From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: Perot and Mortgage deduction
Date: Mon, 12 Oct 1992 18:48:24 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <1992Oct12.175229.19003@cbnews.cb.att.com> nrc@cbnews.cb.att.com (N. Richard Caldwell) writes:
>From article <1992Oct12.035238.7853@anasazi.com>, by john@anasazi.com (John R. Moore):
>> Keywords: 
>> 
>> In article <1992Oct8.160501.7332@cbnews.cb.att.com> nrc@cbnews.cb.att.com (N. Richard Caldwell) writes:
>
>> Those who bought homes with the rules
>> the way they are now would be hurt badly by a change. Removing the
>> home mortgage deductions would drop about 30% off the value of houses.
>
>I'm more than a little skeptical about the 30% number.   That might be
>true at the very top of the home market (400k+) but the affect for the
>vast majority of american homes would be nil with gradually increasing
>affects as price increases above 250k.  What percentage of American
>homes cost more than 250k?  

  Who cares?  It's not a function of the price of the house; it's a 
  function of the tax bracket of the homeowner!   I'm in the 31% bracket
  and my house is only worth $155K.    The government's involvement 
  in the housing market by allowing interest deductions has distorted
  house prices upward.   Since Perot wants to raise taxes he will cause
  an even *bigger* distortion since someone in his proposed 35% bracket
  gets an even bigger break than someone in the 28% bracket.    And no, 
  people who earn $89,000 do not usually buy $250,000 houses, in fact
  they would be unlikely to qualify for such a mortgage if they tried.

  Again, the only fair way to cut this is across-the-board.  Why should
  we single out people with expensive houses?  House prices are a
  function of local conditions.  My house, a three bedroom ranch with
  a full basement on 1.5 acres, would probably cost twice what it does
  if it were in Silicon Valley.  Everybody knows the three factors de-
  termining house prices in real estate are:
  1.  Location
  2.  Location
  3.  Location
                                            
  The correct thing to do is reduce the mortgage interest deductions by 
  a certain percentage every year FOR EVERYONE -- remember "sharing the
  pain?  But the other poster is right -- this would have to be done 
  gradually to avoid a banking and housing catastrophe  -- just imagine
  the effect on the banking industry and secondary market of a sudden
  drop in real estate prices collaterizing most of their loans of even
  20%, nevermind 30%!


>> Even removing deductability at the top of the housing market would cause 
>> values to drop all down the line. 
>
>I don't see how that follows.  It seems to me that reducing the tax
>benefits of the most expensive homes would make homes of less than
>$250k more attractive and thus more valuable.  

  Because the *vast majority* of house purchases are NOT new construction.
  I.e., someone has to move out first, and typically that someone moves
  UP.  When you make houses over a certain price more expensive you
  stop the whole train.

  Perot's plan is just another instance of government creating a bizarre
  distortion in a market.  Just like it has in the oil industry, the
  food industry, the airline industry, the insurance industry (locally
  in states) and many others.   Perot has too much faith in government
  bureaucrats and not enough guts to propose getting government out of
  some of these areas.  He proposes to fix one distortion by adding an-
  other distortion.   It will be a hideous mess.

  The solution is to REDUCE the role of government  --  Perot's plan is a
  lot like the S&L mess in that it only *partially* removes a distortion
  but leaves a connected one intact and this creates a nonlinearity with
  a bigger mess than you had to start with.  



---peter