The leaders of a White House commission charged with reducing the federal budget deficit this week laid out a sweeping proposal that would, among other things, scrap tax deductions on mortgages over $500,000, according to the Wall Street Journal and other news media outlets. Opponents of the mortgage deduction argue that ending the tax break would not only create a deep source of money for reducing the U.S. budget deficit, but in the aftermath of the mortgage crisis, the country needs to rethink its favored tax treatment of homeownership.
owever, Lawrence Yun, the chief economist for the National Association of Realtors, says this argument downplays two critical facts. First, homeowners already pay 80 to 90 percent of the income tax in our country, and among those who claim the mortgage interest deduction, almost two-thirds are middle-income earners.
"When we talk about the beneficiaries of this tax benefit, we're talking about households who are the pillars of federal income tax revenue," Yun said in a recent column. "We would now be asking them to shoulder an additional tax burden, and also to brace for a 15 percent drop in home values-that's how much we can expect values to fall as buyers discount the value of the deduction in their purchase offers."
Secondly, those who blame the mortgage meltdown on our nation's support of homeownership are ignoring the origins of the crisis, Yun argues. The real culprit was unprecedented laxity in underwriting and faulty ratings by credit rating agencies of the securities backed by those mortgages.
Critics of the mortgage deduction fail to understand the tremendous benefits to our country, including higher student achievement among children of homeowners, improved stability of neighborhoods, and a better quality of life for residents and communities.
"Whatever deficit reduction might be realized by taking a carving knife to the mortgage interest deduction would come at an intolerably steep price: trillions of dollars in wealth destruction and a new uncertainty in what has long been recognized as a bedrock of our economy," Yun writes.
Nowhere in the country would the issue have more of an impact than here in the Bay Area, where high housing prices mean mortgages routinely run in excess of $500,000. While the highest priced markets in San Francisco, the Peninsula, Silicon Valley and Marin would be hit hardest, all of our cities would be affected should home valuations drop and housing markets become further destabilized.
Talk of scrapping the deduction could not come at a worse time, just as the housing market is starting to recover. Mortgage interest rates just hit a new record low this week with 30-year fixed mortgages at 4.17 percent, according to Freddie Mac. This is a unique time in all of our lifetimes where interest rates, affordability, and available inventory have never been so attractive. Hopefully, these elements will combine to ensure our nascent housing recovery gains momentum. We can't afford to have federal policies that send the market in reverse again.
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