Buying a home isn’t such a good deal anymore

MPR News’ Matt Sepic reports today that home buyers are being squeezed in these parts because there aren’t enough home sellers. Land prices are too high so the homes that are being built may not be that affordable.

Maybe it’s just as well.

Buying a home isn’t the deal it once was, CNBC points out today. The days of a home as an appreciating investment may well be done.

With mortgage rates being so low, there’s not much of a tax savings for owning vs. renting.

“It has removed one of the main reasons people had urgency to buy,” real estate consultant John Burns tells CNBC. “High rent should be a kick in the pants, lowest interest rates should be a kick in the pants, but I think if you were getting a tax break too, I’m sure we’d see more entry-level buyers.”

But why should a home buyer get a tax break at all? Are they better than renters?

In focus groups of people who are buying homes, hardly anybody mentions tax breaks anymore, according to CNBC.

The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers.

According to Burns’ analysis, a typical first-time homebuyer, financing 95 percent or less of a median-priced U.S. home (around $200,000) pays less than $12,000 in mortgage interest and property taxes annually. That is not enough to hit the itemization level.

Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal.

Seventy-seven percent of the mortgage interest deduction benefit went to people with incomes higher than $100,000, says the Center on Budget and Policy Priorities, which favors eliminating the mortgage interest deduction and replacing it with a mortgage interest credit.

That’s unlikely to happen. In fact, nothing is likely to happen. It remains a popular tax deduction even if fewer and fewer people are going to able to benefit from it.

  • Gary F

    I had this discussion with my 20 year old son, he doesn’t think he’ll buy a house.

    That’s fine, but if you aren’t going to put money into an asset like a home, you better start dollar cost averaging money into the market and saving money.

    If you are of the generations after the baby boom and don’t play on buying a house, you better start saving now, because you will have nothing for retirement. And if you think social security is going to be your retirement, you are not just naive, but foolish.

    With a home, at least you have an asset, something.

  • Brian

    I’ve never understood the reasoning behind the mortgage interest deduction. I don’t see any “fairness” reason to deduct it and it sure is a round-about way of incentivizing home ownership.

    I’m a millennial homeowner, so I thought it was worth it to buy. But I do think it is healthier to not think of a home as an investment. I think that reasoning leads to too many bad outcomes overall. I am paying for a place to live, just like a renter. I hope to get more out of our home than we put in, but it wouldn’t ruin us if we don’t.

    • Jasper

      No, there isn’t anything fair about that deduction. Government sure is not known for being very fair. I’m disgusted to learn how high the deduction/incentive is just for being married. Why on earth do [the right] people get deductions for these things??

      • Jack Ungerleider

        Because the tax code is one way society, through its collective action as a government, can influence societal behavior. The value judgement made by specific elements of the tax code theoretically reflect the consensus opinion on what we consider “good behavior” vs. “bad behavior” at the time each piece is enacted.

        • jon

          That presumes that any of us in “society” can understand the tax code and make any attempt to manipulate it to our advantage…

          Most people I’m sure pay the tax guy once a year and don’t think about taxes again until they get a W-2 the following year.

          • Jack Ungerleider

            Manipulation of the tax code is your point not mine.

            My point is that mortgage interest deductions, dependent credits on income taxes, no sales tax on clothing or food, excise taxes on alcoholic beverages and tobacco products all reflect societal values. The promote or discourage certain behavior by members of society. Since all tax law is enacted by elected representatives (state or federal) then we can assume that these representatives reflect to “will of the people” at the time the laws are enacted. An example of a change in the tax code to promote smaller families would be to cap the dependent credit at 2 or 3 dependents. That would say to families that society is willing to assist in the raising of your children to a point. Beyond that point you are on your own. (I am not suggesting this be policy. It is an easy example of how a change in societal thinking could be implemented in the tax code.)

          • jon

            Then I’ll drop the word “manipulation” from my statement.

            That presumes that people understand the tax code well enough to structure their actions based on the tax implications of those actions.

            I don’t believe that to be the case. I believe that most people pay taxes when they are forced to, and otherwise spend very little time thinking about taxes, or influencing their actions based on the tax code.
            Heck even when they do pay “hidden” taxes like the sales tax or payroll taxes I think very few people take notice of them.

            While driving the course of society might be a function that the tax code could serve, the complications of the tax code make that unreasonable for most people.
            Then There are cases where things like the “repatriation tax” drives businesses to inversions, that we denounce it as un-american!

      • CHS

        Jack’s statement about the tax code being the lever that government uses to change society is spot on. Just look at all those sin taxes out there…

        I’d be cautious about assuming that the marriage ‘incentive’ is so rosy, it really depends on the situation of the two people that are married. Once they changed the standard deduction to be twice the single amount for a married couple, it comes down to the income of the two. If one makes significantly more than the other, the benefit can be good, if they are the same, it can wash out. Add in some of the other factors and it can actually hurt you to file as married.

    • David

      I’m pretty sure there is nothing “fair” about the tax code.
      I am also a millennial home owner. I look at it the same way. A place to live the way I want to live without having to get permission or move if I don’t want to. It isn’t an investment.

    • Dan

      All interest used to be deductible. It was more or less intended for inventory financing for small businesses, but up until the 80’s, everyone could take deductions on any interest. Even for things like auto loans.

      Then in the mid 80’s the personal income interest deduction was eliminated, except for mortgages. Why except mortgages? I’m not entirely sure, but I’d bet the reasons that keep the idea from getting traction today played a big part. Lobbying by realtors and banks. People were already getting the deduction, and were relying on it when they’d made a 30-year financial commitment.
      Add to that, mortgage rates at the time were going between 10% and 18%, so it was a big expense (and deduction) for many Americans.

      Now go back to taking selfies for your snapchat or whatever you millennials do 😉

      • That was Reagan’s tax “increase.” In exchange for losing deductions, the tax rates were slashed. The administration said it would be a wash.

      • Jack

        That would be the ’87 tax act. The consumer loan interest (like autos) went through a phase-out period – I believe that ended in 1990 but could be wrong.

        Mortgage interest deduction is like the charitable deduction situation. Talk about removing that one and you will see the non-profits heavily lobbying Congress. Case in point – when the rules changed on donations of autos.

  • Postal Customer

    Buying a house (let’s call it ‘house’ because ‘home’ is a realtor word) was never supposed to be an investment. It’s supposed to be a place to live.

    Nate Silver addresses this in his book. Housing inflation was pretty low for decades and you never made much (if any) money when you sold your place.

    • jon

      A home is an investment… when compared to other alternatives.

      If you start with the simple assumption “I need a place to live”
      My options are 1) rent, 2) buy outright, 3) mortgage.
      Most people can’t afford option 2, though over the course of many years it would be the cheapest.
      Option 1 gets you a single bill from a landlord, they take care of taxes, and maybe even utilities, makes life easy, but once your lease is up you have nothing to show for that money spent, and the rates can (And likely will) go up every year.
      Option 3 gets you a house, you have to pay property tax (or have it rolled into the mortgage) you have to pay utilities (Which you may have had to pay while renting) and you have to pay for repairs (that’s the real kick in the pants). When you are done with the mortgage you still have to pay property tax, and repairs and utilities, but you also have an asset that can be sold.

      Now the details on which option are better depends on your situation and the exact prices you’d be paying… back when I bought my house, I had the option of renting a 1 bedroom one bath in an apartment complex in the same area for $1050 a month, OR buying with a mortgage of $950 a year, taxes brought that up to $1050(ish). When all is said and done I’m now up $70k in equity, though I’m probably down about ~$20K in repairs and maintenance, so we’ll call it an even $50k in equity that I have now that I wouldn’t have had while renting…

      Granted, that $50k cost me ~$104K over the last 7 years… though I also came out with a place to live… Were I willing to not pay for a place to live buying the house would have been an awful investment, but buying, at least in my case, ended up being a better investment than renting, though they would have both been losers for an investment were I to be looking at them strictly from that perspective.

  • Dan

    If interest rates doubled you could get a bigger deduction, not sure it would make the purchase a better deal.

    • You know, back in the day, we used to do the napkin math on loans like mortgages. You figured your total outlay on a mortgage was 2 1/2 to 3 times the amount of the mortgage.

      Back when I moved to Minnesota, paying off a $100k mortgage, would cost you $265,000. At today’s rate, it would cost you “only” $170,000.

      It’s pretty hard to find anything that would save you almost $100,000 on a $100,000 mortgage.

      • Dan

        Exactly 🙂 When I bought my first place and they showed the total paid to the bank if the schedule was followed, they said “you should have seen these in the 80’s, 3x the financed amount was typical”

        • I remember when my sister told me around 1980 that she wanted to buy a condo for $65,000 in Central Square, Cambridge, Ma , she didn’t seem to wince at all at the 16% mortgage rate. Total payout? $314,000. She sold it by ’86 and actually turned a pretty good profit.

          • Rob

            The only profit would be whatever she made above $314,000; is that what you meant?

          • It would only be $314,000 it you held the note to term.

          • Jack

            The smart folks make bi-weekly payments (equivalent to 13 monthly payments a year). If you play your cards right and have a mortgage that recalculates interest at the time of each payment, you can knock years off the term.

  • Kassie

    In the past 10 years I’ve been a homeowner, then a renter, and now a homeowner again. There are so many reasons I couldn’t wait to be a homeowner again after renting for three years.

    1) It is cheaper. I live in a nicer place, with more space, in a much nicer neighborhood for less. It ends up being about $20 a month cheaper all in, but my rent was raising at 5% a year, so next year I’ll be saving even more. Rents are super high right now, we couldn’t even begin to be able to afford to rent a house in Minneapolis.

    2) Tax breaks. I didn’t get a renter’s rebate because I make too much. Every year I was within a few hundred dollars of being able to itemize and this year, I got to, even though we only owned the house for a couple months, it put me over. This year I’m actually getting a small return while all the years I rented I had to pay in extra. That’s without adjusting my withholding. I hate, hate, hate the tax break. Single people making the same amount of money should pay the same taxes regardless of where they choose or are able to live. That tax break benefits certain localities over others and people with good credit. It is unfair.

    3) Renting sucks. Sure homeowners have to fix things and replace things, but so do renters if they want something nice. We didn’t have any bathroom storage in our rental, so we installed a cabinet, towel rack and toilet paper holder. We had to do all the mowing and shoveling and yard maintenance, but we weren’t allowed to plant things or change anything to make those things easier or the place look nicer. In one place I rented, the building was having issues with city code, so I was getting my place inspected every week almost, which was a huge hassle. You have no stability as the landlord can do whatever they want to your house, including selling it out from under you.

    • Tim

      1) I’m not convinced it’s that much cheaper in the long run when you consider all of the costs — it would depend on how much you’re budgeting for in terms of repairs, maintenance, etc when you say “all in”. Month-to-month, sure, but less so the longer you live somewhere and have to start putting serious money into a place.

      2) True. But here again, that gets offset by the cost of ownership over time. Though I agree that the tax breaks are unfair and it’s a bad system.

      3) It can, but it also depends on where you live and the quality of the management. Many places won’t let you do so much as put a nail in the wall anyway, and cover all of the outdoor maintenance.

      • Kassie

        But rent will always go up, my mortgage never will unless I decide to refinance. Sure my property taxes will go up, but not like rent. We were paying $1200/mo for a crappy little house on the East side of St. Paul. It would of gone up to $1250 if we renewed our lease and $1300 the next year. I was just talking to a friend in a one bedroom apartment. Her rent has gone up $200 in the last couple years.

        And yes, it does depend on where you live and the quality of the management, but you pay for those things. If you want a house, not an apartment, where the landlord shovels and mows, that will cost you a fortune. I was a renter six months ago. I know what I’m talking about. And I’m telling you that in the short and long run, it is cheaper and much less hassle to own.

        • Jack

          The other great thing about home ownership is when you get the place paid off and you are paying yourself the equivalent mortgage payment – building up the “fix up the place” fund. Never would have had that when renting.

  • In a sellers market the cost of acquiring a home go up. Sellers often have multiple offers on a home now in many markets which drives the price up. Sellers are also less likely to give credit towards closing costs.

  • Ron Fresquez

    I am fortunate my wife and I bought her parents home in Edina 22 years ago. It is a pretty good size corner lot and it is the only all brick house in the neighborhood. The house was built with load bearing steel I Beams and the interior has plaster walls. The house was built by my wife’s grandfather for her father who owned a lot of where Southdale was built. He also owned quite a few business and property in New Ulm.
    We have since paid off the mortgage and we just have to worry about upkeep and other expenses. Because Edina is a first tier suburb all the infrastructure costs have been covered years ago. As a result taxes are very reasonable compared to Minneapolis and other suburbs. The Edina school system is consistently ranked very high in the State and the nation. The crime rate is very low. In the 22 years we have lived in Edina we or none of our neighbor have experienced a burglary. There is little acreage for building. As a result it is very difficult to buy an affordable house in Edina. A typical 1950″s two bedroom rambler that has not had much updating generally sells for between $500 & $600K. These ramblers are not on the market for long. Many of these ramblers are razed and replaced with $1+M houses often referred to as McMansions.
    We recently gutted and completely remodeled our basement. The contractor had a dumpster on the driveway to get rid of debris from the demolition. We had notes from realtors inquiring if we were selling our house because there was a dumpster on driveway. We had several people who were driving or walking by stop and come to our door also inquiring if we were moving and selling our house because there was a dumpster on the driveway.
    Is possible to sell our house and make a nice profit? Yes, however we still need a place to live.