Posted By Rob Hahn June 11, 2010, Filed under: Real Estate@ 4:32 PM
A while back, I wrote on Inman (subscription required) that the single greatest asset of realtors was political power, and got mixed comments about that position. Well, the time to find out is upon us:
The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.
Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.
When NAR lauched HouseLogic.com last year, one of the examples it used to talk about how important HouseLogic.com would be was defending the home mortgage interest deduction. With the Obama Administration putting the elimination of the mortgage interest deduction back on the agenda for 2010, it’s time to find out just how powerful NAR is, and whether NAR does in fact add value to the Realtor or not.
Plus, given that the “recovery” of 2009 and spring of 2010 (I have my doubts on how much of the recent market is a recovery vs. simply pulling deals forward in time, but nevertheless…) was widely seen as having been fueled by a $8,000 first time homebuyer tax credit, the elimination of the mortgage interest should have interesting — if devastating — consequences for the market.
There are those, such as the Urban Institute, who think that the mortgage interest deduction doesn’t actually mean very much for homeownership:
The MID [Mortgage Interest Deduction] disproportionately benefits taxpayers in the top fifth of the income distribution (Toder, Harris, and Lim 2009). Those who do not itemize deductions on their tax returns receive no benefit and the subsidy rate is larger for individuals in higher marginal tax rate brackets. Because most who benefit would own homes without the deduction, it mostly provides an incentive to live in more expensive homes, not to own instead of rent. Other countries without an MID have similar homeownership rates.
Toder, et. al., might very well have a point… especially from a policy standpoint. But that “mostly provides an incentive to live in more expensive homes” piece is going to affect brokers and agents whose incomes are directly tied not only to transactions but also to home prices.
The recent experience of the home buyer tax credit also suggests that eliminating the MID would have negative consequences. If $8,000 was enough to get a bunch of buyers off of the sidelines and into homeownership, losing the MID may be enough to get a bunch of homeowners to sell, and even more people to wait on purchasing.
Just to put some numbers on this, based on this worksheet, a buyer who takes on a $240K mortgage in the 25% federal income tax bracket receives tax savings of more than $23,000 over the first seven years of homeownership (when the amortization is such that interest is the bulk of the mortgage payment). That’s just over the first seven years.
At this point, I think anyone who claims to know what the elimination of the MID would do the housing market is probably (a) smoking something, or (b) selling something. At the same time, even if one doesn’t know for sure, it’s hard to imagine that getting rid of the MID would be a net positive for housing.
Even assuming that the Urban Institute and other critics of the MID are correct, buyers would then move down the price chain since the incentive to live in more expensive homes will be eliminated. Housing prices may not collapse, but they’re certainly not going to go up.
Plus, maybe my wife and I are unique and different, but when we were first-time homebuyers, we definitely had conversations about the fact that the mortgage interest would be tax-deductible in our financial calculus about whether we should buy or continue to rent. Without the MID, we may have held off our purchase for a few years longer and simply stayed out of the market.
Just the rumor of the MID going away is likely to influence the market:
ANOTHER UPDATE: A reader emails: “Speaking for myself, just the rumour of ending the mortgage deduction has caused me today to call off my house search. Not just because of the loss of the deduction to me personally, but because it’s easy to imagine this crashing prices, which is all you need to, in fact, crash prices.”
And finally, given the enormous shadow inventory of not-yet-released foreclosures and the extend-and-pretend games that banks are forced to play, it’s hard to imagine a scenario where the glut of inventory can be worked through faster by removing the mortgage interest deduction from play.
Nonetheless, who knows what the impact would actually be?
One thing I can surmise for certain, however, is that the lobbyists at NAR suddenly have a new #1 mission over the summer. Realtors (as well as licensees who are not members of NAR) may learn by the end of it that political power is in fact their single most important asset. And maybe folks would come around to seeing that HouseLogic, and not RPR, is the most significant initiative launched by NAR last year.
So I’m curious to hear from those who are in the trenches day in and day out. How important is the mortgage interest deduction to homebuyers? Is it something they mention when discussing how much to pay for a house? Or when they’re trying to find a house? Or is it completely irrelevant by the time someone has entered the market?
Do you ever find that you have to point out the mortgage interest deduction when discussing the pros and cons between renting and buying? Is it persuasive to most people, or only those really right on the fence? Does it matter whether you’re in a luxury market (where the buyers are likely to be in high tax brackets and have larger mortgages = larger deductions) or in a low-income market?
Inquiring minds want to know.