The National Association of REALTORS has been watching the GOP and DNC’s platforms closely to see what is being said (or not said) about the mortgage interest deduction, which allows homeowners who itemize their deductions to have their mortgage interest deducted from their gross income (simply put.)
After a couple of tried, the Republicans came out with a luke-warm statement of support for the deduction; the Democrats essentially ignored it.
We are told by NAR that without the deduction, the housing market as we know it will come apart.
But is that really the case?
When I purchased my first house with my then-wife, I never gave a thought to the mortgage deduction. Rather, I was thinking about the child we were going to have and the pounding stereo of the jackass neighbors below us to the left. After years in apartments listening to some other idiot’s bass line, I was done.
We eventually divorced but, when I moved back to an apartment briefly, at no point did I sit back and think how terrible my tax burden now would be because I’d lost the interest deduction. Since I didn’t itemize, it was a non-factor in my existence.
These days, I do itemize. And as someone who receives a 1099 and not a W-2, and therefore has to pay his own taxes rather than having anything withheld, there are few things more enjoyable than watching the number on TurboTax drop when I enter the mortgage interest information into the software.
But here’s the thing …
The presence of the deduction never has had any impact on my decision whether to own versus rent. I’m one of these old-fashioned types who rhapsodizes about owning a place of his own (even if my lender happens to own more of it on a percentage basis than I do) and I enjoy the freedom to let the beagle pack run free (or sleep free, as the case may be.) I don’t want to be beholden to a landlord when I want to paint, landscape or otherwise make my mark on the 1/5 of an acre that is mine.
It has, however, had an impact on how I view the methodology of purchasing a home. As some of you know, even a small additional payment every month included with your regular mortgage payment can shave months and years off the end of the loan, saving you thousands in interest payments. In general, most of us tend to believe that is a good thing … less debt equals better nights’ sleep.
But with the mortgage interest deduction in place and the opportunity to give less money to the federal government, why pay things off early?
Back in 2006, Roger Lowenstein wrote this for the New York Times magazine:
Addressing the National Association of Realtors in 1984, [President Reagan] said, “I want you to know that we will preserve the part of the American dream which the home-mortgage-interest deduction symbolizes.” He didn’t mention that it also symbolized the American love affair with debt; after all, it encourages people to pay for their homes with a mortgage instead of with equity.
I would tend to agree. And that’s a bit problematic for someone who looks at the soaring national debt as an expense issue more than an income issue.
From the same article …
More than 70 percent of tax filers don’t get any benefit from the deduction at all. O.K., many of them are renters. But even among homeowners, only about half claim the deduction. And for the 37 million individuals and couples who do, the rewards, at least on average, are surprisingly modest — just under $2,000 per return. (Figure it like this: the median home, as computed by the Bureau of the Census in 2003, is valued at $140,000. If you finance 80 percent of it with a 6 percent mortgage, your interest bill is $6,720 a year. A taxpayer in the 25 percent bracket would save one quarter, or $1,680.)
But cumulatively, the deduction is a big deal.
Report are the mortgage interest deduction will cost about $84 billion this year. That’s not exactly chump change.
America may be the land of opportunity but it also tends to be the land of sacred cows. We can’t touch Medicare, we can’t touch Social Security and, according to NAR, we can’t touch the mortgage interest deduction lest we destroy the housing industry as we know it.
At some point, though, something’s got to give. It’s the nature of a budget, something all of us seem to know individually.
There’s no question the loss of the mortgage interest deduction will cause some to change their thinking, and cause real estate investors to do some recalculation as they decide what next steps to take. Having said that, would it really cause Americans to lose interest in owning a home?
I’m rather hard pressed to believe it.
Your thoughts are welcome below.