Richard Green is a professor in the Sol Price School of Public Policy and the Marshall School of Business at the University of Southern California. This blog will feature commentary on the current state of housing, commercial real estate, mortgage finance, and urban development around the world. It may also at times have ruminations about graduate business education.
Wednesday, February 25, 2009
More on the relative tax breaks for owning and renting
Anonymous comments:
This is because I did not write clearly, not because I hadn't considered it. Bill Wheaton's point was that the deduction for depreciation for rental units (about 3.3 percent per year) offsets the non-taxation of imputed rent. Most owners who get lots of net income from imputed rent are the elderly, who have paid off their mortgages. Because they generally have low cash incomes, they are in low tax brackets, which means that the value of the tax benefit are small. Owners of rental units are often in higher tax brackets, which means the value of the depreciation deduction might be high.
How it all washes out is an empirical question, of course...
What's missing from this argument is that the lander is taxed on the rental income (after the deductions mentioned) but the homeowner is not taxed on the imputed rental income from the home.
The real tax break that homeowners get is not the interest deduction, but the fact that the imputed rental income (what the home would rent for) is not taxed.
This is because I did not write clearly, not because I hadn't considered it. Bill Wheaton's point was that the deduction for depreciation for rental units (about 3.3 percent per year) offsets the non-taxation of imputed rent. Most owners who get lots of net income from imputed rent are the elderly, who have paid off their mortgages. Because they generally have low cash incomes, they are in low tax brackets, which means that the value of the tax benefit are small. Owners of rental units are often in higher tax brackets, which means the value of the depreciation deduction might be high.
How it all washes out is an empirical question, of course...
Sunday, February 22, 2009
Principal Reduction or Interest Reduction?
A concern raised with the Obama housing plan is it focuses on payment reduction instead of principal reduction. But a payment reduction based on a cut in interest rates has a de facto impact on principal. While par remains the same, the present value of the remaining payments falls. For anyone who doesn't need to move, this has the effect of reducing the amount owed (the mortgage) relative to the amount owned (the house).
As for those who do have to move, they are still stuck with the par value of the mortgage. On the other hand, a lower interest rate allows for more rapid amortization. An 8 percent 30-year mortgage with a 100,000 balance amortizes by about $835 in its first year, while a 5 percent mortgage amortizes by $1475. Not a huge difference, but every little bit helps.
As for those who do have to move, they are still stuck with the par value of the mortgage. On the other hand, a lower interest rate allows for more rapid amortization. An 8 percent 30-year mortgage with a 100,000 balance amortizes by about $835 in its first year, while a 5 percent mortgage amortizes by $1475. Not a huge difference, but every little bit helps.
Saturday, February 21, 2009
Are Owner and Renter Housing treated equally under the federal tax code?
UC-Irvine, The MacArthur Foundation and the Rockefeller Foundation sponsored a conference this week on "Housing after the Fall."
The conference featured a number of interesting papers, but one of the most interesting conversations happened in the aftermath of Marge Turner and Denise DiPasquaule's talks on rental housing. They both pleaded for equal treatment of owner and renter housing (as did Stuart Gabriel the day before). But Bill Wheaton and John Weicher made provokative and possibly correct arguments about why the two house tenure are basically treated equally.
The biggest benefit of owner relative to renter housing is that imputed rent is not taxed. But as John points out, those who own their homes with equity are largely the elderly, many of whom have low cash incomes, which means that they have low marginal tax rates a so get small after tax benefits from owning. Both owners and landlords get to deduct interest and property taxes (although owners who pay the AMT cannot deduct property taxes). Landlords can deduct depreciation and maintenance; owners cannot. Landlords are probably in higher tax brackets than renters. Owners are (largely) exempt from capital gains taxes, but so are landlords, who can use like-kind exchanges to defer capital gains taxes forever.
Bill said he did a back of the envelope calculation that shows that the tax code treats the two tenure types about the same. The topic merits further research, but it may mean that those who think owner housing gets treated preferably may be wrong.
The conference featured a number of interesting papers, but one of the most interesting conversations happened in the aftermath of Marge Turner and Denise DiPasquaule's talks on rental housing. They both pleaded for equal treatment of owner and renter housing (as did Stuart Gabriel the day before). But Bill Wheaton and John Weicher made provokative and possibly correct arguments about why the two house tenure are basically treated equally.
The biggest benefit of owner relative to renter housing is that imputed rent is not taxed. But as John points out, those who own their homes with equity are largely the elderly, many of whom have low cash incomes, which means that they have low marginal tax rates a so get small after tax benefits from owning. Both owners and landlords get to deduct interest and property taxes (although owners who pay the AMT cannot deduct property taxes). Landlords can deduct depreciation and maintenance; owners cannot. Landlords are probably in higher tax brackets than renters. Owners are (largely) exempt from capital gains taxes, but so are landlords, who can use like-kind exchanges to defer capital gains taxes forever.
Bill said he did a back of the envelope calculation that shows that the tax code treats the two tenure types about the same. The topic merits further research, but it may mean that those who think owner housing gets treated preferably may be wrong.
Wednesday, February 18, 2009
Brad Delong (and I) on Robert Barro
Evidence, Logic, and Robert Barro
Hoisted from Comments: Richard Green writes:
Grasping Reality with Both Hands: Council on Foreign Relations Wingnut Watch: Benn Steil: I am glad that Barro's logic escaped you, as well. As I am not a macroeconomist, I figured that it was I who was dense. But it seemed to me that the facts presented in the article showed that even an enormous stimulus that burned a lot of resources (building tanks and ships that will be destroyed are kind of like bridges to nowhere, economically) had very little crowding out effect.
The context is Benn Steil's claim that Robert Barro's January 22, 2009 Wall Street Journal op-ed "provides logic and offers evidence" to support Steil's claim that the interest elasticity of money demand is zero and thus that the fiscal multiplier is zero too.
As I said before, the evidence that Barro presents suggests a multiplier for temporary government purchases not of Steil's zero but instead of 0.8:
Robert J. Barro: Government Spending Is No Free Lunch: Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II.... I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540).... We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War.... Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before...
But it is the logic that most puzzles me. Barro writes:
The [Keynesian] theory... assumes that the government is better than the private market at marshaling idle resources.... Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one...
If I read this paragraph correctly, Barro thinks (a) there are theoretical reasons to think that the fiscal multiplier cannot be greater than one, and (b) there are theoretical reasons for thinking that if you believe in positive fiscal multipliers you should also believe that expansionary monetary policy that raises the flow of nominal spending will also raise employment and production--which people do, for it is only when they fear that monetary policy is tapped out and cannot raise the flow of nominal spending any more that they fear that monetary policy may be ineffective.
So I don't understand how Barro gets to his very next sentence:
A much more plausible starting point is a multiplier of zero...
Hoisted from Comments: Richard Green writes:
Grasping Reality with Both Hands: Council on Foreign Relations Wingnut Watch: Benn Steil: I am glad that Barro's logic escaped you, as well. As I am not a macroeconomist, I figured that it was I who was dense. But it seemed to me that the facts presented in the article showed that even an enormous stimulus that burned a lot of resources (building tanks and ships that will be destroyed are kind of like bridges to nowhere, economically) had very little crowding out effect.
The context is Benn Steil's claim that Robert Barro's January 22, 2009 Wall Street Journal op-ed "provides logic and offers evidence" to support Steil's claim that the interest elasticity of money demand is zero and thus that the fiscal multiplier is zero too.
As I said before, the evidence that Barro presents suggests a multiplier for temporary government purchases not of Steil's zero but instead of 0.8:
Robert J. Barro: Government Spending Is No Free Lunch: Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II.... I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540).... We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War.... Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before...
But it is the logic that most puzzles me. Barro writes:
The [Keynesian] theory... assumes that the government is better than the private market at marshaling idle resources.... Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one...
If I read this paragraph correctly, Barro thinks (a) there are theoretical reasons to think that the fiscal multiplier cannot be greater than one, and (b) there are theoretical reasons for thinking that if you believe in positive fiscal multipliers you should also believe that expansionary monetary policy that raises the flow of nominal spending will also raise employment and production--which people do, for it is only when they fear that monetary policy is tapped out and cannot raise the flow of nominal spending any more that they fear that monetary policy may be ineffective.
So I don't understand how Barro gets to his very next sentence:
A much more plausible starting point is a multiplier of zero...
A good plan, except...
I just watched the President outline his mortgage plan. I think it has two of the three key elements necessary: it will get people's loan balance below the value of their houses, and it will reduce payments to a sustainable level. What is missing (or at least I think it is missing), is a clawback provision for those homeowners who get a subsidized loan and then profit on sale later. I think this is critical for fairness. But perhaps I have just not digested the details of the plan yet.
It was so refreshing to see a President explain things so well, though...
It was so refreshing to see a President explain things so well, though...
Monday, February 16, 2009
Gary Kamiya says the Newspaper Business Model won't work anymore
I have said something like this too, but I think he says it better:
I have one little suggestion for those who want papers to survive. When you are on their website, if you see an ad for anything that remotely interests you, click on it. It is not much, and almost certainly not enough, but it at least will show advertisers that you are reading the site.
But the real problem isn't that newspapers may be doomed. I would be severely disheartened if I was forced to abandon my morning ritual of sitting on my deck with a coffee and the papers, but I would no doubt get used to burning out my retinas over the screen an hour earlier than usual. As Nation columnist Eric Alterman recently argued, the real problem isn't the impending death of newspapers, but the impending death of news -- at least news as we know it.
....
If newspapers die, so does reporting. That's because the majority of reporting originates at newspapers. Online journalism is essentially parasitic. Like most TV news, it derives or follows up on stories that first appeared in print. Former Los Angeles Times editor John Carroll has estimated that 80 percent of all online news originates in print. As a longtime editor of an online journal who has taken part in hundreds of editorial meetings in which story ideas are generated from pieces that appeared in print, that figure strikes me as low.
There's no reason to believe this is going to change. Currently there is no business model that makes online reporting financially viable. From a business perspective, reporting is a loser. There are good financial reasons why the biggest content-driven Web business success story of the last few years, the Huffington Post, does very little original reporting. Reported pieces take a lot of time, cost a lot of money, require specialized skills and don't usually generate as much traffic as an Op-Ed screed, preferably by a celebrity. It takes a facile writer an hour to write an 800-word rant. Very seldom can the best daily reporters and editors produce copy that fast.
I have one little suggestion for those who want papers to survive. When you are on their website, if you see an ad for anything that remotely interests you, click on it. It is not much, and almost certainly not enough, but it at least will show advertisers that you are reading the site.
Fannie and Freddie must be making large profits on their new business
According to Ken Harney, even if borrowers have a 20 percent down payment, if their FICO score is less than 740, they will pay hefty fees to obtain a Fannie Freddie mortgage. Given how far prices have already fallen, and given that borrowers are required to have a lot of their own money at risk, it is hard to see how the GSEs will lose on these loans, while at the same time they will collect a lot of money in fees.
Of course, they have lots of losses to make up for, so new borrowers are being charged for the mistakes of old management. But this seems neither forward looking nor productive to me.
Of course, they have lots of losses to make up for, so new borrowers are being charged for the mistakes of old management. But this seems neither forward looking nor productive to me.
Sunday, February 15, 2009
The Trouble with Washington
I was back at GW the last few days for a conference the George Washington Institute for Public Policy put on with the Lincoln Institute for Land Policy on Local Government Autonomy in the United States.
Overall, it was a great event. I was priveleged to discuss a Bill Fischel paper (Bill knows more about property taxes than just about anyone), and the quality of the discussion was excellent. But when people asked me whether I missed Washington, I had to say "no," but I couldn't quite put my finger on why. Washington is a beautiful city, with wonderful cultural amenities. It is diverse, it has many people there I like very much (and whom I do miss), and I got to read while riding Metro to work in the morning, afther which I would have a pleasant walk from Dupont Circle to Foggy Bottom.
I then came across the following quotes on mydd (h/t to atrios) this morning:
I think these quites sum up the trouble with Washington quite well. It is a city full of self-important naval gazers. The biggest difference between DC and LA is that the first question you get asked in DC is "what's your title," while the first question you get asked in LA (outside of Hollywood, anyway) is "how bad was the traffic on your drive here?"
http://mydd.com/story/2009/2/14/1597/39888
Overall, it was a great event. I was priveleged to discuss a Bill Fischel paper (Bill knows more about property taxes than just about anyone), and the quality of the discussion was excellent. But when people asked me whether I missed Washington, I had to say "no," but I couldn't quite put my finger on why. Washington is a beautiful city, with wonderful cultural amenities. It is diverse, it has many people there I like very much (and whom I do miss), and I got to read while riding Metro to work in the morning, afther which I would have a pleasant walk from Dupont Circle to Foggy Bottom.
I then came across the following quotes on mydd (h/t to atrios) this morning:
"It's eerie -- I read the news from the Beltway, and there's this disconnect with the polls from the Midwest that I see all around me," said Ann Seltzer, the authoritative Iowa pollster who works throughout the Midwest.
[...]
"I don't think he's lost anything in terms of overall job approval or favorability," said Andy Smith, a pollster at the University of New Hampshire. "That's just the a perception inside the Beltway that everybody outside Washington pays attention to politics and eats and lives politics the way you guys do down there."
I think these quites sum up the trouble with Washington quite well. It is a city full of self-important naval gazers. The biggest difference between DC and LA is that the first question you get asked in DC is "what's your title," while the first question you get asked in LA (outside of Hollywood, anyway) is "how bad was the traffic on your drive here?"
http://mydd.com/story/2009/2/14/1597/39888
Sunday, February 08, 2009
Airports are Infrastructure too
Patrick Smith writes in Salon:
"Americans haven't figured out how to build a proper terminal. We fail at aesthetics, we fail at amenities, and we fail at the relatively simple task of moving people efficiently from A to B. The newest terminals across Europe and Asia are attractive, spacious, quiet and efficient, abounding with passenger-friendly touches. Ours, by comparison, often seem engineered for inconvenience and stress. In Amsterdam, Frankfurt, Hong Kong and Kuala Lumpur, Malaysia, passengers step from commuter trains directly into the check-in hall. At Kennedy, getting to or from Manhattan, or just getting from one (brand-new) terminal to another, is like mounting an expedition."
Airports and the air traffic control system are important to economic growth. And yet among the discussions of the stimulus and infrastructure spending, I have heard little about the air traffic control system (or for that matter, the freight rail system and the water ports, all of which have insufficient capacity--and all of which should have higher priority than passenger rail, aside from the Northeast Corridor and perhaps the Great Lakes and Southern California).
Two of our most important international airports, LAX and JFK, are embarrassing. SFO's runway configuration slows traffic dramatically in the face of mild degradations in weather. Atlanta and Dallas are just unpleasant. We have a few good large airports (MSP, IAH and the new DTW come to mind), but most of them are far behind their counterparts in Europe and Asia. The best I can say for us is the French and (remarkably) the Japanese can be just as bad as we are: Charles De Gaulle and Narita are also astonishingly unpleasant.
"Americans haven't figured out how to build a proper terminal. We fail at aesthetics, we fail at amenities, and we fail at the relatively simple task of moving people efficiently from A to B. The newest terminals across Europe and Asia are attractive, spacious, quiet and efficient, abounding with passenger-friendly touches. Ours, by comparison, often seem engineered for inconvenience and stress. In Amsterdam, Frankfurt, Hong Kong and Kuala Lumpur, Malaysia, passengers step from commuter trains directly into the check-in hall. At Kennedy, getting to or from Manhattan, or just getting from one (brand-new) terminal to another, is like mounting an expedition."
Airports and the air traffic control system are important to economic growth. And yet among the discussions of the stimulus and infrastructure spending, I have heard little about the air traffic control system (or for that matter, the freight rail system and the water ports, all of which have insufficient capacity--and all of which should have higher priority than passenger rail, aside from the Northeast Corridor and perhaps the Great Lakes and Southern California).
Two of our most important international airports, LAX and JFK, are embarrassing. SFO's runway configuration slows traffic dramatically in the face of mild degradations in weather. Atlanta and Dallas are just unpleasant. We have a few good large airports (MSP, IAH and the new DTW come to mind), but most of them are far behind their counterparts in Europe and Asia. The best I can say for us is the French and (remarkably) the Japanese can be just as bad as we are: Charles De Gaulle and Narita are also astonishingly unpleasant.
Friday, February 06, 2009
Would 4 percent mortgages get capitalized into house prices?
I don't know--and neither does anyone else.
I am in the middle of a project with Chris Redfearn and Stuart Gabriel that looks precisely at this issue. Our finding is that capitalization varies a lot by time and place. The coasts are different from the middle of the country; the period before 1997 is different from the period after. When we do rolling regressions across time to attempt to identify capitalization effects, we get very unstable coefficients.
This is not to say borrower relief is a bad idea--I have come around to the view that we need to do it (although I would like to see clawbacks). But let's not kid ourselves--we have no good model to predict the effectiveness of any policy right now.
I am in the middle of a project with Chris Redfearn and Stuart Gabriel that looks precisely at this issue. Our finding is that capitalization varies a lot by time and place. The coasts are different from the middle of the country; the period before 1997 is different from the period after. When we do rolling regressions across time to attempt to identify capitalization effects, we get very unstable coefficients.
This is not to say borrower relief is a bad idea--I have come around to the view that we need to do it (although I would like to see clawbacks). But let's not kid ourselves--we have no good model to predict the effectiveness of any policy right now.
Sunday, February 01, 2009
Ads I can live without
So I am watching one of the best Super Bowl 4th quarters ever, and this ad comes on with an obnoxious baby advising us to stop being passive about our 401(k)s and (basically) to try to pick individual stocks on our own. Does the company that made this ad really think this can work?