The gamble – Eliminating the Home Mortgage Deduction
As the golden and amber leaves of autumn begin to fall on our yards here in North Texas, about 1,364 miles to the east, something is brewing in Washington D.C. In order to bring our outrages deficit down to a reasonable sum, one proposal that appears sure to pass is the elimination of the mortgage interest deduction. Is this really a good idea? What effect will it have on the housing market? What about mortgage rates and home prices? What seems odd is they are considering cutting the things which did not get us into our current situation in the first place. Many argue eliminating the mortgage interest deduction will not change much. That the mortgage interest deduction benefits mainly those with higher incomes. Which is partially correct, but the rest of the story is a little different. First time Buyers will also feel the brunt of this cut. High income people who live in high-priced homes obviously pay a lot in mortgage interest however first time buyers with a thirty year fixed mortgage pay most of the mortgage interest within the first few years of the loan. Now granted most first time Buyers are not thinking about the deduction when they are shopping for homes. However for some, those who are on the border of renting versus buying may be more persuaded to go with renting. The high income folks might find it more advantages to rent then buy. Why put up with the hassle and expense of owning if you can rent for the same amount? What about construction? Will this deduction place an additional burden on the construction industry? Will contractors be reluctant to build new homes? Those questions are yet to be answered however they are worth considering. The construction industry is on shaky ground with the current economic state. At the very least investors might be reluctant at least at first to invest in new developments.
Some say the elimination of the mortgage interest deduction will have a minimum negative impact on housing prices. They say it might be as little as a 3% decrease in home prices however others say the amount will more likely be in the 6% range. Home prices are already depressed. Sure there has been a modest upswing but even if eliminating the deduction decreases prices to 3% home owners will be hit hard. A home worth $200,000 could be worth $6,000 to $12,000 less. Those are big bucks, especially to those who live on a fixed income. Mortgage rates are an unknown factor. The decrease in home prices may perhaps mean interest rates stay low. Unfortunately we have no crystal ball to gaze into, interest rates are a question. What will they do? I understand we must tackle this ridiculous deficit and we are heading towards a financial cliff. What we need is a strong honest economy. Where people are employed, the country is producing goods and services and where we are competitive with the rest of the world. That coupled with sensible cuts, only then will the deficit shrink. However as I write this it appears as if both sides are in agreement with this proposal. Some are floating a different one. Only eliminating the deduction for second residences, home equity loans and homes with prices higher the $500,000. Which is a better solution however with the housing market so fragile can we really afford this gamble? I guess time will tell. See ya down the road.