- The elimination of the mortgage interest deduction will remove a valuable motivation for homeownership.
Make no mistake, the 100-plus-year-old mortgage interest deduction (MID) is in play, and the odds are good that it will be a shadow of its former self should the proposed tax reform framework become law. Once gutted, its long-term prognosis will be dim.
The administration’s tax reform framework and the rough outline proposed by Republican Members of Congress pay lip service to retain the deduction for mortgage interest, but they also nearly double the standard deduction that both renters and homeowners can take, from the current $6,350 for individuals and $12,700 for married couples.
That leaves only about the wealthiest 5 percent of homeowners with an incentive to itemize deductions and utilize the MID, according to the National Association of Realtors.
This cynical version of a Washington shell game benefits the wealthiest of homeowners, for whom the MID means little — and eliminates a significant incentive for homeownership for middle and lower income and first-time buyers who need it most.
Should the proposed framework become law, the MID’s days will be numbered. With a minor constituency and a minimal impact on the real estate economy, the deduction will become easy prey for its enemies on the left and the right.
“People don’t buy homes because of the mortgage deduction,” said White House National Economic Council Director Gary Cohn last week. “The no. 1 reason why people buy homes is they’re excited and optimistic about the economy.”
The MID makes the difference
Cohn probably doesn’t know many buyers’ agents — especially those who survived the Great Recession, a time when people weren’t very excited and optimistic about the economy.
He probably hasn’t talked to first-time buyers today, who struggle to put together down payments and improve their incomes enough to qualify for starter homes, which are costing them 2.3 percent more of their income today than they did last year, according to Ralph McLaughlin at Trulia.
It may be true that the MID is not the most important reason that people buy homes, but it is often the frosting on the cake that convinces renters to buy.
Whether the economy is good or bad, the leap into homeownership for first-time homebuyers is a challenging one, and the vast majority do it for more than one reason.
The mortgage interest deduction is almost always one of them. It can make the difference in first-time buyers’ ability to buy a home, in part because mortgages are structured so that the first few years of payments consist almost entirely of interest.
When April 15 rolls around, every potential first-time buyer knows he or she would be paying fewer taxes if he or she owned a home.
Not only does the MID motivate buyers, but it also plays a major role in the real estate economy.
Abolishing the current MID would reduce borrowers’ ability to pay for their homes by 17.65 percent and reduce home values by 19.94 percent, according to a peer-reviewed study by international housing economists published last December in the Journal of Housing Economics.
With no details about either the administration’s or the congressional plan, it’s hard to know how real estate consumers will fare.
What is certain is that the elimination of the MID will remove a valuable motivation for homeownership.
For agents, brokers, builders, lenders and everyone else who makes a living from residential real estate, the crippling or demise of the MID will certainly mean:
- Buyers will have one fewer convincing motivations to buy a home. Facing the challenges that confront first-time buyers today, they may never become homeowners.
- New owners will discover the tax benefits that motivated them to buy are gone. With the standard deduction, they get the same tax benefits that renters will enjoy. They will also be one step closer to losing the option to itemize and use the MID.
- Sellers will find that without the MID incentive, demand for their homes will be less than if the MID remained, and their homes may sell for as much as a 20 percent less.
- The next downturn in the housing economy will be worse than it would have been if the MID was still intact. There will be no MID to move recalcitrant buyers forward when they are losing confidence in homeownership.
Is homeownership still a national goal?
Rather than dying an incremental death as under the current proposals, the end of the MID should come as the result of a national debate that reaches a consensus to reduce or eliminate homeownership as a national priority.
There’s nothing new about using the tax code to encourage behavior that furthers national goals, and the current debate will leave in place many tax deductions, credits and exemptions.
Tax-deferred retirement plans encourage workers to save for retirement. Child care credits make it easier for young mothers to work. Energy credits promote conservation and retrofitting solar heating to save energy. Employers receive tax benefits for providing employee healthcare insurance. These are all worthy ends.
So is homeownership.
The benefits of homeownership are well-proven. It is a well-traveled road to financial security, the way that most Americans establish personal wealth and safety for generations.
Homeownership is a source of family pride, stability and security. It is the foundation of healthy communities and the institutions that rely on them — schools, hospitals, public safety and local commerce.
Finally, homeownership is a massive economic engine that accounts for 15 percent to 18 percent of our national gross domestic product.
At a time when our national homeownership rate is near a multi-decade low, when the gap between minority and white homeownership is greater than in recent memory, when young adults want to buy homes but face extraordinary barriers in the form of student loan debt, soaring prices and abysmal inventories — is it really such a good idea to end the MID? If so, is this the best time and the best way to do it?
Steve Cook is a communications consultant at Commsconsulting.com and was the former editor of Real Estate Economy Watch.