Dump the mortgage deduction to revive U.S. housing

August 25, 2010

Some sacred cows need to be sacrificed in order for a country to prosper again. Let’s start with the deduction for mortgage interest on U.S. tax forms.

Killing the mortgage deduction wouldn’t be heresy for the American dream; it would allow more people to buy homes. The money saved by eliminating this break could actually boost homeownership, reduce payroll taxes or pare the budget deficit.

This sounds wildly counter-intuitive in light of the dismal home sales reported on Tuesday — the worst in 15 years. With the expiration of the $8,000 first-time homebuyer tax credit, buyers retreated to caves and thousands of more foreclosures came on the market.

I know the industry doesn’t want to hear this, but removing the interest break would lower prices — and ultimately sell more homes — if the deduction is transformed into a dollar-for-dollar credit that anyone can use.

The mortgage interest write-off may have over-stimulated the housing market during the bubble years. If you could write off interest on a higher-priced home, why wouldn’t you? This financial steroid also led to price inflation and led overstretched homeowners into more dodgy loans where they were exposed to bond-market risk.

As it stands now, the write-off subsidizes the affluent at the expense of everyone else, particularly renters. Residents of states with the highest mortgage values understandably took the most deductions. Maryland homeowners, for example, had the highest percentage of residents taking the write-off — about 38 percent — according to a National Association of Realtors, a Washington-based trade group.

Not surprisingly, the highest actual dollar amount of deductions were reaped where real estate prices are highest. California was the top state for loan interest write-offs with an average $18,876 deduction (of returns that claimed the break). Hawaii followed with roughly $17,000.

The unfair catch is that you have to itemize to get the deduction and only about one-third of US taxpayers do so. So two-thirds of taxpayers are not getting this break to reduce their taxable income. With the exception of Arizona, Colorado and Nevada, the top-10 states where interest was written off were on the coasts.

As the tax code’s single-largest individual subsidy, the mortgage break is estimated to have cost the Treasury about $80 billion last year.

There’s a better way to promote homeownership that will benefit more taxpayers. By scrapping the deduction in favor of a credit, the Treasury could save almost $400 billion between 2013 and 2019, according to the Congressional Budget Office.

A homeownership credit would be simpler and easy to access, although it would need to be capped. You wouldn’t have to itemize. If Congress decided to rescind interest write-offs for second homes and home-equity loans, the credit could be even larger or the savings could be channeled into payroll-tax breaks, which would help more working people.
The trade-off, of course, is that home prices may decline further in the priciest areas and after-tax income would drop slightly for the highest-bracket taxpayers. How is that a good thing?

With a more egalitarian mortgage credit, 80% of taxpayers would reap a benefit, the non-partisan Tax Policy Center found. Since there’s little academic evidence that the deduction raises homeownership, why not try the credit? It worked in stimulating home sales over the last year in one of the worst housing markets since the Depression.

It’s far more likely that the resulting drop in home prices from paring the write-off will be offset by more younger and minority buyers being able to afford homes.

One of the most reasonable deduction-for-credit swaps was proposed by President Bush’s tax reform commission, whose proposals were generally treated like root canals. The commission suggested a 15% credit on loans up to $412,000.

Ending the mortgage subsidy alone, of course, will not stem foreclosures or restore demand. For that, a national housing policy that allows homeowners who are “underwater” (owing more on their mortgages than their homes are worth) to write down their principal in bankruptcy is worth considering. Stimulating job growth will also be of paramount importance. There’s no sense in buying a home if you can’t be sure you’ll have the income to pay for it.

Comments

I certainly agree that the interest deduction should be done away with. Many countries prosper without it. But why should homeowners get any special credit at all? Don’t renters (and, for that matter, the homeless) deserve an equal share of whatever credits are to be granted?

Posted by rentpayer | Report as abusive
 

I think you’re smoking something illegal. You have a better chance of putting a Muslim in office. Errrrrrrr, let me rephrase that…..

Posted by noway | Report as abusive
 

a one time credit on mortgages w/out yearly deduction of interest is a short term and panicking suggestion, it also penalizes the one with cash still supporting a debts mentality. We need sustainable support for the housing market, perhaps even deductions of upkeep like in Australia. Itemization of return is a taxpayer choice. And if prices continue to fall it is just a healthy corrections from the excesses of the last few years.

Posted by robb1 | Report as abusive
 

Why don’t you suggest to make a rule of 20% or 30% as a down payment to get a loan? It will reduce the house prices very quickly. Isn’t it much easier? People must pay taxes on withdraws from 401(K) plan to pay for house or car. People trying to save money on 401(K) plan, and losing more money on loans? Where is the logic? The logic is reap off people. People should decide what to do with their money and not the Wall Street. Honestly speaking, if you really want suggest something, you should think more about before publishing.

Posted by gam32839 | Report as abusive
 

I don’t agree with the connection that eliminating the deduction will lower prices and stimulate demand. If the current mortgage rates cannot get buyers off the sidelines and into the game then eliminating a deduction that by your own research 2/3 of the people don’t take advantage of surely won’t have an impact.

We have seen that the Obama administration loves to spend money. Why not buy up as many of the foreclosure properties as they can afford. This will help clean up bank balance sheets. They could then spend more tax payer money (hear me out I’m actually not being sarcastic..) to refurbish the properties with American Goods and American labor. Then they could re-sell the properties partnering with the National Association of Realtors so that the sale gets done correctly and quickly. This should help the unemployment numbers due to the trickle down effect of using American labor and American goods which will help consumer confidence. When they sell the homes to qualified buyers who have returned to the market because unemployment has dropped and confidence has risen, the tax payers may even make a profit.

Posted by deewpb | Report as abusive
 

You can’t save our Treasury $400 billion while simultaneously putting more money in people’s pockets. That’s absurd.

What’s also absurd is suggesting that removing mortgage interest as the one stimulus for home ownership would somehow increase home sales.

Home ownership is our only real hedge against rising housing costs as we grow old. What would you have America do with all of its retirees when they can no longer afford to live in their rented homes?

Posted by MeeerkatMac | Report as abusive
 

“There’s no sense in buying a home if you can’t be sure you’ll have the income to pay for it.”

Wasik: looks like you answered your fifth paragraph Q. (“If you could write off interest on a higher-priced home, why wouldn’t you?”) in your last statement. The “why” is, if you are buying way over your income level, regardless of deduction or credit, that is an irresponsible, immature thing to do, which many people did for ego reasons. Look where it got them and us.

What I do not get from your article is this: what is the difference between a tax deduction for mortgage interest, and a credit, other than which categories of buyers/houses you apply it to? Either one, deduction or credit, could be applied to any group of buyers for any reasons, any income level. So what is the big deal in whether you make it a deduction or a credit?

The bottom line is that the lenders and the borrowers that made and took adjustable-rate and interest-only loans on overpriced houses were the major direct pin that pierced the over-inflated U.S. housing market balloon, the hot air of which then blew over the rest of the country’s economy. The reality of the principles of nature that something is not going to forever go upward the way housing prices in the above mentioned geographical areas did for a few years, for no good reason, and not have an equal let down at some point. Those loans were obviously over the income level of the buyers, given that they had no cushion at all, and there was no justifiable reason to believe the prices which escalated so much so quickly would hold, and especially, that they would continue to double every two or three years as the TV real estate people wanted us all to believe.

They “why” of your question is the greed and ego that now drives corporate America, and the gullibility and ego that drove the buyers to take out the irresponsible loans.

Posted by ayesee | Report as abusive
 

This isnt a brilliant move — its an INCREDIBLY brilliant move! This sacred cow has to sacrificed because it provides an incentive to drive up prices. The deduction is fine when you have a job, but when the economy collapses, then what? Further, the solution can be made very simple if we look at the rock solid real estate market in Canada.

First, in Canada mortgage income is proven with your tax filing info. No other document is accepted. Then you have to prove with a monthly budget that you do have the ability to make the payments. You have to put down 5-15% cold hard cash that is unencumbered (not borrowed). If you follow these rules, the government offers CMHC mortgage insurance. In respect to deduction, if the value of your home goes up, you get to keep the money tax free (conditional to living in it one year or more). Adapt the Canadian model. Its very simple and it works.

Posted by cynicalme | Report as abusive
 

“but removing the interest break would lower prices”

and send even more homeowners underwater!

What on earth is a “dollar of dollar” credit? Based on what was once deducted? How does that help anyone who doesn’t have a figure to deduct now because his or her income isn’t high enough to use the deduction? And how does a renter figure that deduction/credit? Does the landlord get to do it too?

You want to do some real mischief? How about proposing the revocation of depreciation for all commercial buildings? I remember a Columbia real estate professor 30 years ago who suggested that the depreciation of buildings really might not be all that justified. Buildings don’t wear out as quickly as machinery. And the depreciation is written off regardless of whether or not the buildings are ever repaired or replaced. A sale of the property simply starts the process all over again and the structure can continue to age. The owner is permitted to “sell the smoke” to REITs.

Posted by paintcan | Report as abusive
 

I don’t agree with the connection that eliminating the deduction will lower prices and stimulate demand. If the current mortgage rates cannot get buyers off the sidelines and into the game then eliminating a deduction that by your own research 2/3 of the people don’t take advantage of surely won’t have an impact.

We have seen that the Obama administration loves to spend money. Why not buy up as many of the foreclosure properties as they can afford. This will help clean up bank balance sheets. They could then spend more tax payer money (hear me out I’m actually not being sarcastic..) to refurbish the properties with American Goods and American labor. Then they could re-sell the properties partnering with the National Association of Realtors so that the sale gets done correctly and quickly. This should help the unemployment numbers due to the trickle down effect of using American labor and American goods which will help consumer confidence. When they sell the homes to qualified buyers who have returned to the market because unemployment has dropped and confidence has risen, the tax payers may even make a profit.

Posted by deewpb | Report as abusive
 

We had the mortgage deduction in the 1960′s and it wasn’t a problem…. We had the mortgage deduction in the 1970′s and it wasn’t a problem…. We had the mortgage deduction in the 1980′s and it wasn’t a problem… Do you get it yet????
So wouldn’t the better question be, why is there a problem with the mortgage deduction today??? Let’s look at the true ’cause and effect’ of the situation.

Posted by edgyinchina | Report as abusive
 

What planet are you on?

How would canning the mortgage interest deduction really lower home prices? It may make people think a little harder about the amount of debt they hold on their home, but it really wouldn’t have a penny of impact on the price of the home.

Just another way to screw the taxpayers.

Posted by Pat8 | Report as abusive
 

If you want to sacrifice a sacred cow why not go to the root of the problem? What is credit? It wasn’t that long ago (less than 100 years) that many peoples thought interest in any form was usury! Face the facts the housing market was huge in fact it had become what is known as a bubble and that bubble popped! Does anyone know what this means, the housing market was and is overvalued.
Back to credit, when I grew up it was pay as you go and if you didn’t have the money you went to work (ouch) earned the money and then bought what it was you needed. We may not have had the money to buy what we wanted but we made do. We don’t want to see the bubble reinflated and besides that I don’t think we can without hyperinflation. This means we will continue to see the correction. The sacred cow I would like to see put to rest is the charging of interest for private homes. Many may say that this is impossible but they are wrong. For the scholars I give a code PS 15:5 or read “Merchants of Venice” by William Shakespeare. As I said the charging of interest was looked on as unethical by many cultures up into even modern day. We the Americans felt the same until around the middle of the last century. The other sacred cow that would need to be put to rest to make this work is, restrict any corporation from owning private property outside incorporated areas of cities.
Get the monkey off our back. These two changes may not revive the economy at first but it would make housing affordable. In the long run this would also make a more wholesome life for everyone (except those who want to lord their authority over us or who don’t want to work for a living).
For the scoffer, I only bring up historical documents and how some cultures feel about interest to add creditability to what I have thought through on my own using exoteric information.

Posted by Consult | Report as abusive
 

Well argued, but good luck with reason

Posted by STORYBURNthere | Report as abusive
 

I may be the only person to comment so far who doesn’t own a home. I am an Occupational Social Worker with a Bachelor’s degree. I owe several thousand dollars of student loan debt that I cannot pay off and have been in “financial hardship” status since 2005 when I graduated. I work 40 hours a week, for less than $2000 a month salary with 5 years experience and believe me I am in the top of my wage bracket for my region of the Pacific Northwest. I have a wife and 2 kids and we struggle to get by with my wife earning equal wages to mine – without a college education. We would love to find a home mortgage for $800 a month but that is proving to be impossible. We currently pay $600 a month for rent and that is a steal of a deal we only accomplished by renting from friends. All of these government “incentives” don’t add up to enough to help us afford a home of our own. Anyone who says my family doesn’t deserve a home of our own because we cannot afford it and calls working class people like us irresponsible for buying into the American Dream is not giving us the credit we deserve for our efforts. When the cost of living is so high that we cannot afford maintenance on our cars that get us to work, when daycare takes more than a third of our monthly income, when putting pregnant wife on my Kaiser health insurance costs half of my gross monthly income, how do you expect me to be able to afford a screwy mortgage? Truth is Millions of people just like me are living from paycheck to paycheck, praying to keep my health and sanity long enough to pull my family to economic self sufficiency.

Posted by Mikewashere | Report as abusive
 

Why do we need to have high home price??
Can someone answer me why we need to ‘revive’ housing market?

The way I see it is, there is nothing wrong with home price going down to the market level (ie price as determined by supply and demand as in ECO100).

The only people who get hurt by lower home price are speculators who buy houses not to live in it but to rent out and then hope to sell it later for a lot more money. They are the people that have more than one houses.

If you own a house that we plan to actually live in it and have a family, then you’re not gonna sell it anyway. Why does it matter what the price is?

In fact, it’s better that house price goes down as it will eventually lower the value of the house which the government uses to impose property tax on. You pay less tax, isn’t it good?

The way I see it, there is no need to spend taxpayers’ money to revive the housing market. Let the speculators suffer, they deserve it.

Am I missing something here?

Posted by trevorh | Report as abusive
 

Here’s an even better idea: dump ALL subsidies, from timber to corn to mortgages. Reform GAAP and financial regulations such that they stand on three pillars: honesty, transparency, and simplicity. Reduce the corporate tax rate to 10% and simplify the tax code radically – thus effectively instating a massive tax increase in the form of a tax cut. Radically simplify the personal income tax code, effectively eliminating ALL deductions and moving to a modified flat tax.

Then, get the hell out of the way and watch the economy ROAR to life.

Posted by JackMack | Report as abusive
 

Deduction is not an issue, but arrpoving mortgages with an LTV above 80% is…

Posted by GA_Chris | Report as abusive
 

typo in my prev post:

If you own a house that YOU (NOT we – typo) plan to actually live in it and have a family

Posted by trevorh | Report as abusive
 

Typically, the political reaction is find more money from people that make more money. In addition, make certain that the incentive to achieve is gutted.
The flat tax puts an equal burden on everyone. No need to tax the successful just to pay for the unsuccessful. When the average house-wife manages her family budget on a fixed income and the geniuses in Congress can’t, I see no reason to give them additional money to blow on their perpetuating political careers. Rather, the accountants and lawyers should no longer be able to exact large fees for doing something that should be relatively simple. The big problem is how the government will manage the money coming in. How will they find a new scapegoat when they lose the “rich” to beat on? Will they turn on themselves as the grossly inept people that they’ve become? And finally, why won’t the inevitably inept people in Congress be replaced so that the same problems are not regenerated. Actually, when one thinks about it, its a no-win situation. Government never changes.

Posted by cyberpenn | Report as abusive
 

The logic is counter intuitive because the logic is non-sensical and the concept destructive. Home prices will be driven to an even lower equilibrium price destroying residual equity, and force even more people to turn over their keys.

Posted by SanPa | Report as abusive
 

Just because real estate prices may drop does not mean that real estate taxes – assessed at the local level will follow. And to cut away at the federal take is also to cut at the state and local level because the lower levels get federal money for so many local needs.

So many costs of municipalities are built-in, in the form of prior debt obligations, that the tax rate may raise even while the value of the tax base may fall.

And there is no magic value or true value to anything in the economy. The mortgage deduction isn’t solely responsible for the speculative fever that gripped housing prices. Mass hysteria was.

There is one main and insurmountable reason why the economy is not reviving and that is that this country lives with costs that are two high. The cost of labor and the cost of living was supported by more debt than people imagined. The rest of the world is becoming developed rapidly and can do nearly everything this country and the rest of the developed world thought they once could do without competition. Even an attempt at neocolonialism isn’t helping. It’s just adding to the national debt and the incomes of the upper brackets.

The developed world can’t help us because they can live at a fraction of our costs (although to them it does not seem that way – costs being relative). If the USA decided overnight to allow 200 million Chinese or East Indian villagers to enter this country, and they were paid at their domestic rates of pay – they would not likely be able to pay for camping trailers without ganging up together and stuffing the things with as many people as possible just to pay the mortgage or rent. That is precisely what happens in Chinatowns or other ethnic enclaves. I know from experience that it occurs in Chinatowns but I only suppose about other neighborhoods with high immigrant populations from countries with low paid populations. They suffer until they can get better established and move out.

Immigration worked well when my Grandparents entered this country because the country at the turn of the century was hungry for labor. And that is the only reason they were allowed to enter. The country no longer needs vast labor and jobs have become a privilege.

The country is becoming aristocratic and those who have, get, while those who don’t, loose what they have. It’s so smugly biblical it turns my stomach.

But I think the proposals of the unnamed article above are pure baloney and they won’t work. This country has never faced a situation like the Spanish empire, many South American regimes and pre-revolutionary France, Russia or China had, where their currencies turned to garbage and the countries were effectively bankrupt. And it was due to protracted and expensive wars that they usually fell into the abyss.

I don’t think the US is going to be an exception. I can’t wait to see what the next crop of elected leaders are going to do after November and again in two years time.
I have very low expectations. None of them sounds like they have a clue.

Posted by paintcan | Report as abusive
 

I don’t understand the logic that home prices will decline
if tax deductions are eliminated – That means homeowners will lose more equity, thus lose money & decrease net worth – Does this make sense to anyone out there?
Claude DeMoss
Licensed Real Estate Broker
San Jose, CA
In the business since 1962

Posted by Sequoia1952 | Report as abusive
 

I don’t care what you need to do to justify this but this tax break to the well off needs to go. Also, we need more affordable housing. No more wasteful Mini Mansions. Lets see some more apartments.

Posted by anarcurt | Report as abusive
 

Great idea! I’ve always hated the tax deduction. Removing it in 2011 would help people come to grips with two fundamental changes needed in America:

1). A house is a place to live, not an investment. You should buy a house that fits you.

2). A mortgage is not an asset to the borrower.

People need to buy homes not real estate and treat it like a purchase not arbitrage.

Posted by ElroyFromIowa | Report as abusive
 

Great idea! I’ve always hated the tax deduction. Removing it in 2011 would help people come to grips with two fundamental changes needed in America:

1). A house is a place to live, not an investment. You should buy a house that fits you.

2). A mortgage is not an asset to the borrower.

People need to buy homes not real estate and treat it like a purchase not arbitrage.

Posted by ElroyFromIowa | Report as abusive
 

For those confused about why prices would decline the reasoning is presumably that people are prepared to pay more (ie too much) for something when they get a tax deduction (and therefore recover part of the cost). Common sense is often out the window (I have had tax clients who throw thousands away leasing sports cars because they ‘get a deduction’ without realizing that even net of tax deductions they are still throwing away money unnecessarily). More importantly though, a fundamental tax principle is that it should be fair and equitable, which is corrupted if only ‘homeowners’ get a certain deduction. It seems that in the US this principle is not part of the strategy however. Two taxpayers who earn a similar income should pay the same tax. In South Africa for eg this has resulted in a huge simplification of the income tax act, removing complex provisions revolving around marital status, number of dependants and personal circumstances, as well as ‘special interest group’ style provisions. The goal is not to address ‘social’ aims in tax legislation but rather separately (for example welfare structures). I suspect the US loves the incredibly complex status quo with state to state differences and special interest groups and resulting ‘loopholes’ which is wonderful for keeping poilticians and lawyers employed and not useful for facilitating commerce nor reducing tax administration costs.

Posted by WithRespect | Report as abusive
 

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