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Does the Mortgage Interest Deduction Help The Real Estate Market?

Dennis Norman St Louis RealtorLast week, The Washington Post published an article by Kenneth Harney which said “if you take mortgage interest tax deductions, the next 100 days could have significant financial implications for you, thanks to Congress’s new federal debt ceiling plan……the compromise legislation created an unusual mechanism — an evenly split, 12-member bipartisan supercommittee — that could call for major cutbacks on real estate write-offs by Thanksgiving.”

The question is, would doing away with the mortgage interest deduction put the final nail in the coffin for the housing industry? Read on to hear two opposing opinions on the topic.

“Any changes to the mortgage interest deduction now or in the future could threaten recent progress toward stabilizing the housing market, critically erode home prices and values, destroy middle-class wealth accumulation and hurt economic growth.” ~National Association of REALTORS® (NAR) Chief Economist Lawrence Yun.

Not surprisingly, the National Association of REALTORS® (which I’m a member of) supports the mortgage interest deduction and feels taking it away would basically destroy the market. NAR has taken several steps to preserve and promote the mortgage interest deduction (MID) including:

  • Creating an I-Phone App to allow consumers to estimate the amount of savings or tax benefit they would receive from the mortgage interest deduction.
  • Promoting House Resolution 25 which expresses that the MID should not be restricted or changed.
  • Produced a video showing who would be hurt most by curbs or cuts of the MID – to watch video click here.
  • NAR President Ron Phipps did a podcast in which he explained how the MID benefits the middle class – To listen to the podcast click here.
  • NAR President Phipps also appeared on Bloomberg Television to talk about the MID and called it ‘Pivotal’ to U.S. Housing – To watch video click here.

The National Association of REALTORS® cite the the following as reasons the Mortgage Interest Deduction should not be eliminated:

  • It is vital to the stability of the American housing market and economy
  • It facilitates home ownership by reducing the carrying costs of owning a home, this is particularly important for the middle class
  • Now is the worst possible time to change tax laws which could further impair the housing market
  • Eliminating the MID will lower the homeownership rate in the U.S.
  • It has been part of the federal tax code for more than 100 years and was not a cause of the housing market bubble or deficit
  • Reducing or eliminating the MID will put even more tax burden on homeowners who already pay 80 to 90 percent of U.S. Federal income tax
  • The MID does not just benefit the wealthy, in fact almost two-thirds of those who claim it are middle-income earners and 91 percent of people claiming the deduction earn less than $200,000 per year

“We find that, on average, the MID (Mortgage Interest Deduction) has no statistically significant impact on homeownership attainment.” ~ Christian A. L. Hilber, London School of Economics and Tracy M. Turner, Kansas State University in “The mortgage interest deduction and its impact on homeownership decisions”

The study that I took the above quote from is a study done in 2010 that is often quoted by opponents to the Mortgage Interest Deduction. In doing the study, the authors looked at housing data from 1984 through 2007 to determine whether the effect of the MID on home ownership. Below are some of the other findings in the study:

  • The MID is an ineffective policy to promote homeownership and improve social welfare
  • The MID only boosts homeownership attainment of higher income households in less tightly regulated housing markets
  • In 2007 for every dollar of mortgage interest, there was 26 cents in tax savings generated as a result of the MID. The MID is the second largest U.S. tax expenditure, estimated to be $104.5 billion in lost tax revenue in 2011.
  • The MID has an adverse impact on the homeownership attainment of households residing in tightly regulated housing markets.

“The current tax subsidy for owner-occupied housing offers little to like.” ~ Todd Sinai, Ph.D., Associate Professor of Real Estate and Business and Public Policy at the University of Pennsylvania’s Wharton School in HUD’s “Evidence Matters”.

In his viewpoint article, Todd Sinai makes the following points:

  • Most academic research suggest that the subsidy (MID) has little to no actual effect on homeownership rates; instead, it induces those who already would have bought a home to spend even more on housing.
  • The subsidy is also highly regressive and it’s benefits overwhelmingly favor high-income households in areas with high home prices
  • The MID should be eliminated, as it has an annual estimated cost of 93.8 billion and constitutes nearly 9 percent of the 2011 budget deficit.

In readying Prof Sinai’s article, the MID is only the tip of the iceberg in terms of housing subsidies he would like to see cut. He goes as far as to suggest that if you are going to allow a homeowner to deduct the interest on a home mortgage then they should have to claim the estimated rental income their home could produce as income.

Does the Mortgage Interest Deduction benefit the housing market enough to justify it’s cost to tax payers?

Lets see….it’s a lousy real estate market; I make my living in the real estate industry….. do I want anything to happen to negatively impact it in any way? NOPE….Would I like every known (and even unknown) subsidy or incentive out there to be used to promote home sales? YEP….Therefore, I guess I’m all for the MID.

Seriously though, if I take off my selfish hat, and try to look at the big picture I can say that after doing the research for this article I was surprised to see just how much it does cost to have the Mortgage Interest Deduction. Also, if (and that’s a BIG IF) the study is accurate and the MID is really not promoting home ownership but is just rewarding those people that would have bought anyway, or perhaps just bought a less expensive home, then I would have to question whether the cost versus reward makes sense. However, proving a negative is impossible, so trying to determine whether or not someone that did buy a home with the MID in place would have bought if the MID was not in place, is pretty much a guess at best in my opinion. One way to find out is to take away the MID and see what happens…..problem is, if you’re wrong, we’re all in trouble.

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