To reduce the housing problem the best policy is Tax Credits.
The Interest Deduction Housing bubble
A well-known, and middle class beloved feature of the US income tax code is that house Mortgage Interest is Deductible (the MID). Thus, a $2000/ month payment which is $1900 interest, at a 30% tax rate, means an offsetting tax reduction of $570, for an effective net house buying cost of only $1430. If the tax rate is only 20%, the deduction is only $380/ month.
As US house prices generally increased from the Volker-Reagan recovery of 1984, there was always an incentive to keep the interest portion of the mortgage payment high, so that more of it was deducted. This was both in selling then buying, or flipping, and also in re-financing with equity loans – that convert the equity which was paid for and from appreciation into loan, and especially interest payment. So that it’s deductible.
Instead, there should be some percentage of house payment, both interest and principal, that qualifies for a tax credit. If it was a 30% credit above, the tax credit would be $600. But, unlike the interest deduction, this credit would continue even as the payment shifts in time from interest to more principal – and it is the principal payments that build up the equity. Clearly a flat % tax credit is better for middle and lower class, than a deduction where the rich in the highest bracket get the most benefit.
There should also be a lifetime maximum on how much tax credit can be granted. With median taxpayer income of about $40k per year, a good lifetime maximum of about 10 midian tax years ($400k) would be good , to limit the total benefit, and reduce the speculator investment reasons for house flipping. Creating a formula for adjustment now, allows the natural growth of income to lead to an increase in the lifetime benefit.
In the current popped-housing bubble economy, a huge 50% tax credit should be enacted, with a $20k / yr maximum credit ($40k in house payments, or 100% of prior year’s median taxable income), so as to immediately benefit those making house payments, and give bankers some relief through fewer foreclosures because buyers can afford more after-tax house payments. This high 50% credit rate could be slowly reduced towards the “normal” 30% range, as the prior year’s unemployment drops from 8.0 % to 6.0%. Those 20 steps of 0.1% each should be a full 1% drop on the credit rate, in the following year, to be adjusted yearly.
1) Tax credit instead of deduction, start at 50%
2) Credit on both interest and principal
3) Lifetime maximum, 10 years of median taxable income (now about $400k)
4) Yearly maximum credit of half the median taxable income (now about $20k)
5) Slowly reduce the credit, as the unemployment rate comes down, with a final target rate of 30%. The credit rate reduction could begin decreasing when unemployment is less than 8%.