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Why Does the Government Hate Renters?

Ed Glaeser summarizes the lessons he learned from the housing crash. Among them, "let no one ever again say foolish things like housing prices never fall," "there is extraordinary pain in both housing price busts and booms," and "American housing policy has been monumentally foolish."

Can I get an amen?

I'm looking into buying a place myself, and a big part of the incentive is the tax preference: The fact that my mortgage uses pre-tax money while my rent requires post-tax money is a huge difference, particularly over time. And what will boost me into that lush future? Well, the fact that I make a fair amount of money for someone my age. The fact that my grandparents put away a bit of money to help with my eventual down payment. The fact that my earning potential looks likely to rise, which reassures my bank. The government is in effect giving me a cash reward for being pretty well-off.

That's a rather dumb way to apportion resources. More to the point, it's not necessary. The economics and emotional rewards of owning a house are compelling enough without the mortgage deduction. If you want to give low-income homebuyers additional help, that would make a lot of sense, particularly given the long-term importance of assets in bolstering financial security. But giving it to everyone who buys a home of any size is simply a regressive attack on renters. Ripping the deduction out right now would be too disruptive, but you could certainly phase in a cap on future home purchases.

By Ezra Klein  |  September 9, 2009; 1:07 PM ET
Categories:  Economy , Solutions  
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The principle of your argument is sound, except that a mortgage payment is a replacement for rent. Rent is paid to the landlord who uses the rent to pay the mortgage on the property, and the landlord deducts the interest on the mortgage from his rental income. Owner-occupants are effectively paying rent to themselves, so eliminating the mortgage interest deduction ends up giving an unfair advantage to landlords.

Posted by: constans | September 9, 2009 1:18 PM | Report abuse

Hmm...welcome to the crazy world of US taxation?

I can cite dozens of examples where our tax policy punishes some people and lavishes others with goodies. Sadly, it's usually them that gots that gets.

There was a proposal during the dem primaries that was aimed at trying to address this - something about endowing each baby with $5,000. Got a lot of pooh poohing at the time but really, you gain about 10 or 15 years on your peers if Gramma and Grampa had a few bucks to put away in your name 25 years ago.

Good luck on your home search!

Posted by: luko | September 9, 2009 1:20 PM | Report abuse

"My grandparents put away a bit of money to help with my eventual down payment."

If you end up buying, don't pay them back or you could end up with a Clay Davis-style "head shot" situation: when you get money from a friend or family for a down payment on a mortgage - money which you declare to be a gift but later turns out to be a loan when you pay the money back.

Posted by: jeirvine | September 9, 2009 1:25 PM | Report abuse

its not that they hate renters as much as they LOVE homebuyers. So much so that they perverse the incetives to homebuying to too far a degree which helped to get us in the housing bust in the first place. At least you're buying at a time when interest rates are at their lowest in a while (don't wait too long, i hear the Fed calling for a raise soon to avoid inflationary pressures) and the market is still filled with homes.

Oh and do yourself a favor, check your credit to make sure there are no surprises out there for you ( I'm trying to refinance mine now from a 30 year fixed (got it 8 years ago) to a 15 year fixed since rates are so low so i can pay it off in 7 less years and my credit ticked down because a dentist never balance billed me the amount my insurance didn't rightfully cover and sent me to collections without me knowing it. In essence my credit is still good thankfully but not as good as creditors now want to see (750).

SEE! none of us are immune.

Good luck to you!

Posted by: visionbrkr | September 9, 2009 1:39 PM | Report abuse

I've often thought that young, single, childless renters in the mid-income range are paying for everyone else. Where's my AARP?

Posted by: ideallydc | September 9, 2009 1:49 PM | Report abuse

Tax deductibility of mortgage interest gets priced into home sales as does interest rates. The rent vs own equation is not necessarily a slam dunk for buying a house. Now, i do agree with you that home ownership has important non-monetary psychic benefits. But financially, it can make more sense to rent.

Posted by: mbp3 | September 9, 2009 1:49 PM | Report abuse

Also, low income home buyers are exactly who Fannie and Freddie are mandated to help and look what the result is. Billions of dollars in losses assumed by the US taxpayer.

Posted by: mbp3 | September 9, 2009 1:53 PM | Report abuse

They could at least make it a flat deduction to make it progressive, if they still want to promote home-ownership.

Posted by: donhalljobs | September 9, 2009 2:17 PM | Report abuse

It's the 30-year fixed-rate loan with no repayment penalty that's made homebuying affordable for most Americans; we could do just fine without the tax deduction.

Maybe a cap on the interest deduction would be politically feasible. Put the cap at, say, 150% of the median family income. After all, how much money do you have to make, in order to pay 1.5 times the median family income just on your mortgage payment?

Posted by: rt42 | September 9, 2009 2:20 PM | Report abuse

Anyone who thinks that the tax code and MID unfairly favor ownership has either never reconstructed a landlord's income and expenses from their tax filing, or doesn't understand the economic incidence of taxes. I assume you and Glaeser are in the former group.

Not only do landlords deduct their entire debt service, they also get to deduct an unrealistically accelerated depreciation on the building and every penny they even think about putting back into the property. All of which, of course, lowers the rent they are willing to accept.

Just becuase you're not checking a box on your tax return doesn't mean you're not getting a break through the tax system.

Posted by: sfmandrew | September 9, 2009 2:20 PM | Report abuse

Said it before, will say it again: it isn't just the financial incentives here, but the cultural stigma attached to renting, when a decent mixture of rental and ownership (and decent regulatory protection for renters) provides mobility to those who need it and long-term security for those who don't.

The problem as it stands isn't so much the lavishing of goodies, but the encouragement of amateur landlordism among people who've seen too many infomercials, been given lots of leverage on their property, and who shouldn't be landlords. The recent expose in one of the Florida papers shows how easily a local "property investor" cartel can poison the housing market and descend into fraud.

Posted by: pseudonymousinnc | September 9, 2009 2:33 PM | Report abuse

"The fact that my grandparents put away a bit of money to help with my eventual down payment. The fact that my earning potential looks likely to rise, which reassures my bank."

It's called FAMILY and it's called GETTING AN EDUCATION. I mean, what's the point of striving to help your family or stiving to get a college degree if there is no advantage in it for you?

"Fairness" is certainly in the eye of the beerholder.

Posted by: WrongfulDeath | September 9, 2009 3:37 PM | Report abuse

sfmandrew, I think that the landlord is always going to be pricing rent at what the market will bear -- 25% of local household income, roughly in line with equivalent mortgage payments -- rather than lowering the amount of rent he's willing to accept based on the deductions he gets. In recessionary periods where local incomes decline, I am sure that those deductions provide a cushion. Outside of that, I don't think renters are generally able to take advantage of the owners' incentives in the same way that a carbuyer can usually claim some of the dealer's incentives from the manufacturer when negotiating over price.

If anything, like pseudonumousinnc alludes to, the situation puts too many landlords on the market hoping to take advantage of these incentives, allowing them to buy homes for more money than they would be otherwise able to afford in order to offer them as rentals.

It strikes me that the tax code is tilted in favor of owners of all types, owner-occupants and landlords.

Posted by: constans | September 9, 2009 3:43 PM | Report abuse

WrongfulDeath - what he's saying is that the mortgage interest tax deduction confers an additional gain on top of the advantage he gets from education and the help of family. The issue isn't that there's a problem with being well off, it's that the government is adding its own extra reward for being well off.

Posted by: etdean1 | September 9, 2009 3:51 PM | Report abuse

1, what mbp3 said and sfmandrew maybe implied: the MI deduction accrues primarily to sellers, not buyers. That's what makes it politically inviolable to a 70+% homeowner electorate. It increases selling prices. This strikes me as a negative externality.

2, what constans said second is right, and what he said first and sfmandrew echoed in his smug way are wrong. Tax policy does not trickle down to rents in the real world, given most obviously supply constraints. I can tend to subsidize sellers, though.

Posted by: wcwhiner | September 9, 2009 4:08 PM | Report abuse

"Not only do landlords deduct their entire debt service, they also get to deduct an unrealistically accelerated depreciation on the building and every penny they even think about putting back into the property."

I find it unlikely that the tax code is broken in precisely the right balance as to not advantage either group-- and, really, neither state (renting vs. home ownership) should be something the government has a great vested interest in promotion.

Posted by: adamiani | September 9, 2009 4:08 PM | Report abuse

Constans- I don't think your description of the elastcity of housing demand is quite accurate.

But, no doubt part of the economic incidence of landlords' deductions are captured by the landlords themselves. Just as much of the benefit of the MID is capitalized into the price.

Both sets of deductions, over the long term, encourage investment in housing relative to other sectors, which is probably their largest economic effect. Whether that's a good thing or not is a whole different question.

Posted by: sfmandrew | September 9, 2009 4:17 PM | Report abuse

The UK phased out a similar mortgage interest tax deduction in 2000 without any drama.

One of the other perverse effects of the deduction is that it encourages you not to pay down your mortgage, which is one reason why HELOCs and other mortgage-backed consumer lending became so popular - why pay down mortgage debt instead of credit card debt when the interest on the former is deductible and the interest on the latter is not? The result is that instead of mortgages becoming a stable long-term savings method, they became a tax-advantaged way of borrowing even more, as people ran up HELOCs, or refi'd rolling their consumer debt into a higher mortgage balance.

The banks loved this - until it exploded because, you know, never paying off your mortgage is no different than renting, and therefore the much higher payments on mortgages eventually became destabilizing - because it kept the amount of borrowing high and therefore meant they could collect lots of interest payments, with the government providing a subsidy. Hooray!

Posted by: Jacob_Davies | September 9, 2009 4:19 PM | Report abuse

It would certainly be fairer as a tax credit at the marginal tax rate applied to the median income. Then lower income households would get the same tax subsidy as higher income households, rather than the tax subsidy rising with income.

Posted by: BruceMcF | September 9, 2009 4:20 PM | Report abuse

"The issue isn't that there's a problem with being well off, it's that the government is adding its own extra reward for being well off."

No poor people own homes?

Which brain do you wish to use today? The liberal one that expects the government to help out individuals or the other one that just hates it when they do?

Posted by: WrongfulDeath | September 9, 2009 4:31 PM | Report abuse

So in all that Glaeser learned about the housing crisis, the reform he recommends is to put a cap on the mortgage interest deduction.

Seems a small remedy for such a very large crash.

(link to a nice story on the history of the deduction: )

Posted by: anne3 | September 9, 2009 6:50 PM | Report abuse

If you want to talk about how the government hates renters, think about the enormous tax break (virtually never passed on to the renter) that it gives landlords in the form of depreciation. On what planet is the building or house someone bought 25 years ago worth nothing? Yet those are the assumptions that landlords use to file their tax returns.

Posted by: paul314 | September 10, 2009 10:49 AM | Report abuse

Ezra: "Why does the government hate renters?"

As with most liberals, Ezra views the economy through the lens of 'fairness'. Well, that's great unless it involves advantage to certain racial and sexual groups and then 'fairness' takes on a completely different meaning of 'advantage'.
So, let's just cut the crap and call it 'racial advantage' instead of Affirmative Action, because that's what it really is.
While Ezra et al looks to workplace representation of race when it suits them, they would never look at large city government employees and say "Why, the blacks are overrepresented."

It's only when it's to their advantage. They think people don't see this.

They do

Posted by: WrongfulDeath | September 10, 2009 10:49 AM | Report abuse

Foreclosures have been a major issue of the economic recession that has hit all countries across the world. The Bush administration overlooked the foreclosure issues of the average homeowners which the Obama administration is struggling to tackle with various initiatives.

The loan modification efforts to prevent the increase of foreclosure rates have not got a huge welcome. The reason is because the lender needs to revise the ‘borrowing terms’ of the troubled borrower who is struggling to repay the loan on time. It also involves reducing the interest rate which is generally not received well by the lender who would lose some margin in the sale. In addition, the revised plan involves cutting the principal amount by reconsidering the financial state of the borrower and hence, it tackles the benefit of the borrower than guarding the interest of the lender. Hence the lenders and their representatives or not willing to either reduce the principal amount as well as the interest received from the borrowers as the amount they pay to the bank also reduces over time making it further difficult for them to tackle the vicious circle.
Read More:

Posted by: rubrik1978 | September 11, 2009 2:32 AM | Report abuse

Spending a dollar to save 30 cents is retarded. Homeownership for a tax break is, see above, retarded. Own if it makes sense to own, rent if it makes sense to rent. See for details.

Posted by: leggo | September 11, 2009 3:01 AM | Report abuse

The current administration was elected to do one thing: keep the party going for the scammers who ran out of "private enterprise" tricks and now concentrate on raiding the treasury or enacting "needed laws" because "there's no time to delay" in order to funnel billions to their own pockets.

Anyone stupid enough to have voted for Demobots will be responsible for their own paychecks getting raided while they stumble out of the recession.

Posted by: jabailo | September 11, 2009 1:55 PM | Report abuse

What crap, WrongfulDeath? The discussion is about Renters and Homeowners. You should not make assumptions of other's point of views without proof to back their arguments. The number of renters is growing in this country, and Ezra is justifiable in pointing out that the tax code favors homeowners instead of renters like me.

Posted by: CRehr2000 | September 12, 2009 3:36 PM | Report abuse

Umm... There *is* a cap on the mortgage interest deduction. You can only deduct the interest on up to $1,000,000 of mortgage debt (so at 5% interest, up to a $50,000 deduction).

Posted by: fccg65 | September 12, 2009 6:27 PM | Report abuse

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