Two powerful lobbying groups that advertise themselves as helping Americans buy homes have announced that they will oppose the Republican tax plan. Their reason? Because it will lower housing costs. Seldom have any denizens of “the Swamp” shown their true colors quite so flagrantly.
For years, the National Association of Realtors and the National Association of Home Builders were strong supporters of Fannie Mae and Freddie Mac, two government-backed mortgage companies, because (they argued) the government subsidies these firms received would create affordable housing for the middle class. That was their stated reason. The real rationale, as they have now made clear, is that Fannie and Freddie’s policies drove up housing prices, thereby increasing their members’ profits.
When the Republican tax plan made them choose between helping the middle class to buy homes and reducing their members’ profits, they chose profits. Doubling the standard IRS deduction while reducing or eliminating deductions for state and local taxes would discourage would-be homebuyers from purchasing more expensive homes. Since both the Realtors and the builders earn more from selling bigger homes amid rising prices, they simply oppose any tax plan that does not help inflate housing costs.
Their analysis is instructive. If large numbers of taxpayers use the new—and much higher—standard deduction in the Republican plan, they will not be eligible to use the mortgage interest deduction in calculating offsets to the cost of the home. This will induce them to be more cautious in what they spend. A bigger and more costly home will not necessarily mean a bigger tax deduction. Accordingly, the Realtors and homebuilders would suffer a reduction in profits.
The same thing is true for the state and local tax deduction, which applies to local property taxes. If this deduction is reduced, homebuyers will not take into account the “savings” they would receive from deducting large state and local taxes on a bigger home. This will also reduce their spending on the home, and this too will mean less profit for the Realtors and homebuilders.
The financial crisis in 2008 was the result of government housing policies—strongly backed by both the Realtors and homebuilders—that encouraged and sometimes even demanded reductions in underwriting standards so that more Americans with modest incomes could buy homes. The result was a massive housing boom, which drove up prices for first-time homebuyers. By 2007, housing was unaffordable for people of modest means, no matter how concessionary the mortgage terms. The crash in housing values that followed caused many Americans—who bought houses at inflated prices they couldn’t afford—to lose their homes.
The Realtors and homebuilders, however, did wonderfully well in the booming market before 2007, profiting from the unprecedented rise in housing prices. They want this market back, and since government housing policies haven’t changed since the financial crisis—the crisis was blamed on the banks rather than housing policies—they are on the way to getting what they want. If you want to know what crony capitalism looks like, this is it.
Among other things, Fannie, Freddie (and the Federal Housing Administration) are still doing what they did before the crisis: keeping down payments low—often at 3 percent or less—so that buyers can buy bigger and more expensive homes by borrowing more. Once again, home prices are booming. This puts buyers in danger of eventual foreclosure because of a loss of a job, divorce or illness. But by the time that happens, Realtors and homebuilders have been fully paid. If this keeps up, another housing bust, and possibly another financial crisis, cannot be avoided.
The Realtors and homebuilders are afraid that the GOP tax plan will have the effect of stabilizing housing prices. Although this would be an obvious benefit for young homebuyers trying to purchase their first—or second—homes, it’s wholly undesirable for the builders and real estate agents. All of which raises one central question, which should be in the minds of all Americans—including members of Congress—when they consider the coming tax debate: Whose side are these people on?