A presidential deficit commission recently proposed a reduction of the mortgage interest deduction, which is the largest government housing subsidy. Further, the White House has plans to propose an overhaul of Fannie Mae and Freddie Mac as discussions continue over how widely the US should guarantee mortgages. The US has been subsidizing homeownership for a long time now through tax deductions and loan guarantees, and this change could be the largest shift in government housing support since World War II.
An article entitled “Homeowner Perks Under Fire” in the Wall Street Journal explains the mechanics of this new proposition and analyzes its merits as well as disadvantages. Currently, the mortgage interest deduction in place gives homeowners the ability to deduct interest paid on mortgages up to $1 million for first and second homes, and also up to $100,000 in additional home equity borrowings. The deficit commission wants to replace that system with a flat 12% tax credit for mortgage interest up to $500,000 for first homes. The other proposed changes would partly offset the costs of this new change for taxpayers.
There is much debate as to whether this new change would be beneficial to current and future homeowners, or if it fact would severely hurt the real estate industry. Congress is voicing its opinion saying reducing the mortgage tax break would hurt the economy and be risky because it makes homeownership more affordable. The real estate industry is backing this view saying that any policy changes could be a disaster for this still fragile real estate market because it would keep prospective buyers from purchasing homes and would depress prices even further. Analysts are saying that even slight declines in prices could leave many Americans with situations where owning their homes is worth less than what they owe on the mortgage, and in essence, this could stifle the recovery by decreasing consumer demand and lengthening the construction industry depression.
On the other hand, other analysts are proclaiming that the real estate industry is misrepresenting the effects of this potential cut on mortgage interest deduction and its impact. Some propose that if the changes in the deduction were to be introduced gradually, it would not hurt consumer demand and would only decrease prices slightly in certain markets, and therefore, the real estate market would be able to become familiar with these changes more reasonably.
Historically, the deduction wasn’t made with homeownership interest in mind as Congress made all interest tax deductible in 1913, which helped stimulate the post war home buying trend where the government also guaranteed numerous cheap mortgages. Economist now point out that this mortgage interest deduction for the most part encourages wealthier Americans to take on more debt, since the deduction only applies to those taxpayers who itemize their returns, and these are the taxpayers who produce higher incomes. A recent study showed that while this mortgage deduction makes homeownership more appealing in markets with a big housing supply, it actually reduces homeownership in denser urban areas because it inflates home prices.
In the past, the Obama administration has proposed small cuts in the mortgage interest deduction for top earners, but some argue that this proposition could yield much different results because of the swollen US budget deficits. It is estimated by the White House that the mortgage deductions will reduce the tax revenue in 2012 by $131 billion.
Amidst all these debates, a recent Wall Street Journal/NBC News poll found that 60% of Americans regarded it totally or mostly acceptable to eliminate the mortgage interest deduction on second homes, home equity loans, and any portion of a mortgage over $500,000.
JOHN BUDZ
NAR President's Liaison to Poland
