Debbie, There is no question that if a person buys a house for say $700K and it falls to $300K, they won't do very good. That being said, there are some areas where further price drops would seem unlikely. For example, I own some in the midwest where you can buy a 3+2+2 house for about $100K - and the prices there have held up through all that has happened in recent years (and in fact inched up a bit). Now, in my case I rent these out, because my job is elsewhere, but if I lived there, yes, you can deduct the entire interest (at least up to certain levels and certain income restrictions) from your earnings. You get the deduction even if the value of the house actually goes up (which admittedly seems to be rarer at this point in time). Also, I forgot at first - you can deduct your property taxes as well. So the savings can be quite large. Of course, like you said if the house goes down, it won't be as good in the long run, but here is a comparison - let's assume a 3+2+2 1500 Square feet in the midwest - it is for sale for $100K or rent for $800/month. If you rent it out and stay for 10 years, you will have paid $96,000 and when you leave have nothing to show for it. If you buy it using standard financing, you will put about $20,000 down (yes that is hard for alot of people). Your payments would probably be about $600/month with the low rates even with insurance (I know because I do this and my payments are maybe $650 using slightly higher rates - I haven't refied). Even if you had to pay the full $800/month though you could still do OK. Everything else is equal - in other words, the renters pay electricity, gas, cable, whatever. I don't fix their washer/dryer/fridge or anything. In the first years, the buyer would pay about $400-500/month interest or lets just say $5000/year. That would directly reduce their "taxable" income - So figure they would save maybe $1500 / year on taxes (and that could go from they owe $500 to they get $1000 or they get $500 to they get $2000 refund, etc.) OK, assuming the house stays the same in value for 10 years and then they move out - we have: Value = 100K They owe = $80K minus probably about ~$20K they would have paid off so $60-$65K range owed. Over the 10 years, they saved maybe $12K-$15K in taxes. Sell the house, pay the comm. get $90ish minus what they owe they get their down payment money back and saved the tax money. Where the real debate comes in then is what if the house went up? What if it went down? Obviously that would affect these results. If the house was just $150K they would be in much better shape then shown - or if it fell to $50K they would not do well. Also, if they stayed for shorter then 10 years, renting might be better - if they stayed longer, buying would look better, etc. JJacksET4
There are some relatively average homes that the school/real estate tax + required homeowner's insurance = $1,000/month As to the tax breaks, that is not a credit, but a deduction - you get a minority of what you paid, based on your bracket. You still pay out a fortune in $$$ & labor to buy/sell/keep a home.
Wow, that might be true in some places, but in the homes that I own, they are in a top-notch school district in the area - the taxes are 1.5% - which is about $1500/year - add in around $100/month for the required insurance and you are talking $200-250/month. Again, in whatever area you are referring to, I don't think anyone would then rent you the equivalent home for peanuts (the apartments might be cheaper). So, there might be some exceptions of course, but again in certain places, renting will be expensive as well. Not sure why a deduction would be so bad - that can be a large amount of money saved - and you don't get it as a renter. As far as the fortune for labor, that is debatable - if the house is in good shape, it really shouldn't cost THAT much each year (you really shouldn't have to replace the roof every year!). I wanted to add that another difference between renting (at least apartments) and owning can be that sometimes there can seem to be less trouble among neighbors who are owners, probably because there aren't so many people crowded into one place - on the other hand, if you do have a problem it's easier to get out of a rental property - so you do want to be very careful with choosing the neighborhood and so on when you are buying. (one time when I was living in an Apt. we were going to move soon anyways, but a family moved in above us that literally had a kid who stayed up at all hours of the night stomping the floor with his feet!). Most houses don't have a person living above you, below you, etc. Just be careful if they do though! JJacksET4
Isn't at least part of the mortgage deduction benefits baked into the selling price of the house? The whole no free lunch thing and all...
Jack, part of the problem with neighbors in avg. apartments is they don't feel part of a community so they are less concerned if they irritate people. When you have owners they try harder not to make each angry because they know they will be next to each other longer than a year, in most cases. In Europe, most live in apts. so that logic doesn't apply, my in laws have lived in the same apt. for 15 plus years. The reason I went to look at higher end high rises, isn't because I want to live in affluent area, because I am a pretty simple guy, but because there is a foot of concrete between floors and commercial grade almost sound proof windows. The apartments in the US, as you mentioned, are low quality, you can hear people getting it on between floors in some of these places, lol.
You bring up a good point. As salaries have decreased in the last few years if you can't deduct more than standard deduction for a couple then mort. deductions and such don't matter.
items you forgot: For those ten years add the costs of maintainence. Lawn mowers, gutters, appliances, plumbers..etc. Property Taxes: 100K house , taxes will be no less then 2K a year. Together could be 30k to 60k Also, the 20k down payment what return could you get over 10 years? If you day trade S&P you could double or triple that.
I'm trying to compare renting a house to owning a house - at my rental houses the renters are responsible for mowing the lawn, etc. (of course they can pay for a service if they want). The appliances are theirs. Plumbing shouldn't cost TOO much each year. My 100K homes taxes are ~1.5K and that is deductible. Of course an apartment is different with no yard, etc. I wouldn't want to think of how badly most people would destroy 20K trying to day trade! I would put it this way then - do you really think that homeowners who are renting houses out to other people are losing money? Think about it. JJacksET4
You don't need any new buyers to lift the real estate market. You just need any buyers--such as people purchasing properties with the intention of renting them out. The ever-widening divide between rich and poor will work just fine.
Wow. I never thought of that. I bet there hundreds of thousands of households in this situation. Also, home office is deductible when you rent.