I agree with the overall point of the post, but I quibble with tax effect being the main driver of the housing bubble. A driver, yes, but with subprime loans, many people were able to buy a house with the same monthly payment as their apartment, so they view it as an opportunity to build equity.

My guess is that for many people, athough certainly not all, tax effect was an afterthought. In fact, for the portion of subprime borrowers buying houses valued under $100K or so, some of them probably did not even pay enough interest for a couple years to make itemizing worth it.
mike | 12.21.07 - 8:56 am | #

The biggest factor that drove the housing bubble and subsequent mortgage industry collapse is the IRS code that allows for mortgage interest to be tax deductible.

I will keep harping that this is THE single stupidest myth that you insist on repeating. Wake the fuck up.

ALL interst has ALWAYS been deductible since the beginning of the income tax. Over time, the IRS code has chewed away at that and now mortgage interest is the only interest that is deductible, and not even at the full amount like it used to be. To call the deduction a subsidy and THE motivating factor in buying a house is just DUMB.

The mortgage industry collapse is due to the Fed trying to subvert the law of supply and demand. Low interest rates increased the supply of credit - and that created a demand for houses and mortgages. Normally, when demand increases prices go up. The price of a mortgage is the interest rate - which during a time of increased demand the Fed continued to LOWER.
Russ | 12.26.07 - 9:42 am | #