Mortgage Interest Deduction: Part 1

Before leaving for their summer recess Congress was once again was talking about tax reform, and once again the perennial issue of the mortgage interest deduction (MID) was on the table. Advocates against maintaining the MID insist that the revenue generated from the elimination of the deduction far out weigh any benefits homeowners receive by its continuance. Recently the National Association of Home Builders (NAHB) refuted that assertion.

The NAHB affirms what most everyone in the mortgage and real estate industries already believe, and that is that the mortgage interest deduction is “a middle-class tax provision that makes it possible for many families to achieve homeownership.” Economists from the National Association of Home Builders analyzed assorted data from the IRS, the Census Bureau, along with “estimates from other sources,” in order to show the validity of the benefits of the mortgage interest deduction to homeowners, or potential homeowners.

One false assertion is that the MID disproportionately favors the rich. According to the NAHB, data from the Congressional Joint Committee on Taxation reveals that the majority of the tax benefits from the MID go to middle-class households, with 86 percent of households who benefit from the mortgage interest deduction having incomes of less than $200,000. The NAHB further notes that, “the majority of home owning households are married couples, so the household income measure will often include two incomes,” meaning these households do not represent the rich.

MID critics also assert that the elimination of the mortgage interest deduction would not damage the economy or individual households. NAHB research shows that elimination of the mortgage interest deduction would reduce the demand for housing by raising taxes on prospective homebuyers. In turn, this reduction in housing demand would also lower home values for existing homeowners who would see a significant loss in wealth.

Data shows that, “a 1 percent decline in home prices would result in a loss of $185 billion to American households. Just a 6 percent decline would eliminate $1 trillion in household net worth. If repealing the deduction lowered prices by 10 percent or more, Americans would lose trillions of dollars in household net worth.  If home values fall, then more families will find themselves under water, in default and in foreclosure.”

The NAHB says that, “if home values fall, then state and local tax revenues fall, making it harder to fund schools, infrastructure, public safety and other important government functions.” Thus, eliminating the MID would have serious economic consequences for all. See Mortgage Interest Deduction (Pt 2) in the next blog.