In the economic agenda he announced today online and in the Wall Street Journal, Rick Santorum says that to “revive” housing, he would “phase out within several years Fannie Mae and Freddie Mac.” He would also “allow families whose homes are ‘underwater’ to deduct losses from the sale of their home in order to better get a fresh start.”
The first proposal is at odds with Santorum’s goal of “reviv[ing] housing.” That’s a problem not with the proposal, though — getting rid of Fan and Fred is a good idea — it’s a problem with the goal.
When people can borrow more mortgage money more cheaply than they otherwise could, thanks to Fan and Fred’s government backing, that money pushes up housing prices. It has nowhere else to go. Conversely, getting rid of Fannie and Freddie would push down housing prices, as houses would lose a big part of their government subsidy.
That would be just fine. But it illustrates that Santorum can never get rid of the housing giants unless he gets rid of the idea, too, that government should “revive housing.” Beyond that, Santorum doesn’t offer guidance on the precise timeline he means by “several years.”
The second proposal — to allow homeowners to deduct home-sale losses against their taxes — is at odds with, well, a lot of things.
It’s at odds with simplifying the tax code. The average homeowner can’t deduct a capital loss on the sale of his house from his taxes for a good reason: the tax code also exempts him from paying capital-gains taxes on the gain from his house if he sells it at a profit (of less than $500,000).
If Santorum wants to blunt the impact of home-sale losses, he should similarly blunt the impact of home-sale profits by ending their exemption from capital-gains taxes.
But that is not what he has proposed. His proposal would just pile a new distortion in the tax code atop an existing distortion.
It’s at odds with practicality. A family earning $75,000 with two kids at home pays about $4,440 in taxes. Sure, if the family sold a house at, say, a $10,000 loss, that $4,440 would certainly help (though it wouldn’t help the federal budget deficit!).
But for a family whose home is many tens of thousands of dollars “underwater,” the tax break would be little more than an afterthought. It wouldn’t affect the decision either way, so why waste the money?
Anyway, what deters most families from selling their homes at a loss is not the idea of a loss, but the fact that it’s not their loss to take.
Homes are “underwater” not because the sinking value of the house has cost the family its own investment, but because selling the house would cost the lender a significant amount of money. Often, lenders don’t want to acknowledge these losses. So lenders don’t allow homeowners to consummate such “short sales.” Santorum’s proposal doesn’t address that issue, except by letting lenders know that, thanks to the tax break, a family has extra cash to give to the bank (or other lenders) to make up part of the “short sale” loss.
It’s at odds with Santorum’s opposition to bailouts. Santorum reminds voters every chance he gets that unlike Mitt Romney (and presidential candidate Barack Obama), he opposed TARP.
But allowing homeowners to deduct home-sale losses would be a massive bailout. If I don’t sell my home at a loss, I’m subsidizing the guy next door who does. I’m paying the taxes that he’s not paying. What’s worse, I’m likely subsidizing the guy next door and subsidizing his lender. People don’t like this stuff.
— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.