Why the Mortgage Interest Deduction Must Be Saved, and A Special Welcome to Cashin Company Realtors
The leaders of a White House commission charged with reducing the federal budget deficit this week laid out a sweeping proposal that would, among other things, scrap tax deductions on mortgages over $500,000, according to the Wall Street Journal and other news media outlets. Opponents of the mortgage deduction argue that ending the tax break would not only create a deep source of money for reducing the U.S. budget deficit, but in the aftermath of the mortgage crisis, the country needs to rethink its favored tax treatment of homeownership.
However, Lawrence Yun, the chief economist for the National Association of Realtors, says this argument downplays two critical facts. First, homeowners already pay 80 to 90 percent of the income tax in our country, and among those who claim the mortgage interest deduction, almost two-thirds are middle-income earners.
“When we talk about the beneficiaries of this tax benefit, we’re talking about households who are the pillars of federal income tax revenue,” Yun said in a recent column. “We would now be asking them to shoulder an additional tax burden, and also to brace for a 15 percent drop in home values—that’s how much we can expect values to fall as buyers discount the value of the deduction in their purchase offers.”
Secondly, those who blame the mortgage meltdown on our nation’s support of homeownership are ignoring the origins of the crisis, Yun argues. The real culprit was unprecedented laxity in underwriting and faulty ratings by credit rating agencies of the securities backed by those mortgages.
Critics of the mortgage deduction fail to understand the tremendous benefits to our country, including higher student achievement among children of homeowners, improved stability of neighborhoods, and a better quality of life for residents and communities.
“Whatever deficit reduction might be realized by taking a carving knife to the mortgage interest deduction would come at an intolerably steep price: trillions of dollars in wealth destruction and a new uncertainty in what has long been recognized as a bedrock of our economy,” Yun writes.
Nowhere in the country would the issue have more of an impact than here in the Bay Area, where high housing prices mean mortgages routinely run in excess of $500,000. While the highest priced markets in San Francisco, the Peninsula, Silicon Valley and Marin would be hit hardest, all of our cities would be affected should home valuations drop and housing markets become further destabilized.
Talk of scrapping the deduction could not come at a worse time, just as the housing market is starting to recover. Mortgage interest rates just hit a new record low this week with 30-year fixed mortgages at 4.17 percent, according to Freddie Mac. This is a unique time in all of our lifetimes where interest rates, affordability, and available inventory have never been so attractive. Hopefully, these elements will combine to ensure our nascent housing recovery gains momentum. We can’t afford to have federal policies that send the market in reverse again.
On a much brighter note, I’m excited to share some terrific news. This week Coldwell Banker Residential Brokerage announced that we have acquired Cashin Company Realtors, the distinguished Peninsula brokerage. With seven branch offices, 270 sales associates, and more than $1 billion in annual sales volume, Cashin is one of the top local brokerages on the Peninsula. They’re a highly respected boutique agency with a long, proud tradition of excellence in serving the upscale Peninsula market.
Cashin has some of the very best, most professional Realtors in the business. I couldn't be more excited about bringing our two great organizations together. A company is only as good at its people and between our Coldwell Banker and Cashin agents, we have the best. I’d like to extend a warm welcome to our new colleagues from Cashin Company. Here’s to a bright future together as the Number One name in real estate – Coldwell Banker Residential Brokerage!
Below is a market-by-market report from our local offices:
North Bay – The market in general has slowed, our Greenbrae office reports, though we are still seeing some nice listings coming on and open house traffic has been pretty steady. One house in Mill Valley came on for just over $2 million and is receiving quite a bit of attention. In the same breath, other homes that have been languishing are finally taking some deep, dramatic price cuts. Sellers really have to look at what they’re trying to accomplish – do they want to sell? Can they hang on for their price? Is it better to take the home off the market and try again later? Should they rent? All viable options, but really depends on each individual seller. In Northern Marin, while there continues to be heavy turnout at weekly open houses, the market remains slow due to buyers “fence sitting” with offers. The consensus regarding listings is that sellers are letting agents know they are going to wait until spring to put their properties on the market. The Northern Marin office will be out in the community this holiday season by participating in the Toys for Tots and One Warm Coat drive. According to the Santa Rosa office, new listings and sales are holding steady. We are still getting attendance at open houses even in the rain but it does feel like it is slowing. The Sebastopol office says the local market is very quiet. Buyers are very particular and sellers are very cautious. Review appraisals are common and deals falling apart at the last minute are becoming more common. Meanwhile in Southern Marin, well priced properties are still selling quickly. The Previews high-end market is substantially up year to date versus a year ago in units sold, but still down overall versus 2008 sales. In Mill Valley 3 properties in the $2 to $3 million range are in contract. In Belvedere 4 properties are in contract in the $3 to $4 million range. In Tiburon 7 properties are in contract from $2 million and up, and Sausalito actually has five in contract in the $2 to $3 million range (and only eight active.)
San Francisco — Our Lakeside office reports the market slowing in terms of sales and listings, while the Lombard and Market Street office report steady activity. There’s been a drop open house attendance, and a couple of REO sales, our Lombard office says. One vacant duplex brought 27 offers, going into contract way over the price. The buyers are there, it’s just that everything has to be “right.” Meanwhile, our Market Street office manager says buyers appear to have become more skittish about writing offers. At open houses they talk well of the property they are in and how much they like it but are not willing to put pen to paper at any amount. The agents are encouraging offers being written in order to open a dialogue but that’s happening in far fewer instances than we would like. As always, the well-priced “hot” property is still going quickly. A 2-unit we have listed in the Castro area of SF went into contract within a week with multiple offers.
SF Peninsula — Our Burlingame office says they’re seeing a steady number of buyer contracts with many feeling that the end of the year is the perfect time to take advantage of available inventory and low interest rates. The listings are tough to get right now with the usual end of year pull back for the holidays and everyone waiting to see what will happen with taxes, jobs and the economy. Across the hills in Half Moon Bay, listings have slowed down, probably due to the holiday season approaching. Buyers out looking and will write offers if the price and condition are perceived as a great buy and are prone to walk away if countered. Our Menlo Park offices report listings and sales either steady or decreasing. Open house activity was still pretty good despite the heavy rain. More buyers are coming into the market. They are slow to decide but our local manager is seeing a bit of a trend. Inventory is getting scarce and demand may be building. In Palo Alto, open houses are kind of holiday slowish. Sales activity is still brisk, however, if well priced – in Palo Alto up to the $2M mark. In Mt. View we are getting more activity in the below $2M price range – as well as Redwood City. Our Redwood City office reports the local market is very slow with lots of price adjustments. The condominium and townhouse market is extremely quiet. The San Mateo office says the market in some cities (Hillsborough) is heavy with listings while other areas, such as San Mateo and Belmont, are very healthy. Foster City, Burlingame and Redwood Shores are steady. Finally, in Woodside, the local market is steady with the medium price range still moving with some consistency.
East Bay – Multiple offers have almost completely disappeared, our Berkeley office reports. Buyers are making low offers and have no sense of urgency. If their low offer is rejected, they simply make an offer on something else or continue on the sidelines. In Orinda and Pleasanton, the number of sales continues to remain steady despite lender issues. However, inventory is decreasing in Orinda while in Pleasanton, homes taking longer to sell. Prices from mid to high 600k in Pleasanton are staying on the market longer. In Walnut Creek, with every new sale comes new challenges: appraisal issues, additional loan conditions and longer escrows. There is still no sense of urgency for buyers to buy. Some hopeful signs in Castro Valley with agents receiving calls from past clients expressing their interest in moving up. It is slowly becoming a buyer’s market with inventory is up in Walnut Creek, Castro Valley, San Leandro and Hayward. Meanwhile, in Danville, we are starting to see low inventories again, while buyer interest remains strong. Buyer activity has picked up after a September lull. Our Fremont manager says it’s not surprising that the listings are down. Tis the season—the Holidays are rapidly approaching. Sales activity is steady, as buyers attempt to close prior to the end of the year. In Livermore, the total active listings bottomed out in May at 193, and the total pending sales topped out in May at 318. Since May, the total listings have increased to 297, a 54% increase, and total pending sales have declined to 233, a 27% decrease. Traffic at Open Houses has been hot and cold during the past two weekends.
Silicon Valley – In Cupertino, inventory is decreasing and sales are edging higher. There are lots of people looking but buyers are only making offers on extremely well-priced homes. Open house activity remains hopeful. Our Los Altos manager says the local market is “sloppy,” – busy in some micro markets in good school districts or special “in town” Mountain View locations. It’s active under $1.5M, slower above $2M and very quiet over $3M. The Los Gatos market is steady. Pricing remains the most important aspect of the sale for both buyers and sellers. The San Jose Almaden office says there are 1500 more active listings over this time last year. Blossom Valley has 47% pending sales, down about 13% from the peak. Almaden has 24% pending, down about 18%. And Cambrian is at 37% pending, down 15% from the peak. Inventory in all these area’s is up about 25%. The Willow Glen office reports the local market is slow, although there are a few high-end Previews properties in escrow. Finally, in Saratoga the listing inventory seems to be declining as expected as we head into the holiday season.
South County – Inventory and sales activity are declining, our Morgan Hill office reports. Year to date statistics (for the Morgan Hill Office) can be graphed as an almost perfect “bell shaped curve.” The office started the year with 25 closed units and gained momentum in the summer months with twice that amount in the number of closings. August, September and especially October began the downward turn to far less closing activity. The South County market is usually about two to three months behind the San Jose market in terms of listings and closings. Agents are working hard to put transactions together but are prepared for the seasonal adjustment that is now upon them.
Santa Cruz – Market activity has definitely slowed down from a few months ago and tracking against 2009 sales. To provide a basis of comparison year over year in October for single family homes, the median price is down 3% to $641K (SFR), closed sales are down 39% for the month of Oct. vs. 09, the number of properties under contract overall is the same as a year ago, expired listings are up 52%, days on the market is the same, and there is 5.2 months of inventory. Short sales are a continued component of this market, with banks taking longer for the process. In a couple of instances, the bank has issued an approval, the property is ready to close, and the bank decides to go forward with the foreclosure. A 2009 change in the accounting policy by the Financial Accounting Standards Board (FASB) allows lenders to delay recording losses on foreclosures until the home is sold, while losses from a short sale must be marked immediately – so there is an accounting benefit for the lender to do a foreclosure rather than a short sale. This explains why the short sale process has become more arduous.
Monterey Peninsula – We are into the fourth quarter of the year, and that’s the time when new listings and sales begin to slow down in Carmel and along the Monterey Peninsula. We are definitely seeing fewer new listings coming in these last few weeks and an increased number of listings expiring, with some homes being rented and others taking a “breather” and not going back on market until early 2011. Still, the fantastic low interest rates for mortgages and the lower prices of properties seem to be keeping our sales activity humming along at a better rate than one might expect. Though these sales are predominately in the lower price ranges, there are just enough of the higher priced properties selling to keep the market somewhat balanced, particularly in Carmel.
A final note on the Previews Market on the Peninsula: Our Burlingame office reports that there are currently 76 active listings on Hillsborough and 21 pending sales. Buyers are continuing to seek properties under $2 million, which is entry level for Hillsborough. They are considering value based on the great schools and half-acre minimum lots. Many offers are all cash or with large down payments.