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Gang of Six and the Housing Market

posted by Adam Levitin

There aren't a lot of details about the Gang of Six debt proposal, but apparently it includes cutting or eliminating the home mortgage interest deduction. There's a good case to be for eliminating the home mortgage interest deduction. But regardless of whether the deduction should go, I question the timing. Cutting or eliminating the deduction isn't going to help stabilize the housing market.

I worry about major legislative changes via budget deals that haven't had a chance to benefit from a public airing. We require notice and comment periods for regulatory rule-makings. It seems ill-advised to undertake more significant reforms without the benefit of public input. Yes, there's a default clock running, but there's a much simpler and less risky way to avoid that--increase the debt ceiling enough to enable a public debate on the long-term solution.

Comments

Adam,

If they only eliminate the deductions on second homes, second mortgages and home equity lines, then I do not see that big an issue.

They take my deduction for my primary residence then I have an issue. It was worth the equivilant of 3 mortgage payments to me last year.

While I favor eliminating the mortgage deduction, imagine what would happen to the price of housing. Average house prices would drop by 30%, assuming that the value of a house is dependant on the after-tax ability to pay for it.

I can't imagine that would be good for the economy right now. And again, I favor cutting the deduction.

A little-dicussed cause of the housing rout in the late 80's was the dropping of the tax rate, which made the after-tax cost of an average home significantly more expensive.

Eliminating the MI deduction will definitely help stabilize the housing market. As long as current buyers are uncertain as to whether the MI deduction will still exist when they sell (an unlikely prospect given the need to increase gov't revenues) this will contribute to instability in housing values. I assume you are using Webster's definition of "stabilize" and not the NAR/ bank lobby definition.

The mortgage interest deduction really only affects higher income homeowners who carry mortgages with annual interest payments big enough to outweigh the standard deduction. Also, I don't think eliminating it will have a huge affect on prices. As a lender, the potential interest deduction is not taken into account for qualifying for a mortgage, nor do borrowers usually use that as a big part of their purchase decision.

Nice to have, but I don't think it will have any real effect on the on the housing market. It might affect it it initially from just an emotional shock of the MI deduction being removed, but not on any factual basis.

We need to get rid of ALL deductions, loop holes, and special interest favors in our tax code. I would gladly give up my pretty significant mortgage deduction to clean up our convoluted tax code. Our tax code should not be used for social engineering.

I guess that your definition of 'higher income homeowners' includes anyone that makes more than $50. It's extremely easy to beat the standard deduction with just interest payments, especially for singles: $5700 in interest is beaten by a mortgage under $100K. Removing the deduction is, in essence, a tax hike for the middle class.

And it might be a surprise for you, but every tax code, ever, happens to be social engineering of some sort. A flat percentage rate favors the rich. Consumption tax favors those who save or spend in foreign markets. Any system with progressive rates can be tweaked to favor whoever you want. Allowances for children put at a disadvantage those who do not have them.

Dan - IMHO you're wrong about eliminating the MI stabilizing the housing market. It will in fact ensure that prices decline, and buyers don't like to catch a falling knife.

We can debate the MI deduction, but now is not the momment in time to do so. Wait until all of the MBS mess is past (5 years).

John S - We can wait 5 years to eliminate the MI deduction, but by then, we'll have moved on to the next recession. Someone probably deployed the same justification in 2002 or 2003 for the MI deduction, claiming that once the dotcom/9/11 bust is over, the time will be ripe.

The MI deduction pushes up house prices for middle and upper class people, at the expense of lower class and young people trying to buy their first home. It's a transfer of wealth to those who need it least (even if they can argue that they still need it).

I don't think there is a chance in the world they are going to eliminate it. The Gang of Six plan seems now to be off the table (bye, thanks for stopping by!) and in any case its revenue raise, if any, was said to be mostly coming from alt min fiddling. My guess is the first commenter is right, they would be limiting the deduction to second homes, or maybe dropping the $1MM loan cap to a lower amount.

IMHO, we should phase it out by dropping the cap $50,000 a year for 20 years. That would be so gradual it would not do much for budget scoring but it also would not impose any shocks on the market as Prof Levitin, who sounds like he is in the market for a home, understandably fears. It would also leave middle class homeowners unaffected for the next few elections, which is why it might be a good approach for current legislators to sign on to.

I read the proposal was to lower the limit on the eligible mortgage amount to $500,000 from $1mn currently and to restrict the deduction to primary residences only.

Am I the only one who is reading Professors Post here?

I believe that if and when we do get to the five year mark and we remain in servitude - this will not more than likely be an issue AT all? Why not stick a finger in the Dike or better yet get a real silver bullet to kill the monster.

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