Published March 14, 2012
The damning evidence is in on two fronts: Housing continues to collapse to unimaginable levels. -- The latest numbers are in from December, showing that home prices fell in 18 of 20 markets.
The statistics prove this housing collapse is now worse than the Great Depression.
Also, just days ago, a J.P. Morgan economist presented a paper at a monetary conference in New York proving that housing was at the center of America’s economic collapse.
The facts are that the housing crash wiped out massive sums of American’s wealth, destroying the borrowing and buying power of consumers:.
Depressed consumer spending in turn led to the loss of millions of jobs. With few consumers borrowing or buying, and so many Americans without jobs, housing prices continue to fall, destroying even more borrowing and buying power, killing even more jobs. This is the definition of a vicious economic cycle. Housing is at the root of all of it.
Even worse, these experts predict the housing market will stay a drag on the economy for years to come. None of this news should come as a surprise, since the biggest investment of virtually every responsible adult in this country is their home.
There is a valuable lesson here -- as goes housing, so goes the U.S. economy. Until we find a way to reverse the housing decline, our economy will remain in disaster mode.
Enter the politicians. They've come to "save" our economy and create jobs. How did we get so lucky?
President Obama's big idea to save the economy from a collapsing housing market is to eliminate, or severely limit, the most important tax benefit in America today- the mortgage interest deduction for upper income taxpayers.
In other words, in order to help housing, Obama wants to eliminate the only thing that makes it advantageous to own a home. Sweet!
Can you imagine a more ignorant political leader? Homeowners depend on that deduction to pay their mortgage.
Whether your income is $50,000 or $500,000, we all bought our homes by factoring in the mortgage interest deduction. That deduction has been part of the contract between government and homeowners since the beginning of taxes. Take it away from high income homeowners and overnight many of the people Obama calls "the rich" will be unable to afford their homes...thanks, as usual, to the brilliant reasoning of politicians.
Do you ever get the feeling that the reason government feels our pain, is because they are the ones causing it?
If you think the housing market is in trouble now, wait until the home mortgage interest deduction is eliminated for upper income homeowners.
From Manhattan, Great Neck, and Scarsdale, to Boca Raton, Scottsdale, and Brentwood, home prices in upper class neighborhoods from coast to coast will drop by about 35% overnight. That 35% number is not a guess, it’s automatic.
Today, if you’re in the top bracket, you deduct 35% of your mortgage interest off your tax bill. If tomorrow you can’t, your home is worth about one third less.
That's how economics works.
Unless Obama manages to also raise the top income tax rate to 40%. Then, when you lose your mortgage deduction your home will drop by about 40% overnight. Can you imagine the carnage to the housing market if this happens?
Obama's economic theories just don't compute. He believes that if you take away more of rich people's income through tax increases, and take away their deductions so that the value of their net worth collapses, that will be good for the economy.
He thinks if you take away rich people's money, consumer spending will somehow increase. Even though the facts are that the top 2% of income earners produce over 30% of U.S. consumer spending, while the top 5% produce 40% of consumer spending.
Needless to say, Obama never took an economics class at either Columbia University or Harvard Law School.
If you think foreclosures and short sales are a problem now, guess what happens when home prices drop another 30% to 40%? We’ll see a massive new wave of foreclosures from coast to coast, except this time it will be expensive homes in upscale neighborhoods.
The Great Recession will turn into a Great Depression.
Luckily most homeowners who have seen their home value melt away, still pay their mortgage every month. I call them responsible. If we didn't have people willing to still pay their mortgage, what would happen to the banks? Well, if homes go down by one third (or higher) overnight, we will surely find out. Many, if not most, of the formerly responsible homeowners will finally stop paying the bill.
If you think we’ve had a banking crisis for the past three years, wait until you wake up the morning after the brilliant politicians in Washington take away the mortgage interest deduction from upper income homeowners. It’s safe to say that many banks will become insolvent, resulting from worthless mortgages and massive new foreclosures.
Oh, but no fear. The politicians will come up with a new bank bailout paid for by...the American taxpayer!
I wish I could say it was only Obama and his socialist cabal that did not understand the importance of the housing market. But Mitt Romney, the leading contender for the GOP nomination, just released his “tax simplification plan.”.
Lo and behold, he too plans to eliminate or dramatically limit the mortgage deduction for upper income Americans. Certainly this plan is far superior to Obama's -- simply because Romney reduces income tax rates across the board by 20% in return for the loss of deductions. But that won't stop the real estate market from collapsing.
Let's look at the ramifications of Mitt's plan. If you cut my taxes by 20%, but at the same time take away my mortgage and charitable deductions, you've raised my overall taxes…all at the same time you’ve dropped the value of a $1,000,000 home by 30% overnight. That means I’m paying more taxes, while my net worth just dropped by $300,000.
If I own a $2,000,000 home, you just dropped by net worth by $600,000. With that double whammy, upper income taxpayers will slow our spending, stop borrowing, and many of us will actually lose our homes to foreclosure.
Why would Romney propose this idea? Because he's trying to simplify and flatten tax rates.
That's a good intention. Although the road to hell has always been paved with good intentions.
Someone needs to point out to Romney and the GOP that the most successful economy in the world belongs to Hong Kong. Their model is a 15% flat tax combined with 0% capital gains tax. But included in this mega successful 15% flat tax system, they allow mortgage interest deduction of up to $1,000,000 and charitable contributions.
Are you listening Mitt?
Hong Kong's economy is booming and their unemployment rate is 3.5%. In other words the perfect choice for improving America's economy is to flatten the rates, while retaining the mortgage interest and charitable deductions for everyone. You can bet I'll be spending the rest of election season whispering (actually screaming) these facts into the ears of Gov. Romney and his economic advisers.
Smart economists are always lecturing about the sad history of politicians making decisions that caused “unintended consequences.”
Obama and Romney’s tax plans are Exhibit A.
Why would we want to accelerate the collapse of real estate, when we know for a fact it is the foundation of the entire U.S. economy?
Why would we even consider taking this reckless gamble at this fragile moment in time?
And trust me, this is only the start.
Politicians always go where the money is.
First, they come for the rich, then they are coming for you. Obama wants to eliminate or drastically reduce the mortgage interest deduction for the rich as a first step.
My gut instincts are that his eventual goal is to eliminate the deduction for everyone. This is how it always starts.
Anyone want to take my bet?
Limit the mortgage deduction for anyone (rich or poor) in the middle of the worst economy since 1929 and it could become the tipping point off the cliff.
Foreclosures will dramatically increase, decimating banks.
Consumer spending will dramatically slow.
Small business owners will be unable to create jobs, as they can no longer borrow money against their number one asset (their homes).
Homes sales drop even further, as it now pays to rent, not own.
If no one is buying homes, construction and real estate related jobs disappear.
The trickle-down effect becomes a tsunami. Jobs are killed by the millions.
It's time to educate the politicians, before it's too late.
Wayne Allyn Root is a former Libertarian vice presidential nominee. He now serves as chairman of the Libertarian National Congressional Committee. He is the best-selling author of "The Conscience of a Libertarian: Empowering the Citizen Revolution with God, Guns, Gold & Tax Cuts." Visit his web site: www.ROOTforAmerica.com.