The Fallacy of Mortgage Interest Deductions

I heard a complaint about the new IRS forms for Mortgage Interest Deduction for 2013 was going to be published late.  It seems that 2013 is not a year of peak efficiency over at the IRS. but I digress.

I suggested that the homeowner probably wouldn't have the opportunity to use the form anyway because they were married and the standard deduction would be bigger than their itemized deductions, of which mortgage interest is included.  What?

This means that the mortgage interest on your home is not going to do anything to lower your taxes because the government's standard deduction is bigger than your mortgage interest benefit.

I'm not an accountant, so please check with your accountants, but this short interaction made me realize the fallacy of sales pitch of interest deduction.  We've all heard it: "go ahead and take the loan, you can afford it, make it 30 years, you can deduct the interest."  It's a romantic and emotional argument that pulls on our justifications for buying a house.

But wait, Congress wants you be a homeowner, or they wouldn't have given us the deduction.  Wrong.

Congress may want people to be homeowners, but their math is so far away from this conclusion that it should be clear to you as a (potential) homeowner that Congress is not and has not made an effort for you to use a mortgage to encourage home ownership.  In the old days, all interest was deductible because it was considered a business expense.  This is a holdover from way back when.

Let's say you take a loan at $200,000 for 30 years at 5%.  The total interest on this loan in the first year is going to be just under $10,000.  yup.  the math is not in your favor, but let's save that argument for another time, shall we?

Couples filing jointly in 2013 is $12,200.  This means you need to have a little more than $2,000 in other expenses, think medical, to jump over the $12,200 standard deduction.  Odds are, most couples won't qualify for this.  Remember that the circa $10k interest only applies for the first year of the mortgage and (hopefully) yours will get smaller every year.  At some point, even if you do qualify now, you won't soon.

The silver lining? Single people.  Single homeowners can benefit from this for quite a few years, because their standard deduction is much smaller: $6,100.  But come on, how many single people are home owners?  Not that many.  If you are: Great! You should itemize your taxes.

The first lesson is if you are a married couple and your total mortgage will be $200,000 or less, don't let the mortgage guy sell you on the tax benefits.  They are probably not there.

The conclusion here is that we should not be emotionally swayed by the argument that deducting your mortgage interest is good for your financial health.  It really isn't.  What is good for your financial health is to put down a bigger down payment and pay down your debt. 

Getting a loan that maximizes your potential tax deductions probably also maximizes your total interest paid.  You'll be in more debt for a longer period of time.

Will increased DVR use cut into TV advertising revenue?

Current Question:

In a presentation to advertisers, Ted Harbert, the chairman of NBC, expressed his distaste over using DVRs to skip commercials by saying, "This is an insult to our joint investment in programming, and I'm against it."

Harbert is expressing an industry-wide phobia among broadcast networks, but what do you think?

Will increased DVR use cut into TV advertising revenue?

Ted Herbert’s recent comments expressing his distaste for the use of DVR to skip commercials highlights the complete lack of connection with his customers.  I can only hope other chairmen are not so disconnected from their client base to have similar beliefs.

There are two reasons to use a DVR; to rewind and to skip.  That a DVR is used to corral up your favorite shows and keep them in order for future viewing is implicit to the technology.  Mr. Herbert’s comments only make sense if he assumes that the majority of his DVR using customers are watching television as it airs and so all they are going to do is rewind.

Yeah, right. 

This may be true for the weekly series that are the main focus of water cooler conversations, but not for every other person who has relinquished control of their lives to their ever expanding schedule of responsibilities.    

Mr. Herbert is clearly focused on a business model that allowed NBC to butcher the presentation of the London Olympics.  And yet there is one fundamental problem with the results that leads him to think he is right.  We keep watching.  And we watch with a greater sense of thrill because, with a DVR, we get to watch the shows we want to watch.  He doesn’t know he’s about to lose us.

Let me be perfectly honest.  I do not own a DVR.  My mother-in-law believes I should move into a cave and has episodes of Gabba Gabba and Fresh Beat Band piled up for my son at her house in a display of competitive parenting that I cannot hope to win.  So I opt for opting out. 

But not really.  I watch Hulu and Netflix and have shifted my viewing style to watch every episode of every season in a series over the course of a few weeks.  I could wait, I suppose, but why bother?  My daily conversations are not based on television programming, so I have no need to stay up to date.  To avoid commercials, I’m willing to wait. 

My TV conversations have shifted to the marathons of programming.  I have shifted to the evolution of character types over multiple seasons.  What Mr. Herbert needs to figure out is how to monetize that specific interest.  I’ll watch a commercial here and there, but our interest in utilizing DVR technology is not going away. 

That said, we have already begun to focus on content creators.  They are more accessible today than ever.  They tweet.  They Facebook.  They find alternative avenues of media.  We are less and less interested in the corporations that manage these content creators because they are no longer required to use the corporate avenues to express their art. 

At the end of the day, Mr. Herbert is already hopelessly behind.  He hasn’t figured out where the next monetizing idea is coming from and he is desperately clinging on to the old tricks.  I get that.   Too bad it won’t work.

What ever happened to the starter home?

A friend of mine just bought a new home.  A co-worker is finally putting his on the market.  I just refinanced my house.  Anyone not waiting for the implosion of the American economy is out doing something in real estate.  The time has finally come for us to go out and reclaim our little island of the American landscape after the last few years of riding the real estate roller coaster.   I only wonder why we are going back to the over built, over valued homes that brought us to the recent real estate disaster.

And yet, few of our peers have changed their underlying perspective on their first home.  Take my neighbor for example.  He's a smart guy, has a little family money and has been renting for 5 years.  In short notice he's been told to vacate his rental and inside of 45 days purchased a home valued at 750k.  His argument: I wanted to be close to a particular dog park in a particular neighborhood.  His first home investment of his life is at 3/4 of a million dollars.  I, of course, do the neighborly thing and tell him he did great on concessions and negotiations, because he's my neighbor and I want to be nice, but inside I cringe and wait for the phone calls.

What happened to buying a starter home?  Are there no decent middle America neighborhoods anymore?  Where are the ratios of income vs home value?  Nowhere to be found I suppose.  The drive is too long is probably a good excuse.  More likely the truth of the argument is the expectation of social living we have developed since coming off the gold standard.  Live better today for more debt in the future.  We are pulled to a fourth bedroom and luxury installations while on the path to home ownership so quickly and expectantly that no-one notices that we are returning to the same risk valuations that created the real estate mess just a few years ago.

Is there shame in purchasing a small humble home with 2-3 bedrooms?  Granite counter tops need not be the status by which we declare our presence in the middle class.  There is no shame in putting a 20% down payment on a small house instead of a 5% down payment on a large house.  It amazes me how we drive around town trying to save 10 cents on gasoline per gallon and then jump $100k in home size without thinking about the cost of interest in the purchase.

I don't know if my neighbor can afford his house.  I try not to judge his decision, because I don't know his financial situation. Maybe he has money set aside he doesn't want to talk about, that's fine.  I hope he does.  I am concerned however, that he doesn't know how to maintain and manage his home.  I am concerned that we jump into these large expenses not realizing the additional costs of maintenance, financing and insurance.  These additional expenses, because my neighbor is not going to install his own appliances, will undoubtedly add up every time he calls a handyman or a gardener.  These are respectable professions that have men filled with common sense and have no qualms to change the value of their estimate depending on the neighborhood where they are doing the work.

Sure enough, my neighbor doesn't disappoint.  Hey buddy, can you come over later and help me install a reverse osmosis water filter?  Oh and as long as you are here, can you help me install some fans?  Neither of these tasks are particularly difficult and I want to see what 3/4 million dollars buys in Southern California, so I say yes.  He's moving in a few weeks and the excitement of closing on his home is still driving the adrenaline in his veins.

In a few minutes I'm gonna throw my small tool bag in the car and drive over.  I'm sure I will be impressed by the home and the neighborhood.  I'll stop and dream for a minute about living in a large 4-5 bedroom place with a den and and office.  But tonight, I'll be sketching the remodeling that we want to do to our home, purchased at 15% of the value of his, and I'll make a note in my calendar to ask myself the question sometime next next year: How much happier is my old neighbor in his large new home than I am in my old small one? 

I think I already know the answer, but I think we have to remind ourselves sometimes.