Housing, Dating, Marriage and the Tax Code

Housing investors and fans of Robert Shiller's MacroShares Major Metro Housing Up ETF (UMM) should pay attention to the dating scene. The WSJ recently had an article on Japanese dating trends. The following sentence from the article made me think about modern marriage and housing prices:

Experts say that in tough times, single women feel an urgency to get married for financial stability, while men tend to put off marriage until they feel they can afford it.

I agree with the sentiment expressed above. If my thinking is typical, then pro-marriage advocates should promote low inflation. If a person has steady wages, s/he will probably want to buy a house. Once s/he buys a house and has money coming in, then marriage and children become the next natural step. Of course, people may marry and have children without owning a home, but most women want a stable place to have and raise their children. This is sometimes called the "nesting instinct." This nesting instinct is one reason housing prices and marriage are inter-related, especially because first-time homebuyers heavily impact housing demand and sales. If you still don't see the connection between marriage, children, and housing prices, listen to Barry Ritholtz:

A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses...Can they [the newlywed couple] afford that starter house? If not, then the entire real estate chain is frozen.

In his example, Mr. Ritholtz uses a married couple expecting children. But if houses are too expensive, then the typical younger person will delay marriage because s/he will not overpay for a house and/or will be concerned about taking on too much debt. Also, if a typical younger person's net worth is low, then s/he will not have a financial safety net and will be disinclined to purchase a house due to the fear of missing monthly mortgage payments. It takes time to build a financial safety net, so we may assume it will take several years before a typical younger person will be able to purchase a home. Thus, in an area with expensive homes, the typical person in his or her 20's and 30's is likely to delay getting married and having children. These seem like reasonable assumptions. The question is whether these assumptions rationally lead to the following conclusions:

1. If the government removes the home capital gains exemption and the mortgage interest deduction, then homes will become more affordable;

2. People are more likely to marry and have children if they can afford a home;

3. Therefore, to promote marriage, the government should not subsidize home purchases and sales.

The more I think about it, the more I believe our taxation system is anti-marriage because it encourages housing inflation. So many people complain about Greenspan and derivatives when discussing the housing bubble, but what about the tax code itself? Our tax code almost guarantees steadily increasing housing prices because of the mortgage tax deduction and the $250K exemption on capital gains when selling a primary residence. No other investment receives such generous tax treatment. But who decided it was a good idea to heavily subsidize housing transactions, and did that person think of the consequences?

The higher the price of a house, the longer a person has to save up to buy one. If single family houses become really expensive--like 500K+, which is still typical in the Bay Area--then the idea of saving a 10% to 20% down payment before the age of 35 becomes almost impossible. This is common sense, but if you're not convinced, just look at the Federal Reserve's numbers. According to the Fed (PDF file: February 2009 report, page A11), in 2007, the median net worth of an under-35 years old person in America was only $11,800--down from an astounding $80,700 in 2004. The median net worth of someone 35-45 was a much more respectable $86,600. Based on these numbers, and assuming banks will require at least a 10% down payment for a mortgage, it is safe to say that the typical metropolitan resident has to wait until around 35 years old to buy a single-family home (not a condo or townhouse). Again, assuming a link between homeownership, marriage and children, the longer it takes for couples to afford a home, the more difficulty couples will have getting married and having children.

However, many people get married before they turn 35 years old, and they want to buy a house, prices be damned. How does a bank accommodate a young newlywed's desire to own a home? Well, we've already seen what happens--the banks would issue the loan and then pass on the risks to Fannie Mae (FNM) and Freddie Mac (FRE). They did this because the tax code encouraged and continues to encourage homeownership. Thus, the predictable result of subsidizing/inflating housing prices is funny accounting (e.g., Alt-A mortgages, NINJA mortgages, "liars' loans," etc.), a steadily increasing marriage age (for those who decide to wait), or both.

If we are truly concerned about marriage and birthrates, isn't it time to re-examine the mortgage tax deduction and the government's plan to re-inflate housing prices? After all, the current tax system benefits banks and mortgage lenders more than the typical American family. By subsidizing houses so heavily, the American government is inflating the value of an essential asset and giving money lenders tremendous power over our lives. Our parents didn't have such high levels of mortgage debt, and they managed just fine. Heck, our grandparents would probably start a revolution if they were under our current system. If you think I'm overstating my case, research American history, especially the Great Depression. One of my favorite sepia pictures shows about fifteen Americans protecting a house from foreclosure. Anticipating the local sheriff, the resident and his neighbors had placed a very visible noose on the front door's awning and stood in the front yard, armed with rifles. I'm willing to bet the sheriff skipped that particular house and the bank wrote off the mortgage.

You don't have go too far back to see how tax incentives have inflated housing prices. For example, there's no question that tax incentives have created housing size inflation. Just look at the size of houses built in the 1950's--they were small, decent houses. American parents did a good job raising kids in those smaller, more affordable houses. Why do we need such large houses today? Who benefits from these larger homes? The developer and bank, which charge prices based on square footage, or the typical homebuyer? Is it really worth delaying marriage and having fewer children so we can pay the bank an extra ten years' worth of mortgage interest and principal?

I'm really getting off-topic now, but there is also an interesting sociological issue with allowing the tax code to inflate housing values. More specifically, couples on the coasts and in metro areas need two incomes to own a decent single-family home. This two-income requirement skews the dating game in favor of both high-earning men and high-earning women; as such, it devalues hopeful stay-at-home parents. If a man or woman is an excellent homemaker but does not earn much money, s/he may be at a disadvantage when "competing" for a long-term relationship. As a result, a woman might be an excellent secretary, waitress, and/or mother, but her "value" will be less in an area where two incomes are necessary for homeownership. By using the tax code to inflate housing values, one could argue our government has placed women who are interested in having and raising children at a competitive disadvantage.

My conclusion: if you want to fix the marriage problem and avoid another housing bubble, re-examine our tax incentives. Encouraging inflated housing prices isn't the best way to keep a nation growing, and it doesn't encourage upward mobility. (It sure does help the banks, though.)

Comments

[markfl:]

It puzzles me that you invoked Shiller's name in the first paragraph but overlooked a discussion of why the last several years have been atypical: in the past home prices have moved in proportion to incomes. The whole collapse of the bubble was almost predestined by the fact that prices, mortgages (and monthly payments) outpaced sustainability in respect to income growth.

A return to more prudent personal savings rates in the range of 5 to 10 percent should aid down payment affordability; nevertheless, I am unmoved by the argument that tax policy should be used to influence "family values." Not that values aren't laudable, but government attempts to promote home ownership probably perverted the whole market and promoted the bubble. I'm generally opposed to government manipulation of social policy via the tax code, no matter if it is intended for a perceived social good.

Aug 05 06:39 AM

[datadave:]

This is a good, well thought out sociological argument that examines the effects of the obvious promotion of homeownership that is an advantage which is more to the benefit of the loan processors and brokers than the actual potential homeowners. However, other facts are relayed here different than the mere tax code including the maddening increase of income inequality that will always destroy economic hope for the majority of potential buyers of homes while benefitting the upper 1, 10 or 20 percent that did well in the last 10-20-30 years.

Smaller, more economical homes are a solution too, but like you said, it doesn't help the brokers and banks to inflate their already bulging profits that preclude economic optimism for middle and lower income earners. Where 40 percent of all profits are going to only the Financial sector, optimism and hope aren't options for the majority.

Your statistics about the younger demographic assets are shocking and disturbing. I've noticed a huge increase of young beggars on the streets of my local college town/city. Many are drifters, bums, w/o much ambition....but they are there where a few years ago they were far fewer. This is in a well-off American town of all places. And as a 'baby-boomer' who has no pension, nor hope of retirement, it's not much better for us either.

Aug 05 08:32 AM

[Clarence th...:]

When you agreed for to wed,
That McHouse seemed so dreamy.
Now deep water you're under,
Your debt-diaper's McStinky.

Aug 05 08:58 AM

[Tony Petroski:]

I agree that the tax code works against married couples in general although it is heavily skewed in favor of homeownership.

My own experience doesn't match the steps you outline above. I got married and then found an apartment, i.e., marriage wasn't the reason to get a house. We were perfectly happy in the apartment until we had a daughter. The daughter was the impetus to find a house. We didn't need tax incentives to do it.

You raise serious social problems worth examining. The Japanese example is not so much an examination of housing patterns but a question about why a society commits demographic suicide by not having enough children to grow or even maintain the size of the nation.

Governments won't have to skew the tax code to spur housing purchases (they already do that). They have to skew the code to favor marriage and childbearing over singleness and barhopping as we've entered a period in America, unfortunately, when only gays want to get married and they don't reproduce too often.

Aug 05 09:21 AM

[Genesis:]

Since this website is all about investment advice, you might want to invest in a rhyming dictionary, or use rhymezone.com


On Aug 05 08:58 AM Clarence the Dog wrote:

> When you agreed for to wed,
> That McHouse seemed so dreamy.
> Now deep water you're under,
> Your debt-diaper's McStinky.

Aug 05 11:54 AM

[johnnywalker:]

"According to the Fed (PDF file: February 2009 report, page A11), in 2007, the median net worth of an under-35 years old person in America was only $11,800--down from an astounding $80,700 in 2004"

So what happened in the last 5 years? Where did all that wealth go? Note that those are median values, so they are less influenced by changes in extremes.

Aug 05 12:54 PM

[Henry Buttal:]

After reading Clarence the dog, I think the following sociological statement might also be true:

"In good times, single women want to get married because they can afford a big wedding, while single men are hesitant to get married because their current high socio-economic status makes them attractive to a large pool of women."

I personally think the economic argument around marriage is null and void in either case...

Aug 05 01:00 PM

[Henry Buttal:]

johnnywalker,

It is an interesting stat, but you have to realize it is a different population. It implies not a disappearance of wealth (though that has probably happened too), but a younger population that has had, depending on how you want to look at it, either fewer opportunities or greater set-backs.

I would like to see the medians of the same populations compared today, and see what the (very painful) decline has been.


On Aug 05 12:54 PM johnnywalker wrote:

> "According to the Fed (PDF file: February 2009 report, page A11),
> in 2007, the median net worth of an under-35 years old person in
> America was only $11,800--down from an astounding $80,700 in 2004"
>
>
> So what happened in the last 5 years? Where did all that wealth
> go? Note that those are median values, so they are less influenced
> by changes in extremes.

Aug 05 01:04 PM

[Clarence th...:]

I can only speak authoritatively with regard to the four-legged bitches.
However - I agree that the economic argument vis a vis marriage is veritable swiss cheese. Too many veritable variables.

On Aug 05 01:00 PM Henry Buttal wrote:
> I personally think the economic argument around marriage is null
> and void in either case...

Aug 05 01:20 PM

[jimmy46:]

our grandparents would probably start a revolution if they were under our current system"""""
BEFORE THE DEPRESSION, 30 YEAR MORTGAGES WERE NOT AVAILABLE AND HOME OWNERSHIP WAS MUCH MUCH LOWER.

If the government removes the home capital gains exemption and the mortgage interest deduction, """""""

THAT WOULD STOP PEOPLE FROM UPGRADING TO A MORE EXPENSIVE OR DIFFERENT HOUSE.

THE "REAL ESTATE CHAIN" WOULD FREEZE.

Aug 05 02:48 PM

[johnnywalker:]

Henry Buttal,

I completely agree that this generation faced greater setbacks and fewer opportunities. Since net worth is equal to assets minus debts, debt creation is probably also a major factor.

I question that the 2007 under 35 population is really different from the 2004 under 35 population, but it would be very interesting to look at a longitudinal study, over the last 5 decades or so, of net worth broken down by age class. I'm sure those data exist somewhere.

Aug 05 03:31 PM

[Boxed Merlot:]

My conclusion: if you want to fix the marriage problem and avoid another housing bubble, re-examine our tax incentives. Encouraging inflated housing prices isn't the best way to keep a nation growing, and it doesn't encourage upward mobility. (It sure does help the banks, though.)
Tony Petroski: Aug 05 09:21 AM
…Governments won't have to skew the tax code to spur housing purchases (they already do that). They have to skew the code to favor marriage and childbearing over singleness and barhopping…


I remember years ago a guy named Ira Hayes, (not the “drunken Indian” / Iwo Jima one), used to say the reason economies will continue to grow is because consumers just keep on coming, and they arrive on the wings of Enthusiasm, i.e. young families. It’s interesting to me that as the economy contracts; there are fewer outcries of obvious “biased” observations like those cited above. 2-3 years ago such comments would have been skewered by the PC police. Score this one on the green shoot column as far as I’m concerned.

Aug 05 04:08 PM

[RatWatcher:]

"According to the Fed (PDF file: February 2009 report, page A11),
> in 2007, the median net worth of an under-35 years old person in
> America was only $11,800--down from an astounding $80,700 in 2004"

I am surprised no one has challenged this $80K number. Sounds like pure BS to me...half of all people (all adults, or all employed adults, even) under 35 had a net worth north of $80K???? Unlikely.

Aug 07 01:23 AM

[Nuwanda:]

Being a single high-earner but non-home owner myself, I'm outraged at how the government provides gross incentives and preferences that are inapplicable to me. For example, I'm about to marry another high-earnere non-home owner. Once married our taxes will rise substantially due to the marriage penalty (though Bush II modified this slightly it still exists once you get to the 28% bracket).

Moreover, I find it appalling that I cannot take a huge tax deduction that everyone else gets only due to the fact they overspent a ton of money on a home and decided to put down roots (something we've not decided to do yet). The mortgage interest deduction has outlived its utility and now is at least partially responsible for the binge homebuying as of lately. Get rid of that damn deduction and require 10-20% down payments and real estate will reflect reality and not the house of cards it has become.

Rant over ...

Aug 09 08:39 AM

[Thomas Smic...:]

An old Benny Hill comment:

Question From Host: What is a bachelor?
Answer: A man who has not considered marriage.
Reply: NO, you're wrong. It is a man who HAS considered marriage.

Aug 09 11:25 AM

[Ivan Johnson:]

All the more reason(s) for a national sales tax at the retail level only to replace the income tax, and term limits for the legislative branch.

Sep 14 10:42 AM