the topic at hand.
Smingles, just because you don’t save doesn’t mean others don’t. Plus, if rates were higher, others would save because better jobs would be more plentiful because income from the new savers would be flowing through the economy. This is called a virtuous cycle.
I saved because I made good decisions. Don’t ask me to pay for the bad decisions of others, including you.
Printed money from central banks is a new idea, created by goofballs who got paid via ‘recognition’ and ‘praise’ by people who needed the printed money. The supporting theory is called ‘a long game’.
@CDR
“Smingles, just because you don’t save doesn’t mean others don’t.”
Where did I say I don’t save? I’m 31, have no debt, make good money, and have close to six figures in savings. I try not to get on the soap box and brag about what a great saver I am. It’s obnoxious. Take a note.
“Plus, if rates were higher, others would save because better jobs would be more plentiful because income from the new savers would be flowing through the economy. This is called a virtuous cycle.”
Dude, get it through your head: most Americans DO NOT HAVE SAVINGS. Period. 60% of Americans don’t have enough money to cover an emergency $500 medical bill. You are simply wrong. An increase in rates would arguably hurt more Americans than it would help. This is basic math. Do you not understand what happens to debt when rates rise? It goes up. It gets bigger. Larger number, yes? You get that?
“I saved because I made good decisions. Don’t ask me to pay for the bad decisions of others, including you.”
I’m not asking for anything. You are the one whining about how great you did and how you “deserve” higher interest income. I’d love to see higher rates, if only to see the housing bubble pop. But I’m not talking about me. And I’m not talking about you. I’m talking about EVERYONE ELSE. And higher rates would, by and large, not help most people.
smingles, earning 5% on the savings you report would earn you a fine annual sum. A decade ago, this would be easy to find in a mutual fund. Perhaps again in the near future. Don’t diss it. By the time you’re thinking of retirement, the annual amount should be much higher and you will be sitting pretty. You’re on your way. Why toss it out just to support the new Fed socialism.
The problem with low to negative interest rates is that it isn’t for everyone- it’s for the large companies and the rich. They buy up limited resources such as land and drive up rents. Big businesses get a blank check to buy out their competitors while new entrepreneurs are starved for cash. It leads to major wealth inequality those with assets see large gains and those without find them ever more out of reach.
Higher interest rates and quantitative tightening will help level the playing field primarily by popping the bubbles in stocks, bonds and housing so that ordinary people with income from labor can afford to gather a decent share for retirement.
The downside of any bubble popping is that it causes massive economic restructuring as overpriced projects can no longer support the debt load and the “zombie” business suddenly lose their previously endless support.
Corrections always overshoot to the downside as booms do to the upside. Hopefully the next restructuring, which is as inevitable as the next high tide, can lead to a stronger economic basis then the fed allows with its constant desire to fund the next bubble.
Is this THE John Taylor? That is, Professor J. Taylor at Stanford?? In any case, I agree with your observations, John. The only bad news is that the aftermath doesn’t reduce the inequality to any significant degree (Piketty – summary from the “Economist” -https://www.economist.com/blogs/economist-explains/2014/05/economist-explains ). it just slows the process a while. It’ll take something massive to make any significant change (Piketty) like a world war.
What the Fed says and what the Fed does are two completely different things.
They’ve been blabbing about the balance sheet for a long time now yet it still sits inches away from record levels at over $4.3 trillion.
They’ve been talking about raising interest rates for over 2 years yet the Fed Funds Rate is still sitting at an emergency level of 1.38%.
When Bernanke started QE he said he was going to temporarily raise the balance sheet to as high as $1.8 trillion yet now Powell says the Fed will not ever decrease the balance sheet to below $3 trillion (he said that was the new floor) and he expects the balance to continue to grow.
These guys are compulsive liars – nothing they say matters. All that matters is what they do and all they do is loose money policy – there is and never will be tightening. So don’t worry about it the government will have no problem finding a willing bidder at treasury auctions.
Everything is paid for with inflation (currency dilution). The rudder fell off the ship long ago don’t expect it to change course.
The tax plans of both parties do little to deal with the medium and long term trend of ever increasing public and private debt. I’d like to see the politicians raise taxes just enough to match spending and not even be concerned about paying down the debt. Then the revolution begins. Of course politicians aren’t suicidal.
The GOP is the party of small government, read the boilerplate, their main architect is Grover Norquist, their motto is “starve the beast”, and so they love military spending because it is like burning money. In the long view theirs is an entirely private economy, police, fire, mercenary soldiers. You pay for everything. (it’s your right and your moral decision). It’s like Walden Pond and Sandy Hook all rolled up into one. Most people who vote GOP also suck up to the government trough, so it has a dystopian element.
Analysis of year 1 of the tax plan is pretty clear. But what is predicted for year 2, year 3, etc. as impact on the average family. I’m always skeptical when I’m told I am winning.
Overall, I am in favor of this tax plan. And yes, some real estate markets will suffer, which is inevitable when they are gov’t subsidized. They will suffer with this tax plan or some future tax plan, but eventually the gov’t subsidy will end.
And with the the end (or lowering) of the gov’t homeowner subsidies implemented by making home mortgage interest commonly tax deductible, will our economy become more efficient?
Or does the gov’t subsidies encourage better property management and an immeasurable economic gain of nicer neighborhoods?
In history (late 19th century), when Irish citizens were encouraged to own property (actual granted the right to own property), an economic and building boom followed in Ireland. Is Trump’s tax law possibly flawed to do the opposite? by tilting incentives to renting?
Here my wife and I sit .. remaining OWNB’s ( out with money not buying ) despite all the panic driven wisdom of the last ten years .. in a high enough income bracket to benefit from this tax debacle .. living in a state with moderate to low taxes etc ..
While the middle / lower middle and lower classes that all voted in the congress and senate that passed this mess take it firmly in the shorts to mine and those above me’s benefit
Ahhh .. schadenfreude … although sometimes bitter … a most satisfying dish overall
My taxes under the new plan are easy to calculate because we don’t own anything. We will be saving at least another $150 a month and my husband just got a small raise too. This is all due to the new tax plan.
I think this is why the Dems are deluded right now to think this tax plan will hurt Repubs in 2018. A lot of people, especially those with kids and renting will see a tax cut, possibly of more than $200 a month. And its easy to not give a shit about a lop sided tax bill when you see a healthy income boost.
The mess may come way afterwards if there is a whiplash in asset values or they make a drastic cut to social security or medicare. But initially I think people who see a tax increase will either be happy or indifferent.
We know people that will benefit from the repeal of the Obamacare mandate. Lots of single guys don’t get the insurance and they make to much to get a subsidy. They will benefit by thousands in this new tax plan. The dems are in a very bad place but don’t seem to know it.
Like to place a small wager on that Petunia ?
Fact is you’re only looking at the large print while ignoring all the fine details included in this little debacle
Read the tax reform bill ( in detail ) …and read what the repeal of the health care act will do to people .. especially those like yourself
Guaranteed Petunia .. you’ll be taking it in the shorts on all counts ( your tax calculations are extremely flawed and missing all the small print details ) .. to the likes of myself and Wolf’s .. benefit
But hey … sorry for your lose but guaranteed the wife and I will be enjoying all that extra cash you’ll be paying for … starting with the all but elimination of the capitol gains tax .
TJ,
I don’t begrudge you a single penny you make. But you have no idea what it’s like at the bottom looking up. So I will take the bet and tell you why.
On average a single working mother makes $25K and votes democratic. This tax cut makes $24K tax free and gives her back another $1400 per child in cash. Assuming she was paying 10% on half her income, she is now in the money by almost $3K or more. A new voter for the president paid for by the plan. The only deficit she cares about is her own.
TJ
Correction:
On average a single working mother makes $25K and votes democratic. This tax cut makes $12K tax free and gives her back another $1400 per child in cash. Assuming she was paying 10% on half her income, she is now in the money by almost $2K or more. A new voter for the president paid for by the plan. The only deficit she cares about is her own.
It is still borrowed money… Like a HELOC on the National Debt while the FED unwinds and raises rates at the same time.. We have tons of problems that need funding or at least leadership and this is what we get!
So instead of fixing anything or simplifying anything or even paying down any amount we are just going to go faster in the hole? And degrade the environment while we’re at it.. this tax plan does include such things as drilling in the arctic. They added a lot of kitchen sink dirty dishes to it..
But Wolf was writing about the mortgage deductions and in the big picture, that probably won’t amount to a hill of beans.
I don’t think the tax bill in isolation will necessarily hurt Republicans. It’s just part of a broader message, one that has been broadcast to varying degrees of success for years by Democrats: Republicans only care about the wealthy, at the expense of everyone else. That message seems to be resonating stronger and stronger as the economy increasingly leaves more and more Americans behind.
I do agree that people are inherently selfish and short-sighted, so in that regard I tend to agree with you that people will like whatever savings they get. BUT the optics of the bill are terrible. There is a reason– almost unprecedented, by the way– that about 2/3rds of Americans are against this plan. It’s nearly impossible to have a majority of Americans oppose a tax cut. And yet the GOP accomplished it. I don’t think an extra $100 a month is going to move the needle for most, especially when it’s framed against how much the upper class benefits.
Most people didn’t blink an eye when they received the George W. Bush tax rebate checks (typically $600 – $1200). Most of it went towards paying down debt or big ticket purchases (TVs, etc.). I’m not so sure they’re going to care about an extra $100 a month this time around, either. It’s peanuts and many will acknowledge that. If you’re already struggling, this isn’t going to help you much. If you’re already successful, this will make you more so.
Which are the Democratic programs which in actual fact have
Been successful in helping the lower classes? And mind you we are not
Simply talking about wealth transfers but programs which have actually elevated people who would not have been elevated on their own in a free market? Mind you I’ve read Thomas sowell’s work, Which shows how most social economic indicators for blacks in America were moving up prior to the great Society programs, but then shifted downward or at a much slower rate of rise after the implementation of a great society projects.
We all follow wolf’s lead here and Just try to stick to the facts, right?
Interesting how expenses for health insurance are not factored into these analyses. Under this plan premiums are going up, up, up. For individuals and for corporate/group.
Americans are spending a lot more money every year paying for ever more expensive policies (that deliver less and less).
This is money that is NOT going into the economy to buy a car, remodel a kitchen, go out to eat every week. This will take a toll on the economy.
For a 60 year old who is not receiving any subsidies, preliminary estimates are $1400 – $1800 a year more than they were already increasing, and expected to continue to increase at a higher rate.
Within a year or two, it will wash out any savings and turn into a net loss for many.
Of course the young, healthy ones who skip out on insurance will save more, but I don’t think this is a significant demographic, and some of those will certainly gamble and lose big. Even a minor event will wash out multiple years of savings.
Is the lowered mortgage cap number of $750,000 for only married and filed jointly? How is a single person who purchases a new home affected? My understanding is that there’s a $500,000 cap currently in place for an unmarried taxpayer.
Will more coastal elites establish residency in a lower-tax state thru the purchase of a coop/condo now that local taxes can’t be written off? I think so.. PJS
“”What IS bad, is cutting taxes in a way that goes mostly to the rich (who hoard money and don’t spend it)””
WRONG and CORRECT at the same time…..
I have watched ALL of the “tax reforms” since the late 50’s and early sixties. NONE of the “tax reforms” since the 70’s have benefited the common man. Between those “reforms” and the growth of cheaper and cheaper imports the working stiff has been beat down.
The rich DO NOTHOARD MONEY (unless you consider buying expensive paintings and expensive classic cars hoarding). They “invest” money in ways that will hopefully make their cash stash grow. These investments sometimes actually provide jobs for the rank and file. Much of the time these investments are made outside of the US of A and do nothing good for the rest of US.
That being said – I think that (nay – I KNOW) that money in the average joe’s pocket will get recycled many times over compared to the what a rich persons money will.
Tax the living daylights out of the wealthy and large corporations, zero taxes on the working stiff that has a total family income of under 50K, put interest rates at between 5 and 7 percent and watch the economy flourish as it did in the 50’s and 60’s…
There is MUCH MUCH more to consider.. Levy heavy import taxes to drive the cost of a import up to the costs that a US based factory has to have to survive and jobs and prosperity will return is just one.
Off my soapbox. For now….
Enormity
1. the great or extreme scale, seriousness, or extent of something perceived as bad or morally wrong. “a thorough search disclosed the full enormity of the crime”
2. a grave crime or sin. “the enormities of the regime”
You forgot to list definition number 3, per Random House Webster’s:
“#3. greatness of size, scope, extent, or influence; immensity. The enormity of such an act of generosity is staggering.“
living in a house is pointless in an environment that allows people and corporations! to buy multi dwellings.
the house is no longer for living, it becomes a speculation.. and eventually a debt burden.
my advice, get out of your house, dont rent.
I couldn’t disagree more. My 98 year-old Craftsman bungalow in Minneapolis was bought for $55 per square foot by me in 1995, and it’s been paid off since 2010. It is modest, well built, comfortable and economical. Plus, it gives me privacy, autonomy and a great quality of life.
When my family sold our business in the same year it was paid off, I could have easily ‘moved up’ to a more expensive home, but why? I will live in my house until I croak and wouldn’t want it any other way!
On the other hand, is vehicle dweller being sarcastic?
P.S. the median home value in my 55406 zip code is $233,000.
I’m with you man. The Fed raised the cost of housing beyond what was reasonable – given current wages – so I’m no longer a consumer of housing, period end of story.
They can keep their poorly constructed overpriced junk and cram it. I’ll work another couple of years and live in my van, then I plan to move to a cheaper country and become a housing once consumer again.
In Seattle houses start at $800,000, maybe not a lot of money to a speculator who raises easy money in the bond market but that’s a big chunk of change to anyone who earns a wage. Housing has become one more thing I can no longer afford – and I’m not alone. When I park my van in the Walmart parking lot overnight I meet and talk to a lot of other working people who can’t afford housing and live in vans and old RV’s. For now I save every penny I can in the hope of getting out of this country one day. Welcome to America in 2017 everyone!
I’m an older millennial in nearly the same boat as well, though I continue to rent, despite having the downpayment, income, credit score to buy in the Seattle area.
In my analysis, I’d rather have an $800k portfolio than an $800k house, especially when that house is realistically worth maybe $500k. Not to say that we’ll never decide to own a home, but at these price points it’s just not worth it. And as I don’t consider a home an “investment”, but a box we live in, the opportunity cost of dropping most of my net worth into one overpriced, illiquid asset just doesn’t make sense. An investor putting their downpayment into an S&P500 index fund and renting has historically done far better than someone buying a home in the vast majority of areas of this country.
The portfolio continues to grow and pay US – a home ties us down geographically and requires us to pay IT to keep it functional and maintain its value.
Many states have reduced income tax rates in the last few years with limited corresponding increases in economic activity. Why do the feds think it will work at their level ? Oh folks you have a few more days to get your tax subsidized HELOC’s . the “level the field with renters” was a good observation WR
http://www.wbur.org/hereandnow/2017/10/26/melissa-rooker-kansas-tax-cuts
Marquette, KS offers free land, but no one seems to want to go there.
http://www.freelandks.com/
* correction – from what i could glean from web sites the HELOC interest deduction will be no longer be deductible for anyone .
The new tax plan is good for Made in American jobs.
More factories and small businesses, the larger number of workers.
When middle and upper middle class jobs will rise, RE & landlords benefit.
Socialists always love large armies of workers.
The bigger his success, the more socialists secretly will admire Trump.
Trump will revive the old fashion left.
“44% of US homes are worth enough to carry a mortgage whose interest would be large enough to surpass the old standard deduction” This doesn’t mean the same thing as “44% of homes with mortgages”. Almost 1 in 3 homes are owned outright, no mortgage. Some people paid cash. Some paid off their mortgage.Some inherited the house. Most people don’t itemize on their tax returns to take the interest deduction. It is not a real factor in real estate ownership, although it is often believed to be so. The NAR, in the face of proof to the contrary, has been peddling this fiction for decades. In Canada, where there is no interest rate tax deduction, they have the same market as the US.
Most of those million dollar homes paid for in cash are indeed mortgaged in the shadow banking world. While the houses don’t have a mortgage lien, the owners are indebted to their private bankers, where they have huge credit lines. Hollywood types and politicians are among the highest borrowers, as are the financial people themselves.
Ditto for property and provincial income or sales taxes: none are deductible for purposes of determining federal tax payable.
Mortgage interest was never deductible in Canada. And look how insane their housing market is. It is all driven by low interest rates and easy credit. When that changes, the housing market will turn.
“It levels the playing field between renting and owning. In fact, it’s a particularly big benefit for renters. It’s the great equalizer.”
How is this a big benefit for renters? Can you clarify?
If more people rent,then rents will go up due to scarcity of apartments!
Renters don’t pay mortgage interest. So they normally don’t have enough deductions to itemize and cut their tax bill. But now they get the full benefit of the doubling of the standard deduction (minus the personal exemption).
Homeowners who take the new standard deduction will get the same benefits, but they will lose their mortgage interest deduction. For many of them, the savings could be very small. Renters have no deductions to lose in the deal.
It doesn’t impact the housing stock, or housing scarcity. People can rent or buy houses or apartments/condos.
And yes, it could be a net benefit for commercial real estate and landlords. In addition, there are several provisions in the tax bill that benefit real estate investors. The administration is studded with RE investors. So this would make sense.
Wolf, in the Bay Area, there are more than a few people who rents while having their property as rentals. It is a mad economy we live in. So much for the idea of individual ownership, welcome all to LLC land.
Landlords are by and large a pretty savvy group. I imagine they will recognize that their tenants will soon have a bit more cash on hand each month and continue to raise rents accordingly, so I don’t see much relief there. Unless maybe you just signed a lease and are locked in at that price for a year.
and another round of rent increases should help the Fed reach its 2% inflation target, although high rents relative to property values are not the same as equivalent rents.
Prices are already falling year on year. Now they’re going to fall just a little faster.
So, someone help me out on this one.
One of the give away was the $10K deduction for state income tax or property tax. But it’s not clear if this is $10K per house hold, or $10K per individual.
You can see how this is technically an excess tax on married couples. Any clarification on this one?
Moody’s has already answered the question for me – consequence of tax bill: a 10.5% drop in property value:
https://slate.com/business/2017/12/housing-markets-worst-hit-by-republican-tax-plan.html
I live in Union County, NJ.
My son-in-law and I did a back of the envelope calculation two weeks ago and came up with a 10% loss of value. Purchasers of homes over $1 million will capitalize the loss of tax deductions (for real estate tax, NJ personal income tax and mortgage interest) over the ownership period of the home (at least 7 years). To make up for increased Federal income tax, the purchase price of the home must decrease.
The net result in this area will be an increased demand for homes under a $1 million and more people renting. Rents will go up.
NJ Communities, counties and the State of NJ will be under great pressure to reduce costs and not raise taxes. Our real estate taxes have increased 2% per year for the 40 some years I have lived in my house.
Failure to not curb non-deductible property and income taxes will just push property values down more, due to the increased costs of ownership.
Landlords will not only pass all of these costs through but increase rents more because of increased demand.
This was La-La Land for property developers over the past 10 years. Every project involving a tear-down and re-build sold and made money.
I haven’t lived in the NY metro area for decades now, here are a few thoughts on the matter from a native. Yes property values will drop in NJ for all properties, but rents will not be going up. NJ will only attract renters who work in the state and most people commute to NYC.
Given the choice, renters would rather be in NYC and surprisingly the property taxes in the city are low compared the rest of the region. The property taxes average under 1% in NYC and over 2% in NJ. With the savings in commuter costs and commuter taxes rents will be increasing in NYC.
NYC has its own income tax, the revenue from which helps keep property taxes down. Upstate counties with lots of people on Medicaid and few wealthy taxpayers have much higher property tax rates (4% plus in some cases).
It was my understanding that landlords are running a business and can deduct all of the property taxes for all of their properties as a business expense. Rents should not go up due to increased expenses since nothing has changed for landlords with regards to tax deductions.
Rents should not go up unless the demand for rentals goes up.
Am I correct?
Rents will go up temporarily but will then go down or stay the same I would think. After all the “new renters” will need to provide a discount to the buyers, and the later can then rent their new units at a lower price.
The tax cut plan is a loser for all individual taxpayers. You don’t hear about this in the media, but the corporations’ share of our huge $20T national debt was just shifted to individuals, as corporations will pay 40% less tax in the future, while the net individual tax cuts are relatively miniscule.
The politicians have hidden this fact the best they can. They don’t speak of debts, or the fact that individuals now own a greater share of it as a result of the tax plan.
The dimwits in the media spend all day talking about which individuals come out ahead, but the fact is all individuals just got shafted royally once you factor in the shift in national debt burden.
The politicians apparently think the public is too stupid to figure this out. It’s deceptive and damages what little trust we have left in society.
So many voters have been distracted by bogus issues like gay marriage and abortion in recent years. Now the chickens have come home to roost. A growing number of seniors on Medicare will be subject to premium surcharges in coming years as the income level at which surcharges kick in has not been adjusted for inflation in the past decade. Rising Medicare premiums applied only to “the rich” (actually high income folks) are another way to means test Social Security. The monthly benefit payment goes down just the same each January, but the gross benefit (before deductions) is subject to Federal income tax.
and no talk of spending cuts. Amazing.
Talk of *spending cuts* doesn’t garner voter support on either side of the political spectrum. Just look at the *austerity* policy in Germany.
Ridiculous, isn’t it. The deceptiveness and spinelessness of our politicians has no bounds.
We need to start calling them out as individuals. They get protection from their parties. When moronic decisions are made, they can always say its the party’s decision, and not theirs.
Our two political parties are leading us towards disaster. Both of our parties would damage the whole to get a greater share of it.
Yep, that’s the crazy part, the elephants were all about austerity and keeping the debt in check. But the second they’re in charge, it’s time to go back to the Bush era. I would say that the last set of guys that had this country on a path to surplus was a Democrat by the name of Bill Clinton, then W wiped all of that away.
Lest anyone think I’m letting the Jackasses off the hook, Barack O exploded the debt in a way that made W look like a wimp. All in the name of saving the economy, and then pushed through stuff by fiat that would then get reversed. But all that really did was put money in the pockets of his donors, and I will wager a good portion of America felt no better in 2016 than they did in 2008.
It might feel like the US is becoming two countries, but in reality, it’s just both parties playing to their rich donor base, and then screwing over everyone else, then they try painting themselves as heroes of the people. The only difference is that typically, the Jackasses do a better job, because they happen to have the media on their side mostly.
Don’t get me started on the Democrats. We’re facing an economic meltdown in the near future and they would rather focus on social issues and debate Middle East policy, and other things that have no clear solution, at least in the short and medium term. That’s why Dems lost the election. How much people get rewarded for their work and ingenuity will always be the key issue.
Note how wealth and income disparities flourished under both Bush’s and Obama’s tenure. This destabilizes the economy and is bad for everybody. Obama stood by as harmful ZIRP policy was implemented. The present bubble was created under his watch.
Clinton and Gingrich negotiated for a spending cut and tax cut in the late 1990’s. It came close the balancing the budget at that time. Bush destroyed that with deficit spending. Why can’t we do what Clinton did again? That is why I voted for another Clinton this go-around. It worked once before with a Clinton. Am I naive?
I should have said Clinton had a tax increase and Gingrich had a spending cut. Bush had a tax cut and spending increase. Not unlike what we are seeing today with Trump. We need a Democrat President and a Republican Congress to get this done.
Aside of the tax changes etc the big issue in the US by the looks of things similar to the UK is how complicated the tax system is.
Surely rather than changing taxes why don’t they make the system simpler.
My question for those more knowledgable than I, is what happens should the interest rate for mortgages suddenly spike?
According to my calculations any rate above 7% on a 200K mortgage exceeds the new 10K interest deduction cap…. and while it’s been a long time since we’ve had high interest rates it is certainly a possibility. And if rates hit double digits it seems like it would be a punishing blow to middle class home ownership
If mortgage rates hit “double-digits,” it would be because inflation (as per CPI) would have reached 8% or more and is threatening to stay there. All kinds of things would come apart in this scenario.
The only limitation on mortgage interest deductibility is the $750k principal amount and it can’t be a home equity loan. There isn’t a limit on the amount of interest that can be deducted.