Secret #59 – We Have 2 Completely Different Tax Codes for Single-Family Houses – 1 for Live-in Owners and 1 for Landlord Owners – Which Distorts the Market for Single-Family Houses
The obvious and free way to increase home ownership that no one talks about.
Tax breaks for landlords don’t distort the market for apartments because all apartments are owned by landlords and most all apartment owners face the same tax code.
The problem with single-family houses is landlord owners face a completely different tax system than live-in owners, but live-in owners have to compete directly with landlord owners – and all their tax breaks – when live-in owners buy single-family houses for their families to live in.
Every tax break given to landlord owners but not to primary-home owners, reduces primary-home ownership in at least 2 different ways - landlords buy more houses and landlord purchases drive up house prices for primary-home buyers.
1) Because of all their tax breaks, landlord buyers can afford to pay more when buying rental houses which drives up house prices for primary-home buyers. Those higher prices mean primary-home buyers buy fewer houses and home ownership is less. (In addition, primary-home buyers have less money to spend on other things in the economy which slows economic and income growth.)
2) Because of all their tax breaks, landlord buyers buy MORE rental houses than they would without all their tax breaks. Some primary-home buyers get outbid and pushed out of home ownership by landlord buyers who can pay more because of all their landlord tax breaks. Home ownership is less.
Remember, the supply of houses is EXTREMELY inelastic which make house prices EXTREMELY sensitive to changes in demand. The supply of single-family houses in the U.S. increases more slowly than the supply of gold globally.
Small increases in the demand for houses become larger increases in demand because of all the landlord tax breaks. House price booms are a lot larger than they would be without all the landlord tax breaks. And then the house price busts are a lot larger, too.
Landlord owners are not only displacing live-in owners, but they’re also destabilizing live-in owners financially. The result is more unstable family wealth for the Americans that do own their own houses.
The home ownership rate isn’t much higher today than in the 1960s despite real median family income being about 50% higher. That’s because landlord income has increased as well, due in large part, to the landlord tax breaks.
Without the landlord tax incentives on single-family houses, and all the additional tax-driven purchases by landlords they cause, the U.S. home ownership rate would be much higher today.
In addition, without as many landlord purchases, house prices would increase less and that would also increase the U.S. home ownership rate.
It’s gotten so bad now that some large landlords are actually buying up entire subdivisions of brand new, single-family houses and turning them into rentals. That’s how big the government tax giveaways are to landlords.
If landlords want all those landlord tax breaks, they should buy apartments where all owners face the same tax system.
Let’s have no tax breaks for single-family houses unless all single-family home owners get the same tax breaks, not just landlords.
Every tax break landlord-owners get that live-in-owners don’t get, lowers the home ownership rate.
One Tax Code for Homes – Single-Family Houses and Condos. Unlike the rest of the economy, we don’t need investors to drive single-family housing construction and the housing economy. Live-in home owners can drive all the investment needed in single-family housing.
YouTube has a ton of videos explaining all the landlord tax breaks.
An excellent point. But in economics we always need to look beyond the problem and proposed solution. The following is not to defend or support your proposal as stated - I tend to agree from a fairness aspect. But we need to look at the problem from all angles - we need to look at possible 2nd and 3rd order effects.
1. Change tax code so that live-in home owners get the same tax breaks as landlords and vice versa (depreciation, mortgage interest, etc) - the most obvious 2nd order effect of this solution is that the tax base decreases dramatically. The most recent Tax Expenditure Budget (https://home.treasury.gov/system/files/131/Tax-Expenditures-FY2023.pdf) notes that individual tax breaks sum to about $1.6 trillion dollars (compared to corporate tax breaks at $162 billion in cost - revenues the government doesn’t collect due to the break). Without going deep into the specifics, one can conclude that extending tax cuts to homeowners will increase this expenditure resulting in further government deficits. Possible 3rd order effects from this are the increasing monetization of government debt and therefore increased inflation. Not to mention the possible asset/ market effect of increasing residential property values which could make the housing affordability even more of an issue (especially for the lower income population).
2. Change tax code so that all residential real estate tax breaks are eliminated: on the surface this will increase government revenues which would be a great thing for our national debt. We might even call it Austerity. Perhaps it would limit future inflation. BUT! What will this option do to home prices and the housing market? Investors might flee the market place and look elsewhere for investments. This might flood markets with new listings and depress asset prices across the board. This would be great for housing affordability and people who do not own homes. But it would hurt current homeowners and a whole lot of people might be underwater. Maybe this decreases prices further in a nasty feedback loop. This scenario would also hurt the residential construction industry for a long while. So it might be good today but be terrible in the long run if we find ourselves in a housing stock dilemma a decade or so from now. This course might also cause a lot of layoffs and unemployment in the construction and services industry - the housing industry is HUGE at about 15% of GDP). If the effect is bad enough, we enter another 2008-like scenario. Maybe even Depression. Housing is such a big part of the economy that a devaluation/ deflation in the sector would have numerous feedback loops across the board (e.g. a spike in unemployment reduces income tax revenues and expenditures as the government spends to solve that problem thereby increasing the deficit). Who knows how long it would take for that mess to correct? If I go deep enough into the consequences rabbit hole, I can even imagine a scenario where this has the paradoxical effect of decreasing individual home ownership in favor of corporate home ownership if the prices get low enough that the investment makes sense to the wealthy despite no tax breaks - if the imagined recession/depression is bad enough, perhaps corporations and the wealthy are the last ones able to actually purchase houses and end up holding the whole bag. These are very much worst case imaginations but stranger things have happened.
3. Change tax code to favor live-in homeowners over investors (in other words, more tax breaks for the former, less for the latter): maybe this is the most “fair” option. Perhaps this is the option with the least overall consequence. But I still envision a world similar to Option 2 where the housing market is depressed as liquidity flees the market place. Then construction of new housing slows, etc. I still think this would have a depressing effect on the housing market that could very well infect the rest of the economy. I also envision a world where the investor class, as sophisticated as they are, react in a way where they do not outright own homes but own them in truth (much like the mortgage owner actually owns the home in truth if not in fact until the mortgage is repaid). Perhaps they all start forming S&Ls or credit unions (who also have tax breaks).
Conclusion: be careful deriving an ought from an is. Any dramatic shift in the current tax structure will absolutely have 2nd, 3rd (and more) effects on the economy. And I think we are in a precarious enough position (in all aspects) that maybe taking a breath and making small changes is the best course. The most dangerous effect is probably one that can’t even be imagined or deduced rationally. Not that my opinion matters that much in the aggregate, but I would support option 3 as long as the changes are small and incremental over time (you know, the frog in a slowly heating pot thing). The most drastic and dramatic changes tend to have the most devastating effects (e.g. dramatic increase in Fed Funds rate in 2022-2023 and its effect on the housing industry).