Marketplace - Who benefits from mortgage interest tax breaks?

Episode Date: June 3, 2024

A tax break that started out as a way for the government to incentivize homebuying has primarily benefited the wealthy, research shows, while costing the U.S. government $30 billion a year in tax revenue. That amount may more than double in 2026. Also in this episode: OSHA works on new heat guidelines for the workplace, construction spending falls, and the Federal Reserve wants interest rates to be “neutral.”

Not too hot, not too cold, Goldilocks, but for interest rates. From American public media, this is Market Flags. In Los Angeles, I'm Conn Rizdall. It is Monday today, the 3rd of June. Good as always to have you along, everybody. As the Federal Reserve thinks about interest rates, which it will do Tuesday and Wednesday next, Chair Powell and the gang are, of course, weighing the data. That's what they tell us all the time.

They're also looking for signs that the place they've put their main interest rate, the federal funds rate it's called, a bit above 5% right now, they want to make sure that that's actually doing what they want it to do, slowing the economy without stopping it. That sweet spot, in turn, depends on what in normal times would be the interest rate at which the economy is not running too hot, but also not running too cold. It's called the neutral rate. And as Marketplace's Sabri Benishur explains, by the way of getting us going, the neutral rate is a bit tricky to nail down.

Imagine a world where inflation is fully under control. The economy is growing at just the right speed, not losing steam, not overheating just right. The interest rate that would keep all those things in balance is called the natural or neutral rate. The neutral rate is the Fed's kind of guiding compass. Matthew Pignotti is a senior analyst at Capital Advisors Group. If you are trying to sail north, you might have to steer east or west sometimes with currents and wind, but your compass will help you get back on track. It is the same for the Federal Reserve. And for the Fed, over the long run, the short-term interest rate might deviate from the neutral rate, but in the long run, that's what they want to get to. Sometimes things happen. Inflation flares up and the Fed has to

slow the economy down. Or there's a financial crisis and the Fed has to get the economy moving. Joseph Gagnon is a senior fellow at the Peterson Institute for International Economics. And when they want to slow the economy down, they raise the rate above the natural rate. When they want to speed the economy up, they lower the rate below the natural rate. There is one problem with this North Star, this shining perfect interest rate on a hill. You cannot measure it directly. It's theoretical. There is no simple formula that will spit it out. But in hindsight, over time, you can see roughly where it is. If you look back in time and the economy was stable, then whatever interest rate it had was

probably the right one? The error around the estimates, because the neutral rate is not observable, the error bands for these models are very wide. David Rogel is a fixed income portfolio manager at BlackRock. Right now, the Fed believes the neutral interest rate is two and a half percent. That is a lot lower than the five and a half percent we currently have. So one day, when inflation is fixed, the idea is we will get back down to two and a half percent, which would affect new mortgages and car loans and credit cards. But I think what you're hearing from the Fed, the communications, is that there's less certainty

about that. The mystical Goldilocks neutral interest rate can change depending on a lot of factors, population growth, productivity, federal spending, and it may be changing now. Again, Matthew Pagnati, a capital advisors group. I think that there's a lot of good evidence that it's rising. For starters, we've had high interest rates for a year now, and the economy has barely battled ash. No recession, no slowdown.

So maybe the normal times interest rate of the Fed's dreams is actually higher than it used to be. But also, maybe not. In New York, I'm Sabri Benishor for Marketplace. Shining interest rate on a hill. I kind of like that one. On Wall Street to start this week, a little up, a little down, stasis of sorts ahead of the big May jobs report coming to us on Friday.

We will have the details when we do the numbers. The thing about the neutral rate that Sabri was just telling us about, and what the neutral rate itself is telling us about how much the Fed is actually putting the brakes on this economy, is that the price of money, which is just another way to think about interest rates, trickles down through every moving part in this economy. Today's case in point, spending on construction. We got new numbers from the Census Bureau this morning on construction spending for the month of April, basically flat from March. And going back to the start of this year, it's barely budged after a healthy 14% run-up in spending last year. Why the slowdown? Marketplaces Daniel Ackerman took a look around

the construction economy to find out. This year's flatline in construction spending was kind of inevitable, said Anubhan Basu, CEO of Sage Policy Group. I think its interest rates finally starting to catch up with this industry. The Federal Reserve started raising interest rates back in 2022 to stem inflation. Basu says at first the higher borrowing costs didn't really affect builders. Because people have signed contracts, they've made decisions to move forward, and it takes a while for those higher interest rates to interrupt the economy.

But he says that interruption may have arrived. Spending on the construction of commercial buildings was down in April, along with multifamily housing. What we're seeing right now is the end of an apartment building boom. Robert Dietz is chief economist at the National Association of Home Builders. He says last winter saw one million apartments under construction.

The highest unit count since May of 1973. Now though, that number is down by more than a third. He says in part because developers are having a harder time financing new buildings. But not all construction is so sensitive to borrowing costs. If you've flown in any airport lately, you've seen a lot of construction. Catherine Thompson is CEO of Thompson Research Group. She says transportation infrastructure from air to rail to roads has taken off, thanks in part to recent federal legislation.

Also being built, water systems and industrial construction like factories. There were candidly pretty boring categories up until now. She expects factories to keep getting built even if overall construction remains flat for a while. I'm Daniel Ackerman for Marketplace. We've been reporting on this program for years now that home prices in many parts of this country are at record highs. And with interest rates being where they are, 7%-ish, home ownership is only getting harder for a lot of would-be buyers. The tax code has been of some help.

The mortgage interest deduction has made it easier for some homeowners to swallow the purchase price of a new home. It is kind of a classic tax expenditure, that interest deduction, a tax break that the government uses to incentivize certain behaviors like, in this case, home ownership. Question is, does it actually do what it is supposed to do? Marketplace's Kimberly Adams has that story. On a rainy day about an hour outside of DC, Realtor Wendy Wright is prepping for an open house. So we're gonna take our shoes off as we enter the house

just because it has been well staged and cleaned before everybody comes through. Wright is a Realtor with Keller Williams Metro Center in Virginia, but she's on the other side of the DC suburbs setting out balloons and bottles of water at a five bedroom, four, four-and-a-half bath home. This is brand new construction built in 2021.

The deck on the back of the house, a full master bedroom, or primary bedroom as we call it today. The home is listed at almost $900,000, but unless the buyer pays in cash, interest will make the house cost several times that over the life of a typical 30-year mortgage. So the government tries to help. The mortgage interest deduction was introduced in the tax code really as a way to try to help with the goal of helping folks have a more attainable homeownership. Garrett Watson is a senior policy analyst

at the Tax Foundation. Though it does reduce the cost for homeowners who do claim it, it does come with some trade-offs. For example, you can only take the mortgage interest deduction if you're the one taxpayer in nine who itemizes on your tax returns and if the mortgage interest you pay is more than the standard deduction

of just under $30,000 for married couples filing jointly this year. The average deduction usually goes to people earning $100,000 to over $200,000 a year. Mohamed Elam El-Din is a policy associate at the Turner Center for Housing Innovation at UC Berkeley. He says it's wealthier people who both itemize and pay enough interest to get the deduction. For people earning over $200,000 a year, this reduces their taxes by $5,300. While people earning $100,000 or less see an average deduction of about $300. The 2017 Tax Cuts and Jobs Act, the Trump tax law, changed how much of a mortgage is

eligible for the interest deduction. It used to be a million dollars. It became $750,000. But points out realtor Wendy Wright nowadays. At higher interest rates, your interest on your mortgage is higher. Hence, you're probably taking more of a deduction at a lower price point because of the interest rate being higher. Still, the vast majority of people don't benefit from it.

And many economists argue there's not much evidence that the mortgage interest deduction actually gets more people to buy homes instead of renting. It just makes homes more expensive. Plus, says Garrett Watson at the Tax Foundation, all of those deductions for big, expensive houses going primarily to wealthy people, they cost the federal government money. Every year about $30 billion. And if that deduction were pared back further or eliminated, that revenue could be used to lower rates elsewhere or to go and fund other priorities. And the hit to federal revenues from the mortgage interest deduction is set to jump at the end

of 2025, when the provision in the 2017 tax law expires, unless Congress changes or extends it. In Washington, I'm Kimberly Adams for Marketplace. Dan Ackerman was talking a minute ago about flat construction spending for April. We got a different big spending data point last Friday, consumer spending, which softened a little bit in April, that after holding pretty steady for three months. So with signs that the consumer might be slowing down a bit, we decided to give two of our retail regulars a call. Hi, my name is Larry Groves, and I am the co-founder of the Growing Groves Plant Shop.

My name is Ricky Barossa, and I'm also a co-founder of the Growing Groves plant shop. My name is Ricky Barossa, and I'm also a co-founder of the Growing Groves here in Davis, California. Business is good, I think. So the shop is doing well. It's interesting now to be open for two years and kind of navigate the current economic climate. The month that we're in is a very interesting time

because, you know, we're in a college town and a lot of graduates are going through commencement ceremonies right now. Our slow season definitely is like when people are graduating, like summer, and then we ramp back up back in September. During early spring, we kind of sit down with each other and talk about things that like, you know, what can we do to supplement, you know, the income loss?

We just start talking about, oh, should we, you know, start, you know, reining back our expenses? That's always the hardest conversation for me because I don't want to slow down. As the one who controls the finances, I'm like, okay, let's, I love his ideas, but sometimes you have to rein them in. I'll bring up an idea.

Hey, I think we should get this for the store. Okay, we'll make, you know, we'll think about it maybe in a couple months. And I'm like, I already ordered it. So I think, I think that's when my like corporate side comes out and I'm like, okay, let's, you know, we'll think about it maybe in a couple months. And I'm like, I already ordered it. So. I think, I think that's when my like corporate side comes out and I'm like, okay, let's, you know, bring up a Google sheet and you know, have everything outlined and see if we can do it.

But it's fun to go through that together. Yeah. The biggest challenge for me personally is burnout. I think that I like really hit a wall kind of like early spring where I was just constantly going. One way that I tried to like combat that is just wake up every morning, come to the store and just write out a to-do list. Because it just for a while felt like I wasn't getting anything accomplished.

Yeah, I think seeing him go through all this, as my other job, my main job ramps up, I don't have enough time to help him as much as I can or I want to. When we do have a day together, we're like, oh my God, we can rest. And then it's like, we just talk about the store all day and just be like

okay well we could try this but the days where we can just do nothing and they're amazing it's amazing it's amazing yeah. My goals for this year is to really work on like content and branding and to really work on like content and branding. And I just want things to run more smoothly. Like I want like our everyday, you know, we have an SOP that we follow. We have like calendar dates that are readily available for everyone. Yeah, I think we have a better understanding

of what it means to run a business and the balance that you need to have to keep running the business. Future outlook I think is you know positive so yeah we'll see what happens. Larry Groves and Ricky Barrosa running the Growing Groves plant shop up in Davis, California. Coming up. They had the ability to crank out a reinvention of the peanut butter and jelly sandwich. One billion dollars worth. But first, let's do the numbers.

Dow Industrial is down 115 points today, about three tenths percent, finished at 38,571. The Nasdaq gained 93 points, 6 tenths percent closed at 16,828. S&P 500 added five points, about a tenth percent, 52 and 83 there. GameStop soared 21 percent today. The meme stock rose after a social media post from Keith Gill, the investor known as Roaring Kitty on Reddit, appeared to show that he had 5 million shares of video game retailer. Meme stock AMC jumped 11%. Both stocks were hit by a technical glitch, by the way, in the New York Stock Exchange earlier that showed incorrect prices for a number of stocks including Berkshire Hathaway

A shares. BRK is the ticker today. Down 6.10% at the end of the day at one point this morning. Shown wrongly as being down 99.7%. That, my friends, would have been a bargain. BRK A trades today at $631,000 a share. Let's buy two, huh? Spotify. Tuned up 5 and 2 thirds percent today after announcing a premium subscription price hike from July, the second raise in a year for the streaming service. Bond prices were up, yield on the 10-year T-note fell to 4.39 percent. You're listening to Marketplace.

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Amazing prices await you for a limited time only at dell.com slash deals. That's dell.com slash deals. Add a little curiosity into your routine with Ted Talks Daily, the podcast that brings you a new Ted Talk every weekday. In less than 15 minutes a day, you'll go beyond the headlines and learn about the big ideas shaping your future. Coming up, how AI will change the

way we communicate, how to be a better leader and more. Listen to Ted Talks Daily wherever you get your podcast. My name is Lee Hawkins. I've been a journalist for over 25 years. On my new podcast, What Happened in Alabama, I get answers to some of the hardest questions about how things came to be for many black Americans and the truth that must come before any reconciliation can happen. I investigate my family history, my upbringing in Minnesota, and my father's painful nightmares

about growing up in Alabama. What Happened in Alabama is a new series confronting the cycles of trauma for myself, my family, and for many black Americans. Listen now. This is Marketplace. I'm Kai Rizdal. It is going to get hot out here in parts of the West this week, 120 degrees hot in some of the West this week, 120 degrees hot in some of the deserts. It's the first big

heat wave of what is expected to be another abnormally hot summer in most of the country. Last year was, as you know, the hottest on record as well as the deadliest. And some jobs can be especially risky. Construction, farming, logistics, to name just a couple. Marketplace Megan McCarty-Corino has more now on shoring up workplace protections for heat. More than 400 workers died due to exposure to heat between 2011 and 2021, according to federal records. The Occupational Safety and Health Administration has been crafting new heat-specific rules at the direction of President Biden since 2021. We don't know exactly what those rules will be,

but they would likely trigger things like required rest and water breaks when the heat index reaches certain thresholds. Nobody disputes that overexposure to heat is a hazard. Mark Friedman is vice president of workplace policy at the U.S. Chamber of Commerce, which has pushed back against early proposals. He says current general guidelines for rest, water and shade are effective. If OSHA sets stricter thresholds to say a heat index of 80 degrees, he says businesses with heat-generating equipment would find it difficult to maintain temperatures. Such a regulation could really impose a lot of costs on employers and in some cases perhaps jeopardize their ability to stay in business.

The agency appears to be close to releasing its final proposal, says Debbie Berkowitz, who was at OSHA during the Obama administration and is now a fellow at Georgetown. But they have many, many steps they have to go through. It could take another couple of years. It takes an average of seven years for OSHA to create a new national standard. Five states have created their own and several more are close to adopting them, says Anastasia Christman at the National Employment Law Project. Part of it is workers have found their voice and their power in the last, say, decade and

have really started to understand that the best way to address these problems is to speak out about them together. But Texas and Florida have preemptively banned local jurisdictions from enacting new rules. And in California, the first state to regulate heat in the workplace, a long planned extension of protections to indoor sites has stalled over uncertainty about how much it will cost the state. I'm Megan McCarty-Corino for Marketplace. Consider the peanut butter and jelly sandwich. A staple of the elementary school lunchbox and a great snack for adults everywhere. A classic that needs no improvement.

Well, maybe. But if you want to build a brand, you gotta innovate. So enter the Uncrustable, a PB&J with, just like it sounds, the crusts cut off. More than 25 years old and on the cusp of being a brand worth 10 digits. Clint Rainey wrote about it the other day at Fast Company. Clint, welcome to the program.

Hey, Guy, thanks for having me. Uncrustable's basically a peanut butter and jelly sandwich of sorts, is gonna be a billion dollar brand? Are you kidding me? It's pretty nuts to think about, isn't it? Yes. What? How? I mean, I think that this is one of those great success stories. You have a company

smucker that has for over 100 years, like 125 years, been producing these like basic pantry staples, peanut butter, coffee, baking mixes, shortening, and realized at a certain point that they had jelly, they had peanut butter, they could probably figure out bread, and if they just put those things together, they had the ability to crank out a reinvention of the peanut butter and jelly sandwich that, you know, appealed to not just parents for kids' lunches, but athletes who are looking for, you know, a quick way to refuel. We'll get to the athletes in a second. So we should say, first of all, Smuckers did not invent the Uncrustables, but they did sort of launch it. They've been around for a long time. It's not like Uncrustables are new, right?

They've been around for 25, 26 years. Right, right. The reason that I wrote this story was that these things were just starting to pop up everywhere. I was seeing them on social media. I was seeing them at halftime shows, Charles Barkley coming on during a basketball game talking about how he like stocks them in his freezer. So Smucker purchased the brand from two dads in the Midwest in 1998.

They went straight into cranking away on these things. And the expansion of the brand and the growth of the product has been almost entirely organic. So organically, people were snatching these things up, but there was no marketing behind it yet. And look, you don't need marketing when Charles Barkley is talking about them in a halftime show and Travis Kelsey,

for crying out loud, is saying he needs more of them than anything else. I mean, this thing has, look, I get that it's convenient and all that, but fundamentally, it's peanut butter and jelly sandwich, right? No kidding, and I think it sort of became, I don't wanna call it an inside joke, but I mean, sort of, right?

Like, there was some reporting that the Baltimore Ravens ate 7,500 of these things last NFL season. You know, they just sort of become this cultural artifact, especially in professional sports where it's something everybody can kind of laugh about. Here's the kicker question. Have you tried one of these things? I have. And I will admit with some level of embarrassment that I had not before I started writing the story. But I went out, I live in New York City, and there's a lot of things that are difficult to find in New York. I did not struggle to find Uncrustables. I had advance warning

that they were going to be in the frozen section, which I was told by multiple people at Smucker is a source of confusion for consumers. They don't necessarily think to make a beeline for the freezer aisle. Are you supposed to microwave them to thaw them or what do you do? Apparently absolutely not. But there is an entire cottage industry on Reddit and other forums online of people who are suggesting ways that you can improve them and that involves air fryers and microwaving. And it's insane, but some people want to remove the tiny little crimped edges that- Oh no.

I know, I know. You're uncrusting the uncrustable? Come on, man. It's insane, right? I mean, at that point you have to assume it just oozes out the side But that I didn't try so I can't swear to it Peter butter and jelly it is ripe for disruption Clint Rainey He's a contributing writer at fast company talking about uncrustables Clint. Thanks a lot. Appreciate your time. Thanks so much guy This final note on the way out today, another entry in the private equity buys up an iconic

American company file. CNBC is reporting today that Skydance, which is a consortium backed by among others KKR, has come to terms with Paramount on a takeover. It's an $8 billion deal, give or take, waiting only on a sign-off from Sherry Redstone, who's holding company National Amusements, owns Paramount. Our daily production team includes Andy Corbin, Lizzie Hassan, Maria Hollenhorst, Sarah Leeson, Sean McHenry and Sophia Terenzio. I'm Kyle Rizdal. We will see you tomorrow, everybody.

This is APM. Hey everyone, it's Rima Chreis, host of This Is Uncomfortable. This is APM. Hey everyone, it's Rima Chreis, host of This Is Uncomfortable. If you're looking for some good recommendations on books to read, well you should join This Is Uncomfortable's Summer Book Club. Every other week in our newsletter, we'll share a new book that'll make you rethink your relationship to money, class, and work, while also featuring an interview with the author or an expert on the topic.

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