patrick.net

I’m only making hit-and-run Zen Socia1ism remarks on patrick.net from now on, I’ve decided… forget the in-depth analyses and critiques, backed by copious references and showing staggering insight and profundity…

I might make justme my drinking buddy, Randy ;)

From the thread post:
The deductibility of paid mortgage interest from income does not help house buyers. It simply drives up the cost of housing to the point where it is just as unaffordable as if there were no such deduction.

I agree with this, along with other incentives like 'First Home Owner Grants' (FHOG) and stamp duty exemptions for first home buyers -- these can help a little, but they all run the risk of being capitalised into house prices by a greedy RE industry.

I will be interested to see what the Darwin housing summit produces, hmm -- my suggestions are to somehow target the root causes of the most recent inflation rather than ameliorating the problem with strange financial bandaid measures, but this would be unpopular with a big segment of voters. Are politicians genuinely bewildered by the problem, or are they just playing dumb so they don't have to get involved in a messy situation which has historically always corrected itself? (Although the conventional housing market has always been riven with examples of failure.)

Completely off topic to mortgage interest, but of general interest to Bay Area Bubble Watchers...

1. Go to zillow.
2. Run a search on your favorite area.
3. Uncheck all the options for
- For Sale
- Make Me Move
- Recently Sold
- All Other Homes
4. Now, check only the box for "Recently Sold". It will show a bunch of yellow flags on the map.
5. Click any yellow flag to see a small pop-up window.
6. Compare the Recently Sold price to the Zestimate.

I am seeing consistently 10%-15% lower numbers for actual recently sold prices, compared to the Zestimate. In one case, I actually saw a 30% difference. This was in the Friggin Fortress, btw. Fortress my ass, :-)

And wait, there's more! If you now click the checkbox for "For Sale", you will see little red flags marking homes on the market. Click the flag - the Asking price is still generally above the Zestimate.

SP

For those who did not want to read the earlier post, here is the summary:
Actual sale prices are 10-15% below Zestimates.
AND
Asking prices are still higher than Zestimates.

It is obvious what this disconnect will do for the comps when recent sales start getting included in the stats.

SP

As a director of maintenance for a corporate flight department responsible for maintaining two Challenger 601 business jets I have to take exception to all this hostility towards people that own them and even the jets themselves. Do you have any idea how many people are employed to support corporate aviation? I doubt it. And most of these jobs pay very well. If you choose to go after the rich folks that own the aircraft you will ultimately be going after many thousands of ordinary guys like me that will no longer have jobs building, maintaining and supporting these very same aircraft.

There are always cheaper ways to travel no matter who you are but people with means have good reasons to choose a corporate jet. They are able to fly into airports all over the world that no commercial aircraft could ever land in. The aircraft will never leave without you no matter how long you've been delayed. Your aircraft will never be hijacked by a terrorist. The aircraft themselves have a phenominal safety record. For example since Gulfstream first began sales of their aircraft back in 58 not one has been lost to anything other than pilot eror. Boeing and Airbus can't make that claim. Finally the interior layout is well suited to business making it possible for groups to interact with each other and prepare for meetings while enroute to them. Try that in first class and see what happens.

I see David J has provided most of my would-be response to the ego-extension observation above.

From the vantage point of utility, when CEOs, CFOs or governing boards make use of private aviation, they depart locally on their own schedule. If your headquarters are located somewhere other than an aviation hub, say, Charleston WV and your destination is Ocala FL, civil aviation isn't of much use to you. Factor in a corporate plane and your business is conducted in an afternoon and involves no overnight stay. That is what real-world companies weigh when considering the purchase or shared lease of an aircraft: utility.

I don't know why I bother. Some here invariably see poverty in all its guises as virtuous and wealth just as invariably as tainted.

Let me be clear for once. I see no evidence either camp owns either franchise.

DS,

One factor in Australian housing prices, which I bet will NOT get mentioned in Darwin, is the perverse incentive in the tax system for people to buy the biggest possible house. I should have mentioned this in my previous post.

In short, the structure is not taxed at all in Australia, only the land. So if you have a $100K block of land, you will pay virtually the same taxes if you have a second-hand transportable home or a 600sqm (6500sqft) mansion.

MonkeyInChief,

You're wrong on a couple of points in your response to my post above.

First, the deduction caps out on 1 million dollar mortgages. Most of the regular posters here seem to be middle class software guys. Hardly what I call rich, and in their areas 1 million dollar homes are almost starter homes. Hell, my girlfriend's parents have a shack in LA that was pushing a million dollar value at the peak of all of this. The point being, 1 million dollars right now is not considered anything special for housing, so it is NOT a perk to the rich. Secondly, the only reason people who are wealthy have mortgages is as investment capital. If the mortgage doesn't make sense financially they pay it off. Don't confuse the silly mcmansion owning, hummer driving, just received an NOD pig as rich. That's not rich.

Your other points sound good but don't ring true historically. Prices are currently falling, and have in the past with no change to tax laws. In your points, and others have done this as well, it is almost made to sound like the legislature granted a tax deduction for mortgage interest as a subsidy to some special voting block. This is not the case, it used to be until 1990 that all interest was deductible. The tax laws were changed about that time where most interest was now not deductible but home loan interest was left alone. A snapshot of that effect, well even without an insentive to borrow, unsecured debt is higher than ever in this country, I just heard a figure of 7 trillion which is basically almost matching the national debt. Gotta love consistency in Americans. As you may remember, home prices fell from 92-95 pretty much immediately after the laws changed.

The issue I take with using the word subsidy is not a purely economic one. You are technically correct about the effect theoretically being similar, but interest is a legitimate deduction for a business, as has been pointed out on the thread. So why shouldn't an individual be able to deduct interest? To me that seems like a very progressive tax structure since the poorer groups would benefit the most.

Not taxing someone is NOT a handout. It is not a subsidy to not tax income paid for medical treatment, under our tax laws some things aren't taxable, that is different than infusing someone else's capital to support an industry. I take issue with the concept of the government not taxing something so now it is considered a subsidy in the negative sense. Ironically this thinking was started by the Jesse Jackson types who to make his listeners not feel ashamed about the real handouts threw the 'coporate wellfare' term around. It is kind of catchy, I have to admit. Basically you can make a bum feel proud if you compare a handout to not taking something from someone. There is a subtle difference.

Corporate jets are awesome, I would love to have access to one. Would you guys please stop trying to destroy yet another American industry with this class warfare? Do you have any idea of the amount of economic activity a jet causes? Depreciating a corporate jet, or deducting lease payments is not a subsidy either. Man, I get nervous reading the board sometimes, it is so not inline with the concept of America for a group of people to sit around looking down their noses at the success of others and determining which of their assets are necessary and which are not. You take the fun out of life that way. Everyone has to be just as miserable as someone else for the system to seem fair.

Just to be clear, I am not solidly in favor or against removing the mortgage interest deduction, I'm just skeptical of the reasoning behind the arguments for doing so.

Like I said, the economic theory, and similarities to subsidies seem to make sense but the anecdotal evidence like the fact that prices and interest rates fell even as MID was left alone doesn't support the theory.

Screw corporate jets. Isn't it about time everybody move to video conferencing?

And if we want to talk about corporate expenditures in terms of job creation...then I demand a tripling in corporate compliance officers, a quadrupling of the Internal Revenue Code, and mandatory foie gras and fava bean dish with every expensed meal!

Astrid,

EXACTLY! Why do CEOs need to jet around when they can video-conference. The answer is "to impress people" and "to be exclusive".

The emperor has no clothes.

Malcolm,

What other Great American Oil-Burning Industry got destroyed by "class warefare"?

I was thinking NASCAR, but they still seem to be driving around in circles every weekend when I flip through the channels...

justme said,

EXACTLY! Why do CEOs need to jet around when they can video-conference. The answer is “to impress people” and “to be exclusive”.

The emperor has no clothes.

While there may be some of this, the main reason business people "jet around" is because there is still, to this day, no more efficient and effective way to do business than to meet face to face. I will not enter into any arrangement, deal, alliance, or customer relationship without first meeting the person face-to-face. Don't underestimate how much essential communication is non-verbal.

When it comes to development teams, I've spent over a decade managing globally dispersed software teams in telecom, where we have access to the state of the art video conferencing facilities. Of the most efficient projects, I have to add at least 20-25% additional management and process overhead for any endeavor to be successful, regardless of how many fancy video-conferencing centers we have at our ready. These projects inevitably end up being Unified/RUP projects where a good deal of time is spent doing documentation that will become obsolete within 3 months. Contrasting that to Agile projects, I can accomplish the same objectives without that 1/5 overhead for method documentation and management and usually cut another 1/3 off of the time-to-market, even including the cost of having a post-release set of documentation produced.

That's the power of having everyone sitting in the same room using the same white-board, eating the same ordered-in lunch.

We are running smack dab into the middle of the mortgage interest deduction issue. My husband has been making more money over the last couple of years and that, of course, means higher taxes. We are literally at the point where we're going to be forced to buy a house just so we don't get totally reamed on taxes and owe several thousand at the end of the year. The deduction is enough to make us pay more up front on a mortgage instead of rent because we'll save more in the long run.

We've talked about the mortgage interest deduction in quite a few past threads. I contend that it is really the primary "behavior-driving" tax policy involved in residential real estate, not the capital gains exemption (which people like to bitch about a lot here).

That said, qualifying mortgage interest deduction *will not* go away. Not in our lifetimes. Not until there is some catastrophic failure of some type, something much bigger than just a house price correction. Otherwise, Realpolitik wins.

SQT, the deduction is a very powerful factor in the buy -v- rent equation. There's no shame in taking a deduction offered. With the right income/tax scenario, the mortgage deduction can go a long way to offsetting the cost of borrowing money, in which case it's like the government taking money away from savers and giving to you to finance your house at a subsidized cost of capital.

We're in the same boat. Prices don't have to come down by much more in our area before the net-of-tax equation starts to get close to the cost of renting. That's kind of the tragedy of the way the tax deductions work. Looking through titles in Marin one will find a surprisingly high number of folks with right around $1.1mm in home debt. Maybe not surprisingly, given the qualified portion is $1.0mm on a primary and $100K on a line. That's a lot of government-subsidized cheap capital.

It is obvious what this disconnect will do for the comps when recent sales start getting included in the stats.

SP,
Don't worry. I'm sure the REIC will find some way to massage the numbers in their favor.

While there may be some of this, the main reason business people “jet around” is because there is still, to this day, no more efficient and effective way to do business than to meet face to face.

Randy H,

My thoughts exactly. Picking on a necessary component of the corporate infrastructure like this is silly. Sure, there are plenty of problems with CEOs and the corporate "elite" - like CEO pay, for example, but this isn't one worth picking on.

I'll add another point. When you get to that level of busy, your time is your most important commodity, even more so than money. Therefore, you are willing to pay for almost anything that will save you time. That extra hour needed to check in to a commercial flight, or to change planes at a connection are worth thousands upon thousands of dollars to these folks.

There’s no shame in taking a deduction offered

Fortunately I don't feel too bad about it. ;)

We're pretty lucky overall though. Prices are really coming down here. This area seems to be getting hit pretty hard by all the foreclosure activity. I think 6 months ought to see prices come within a more comfortable range for us.

Oh, and I have a quick question for everyone. Has anyone cruised Craigslist lately and noticed how much people are asking for stuff? Is it me or does everyone think their stuff is priceless?

My parents (who are neck deep in debt) keep doing this. They post the stuff they want to sell on Craigslist but ask a fortune for old, used furniture and then wonder why they don't get any replies. I keep thinking that people must really need the money to be asking so much. A couple of years ago, when everyone was feeling flush with their "equity earnings" they were all but giving stuff away. But not anymore.

"That extra hour needed to check in to a commercial flight, or to change planes at a connection are worth thousands upon thousands of dollars to these folks."

Then they won't mind paying a couple thousand more in carbon emissions tax for the privilege, rather than deduct it all as business expense (which makes traveling cheaper for corporations than for non-business travelers).

Then they won’t mind paying a couple thousand more in carbon emissions tax for the privilege, rather than deduct it all as business expense (which makes traveling cheaper for corporations than for non-business travelers).

Hey, I'm fine with that.

It is pretty well accepted that a society is more stable and healthy when people own their homes so even if removing the tax deduction makes sense, I am disturbed that people want to remove it merely for the reason that they think somehow it is sticking it to someone who has more than they do.

Malcolm,

I'm a little late to the party here, but I'll just add my 2 centavos:

--The home"ownership" rate recently hit an all-time high of ~69%, almost entirely die to the credit/housing bubble. Does temporarily adding several points worth of specuvestors, fraudsters and unqualified borrowers make us more "stable" or "healthy" as a society?

--For me, it's not about "sticking it to someone who has more", it's about crafting public policies (esp. tax) that do not actively encourage reckless speculation and malinvestment in housing. For me, keeping housing-as-shelter broadly affordable to the middle and working classes represents a social "good" and is at least worth considering when crafting tax policy.

That said, keeping the mortgage interest deduction for one's PRIMARY owner-occupied home (up to a certain price limit) while eliminating it for flip-houses sounds like a reasonable political compromise that could be sold to the general voting public.

I think home ownership says nothing... A lot of idiots took out a mortgage the last four years. Most had marginal to bad credit and zero saving yet,they dived in knowing little to nothing of the commitment they made. It won't matter whether they benefit from MID's or whatever most won't be able to hold on to their homes anyway.

RE: corporate jets.

I certainly don't "hate" private jets or the the advanced technology jobs this sector creates. However, from a social good/policy policy perspective, it's hard to argue that corporate jets are not luxury goods and "deserve" a taxpayer subsidy. As justme pointed out, as transportation goes, they are horribly wasteful and inefficient.

If you're a rich dude and want your Learjet, no problem. Just don't ask ME for a fat tax subsidy to help you pay for it.

Now, by contrast, the Moller Skycar shows great promise of being both very fuel efficient, while providing the same freedom as a corporate jet. Perhaps Moller will eventually create a 'corporate bigwig' luxury edition. I just wish the damned FAA would stop dragging its feet and certify it already.

monkeyinchief said:

You might not like the word of subsidy but any economist will tell you that is exactly what a tax break is. There is zero difference in economic terms between a tax break and a check from the US Treasury.

I agree --any perceived difference is all semantics. If you get to deduct expenses and/or interest for a particular asset class, say mortgage, cap. gains & HELOC interest, but cannot do the same for other assets (stocks, bonds, business expenses), then this is a de-facto tax subsidy.

I see no good reason why fliptards and fraudsters "deserve" a special tax break at everyone else's expense. Long-term, working-class owner-occupiers maybe, but not David Crisp or Casey Serin.

Of course, as others have already pointed out, a tax code that is more asset-class neutral (flat tax, or at least a "flatter" asset class-neutral progressive tax) would avoid such imbalances, while providing the added benefit of greatly simplifying the current, loophole-ridden, Byzantine tax code.

Moller hasn't flown it properly, how can they certify something that hasn't flown?

RandyH said:
Contrasting that to Agile projects, I can accomplish the same objectives without that 1/5 overhead for method documentation and management and usually cut another 1/3 off of the time-to-market, even including the cost of having a post-release set of documentation produced. That’s the power of having everyone sitting in the same room using the same white-board, eating the same ordered-in lunch.

It sounds like you're implying a connection between Agile methods and everyone being in the same place. If so, I would disagree strongly - we use Agile development in a team that is geographically dispersed and it works very well. We rely heavily on tele- and video-conferencing for meetings, on the web (wikis, shared folders) for sharing work, and networked SCM (perforce, online-reviews, continuous builds, etc.) for design- and code-collaboration.

As an aside, I am actually mentoring a intern in Europe that I have never met face-to-face. It wasn't intentionally planned that way, but the guy over there who was to be his mentor got into an accident, so I am pinch-hitting. Working online seems to be AOK as far as productivity and effectiveness is concerned, although I don't think it is ideal for an internship/mentoring type of situation.

I understand that CEO's/CFO's etc. often feel more comfortable with in-person 'hand-shake' rituals, especially in deals involving commitment of money, but that may only be because they are generally a generation or two older. Whether this justifies the expense of a flying aluminium penis is hard for me to judge. On the few occasions that I have had to meet these guys, being able to smell their cologne didn't really add _that_ much value to the interaction. :-)

SP

RandyH said:
Contrasting that to Agile projects, I can accomplish the same objectives without that 1/5 overhead for method documentation and management and usually cut another 1/3 off of the time-to-market, even including the cost of having a post-release set of documentation produced. That’s the power of having everyone sitting in the same room using the same white-board, eating the same ordered-in lunch.

It sounds like you’re implying a connection between Agile methods and everyone being in the same place. If so, I would disagree strongly - we use Agile development in a team that is geographically dispersed and it works very well. We rely heavily on tele- and video-conferencing for meetings, on the web (wikis, shared folders) for sharing work, and networked SCM (perforce, online-reviews, continuous builds, etc.) for design- and code-collaboration.

As an aside, I am actually mentoring a intern in Europe that I have never met face-to-face. It wasn’t intentionally planned that way, but the guy over there who was to be his mentor got into an accident, so I am pinch-hitting. Working online seems to be AOK as far as productivity and effectiveness is concerned, although I don’t think it is ideal for an internship/mentoring type of situation.

I understand that CEO’s/CFO’s etc. often feel more comfortable with in-person ‘hand-shake’ rituals, especially in deals involving commitment of money, but that may only be because they are generally a generation or two older. Whether this justifies the expense of a flying aluminium p3n1s is hard for me to judge. On the few occasions that I have had to meet these guys, being able to smell their cologne didn’t really add _that_ much value to the interaction. :-)

SP
(reposting because the ph4ll1c reference snagged the post into moderation)

SQT Says:
July 5th, 2007 at 9:42 am
"We are running smack dab into the middle of the mortgage interest deduction issue. My husband has been making more money over the last couple of years and that, of course, means higher taxes. We are literally at the point where we’re going to be forced to buy a house just so we don’t get totally reamed on taxes and owe several thousand at the end of the year. The deduction is enough to make us pay more up front on a mortgage instead of rent because we’ll save more in the long run."

Not meaning to pry, but I hope that is not the single reason you are thinking of buying. The fundamental financial seperation in renting verses ownership costs still do not justify a purchases decision solely for the tax benefit.

Moller hasn’t flown it properly, how can they certify something that hasn’t flown?

He hasn't "flown" it (untethered) because the FAA won't give him a permit to do so. And he can't get FAA certification because it hasn't flown untethered...

Kind of a bureaucratic Catch-22.

@Malcolm,

SQT's position illustrates exactly how the MID is a powerful economic incentive to buy, even when it otherwise would make no sense.

I agree –any perceived difference is all semantics. If you get to deduct expenses and/or interest for a particular asset class, say mortgage, cap. gains & HELOC interest, but cannot do the same for other assets (stocks, bonds, business expenses), then this is a de-facto tax subsidy.

That's why I don't see the MID as being the same as say a cash grant for solar, or a tax credit for a hybrid. Those are real subsidies because of your definition, it is a targeted incentive to an asset class. I've benefited from both, so I'm not particularly sensitive to the word I just think it's a weak way to win an argumet to throw the knee jerk terms around like implying that MID is a government handout to an undesireable class. I just read it again how someone views the typical homeowner as the Casey Serin type. Yet no one seems to question his actually taking the deduction (that is if he choses to pay his taxes or not) because he is an investor. The point falls short because the people you want to punish aren't even the same ones you envy. The owner occupied non investors taking MID are the innocent victims of this mess.

I didn't realize that the MID predated even the New Deal.

www.taxfoundation.org/blog/show/1382.html

Apparently there was no initial policy behind the MID, merely towards interest in general.

"He hasn’t “flown” it (untethered) because the FAA won’t give him a permit to do so. And he can’t get FAA certification because it hasn’t flown untethered…

Kind of a bureaucratic Catch-22."

Is that the current reason he's giving? It used to be for insurance reasons and because he only had one M400. For my Hi Tech Marketing class I persuaded my graduate group to do the project on the concept. I can assure you it is not the government holding things up. You can build and fly anything as long as it is classified as experimental, what he is waiting for is the airworthiness certificate which then allows him to market the plane.

Dennis, that's what I've been saying.

@Malcolm,

If you did a project on it, then you probably know a lot more about the legal status & history on Moller than I do. As I live in the most congested part of the U.S., I just want mine ASAP.

Harm, SQT contemplating making a purchase for the wrong reasons at the wrong time is an individual decision and if you wish to use one individual case to base the argument on, then why are pending sales now lower than anytime this decade?

I'm not disagreeing with the fact that it motivates people to own homes. In normal times, this is a good thing, because my whole concern is that I believe in general home ownership is good for society. Therefore, if MID really encourages this then it is meeting its goal. If it is not encouraging ownership, and just shifting the price of a home upwards in a linear manner then I would support eliminating it.

Harm, I'm with you on that one. That's why I chose the project, I love the concept. There are some competing lower tech concepts being developed that you will find interesting. Another company is trying the jet pack design again. It is basically a winged contraption that you strap into. I actually did the market survey for Moller at the Torrey Pines Glider port, and you would have got a kick out of the answers, and stories some of those guys had. In a European country there is an ultralight looking little buggy that is road legal, and can fly.