Thursday, December 2, 2010

Home prices to sink another 15%

That is if the President's National Commission on Fiscal Responsibility and Reform has its way!

This will be short and sweet. If the federal government wants to insure that the housing market stays weak and housing inventory stays large, keep potential buyers guessing as to whether the mortgage interest deduction will be scaled back or eliminated. Nothing gets in the way of a marketplace more than uncertainty.

If the deduction is eliminated the immediate effect could be a drop in home prices of up to 15%. While the proposal is unlikely to be adopted on Friday by the full commission, it's on the table and will be on the table again in the future.

For the banks holding mortgages on homes that would decline in value if the MID is eliminated, their collateral, already impaired, will become that much more impaired creating further risk to an already shaky financial system. This does not consider the securitized mortgage products owned whose values would also get whacked. (and that one day may have to be accurately marked to market).

Why target this staple of the U.S. housing market? For the same reason that the Democrats in Washington are targeting for elimination the Bush tax cuts for anyone earning over $250,000. Because the "rich" need to be taken to task and are considered an easy political mark.

Forget about the fact that these are the same people that help to create the jobs that this economy so desperately needs. This same rationale makes the mortgage interest deduction fair game because the greater the mortgage, the greater the deduction so by extension it favors the "rich" and is therefore regressive.

As an aside, while $250,000 sounds like a great deal of money, if you live in New York City and have a couple of kids in college you will basically be just getting by. The same goes for many areas around the country.

Assume for a second that as opponents to the deduction say, the MID is regressive and does favor the "wealthy." The fallout created by the elimination of this deduction will be non-discriminatory as to income levels and will affect everyone as home prices sink across the board!

Bottom line is that any benefits in additional revenue to the government (that has plenty of other excess fat to cut) will likely be offset by the havoc created in housing and banking.

For now it is all hopefully moot because this proposal will most likely not move forward, but the fact that it was on the table in the first place makes it something worth keeping an eye on.

Let me know what you think.

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