HomeHome Ownership In 1997 Under President Clinton's SecondTerm
by Stephanie A. Chisholm
Slow but continued economic growth with moderate inflation appears tobe the direction for 1997. Lower federal budget deficits combined with amoderately growing economy means continued low inflation levels in the 2.5%to 3.5% range. While significant budget problems lurk just beyond the horizon,problems with social security, Medicare and the interest on the nationaldebt will not manifest themselves until well into the next century.
S low but continued economic growth with moderate inflation appears tobe the direction for 1997. Lower federal budget deficits combined with amoderately growing economy means continued low inflation levels in the 2.5%to 3.5% range. While significant budget problems lurk just beyond the horizon,problems with social security, Medicare and the interest on the nationaldebt will not manifest themselves until well into the next century.
The down side to this type of economy is that home owners will not beseeing dramatic home price increases like those seen during the 1980s. Onthe positive side, the likelihood of a great decrease in home prices similarto that seen in the 1988-1992 years is greatly reduced.
Home Ownership Tax Deductions
The home mortgage interest and property tax deductions for tax payerscontinue to be sacred cows in Congress. These tax benefits allow consumersto reduce their gross income by the cost of mortgage interest and propertytaxes paid for a primary residence. For example, a home owner with incomeof $50,000 in 1996 who paid $10,000 for interest and property taxes wouldonly have to pay taxes on $40,000 ($50,000 - $10,000 = $40,000). On theother hand, a renter with income of $50,000 and $10,000 in rent expensewould still have to pay taxes on the full $50,000 of income.
These deductions are worth thousands of dollars per year to home owners.Overall, the tax deductions cost the U.S. Treasury over $60 billion peryear. Despite this gigantic subsidy, the popularity of the program and theentrenched interests protecting the deductions virtually assure that theywill not be eliminated in the near future. These special interests includeThe National Association of REALTORS, The National Association of Home Buildersand The Mortgage Bankers Association.
While interest and property tax deductions will most likely not be axed,there may be a move to limit them in the future. The mortgage interest deductionis limited to mortgage loans up to $1,000,000 under current law. Needlessto say, very few home owners bump up against this ceiling. Moreover, whenthis limit was put in place in the 1980s, most wealthy borrowers simplyreduced their mortgage amounts to below the $1 million mark. As a result,efforts by Congress to collect additional real estate taxes from the wealthywere thwarted.
Nevertheless, there has been talk of reducing the maximum mortgage deductionto $250,000 or $300,000. The justification for this reduction is that thedeductions were originally put in place to maximize home ownership in theUnited States. For most home buyers, $250,000 will buy at least a starterhome. Above that amount, it is simply a matter of what type of home andthe deduction will not spell the difference between owning and renting.
The Capital Gains Tax
The other major aspect of U.S. tax policy that affects home buyers andsellers is the capital gains tax. Capital gains tax is tax on the profitfrom buying then selling an asset such as a stock, bond or property. Theconcept of eliminating the capital gains tax has always been a major Republicaninitiative, but has traditionally been scoffed at by Democrats as a specialdeal for the wealthy. At present, the current capital gains tax rate of28% is slightly below top marginal income tax rates.
The big news for home buyers and sellers in 1997 will be President Clinton'scampaign promise to eliminate the capital gains tax on home sales for profitsbelow $250,000. Currently, if a home owner sells a home for a profit, capitalgains tax must be paid on the gain. However, Congress made an exceptionfor home owners moving from one home to another. If a tax payer has a gain,he or she may postpone paying tax on it if they use the money to buy a moreexpensive home within two years before or after the sale. This tax benefithas allowed home owners to move up to ever larger homes while postponingtaxes due until well into the future.
When the future does come, there is yet another benefit for home sellers.If a home seller is at least 55 years of age on the day the sale closes,he or she may be able to avoid paying taxes on up to $125,000 of the gainon the sale. Tax payers may take advantage of this exemption, known as theone-time exclusion, if the property has been a principal residence for threeof the five years preceding the sale and several other conditions are met.
President Clinton plans to do away with the one-time exclusion alongwith any capital gains tax on the sale of a principal residence. While cappingthe profits at $250,000 to $300,000, this proposal would free up home ownersto buy and sell homes when it would be best for them. Under the currenttax code, most home owners hold off selling until age 55 when they may havea need or desire to sell well before that time. If this policy were enacted,the real estate market would most likely see an explosion as the many homeowners waiting for age 55 could sell their homes sooner.
The likelihood of passage for this proposal is probably an even bet atthe start of the year. While the program is wildly popular among all homeowners and buyers, the popularity of the program and the benefits it brings(such as an increased home ownership rate) must be balanced against thestark realities of the still-looming federal budget deficit.
Federal Government Programs: FHA, VA
A centerpiece of federal housing efforts has been the FHA loan programrun by the Department of Housing and Urban Development (HUD). This mortgageprogram has helped numerous first-time home buyers overcome obstacles thatwould have been insurmountable under conventional mortgage programs. Withlower down payment requirements, lower asset requirements and looser creditstandards.
In 1996, President Clinton signed the fiscal 1997 VA/HUD appropriationsbill which contained four FHA streamlining amendments. The most importantclause for home buyers included a provision to reduce the cost of FHA mortgageinsurance from 2.25% to 2.0% of the loan amount for buyers who completehome ownership counseling. The other three amendments streamline processingof the loans, which can now be completed directly by private mortgage lendersoffering the FHA program. For Veterans Administra-tion loans, the bill willresult in a slight decrease in interest rates on VA loans.
In 1997, it is possible that FHA may consider privatizing the loan programand developing it into a company such as Fannie Mae. Most special interestlobbyists are against this plan, however, fearing that program requirementswould be tightened and many first-time home buyers would be unable to obtainfinancing anywhere. While the FHA program does serve a specific sector ofthe market, many private lenders have developed their own programs in conjunctionwith non-profit housing agencies that are often more liberal than the FHAprogram. As a result, home buyers should still have ample programs availableno matter what the future status of the FHA program.
Warning for Real Estate Investors
While most real estate benefits for home buyers and owners appear thatthey will remain intact, real estate investors serving the low- to moderate-incomehousing markets may be in for a rude awakening. Many landlords of low-incomehousing rely on HUD's Section 8 rental subsidy program to be able to offerbelow-market rents. With many of these programs expiring in the next severalyears, many Section 8 subsidies to local cities and towns will be reducedor even eliminated. Just as welfare reform is sweeping the nation with respectto cash payments, so will other subsidy programs for housing, food stampsand medical care also come under attack in the next Congress. Landlordsare advised to analyze how they would continue with a complete cut in Section8 funding.
Stephanie A. Chisholm is publisher of the Mortgage Almanac.