Betting Against the House

People who drone on and on about how much money they’ve made on their house -- and some days it seems hard to get anyone to talk about anything else -- really make me miss the last bubble. The exuberance then, when people droned on and on about how much money they’d made on Cisco or Amazon.com, was all about technology shrinking the world, in ways real and imagined. Partly because we got so burned by abstractions and by talk of the brave new world, the current exuberance is mind-numbingly concrete -- centered on one’s own nest and the obsession with remodeling it.

There is a tiresome provincialism and self-righteousness to the real estate bubble. You may have been smart if you bought EBay stock early on, but you were virtuous and responsible if you bought property as early as possible in your adulthood, and now you are being rewarded for your upright character. It’s a bubble that brings to mind those English Victorian novels that featured a named estate as a central protagonist and land values as their theme. If TV had been around in the 19th century, no doubt the characters in George Eliot’s “Middlemarch” would have watched “Extreme Makeover” and fretted about whether they could afford Sub-Zero refrigerators.

Americans are plowing far too much of the national wealth into real estate, an unproductive economic asset. Worse, in markets such as Los Angeles, San Francisco and Las Vegas, they are doing so with the expectation that their investment will appreciate about 20% in value every year. Talk about a Nasdaq flashback.

Real estate aficionados ridicule comparisons to the stock market bubble by pointing out that a home is a concrete asset of inherent value, not some piece of paper promising a share of future earnings. Fair enough, and I concede that housing prices are not going to plummet 90%, as plenty of Nasdaq stocks did. But here is another difference between the two bubbles: It’s far easier to buy a home almost entirely on borrowed money, and that trend is dangerously accelerating as the market reaches its peak.

Banks and Realtors seem increasingly desperate to get everyone into the game. The current issue of Business Week reports that in San Diego, nearly 50% of home buyers last year took out interest-only mortgages, up from only 2% in 2001. These mortgages are the latest gimmick to help people buy more house than they can really afford, by deferring any repayment of principal until the loan’s later years, when monthly payments will spike. But hey, by then the borrowers will be far wealthier thanks to those double-digit annual appreciations as far as the eye can see. Right?

Now for the gasp-inducing disclosure: I am a renter. You could probably tell, figuring that it must take a lot of embittered envy to bash this real estate mania.

The most galling aspect of this bubble, other than the fact that I have not benefited from it, is that I am subsidizing it. My tax dollars get wasted in propping up land values, via farm subsidies and the mortgage-interest deduction. The deduction, which will cost Uncle Sam more than $70 billion this year, is so sacred in this housing-crazed nation that President Bush’s tax reform commission, which is supposed to rethink all aspects of tax policy, can’t even go there.

The deduction is, in fact, a sham. It is supposed to make housing affordable to those who may otherwise not be able to buy into the American dream, but the majority of homeowners, especially those with lower incomes, do not benefit because they do not itemize deductions.

All deductions are regressive by nature because they are worth more to taxpayers with higher incomes. The Treasury will give you a $1,500 break for every $10,000 in mortgage interest you pay if you are in the 15% tax bracket, but you’ll get a $2,800 break on the same deal if you are wealthier and paying a 28% marginal tax on your income. Isn’t this backward?

The deduction is a massive handout to the real estate industry, and a federal subsidy to the lifestyles of the nation’s richest households. The fact that it applies even to a second home (up to a combined $1 million of debt) belies the claim that this tax break is all about promoting home ownership among the renting class. It’s also subsidizing a great deal of speculation at a time when house-flipping in some markets brings to mind the day-trading craze of the tech bubble. Making home equity loans (up to $100,000) deductible is the final insult. Go ahead and borrow against the value of your home to take an around-the-world cruise, why don’t you? Taxpayers will help foot the bill.

Meanwhile, the mortgage-interest deduction is inflating real estate values for the rest of us who are trying to buy in. Washington will forgo more than half a trillion dollars in the next five years for supposed home-ownership incentives that do little to help first-time buyers put together a down payment, which is the biggest hurdle to ownership.

The federal government should get out of the business of encouraging real estate bubbles. If Washington wants to waste money, it doesn’t have to help rich people live richer. It should at least be encouraging investment in something that will also benefit the nation as a whole. But don’t expect political leaders to line up in favor of phasing out the mortgage-interest deduction, certainly not in a nation where, if current trends hold, half the population will soon be real estate agents.