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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Live2Sail who wrote (56149)	6/16/2006 10:15:20 AM
From: GraceZ	Read Replies (3) \| Respond to of 306849

The prices of homes are not set by people who aren't moving. Well you are correct that house prices are set by those who do the buying and selling. Prices are always set at the margin. You have to remember that people are turning over their houses and refinancing frequently, so they benefit from that mortgage deduction at the cost of never coming close to owning their home. Where I differ from you is that I know this doesn't represent the majority of households. "People" in general do come close to owning their own home as my figures showed. When doing an analysis of rent vs. buy, a renter will likely take into consideration the fact that he will be able to deduct a mortgage (rightly or wrongly considering AMT and standard deduction) from his taxes. They do if they get me to do the analysis. Rent vs. own is a fairly complicated set of calculations which have to take into account both the tax considerations and the investments savings habits of the person making the decision. Most people over estimate the value of this deduction primarily because they don't consider the high standard deduction they get without paying a mortgage or they forget to include the decline in interest that occurs over the life of their loan. The other thing they make a mistake with is not factoring the tax consequences of alternative investments or changes in their tax rate. Realtors foist the idea of the mortgage deduction on potential buyers. It would be foolish not to consider the deduction into your cost benefit analysis because in the initial years of a 30 year it can be quite a big chunk and it gets you up to a threshold where it allows you to itemize other things like state tax, property tax as well as charitable deductions. That said, most people over estimate the benefit it confers. Most people who are in a low tax bracket that are living in an area where RE prices are high are better off renting and investing the difference, especially at times like now where one can expect sub par returns from RE in the near future. The problem always with this scenario is human nature, that they don't invest the difference, they spend it. Owning a house forces people to put money into the house, into paying down the mortgage (eventually). I don't factor the house as a savings/investment vehicle but for a large percentage of retiring individuals, their house represents the only asset of value that they can convert to cash to use in their old age, the only asset they pass on to their children.