Economic Update — Budget Proposal Gets Realtors’ Attention
- Feb 27, 2009
Every federal budget, even a proposed one, is like a big layered onion, with plenty for every interest group of every kind to complain about. President Obama’s first proposed budget in particular, since much of it represents a considerable departure from previous budgets, is likely to ruffle more than a few feathers. The man did promise change, after all. The National Association of Realtors is already not too happy about the suggestion, tucked away within the onion, that the federal tax code be charged when it comes to the mortgage interest deductions. The plan is to reduce the value of mortgage interest deductions for high-income households to the tune of $318 billion over the next 10 years. Households in the 33- and 35-percent tax brackets (a couple needs nearly $209,000 in annual adjusted income to get into the 33-percent bracket) would be able to deduct only 28 percent of the value of their mortgage interest payments, instead of 33 percent or 35 percent as currently allowed. Fast as a speeding bullet, the National Association of Realtors released a statement against the plan: “… this is not the time to talk about raising taxes on home buyers and home owners,” said NAR chairman Joe Robson in the statement. “This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the President’s efforts to stabilize housing and turn this economy around.” Not everyone is so fond of the mortgage interest deduction. “One sacred cow that has long been in need of a good stockyard is the home mortgage interest deduction,” wrote Edward Glaeser, an economics professor at Harvard, in “Economix,” a New York Times blog. “So, in the spirit of libertarian progressivism, I suggest gradually reducing the upper limit on the deduction to loans of up to $300,000, and then refunding the tax revenues in a more productive manner.” Interestingly, the same NAR statement also came out against taxing carried interest as ordinary income instead of capital gains, an issue previously reported by CPN. Carried interest refers to the investment income of limited partnerships–not only the hedge-fund managers that most people wouldn’t mind seeing soaked, but also the partnership structures used to own and control a great deal of commercial real estate. On Thursday, the FDIC reported that banks that it insures collectively lost $26.2 billion in the fourth quarter of 2008, compared with a $575 million profit in the last quarter of 2007. Moreover, the number of “problem” banks identified by the agency rose to 252 at the end of 4Q08, up from 171 at the end of 3Q08. In fact, about two thirds of all FDIC-insured banks made money in 4Q08. But the one-third who didn’t included some really big banks–the kind of banks who were so clever once upon a time in investing in hard-to-understand securities, while the smaller banks stuck with easy-to-understand business models, like making loans and charging interest for those loans. The agency put it this way: “Rising loan-loss provisions, losses from trading activities and goodwill write-downs all contributed to the quarterly net loss as banks continue to repair their balance sheets in order to return to profitability in future periods.” That’s banker talk for “we took it on the chin, but hope to stagger back into the ring eventually.” Things started out positively for the markets on Thursday, but eventually the urge to sell dragged the indices down. The Dow Jones Industrial Average ended down 88.81 points, or 1.22 percent, while the S&P 500 was down 1.58 percent and the Nasdaq lost 2.38 percent.