Ownership vs. Rental Costs

 

Faced with a choice between two bad new housing credits proposed by Sens. Johnny Isakson (R-GA) and Debbie Stabenow (D-MI), the Senate merged the two and added several more unwise housing tax incentives and called it the Foreclosure Prevention Act. The Tax Foundation calls “Senate's New Housing Tax Goodies Are Bad Tax Policy"  

Citizens for Tax Justice says the act unfairly Rewards Big Business Over Middle-Class Americans and Julianne Malveaux, an economist and president of Bennett College for Women in Greensboro, N.C. says that the Senate bill rewards those who got us into the foreclosure crisis

The Foreclosure Prevention Act is advertized by its sponsors and supporters as intended to help homeowners and a solution to the mortgage meltdown. Researchers from other leading organizations also say that this bill is bad tax policy. Writing for the Urban-Brookings Tax Policy Center Howard Gleckman says "Why is it that the biggest problems always seem to encourage the worst possible solutions? The latest case in point: The Senate's housing bill, grandly titled "The Foreclosure Prevention Act of 2008."

The Ways and Means Committee (the tax-writing committee in the House) approved a package of tax provisions that was an improvement over those passed by the Senate and which may be attached to a broader bill. The Ways and Means bill does not include the very worst provision in the Senate bill, the "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory. 
 
Unlike the Senate legislation, the Ways and Means Committee bill includes revenue-raising provisions to offset the costs of the tax breaks. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet.

Both bills include a deduction for state and local property taxes available to people who don't itemize deductions (currently this is only allowed for itemizers). At Tuesday's event McIntyre pointed out that most people with mortgages are itemizers, so the people most likely to benefit from this are homeowners without mortgages, making it difficult to see how the provision has anything to do with a mortgage foreclosure crisis. Both bills also include a credit for buying a home, but in neither case would the credit be available for a down payment. It would not be received until after after a homebuyer files taxes after the home is purchased.
 
In the House version, this is a refundable credit of $7,500 of first-time home-buyers, but it must be paid back over 15 years. In the Senate version, it's a non-refundable $7,000 credit for the purchase of foreclosed homes, which actually might encourage foreclosure. The credit in the Senate bill is disallowed to taxpayers in jurisdictions that raise property taxes, which would hamstring state and local governments struggling with fiscal problems from raising revenue to avoid cuts in public services.
 
House leaders are hoping to have a full bill ready for a floor vote in early May.

Research done by Aviva Aron-Dine, Barbara Sard and Chad Stone for Center on Budget and Policy Priorities is titled SENATE HOUSING LEGISLATION HIGHLY DISAPPOINTING: Three-Fifths of Cost of Senate Bill Goes for Tax Cuts, That Will Do Little or Nothing to Address the Foreclosure Crisis. David C. John of the Heritage Foundation says "Responsible homeowners who must move for a new job or for family reasons would suffer because the sale of their homes would not qualify for a tax credit, while those of their less responsible neighbors would qualify for one."

Cato Institute scholar comments on Senate Housing Bill ends with these words "The Senate has long had a reputation for posturing rather than thinking, but this bill wins the posturing prize – for the moment."

A report released earlier this month by the Center for Economic and Policy Research (CEPR) and the National Low Income Housing Coalition (NLIHC) shows that in many bubble-inflated markets, homeownership remains a costly and risky proposition.

The study, "The Cost of Maintaining Home Ownership in the Current Crisis: Comparisons in 20 Cities," evaluates the median house price and fair market rent, as determined by HUD, for 20 major metropolitan areas. The findings of the report reveal that the ratio of homeownership to rental costs varies substantially from market to market, and as such, public policy must go further than a one-size-fits-all solution to the current housing crisis.

 

20 City Comparison

City

 

Monthly ownership costs

 

Monthly rental costs

Low

Middle

High

Atlanta

$991

$1,131

$1,332

$824

Baltimore

$1,600

$1,826

$2,150

$1,013

Boston

$2,051

$2,340

$2,755

$1,353

Chicago

$1,335

$1,524

$1,794

$944

Cleveland

$767

$876

$1,031

$725

Denver

$1,274

$1,454

$1,712

$876

Detroit

$850

$970

$1,142

$805

Houston

$710

$810

$954

$852

Las Vegas

$1,575

$1,797

$2,116

$996

Los Angeles

$3,054

$3,485

$4,104

$1,300

Miami

$1,636

$1,867

$2,198

$1,035

New York

$2,415

$2,756

$3,245

$1,318

Philadelphia

$1,227

$1,400

$1,649

$932

Phoenix

$1,343

$1,532

$1,804

$862

Sacramento

$1,973

$2,251

$2,651

$982

San Diego

$2,771

$3,162

$3,724

$1,355

San Francisco

$3,637

$4,149

$4,887

$1,592

Seattle

$1,921

$2,192

$2,581

$942

Tampa

$1,008

$1,150

$1,354

$883

Washington

$2,303

$2,627

$3,094

$1,324

Source: Census Bureau, U.S. Department of Housing and Urban Development (HUD), and authors’ calculations, see

appendix. (Bold denotes a bubble market.)

 

 

"This is not just a homeownership crisis," said Danilo Pelletiere, NLIHC Research Director and a co-author of the report. "Data shows that nearly 40 percent of foreclosures affect rental properties and in many areas, homeownership markets remain highly uncertain.  Any policy to address this crisis must recognize the rental market as part of the solution."

According to the report, which analyzed data from the Census Bureau's American Community Survey (ACS), the most inflated markets currently see monthly homeownership costs outpacing rental costs by as much as 300 percent. This creates a substantial and unnecessary drain on household income, especially for middle- and lower- income families.

"This could mean that families may have to forgo health insurance or quality child care as they struggle to make their mortgage payments, " said Dean Baker, Co-Director of CEPR and an author of the study. "Furthermore, since prices are still falling in these markets, many homeowners won't ever accrue any equity."

Equity after 4 Years    Low Middle High  Atlanta 46,31444,73043,360 Baltimore -32,409-34,966-37,178 Boston -95,797-99,073-101,908 Chicago -22,478-24,612-26,458 Cleveland 31,61330,38729,326 Denver -23,974-26,009-27,770 Detroit 38,12636,76835,594 Houston 65,52564,39163,409 Las Vegas -32,060-34,576-36,752 Los Angeles -271,851-276,730-280,952 Miami -31,319-33,933-36,194 New York -175,616-179,475-182,813 Philadelphia -358-2,318-4,014 Phoenix -24,072-26,217-28,073 Sacramento -107,621-110,772-113,499 San Diego -203,803-208,230-212,061 San Francisco -346,898-352,708-357,735 Seattle -116,290-119,358-122,013 Tampa 38,75137,14135,748 Washington -115,731-119,410-122,593 Source: Census Bureau, HUD, and authors’ calculations. 

The study projects that in the bubble markets, most homeowners will leave their homes with large amounts of negative equity. For example, it projects that in New York, homeowners will have $179,000 of negative equity and in Los Angeles, the shortfall would be $277,000. In these, and other bubble markets, households would benefit from proposals that attempt to provide affordable rental options as part of policy solutions.

 

Rental Vacancy Rate (%)

City

ACS1

2006

Atlanta

15.7

Baltimore

8.2

Boston

5.4

Chicago

9.6

Cleveland

14.4

Denver

8.3

Detroit

13.5

Houston

11.4

Las Vegas

9.3

Los Angeles

4.1

Miami

7.0

New York

3.7

Philadelphia

12.4

Phoenix

9.5

Sacramento

6.3

San Diego

4.7

San Francisco

5.7

Seattle

5.9

Tampa

5.0

Washington

6.0

Source: 1 2006 Vacancy Rates come from the 2006 American Community Survey (ACS). (Bold denotes a bubble market.)

For cities where the costs of owning are much closer to rental costs, it is likely that a small amount of equity will be accrued. In these markets, policies that keep owners in their homes, possibly through some form of government-guaranteed mortgage, are preferable.