Wednesday, October 31, 2012

Timing Couldn’t be Worse for Move to Ditch Home Mortgage Tax Deduction

After a long drag along the bottom and a few false starts, the U.S. housing market has finally got game again. Home prices have turned the corner in most parts of the country. And builders are scrambling to meet demand for new houses.

So isn’t it about time for politicians to screw this all up?

In the bitter debate over cutting deficits and lowering income taxes, the home mortgage deduction is back on the table again. It’s the most popular tax deduction for Americans and has long been considered a boon for homeownership in this country.

The program takes about $100 billion a year from the federal budget.

Beyond the argument about whether the country can afford this expense, the more important issue here is timing. With the home market finally getting in gear after the worst crash in generations, is it a good idea to be messing with the mortgage deduction? Housing economists don’t think so.

“Removing the mortgage interest deduction would depress house prices, which would remove the shaky demand that has developed as home prices have begun to rise,” said David Crowe, chief economist of the National Association of Home Builders.

“A reversal in the small gain in house prices we have seen so far would also increase mortgage delinquencies and put more homes back on the distressed market,” Crowe said.

And even if the economic impact of ditching the home mortgage interest write-off is overblown, that’s not true for the emotional aspect. A significant majority of Americans say they don’t want the deduction killed.

“The true impact may be as much psychological as real economic, but it will be there nevertheless,” said Dr. James Gaines, an economist at the Real Estate Center at Texas A&M University. “The short-term impact on home sales will be detrimental and not at a good time.

“We need new home construction, which means we need new home buyers, especially in the price brackets that result in high new construction volume.”

Of course near record low mortgage rates in the last couple of years have lowered the home interest deduction’s benefits. Every time you refinance a house at a lower interest rate, the tax write-off goes down. Even so, housing economists say, the deduction boosts both homebuying and the overall economy.

“Homeowners pay well over 85 percent of the income tax, and the mortgage interest deduction and home ownership are the basis for middle-class homeowners to accumulate a nest egg over time to provide for retirement, to be leveraged in starting a small business, or to help children with their college expenses,” said Jed Smith, senior economist at the National Association of Realtors.

“Removal of the mortgage interest deduction — which has an established, proven record of benefits to the country as a whole — would probably cause decline in home prices and home sales and could wipe out much of the middle class’s home equity.”

Steve Brown 
Real Estate Editor 
Dallas Morning News