It is difficult to ascertain if executives from the National Association of Realtors are more concerned about the prospect of rising interest rates or the winds of tax reform.

Both David Lereah, the huge trade group’s chief economist, and Walter McDonald, its immediate past president, said that the association “would aggressively oppose” any move to eliminate the mortgage interest deduction in the Bush administration’s second term.

“We have heard that tax reform will probably be on the table,” Lereah said. “We will do everything we can to see that it remains in place for consumers.”

Lereah, a former economist for the Mortgage Bankers Association of America, is now in his fifth year as the head interest rate prognosticator for the country’s largest trade organization. He is predicting mortgage interest rates will rise to an average of 6.5 percent in 2005.

Like any good leader, he found a way to look at the bright side of higher priced loans. “That will help to limit the effect of rising home prices and maintain generally favorable housing affordability conditions in most of the country,” Lereah said.

NAR also expects another excellent year for housing in 2005, yet not quite hitting 2004’s final figures. Existing-home sales should reach a record 6.55 million this year, up 7.3 percent from a year ago. Slightly higher rates should bring 2005’s existing home sales figures down a tick to 6.3 million, still a historically huge figure.

“For the past three years, I have told you that the next year was going to be the second-best housing year on record,” Lereah said. “I was wrong all three times – they have been better than the year before. However, I’m still predicting that 2005’s pace will be a little slower than this year because of the slightly higher interest rate environment.”

Lereah said he believes the United States is “more toward the middle” of a housing boom than at the end of the end of a robust time.

“The demographics of our country favor this trend going forward because echo-boomers, the children of the baby-boom generation and a group almost as large, will be in the prime years for buying a first home for the next decade. These findings demonstrate a fundamental underlying demand that will be driving the housing market at higher plateau for the foreseeable future.”

The mortgage interest rate deduction has been viewed as an enormous incentive of home ownership. Taxpayers who chose to itemize their federal income taxes are able to reduce taxable income by subtracting the amount the paid in mortgage interest. While the benefit is not a dollar-for-tax deduction, it can be significant amount especially in the early years of a fixed-rate loan.

What could come under scrutiny in the next four years is the ability to deduct the mortgage interest on a second home. Under current guidelines, consumers are able to deduct the interest on two residences – sometimes known as “The Congressman’s Rule” because many lawmakers keep a residence in their home state and another in the nation’s capital.

Accountants said that if the second-home mortgage interest deduction is threatened, taxpayers could choose to rent out their homes for a period greater than their personal use and change the second home’s status to an investment property.

In other housing projections:

  • Housing starts are expected to come in at 1.84 million units in 2005, down from an estimated 1.93 million last year and off a tad from 2003’s 1.85 million.

  • This year, NAR anticipates those rates dropping to 5.3 percent for national existing-home prices and to 5.2 percent for new-home prices.

  • First-time home buyers account for nearly 40 percent of all homes sold, average 32 years of age, a household income of $54,500 and make a 3 percent down payment on a home costing $139,000.

  • The typical repeat buyer is 45 years old with a household income of $79,100 and places a down payment of 22 percent on a home costing $209,000.

  • Inflated-adjusted disposable personal income is expected to increase 4.2 percent in 2005, while the unemployment rate is expected to decline to 5 percent by the second half of 2005.

Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill) was written with John Tuccillo, former chief economist for the National Association of Realtors and is available in local bookstores. Tom can be reached at news@tomkelly.com.

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