Four experts weigh the end of the mortgage interest deduction
Debating the decades-old deduction
The mortgage interest deduction is a portion of the bedrock on which the American housing market has been built. Now some -- including Erskine Bowles and Alan Simpson in their deficit report -- are suggesting it be eliminated to help the federal government balance its budget.
We asked top economists and real estate experts what they think would happen if the decades-old deduction disappeared. Here are their views on its worth.
By: Constance Gustke, HSH.com
Strong forces for; few against
Alan Viard is an economist at the American Enterprise Institute for Public Policy Research
A cold-turkey end to the mortgage interest deduction would send housing prices downward.
But the deduction encourages people to own bigger homes. If it was scraped with no replacement, there would only be a small reduction in homeownership. The greatest impact would be on expensive homes. The majority of homeowners do itemize, but in the top brackets, everyone is itemizing.
Ultimately, there are two factors to consider: the value of existing houses and the quantity of resources devoted to housing. If the deduction was eliminated, you'd see fewer resources going into housing and more into housing investments. It would be more efficient.
There could be transition relief. Perhaps existing mortgages could be left unaffected. There's already one restriction in place passed in 1987. You cannot deduct mortgage interest on mortgage amounts greater than $1 million. I don't know if everyone knows that or not.
Numerous forces are arrayed against cutting the deduction, though. They include construction and mortgage industries, along with homeowners. Nobody has the personal incentive to oppose the cut. And most tax reform groups don't call for its elimination. So, it's unlikely that the deduction would be eliminated.
The Bowles-Simpson plan [a bipartisan fiscal committee] recommends replacing the deduction with a credit. Tax savings would be lower, and there would be a $500,000 cap. But because it's a credit, you wouldn't have to itemize the deductions anymore. That makes sense.
Government should encourage homeownership, but mortgage interest deductions aren't an effective way.
Vital deduction, big benefits
Danielle Hale is a research economist at the National Association of Realtors
Homeowners would see their home values decline 15 percent on average if the deduction was cut. Higher-value areas would feel the most effect. Many homeowners have significant parts of their net worth tied up in their homes. So, that's a problem.
The 75 percent of homeowners who have mortgages use the deduction. It's vital to the mortgage industry and the economy. All sorts of research ties homeownership to additional benefits too. For example, homeowners vote more often and engage in civic groups.
People think of mortgage deductions as huge subsidies. But really, it's a small break for people who pay the majority of the U.S. income taxes.
Lower demand; affluent hit hardest
Polina Vlasenko is a research fellow at the American Institute for Economic Research
If the deduction goes away, the housing market will be hurt. There will be lower demand and lower home prices. It won't have a big effect, though, since nobody buys a home just for a tax deduction.
But removing it is difficult, and there might be an initial shock effect. People will pay more taxes and have less income left over for spending. And the economy isn't recovering that much. There may be a better time to do this.
The biggest difference is mainly at the high-end. At lower income levels, the deductions don't matter. People take standard deductions and don't itemize.
The Federal government has encouraged homeownership over decades by subsidizing homeownership. And incentives do change behaviors. They push people to borrow more money rather than less. But homeownership rates didn't change that dramatically over the past decades.
Realtors would cry
Ilyce Glink is the publisher at Thinkglink.com
Mortgage deductions are great sales tools. And anything that makes housing more expensive might harm a fragile real estate industry. These deductions mainly benefit the middle and upper classes.
If it's eliminated, it would be tough at the beginning. Once we work through the cycle of foreclosures, which will take five or six years, people won't even remember they had the deduction. You could phase it out gradually. But eliminating it sounds worse than it really is.
Realtors will cry and say it will ruin the market. Real estate is Washington's most powerful lobby.
Politicians say that homeownership strengthens communities. People take better care of their homes. But which bills do you pay? I'd rather help people feed themselves.