not a surprise that their desire for homeownership dropped during the same period.” Among those who make the leap from renter to owner, a relatively large percentage have qualms about their decision. According to Zillow, 4% of those aged 55 and above regret their decision to buy rather than rent, while 17% between the ages of 18 and 34 have misgivings. Many households will not buy a home because they believe future values will decline. A just-issued survey by the NY Fed shows that in five years, 29% of the households surveyed expect home values to fall. And, importantly for first-time buy- ers, “younger respondents – those under 50 — perceive more downside risk compared to those over 50.” TAX REFORM With the passage of tax reform in 2017, the rules for residential real estate changed significantly. At first this may not seem right. Such things as mortgage interest and property taxes remain potentially deductible. However, the new rules are constructed in such a way that most people will not take tradition- al real estate write-offs. The Tax Policy Center estimates that just 4 percent of all households will claim the mortgage interest deduction under tax reform, down from 21 percent under the old rules. Taxpayers can take either the standard deduction or itemized de- ductions. Under the new rules many taxpayers will elect not to take shel- ter write-offs because they can get a bigger benefit with the standard deduction, as much as $24,000 for a married couple. Other taxpayers will be forced to take the standard de- duction because itemized write-offs are limited. For instance, there’s a

now essentially zero for many pro- spective first-time purchasers. The visible tax incentive to own – once a huge selling point for the housing sector – is largely gone. HOWTO GET MORE FIRST- TIME BUYERS INTO THE MARKETPLACE Given the litany of problems and woes faced by first-time buyers, is there anything that can be done to increase their numbers? Steps which do not materially enlarge marketplace risk? The reality is that we have in place a number of options which can be used today to increase first- time buyer activity. STEP 1 Make better use of what we have. “The biggest barrier facing most first-time buyers is saving up for the down payment,” according to Mike Fratantoni with the Mortgage Bankers Association. “Lenders need to be active in FHA, be up to speed on Fannie and Freddie’s HomePossible and HomeReady programs, and be in contact with their local housing finance agencies and other potential sources of downpayment assistance.” Mortgages backed through the FHA, VA and USDA are available with little or nothing down, and offer liberal underwriting standards. These programs are designed to serve first-time buyers. For instance, more than 80 percent of all purchase mortgages endorsed through the FHA in FY2018 went to first-timers. We know that government-backed programs work for first-time pur- chasers. We have decades of evidence to prove it. What we need is more program marketing. There are more than 26,500 state and federal licensed mortgage entities. If they each did one additional first-time buyer loan

$10,000 cap for state and local tax (SALT) deductions such as property taxes and income taxes regardless of how much you actually pay. These changes are not an acci- dent. They are a way for the federal government to increase revenues. The tax reform legislation itself says the “repeal of itemized deductions for taxes not paid or accrued in a trade or business (except for up to $10,000 in State and local taxes), interest on mortgage debt in excess of $750K, interest on home equity debt, non-disaster casualty losses, and certain miscellaneous expens- es” will generate an additional $668.4 billion in new tax revenue. Under the old rules, homeown- ers had substantial tax advantag- es when compared with renters. If a renter paid $1,500 a month for housing, there was nothing to deduct. If an owner had a $1,200 a month mortgage payment for principal and interest, and paid $200 for property taxes and $100 a month for property insurance, a total of $1,500, the tax implications were very different. The owner could write off $2,400 for property taxes. At 4.25% over 30 years, the mortgage had a starting balance of $243,932. The interest write-off in the first year was $10,288. In total, the owner would have at least $12,688 in write-offs unavailable to the renter ($10,288 + $2,400). In the 22% bracket, that’s a tax savings of $2,791. In addition, the owner will accumulate $4,112 in mortgage amortization in the first year, a form of forced savings. Now the rules have changed. The new standard deduction — as much as $24,000 — is equally available to both homeowners and renters. Since most owners will no longer itemize deductions, the tax advan- tage between owning and renting is

per month, that would be almost 320,000 extra sales per year, enough to significantly impact the market. STEP 2 Introduce borrowers to down payment assistance plans. There are thousands of potential down payment assistance sources, such things as grants, loans, mortgage credit certificates and lower-cost mortgage insurance. There are special programs for teachers, first responders, healthcare workers, veterans and surviving spouses of veterans. There are also programs for energy-efficient homes and visible properties – homes with easy wheelchair access and other accommodations. Rob Chrane, with DownPaymen-, explains that “more debt and other rising costs directly impact potential buyers' ability to save money for the down payment on their home. The down payment has long-been the first-time buyer's biggest challenge because they don't have the proceeds of another home sale to help fund their down payment and closing costs. Chrane – whose site allows buy- ers to search through thousands of down payment assistance pro- grams by location – adds that “it's important for buyers to research all their home financing options in ad- vance. The average down payment help found by the Urban Institute's report was more than $9,000. That can be the difference between buy- ing a home today or remaining on the sidelines for a few more years.” STEP 3 Change the tax code. The tax rules are full of special benefits for every business and industry you can name – thousands of pages filled with exceptions, preferences and carve outs. If we really want more first-time buyers, then we can achieve that result almost

balance of debt was due at closing. Sure enough, first-time buyer ac- tivity rose from 41% of the market in 2008 to 47% in 2009. This was a good result, but not good enough given the dire condition of the economy. So what did the govern- ment do? It changed the rules. Under the American Recovery and Reinvestment Act of 2009, first-time buyers – those who bought before the deadline and had not owned for at least the past three years – could now get a tax credit of as much as $8,000. Not only was the benefit size increased but, more important- ly, the credit did not have to be paid back. (A tax “credit” means your tax bill is lowered by a certain amount, say $8,000 in this example, while a tax “deduction” reduces only a portion of your tax bill, perhaps 22% of $8,000 or $1,760.) Housing is a large portion of the overall economy. If the goal is to re-charge the economy on a widespread basis, then a tax credit for first-time buyers works. Buyers – and markets – in both rural areas and metro cores would be helped. Local tax collections would increase as a result of more transactions and generally higher prices. And – importantly – some of the homes currently underwater would become salable as property prices rise. Don’t believe that a new first- time tax break would energize the real estate marketplace? In 2010, fully 50% of the real estate mar- ket was represented by first-time buyers – far more than the 33% percent seen in 2018. •

instantly by changing the tax code. We’ve done it before. When the housing market and much of the economy were teeter- ing on the brink of collapse, the government created special bene- fits for first time buyers. Under the Housing and Economic Recovery Act of 2008, first-time buyers could receive a benefit equal to as much as $7,500 for a married couple, $3,750 for a single filer. The term “first-time home- buyer” was defined to mean some- one who had not held title to real estate for at least three years and earned less than $150,000 for joint filers and $75,000 for singles. This was described as a “first- time homebuyer credit” but in the fine print said the government would “re-capture” the money ad- vanced. In other words, it was really an interest-free loan that had to be repaid over 15 years. If the property was sold in less than 15 years, the More debt and other rising costs directly impact potential buyers' ability to save money for the down payment on their home. The down payment has long-been the first-time buyer's biggest challenge because they don't have the proceeds of another home sale to help fund their down payment and closing costs.” ROB CHRANE

Peter G. Miller is a nationally-syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington- based journalist.

18 | think realty housing news report :: august / september 2019

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