Reducing the home mortgage interest deduction: enough with the crocodile tears

 

homemortgageinterest

A Christie’s International Real Estate warning.

The tax bill just passed by the Senate would let new homeowners continue to claim a deduction for the interest they pay on mortgage debt of up to $1 million. Under the House bill, existing homeowners could continue writing off interest paid on mortgage debt up to $1 million, but new mortgages would be subject to a $500,000 cap.

The House provision would be calamitous, tragic, disastrous, critics argue.

Reducing or eliminating the mortgage interest deduction “will hurt millions of hard-working American families and marginalize homeownership,” said Granger McDonald, Chairman of the National Association of Realtors.

Slicing the home mortgage interest deduction could lead to a housing recession, said Jerry Howard, CEO of the National Association of Home Builders.

Let’s get real here.

The change proposed by the House wouldn’t really mean much to many taxpayers. You have to itemize deductions to claim the deduction on your tax return now. Only about one-third of taxpayers now itemize and only three-quarters of those claim a mortgage interest deduction, according to the Urban-Brookings Tax Policy Center.

But that would change because the tax bill would almost double the standard deduction, from $12,700 to $24,000 for married couples and from $6,350 to $12,000 for single filers. With this change, fewer taxpayers would benefit from the mortgage interest deduction. The Tax Policy Center figures the share of households claiming the home mortgage interest deduction would drop to 4 percent. That’s right. Just 4 percent.

That drop would also reflect the fact that, despite a lot of high cost homes in the Portland Metro Area, it’s pretty easy to buy a home for less than $500,000 in most of the rest of Oregon and the nation.

For example, the median home value is $251,100 in Tillamook, $336,600 in Corvallis and $162,300 in Pendleton.

According to the Mortgage Bankers Association, Americans who applied for a mortgage to buy a home in January 2017 were looking for a loan sized at an average of $309,200. The median home value in the United States is only $203,400, according to Zillow.

 

State Home Values

NAME MEDIAN Zillow Home Value Index
California $469,300
New York $267,100
Florida $192,600
Illinois $163,100
Texas $159,000
Pennsylvania $155,000

 

Georgia $149,300
Michigan $126,100
Ohio $122,400

Only 5.4% of all loans originated in 2017 have been for more than $500,000, according to ATTOM Data Solutions. That’s just 325,000 loans, most of which went to the wealthy.

Want to know the median list price by city, state, zip code, and neighborhood? Zillow’s Home Value tool provides that data.

The three states with the highest percentage of home mortgage loans over $500,000 in 2017 have been Washington, D.C. (35.1%), Hawaii (15%) and California (11.5%), followed by Delaware, Massachusetts and Washington state at about 9%.

They’re the ones who would see their ox gored under the House bill, and it’s the members of Congress from these states in the forefront of wanting to preserve the $1 million level.

In Democrat-dominated California, the pain would be noticeable. In the San Jose metropolitan area, 75% of new mortgage loans as of early November 2017 were for more than $500,000 and the median home price was more than $1 million, according to an analysis by CoreLogic Inc. In the San Francisco metro area, 60% of new loans were for more than $500,000.

“I think that harming the ability for Americans to own their home is like attacking motherhood and apple pie,” Rep. Judy Chu (D-Monterey Park), who represents an area that includes Pasadena and much of the San Gabriel Valley, told the Los Angeles Times.

So what the Senate is doing is defending a tax break that mostly benefits a small number of affluent homeowners and distorts the housing market?

The distortion occurs because the tax reduction increases the price of housing. Well-off buyers are willing to pay more because they anticipate deducting their mortgage interest, effectively lowering their monthly house payments.

”… there’s good evidence that cutting back the mortgage-interest deduction would lower prices in high-cost areas, where newcomers find it difficult to move nowadays,” asserts Howard Husock, vice president for research and publications at the Manhattan Institute.

So enough with the weeping and wailing. Reducing the home mortgage interest deduction would be a good thing.

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