NAR has finally gone to the mattresses over Federal policy. Some time ago, I wrote that the mortgage interest deduction may be phased out or limited as part of Obama Administration’s new “sustainable housing” policy. At the time, I’ve heard quite a few people say, “It’ll never happen”. The thought was that the public loves the MID so much, they feel entitled to it, just like Social Security and Medicare. Plus, NAR is such a powerful political operation that no politician would ever dare touch the MID.
Well, the White House Deficit Commission unveiled its recommendation today, and guess what? The MID is most definitely on the table for outright elimination or significant limitation. From Housingwire:
Of the many proposals inside the document, the most contested one for the housing industry will be the mortgage-interest tax deduction. The commission proposes for the deduction to be limited to principal residences only and that eligible mortgages be capped at $500,000 instead of the $1 million current cap. The commission also proposed a 12% nonrefundable mortgage-interest tax credit for all taxpayers.
As expected, NAR criticized that part of the report, suggesting that eliminating or limiting the MID would cripple the housing market, drag values down another 15% or so, and so on. Investors who have been coming back into the market, at least for foreclosures and short sales, might need to redo all of their financial models based on the tax subsidy for mortgage interest not being there anymore. Buyers will need to redo their rent-vs-buy calculations. All sorts of bad things for housing, at least in the short-term, will come about.
Then earlier today, I see that NAR has put out a Call to Action to its members to call their Congresscritters to defend the MID. This is merely the opening battle, so how this issue gets resolved should signal how the rest of the Housing War of 2010-2012 will go.
War Means Diplomacy Has Failed
One troubling sign is that NAR had to resort to a Call to Action in the first place. NAR has a very large building in downtown Washington DC, and is ranked as one of the biggest lobbying organizations in the country. As the Dallas Morning News reports:
Real estate agents, homebuilders and mortgage lenders have aggressively courted lawmakers over the years, in part to avert a need to fight actively to prolong the deduction.
The National Association of Realtors has donated nearly $38 million to congressional candidates in the last two decades – more than all but three other interest groups, according to federal records compiled by the Center for Responsive Politics, a campaign watchdog.
And Realtors alone have spent $13 million on lobbying just this year.
And yet, NAR needs its members to start besieging their representatives’ phone banks with angry phone calls. The behind-the-scenes meetings with Administration officials, with Congressional staffers, with Senators, and so on must have failed. It’s the only conclusion one can draw.
The language in the Commission’s report itself is ominous:
In the weeks and months to come, countless advocacy groups and special interests will try mightily through expensive, dramatic, and heart-wrenching media assaults to exempt themselves from shared sacrifice and common purpose. The national interest, not special interests, must prevail. We urge leaders and citizens with principled concerns about any of our recommendations to follow what we call the Becerra Rule: Don’t shoot down an idea without offering a better idea in its place.
After all the talk about debt and deficits, it is long past time for America’s leaders to put up or shut up. The era of debt denial is over, and there can be no turning back. We sign our names to this plan because we love our children, our grandchildren, and our country too much not to act while we still have the chance to secure a better future for all our fellow citizens.
One can only imagine how much “advocacy groups and special interests” the Commission and its members and their staff must have heard from in the weeks and months leading up to this Report being released. I suspect that the terms of the proposal on the MID — for example, keeping it but capped to $500,000 on a primary residence — was a concession by the Commission. Previous proposals I had read and heard of usually came in at $250,000 — eminently plausible given that the median home value in American is about $178,000.
So to war we go. It will become a political contest.
Don’t Get Cocky
Normally, NAR marches off to war full of brio — sort of like the U.S. military — with victory all but assured. After all, what politician wants to get on the bad side of $13 million a year, and $38 million in campaign contributions? So the NAR members — that’s most of you who read this blog — will sort of yawn, and ignore it. The ones who do call will call, then sit back and wait for news of victory.
Not this year. Not in this political environment. Not in this economic environment. Don’t get cocky.
For starters, politicians recognize that there is a world of difference between grassroots and astroturf. In any other election cycle, the threat of NAR members in their home district pissed off at them because of the MID thing would halt any politician in his tracks. In this one, particularly in light of the disfavor into which housing has fallen (thanks in some part to media efforts to drive the narrative), a politician really has to consider whether he wants his primary challenger to paint him as a tool of the Realtor lobby.
This is especially true when Tea Party hostility to spendings and deficits runs extremely high.
As a political matter, the MID is not exactly the easiest thing to defend to either the Left or the Right.
To the Left, concerned as they are with paying off unions, government employees, and various low-income groups, “spending” some $100 billion a year in the form of tax subsidies to the wealthy is not exactly going to be popular. For example, here’s a column on this exact topic from The New Republic, which says:
From the numbers above, it’s clear that the benefit derived from the deduction is almost perfectly increasing with income. Low- and middle-earners are less likely to itemize their returns, which makes them unlikely to benefit from the mortgage-interest deduction. And because they make less money, they pay taxes in a lower bracket—meaning that every dollar in deductions reduces their tax bill by less than it would for someone in a higher bracket. Calling the mortgage-interest deduction a middle-class tax break essentially requires us to define someone in the 80th or 90th percentile of earnings as middle class. But they’re not; when you make more than 80 percent of the country, you’re rich, even if you don’t want to admit it.
I don’t think a whole lot of Democrat groups will be clamoring to keep the MID, while other programs like Social Security and Obamacare go under the knife.
To the Right, whose general bent is towards “get the government out of the market”, a $100 billion a year subsidy for housing is unlikely to get a whole lot of popular support among the activists and the Tea Party crowd. For example, the new Senator-elect from Wisconsin, Ron Johnson, is a Tea Party favorite. He’s on record as being willing to consider the MID as part of a larger fiscal overhaul:
“I have never lobbied for some special treatment or a government payment,” Johnson said, speaking from his Oshkosh plastics factory conference room. “When you subsidize things, it doesn’t work through the free market system very well.”
We asked if that applied to home mortgage interest deductions, and whether that popular program should be eliminated. Johnson said his goal is to lower taxes and simplify the tax code, and, as part of that, he wouldn’t rule out doing away with the interest deduction.
“If that means horse trading with reductions of certain deductions I’m willing to take a look at all of the options,” Johnson said.
This is just one guy out of a hundred in the Senate, but I do not think this sentiment is uncommon amongst the new crop of Republican/Tea Party representatives in the next Congress.
NAR and the housing lobby may still prevail on this, but it’s not a slam dunk. That possibly 100,000 REALTORS (because let’s face it, if even 1 out of 10 NAR members cared one whit about something like this, that should be considered a success) would call and write letters via an orchestrated astroturfing campaign by NAR is not as scary as it might have been even three months ago. Even the most unedumacated voter would probably think REALTORS lobbying to keep tax subsidies for housing is a wee bit self-serving.
I do know this. This battle may be won by NAR and its allies (NAHB, Mortgage Bankers Association, etc.) if the membership of all of those organizations take the political fight seriously. That means a whole lot more than answering the Call to Action. It will certainly be lost, however, if the members pay no attention to it, take it lightly, believe that “they” will never touch the MID because it’s so popular, or assume “someone else will take care of it”.
And If This Battle Is Lost?
Suppose for a moment, however, that NAR loses this one, and the MID goes down for the count. What then?
First, the aura of invincibility that NAR currently enjoys will be destroyed forever. If Congresscritters worry today about crossing the powerful housing lobby, after getting defeated on something as big as the MID, that fear goes away. In the next battle — whether that be eliminating Fannie/Freddie (definitely on the agenda for many of the incoming Republicans), or shifting most of the subsidies away from housing to rentals, or a national SEC-like regulator over house listings — Congress and the White House are likely to be far less afraid of the housing lobby.
Second, NAR itself will be at a crossroads. Having a million members means very little if only 1/10th of them come out when it is time to fight. The very definition of “NAR Member” will need to be re-examined if NAR should lose such a high-profile, high-stakes political fight because of the apathy of its membership. (The same goes, incidentally, for State and local Associations; if the only reason why people “join” you is to get access to the MLS, you are not a real trade association, sorry.)
Third, as the result of the first two consequences, if NAR loses this battle over the MID, I expect either one of two things: (a) a re-energized NAR, with a smaller membership base but one that is on fire, focused and dedicated to policy matters, that will come out roaring in 2012 during the Presidential election year and grabs back the reins of power; or (b) a depleted NAR that accepts itself as a tier-two political power in Washington, and devolves into a sort of a social club for real estate agents which gives out some awards, offers some group discounts to its members, and holds a really nice party twice a year.
Yeah, the stakes are that big. This is a big, important fight. Now, sure, I may be blowing things out of proportion again, y’know, just to “stir things up a bit” and so on… but then, you thought that back when I warned about Federal housing policy, no?
This is shaping up to be an interesting 2010/2011.