Remove the Housing Tax Credit?!

It has been recently bandied about that one of the most effective ways to get America out of its debt problems is to raise more tax revenue. A simple way to do this is to eliminate all of the tax credits thereby raising the tax revenue without raising the actual tax rate.

While this may have some political merit (as no politician at this stage would agree to increasing the tax rate on the lower and middle classes), and while I agree that at some stage the tax revenue will have to increase, eliminating the housing tax credit at this stage of the recovery would be an economic disaster.

A recent study by the National Association or Realtors estimated that removing the housing tax credit would lead to another 15 percent decline in the value of housing. I personally think that that is a low ball estimate and that the effect would be far worse.

Many people (myself included) find that a house is affordable only because of the tax credit. Remove the tax credit and the disparity between a rental payment and a house payment swings heavily in favor of renting.

Furthermore. the current recovery is underpinned by the banks being solvent. A large portion of this "solvency" is due to the fact that performing loans are recorded at the face value of the note. Plenty of these performing loans are supported by real estate that has a value of less than the note (they owe more than the house is worth). Remove the tax credit and the benefit of paying on a debt worth more than the asset itself makes no sense. Turn these marginal loans into bad debt on the balance sheet of the banks and it is my estimate that this forced mark to market would reveal that our largest banks are insolvent.

We all witnessed first hand the effects of an insolvent banking system recently but this time around the economy would be without the Federal Reserve to support it. Why? The Federal Reserve would lose credibility if it printed more money. Interest rates would be driven through the roof dragging the housing market lower and creating further instability. The result would be another severe recession at best and at worst you wash the slate clean with a depression.

Therefore, why the politicians are even debating this is beyond me but if the vote is for removing the tax credit then watch out below. While I doubt that this will happen it is always good to be prepared.