Congress Set to KO Your Ability to Own a Home

In boxing, it’s called “the old one-two.” Left jab followed by a right cross. For the past several months, we’ve finally witnessed a modest turnaround in the housing market, both nationally and in San Mateo County. Other than a few economic factors, what could knock out this slowly rising recovery in the housing market?

 “Ladieees and gentlemen… in this corner... wearing the mauve trunks... the ‘Housing Market Mauler’… let’s welcooooome...  Looming Congressional Tax Reform.” In late June, the U.S. Senate announced plans to adopt a “blank slate” approach to reform the tax code. 

 The left jab: A “blank slate” approach would eliminate all tax expenditures (including tax deductions such as the mortgage interest deduction, tax exemptions such as the capital gains exemptions on the sale of a primary residence, and the deduction of state property taxes). Senators have to request tax expenditures be added to the reform legislation. 

Senators have only until this Friday (July 26) to request that real estate expenditures be added to the reform legislation before the Finance Committee begins drafting a tax reform package. This approach is supposed to give the Senate Finance Committee a bully pulpit to highlight just how much tax rates could be reduced by eliminating all the tax expenditures. (Remember, in Congress-speak, expenditures = deductions.)

How does this affect you?  A wide range of provisions in the tax code affect residential, investment, and commercial real estate… but let’s focus on one incentive to home ownership that’s been around for over 100 years: the home mortgage interest deduction. Right now, no one Senator has been identified to champion the mortgage interest deduction.

The right cross: Earlier this month, House Financial Services Chairman Jeb Hensarling (R-Texas) introduced a comprehensive discussion draft on mortgage finance reform, titled the Protecting American Taxpayers and Homeowners (PATH) Act.  PATH includes reforms to FHA, Fannie Mae and Freddie Mac and would rewrite the role and mission of the FHA so only first-time home buyers and low- and moderate-home buyers would be allowed to use FHA financing. 

It also calls for the elimination of the conforming loan, while not providing any guaranteed mortgage product to replace it.  As the cliché goes, you don’t have to be Einstein (or in our analogy, Manny Pacquiao) to see this bill will drastically increase the cost of financing for home buyers in high-cost states like California; and especially in high cost areas of the Golden State like San Mateo County. Oh yeah, it also reduces the availability of mortgage capital.

The good news is there are representatives from California on the House Financial Services Committee who believe that home ownership matters and will fight back: Gary Miller (R-Inland Empire & Vice Chair); Maxine Waters (D-Los Angeles and ranking member of the committee); Edward Royce (R-Brea); Brad Sherman (D-San Fernando Valley); John Campbell (R-Irvine); and, Kevin McCarthy (R-Bakersfield & Majority Whip). The bill is expected to be “marked up” in committee next week. (Wish that were a boxing term but it means written in committee.)

Bottomline: if you, as home owners or prospective home buyers, do not oppose these efforts… it’s your shot at the American Dream that will be KO’d.