Strategically Speaking: Market Strategies
A New Era for Home Finance
The building industry can either lead or follow.
By Patrick S. Duffy
As I sit here writing this column, the
U.S. national debt is climbing past
$14.25 trillion, or an average of nearly
$46,000 for each citizen. Each day,
that national debt rises by about $4.1
billion, as 40 percent of the 2011 federal budget
is made up of borrowed money. Of the Obama
administration’s proposed $3.7 trillion budget
for 2012, 30 percent will go to Medicare and
Medicaid, 22 percent will
pay for Social Security
benefits, 19 percent will
go for defense-related
programs and nearly 13
percent, or $474 billion,
will be used to service
the existing debt. So
just what does that have
to do with mortgage
finance? Everything.
For starters, in order
to reclaim up to $131
billion in annual foregone tax revenue, the
National Commission on Fiscal Responsibility
and Reform has the long-standing mortgage
deduction in its crosshairs, to be replaced
by a 12 percent tax credit that would help
those who don’t itemize their deductions but
punish many who do. Not surprisingly, trade
groups representing real estate agents and
homebuilders have strongly opposed the idea
for a number of very solid reasons.
Meanwhile, however, the leaders over at
AARP are also fighting against any changes to
Medicare or Social Security that would anger
their more than 40 million members, while
lobbyists for defense firms visit Capitol Hill to
offer dire consequences resulting from defense
cuts. But if no one budges at all and simply
throws up walls of discontent at the mere
mention of changing the status quo, how do we
ever fix this huge — and escalating — problem?
It’s in times like these that true leadership
is required, and for the building industry, that
may require some compromises on not just the
tax deduction, but also the nature and duration
of home mortgages. Instead of being purely
reactive, what if the leaders of NAHB and
NAR were proactive enough to discuss some
type of gradual and reasonable changes to the
tax code, such as grandfathering in existing
owners and leaving
the tax deduction in
place under certain
conditions to promote
homeownership, but
only if commensurate
changes are also
made to entitlement
programs and the
defense budget?
Those who want
to see the deduction
disappear argue that
other countries, such as the United Kingdom and
Italy, have phased out their own tax deductions
for homeownership and survived — and Canada’s
housing market has done quite well without one
at all — but those countries’ mortgage markets
remain largely the domain of banks, and not
of investors buying securities. In the U.S., it’s a
different story. That’s also why the fate of the
mortgage tax deduction and the market itself,
including the phasing out of Fannie Mae and
Freddie Mac, are so closely intertwined.
For a fully private investor, such as Bill
Gross of Pimco in Newport Beach, Calif., to buy
mortgage bonds, he’s been quoted as demanding
a 3 percent premium to compensate him for his
risk. But Moody’s Analytics economist Mark
Zandi and a colleague have instead offered
up a sort of public-private hybrid solution
that would have government insurers act as
market intermediaries for mortgage securities
but maintain a large bail-out fund and ensure
reserve capitals can withstand steep price
declines. They claim their plan would keep
interest rates competitive while boosting sales,
prices and homeownership.
Whatever the outcome, it seems highly
unlikely that the system which led to the
unraveling of the housing market — and the
global economy — will ever return in the same
form it was before. Into that vacuum, builders
and agents will have no choice but to support
eventual reforms that support not just their own
businesses, but also the country in which they
live. The clock is ticking.
Patrick Duffy is a principal with MetroIntelligence Real
Estate Advisors (www.metrointel.com), a division of Beacon
Economics (www.beaconecon.com), and authors The Housing
Chronicles Blog (www.housingchronicles.com). He may be
contacted at pduffy@metrointel.com or at 888-82-DEVELOP.
|
