We believe we have found one of the primary reasons why entry-level home buying has not recovered—and why homeownership has been plunging.
For decades, homeowners benefitted from both the financial and psychological benefits of paying less taxes. Homeownership came with income tax savings because mortgage interest plus property taxes easily exceeded the standard deduction allowed by the IRS. For most American homeowners that has not been true since 2008 because:
- Falling interest rates and home prices have reduced mortgage interest.
- The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers.
Today, a typical first-time home buyer financing 95% or less of a median-priced US home pays less than $12,000 in mortgage interest and property taxes, which is not enough to warrant itemizing. Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal. Years ago, we eliminated income tax savingsfrom our calculation of the rent-versus-buy decision, and I cannot remember the last time I heard a prospective first-time home buyer (not in California or New York) mention income tax benefits as a reason for buying.
In the graph below, we show the change over time for a typical homeowner couple with an 80% loan-to-value mortgage and a 1.5% property tax rate on the median-priced US home. That owner paid mortgage interest and property taxes in excess of the standard deduction every year from 1972 to 2008. Today, that homeowner’s deductions fall nearly $2,500 short of the standard deduction.
Every April 15, the most financially qualified renters in the country used to feel the pain of not owning by writing a check to the IRS. For most, that is no longer the case. The lack of tax savings is just one of numerous reasons why homeownership is the lowest it has been in decades, and we believe homeownership is headed lower. This is just one of many findings in our upcoming book, which will be published later this year, called Big Shifts Ahead: Demographic Clarity for Businesses.
© John Burns Real Estate Consulting