Eliminating the Mortgage Interest Deduction: Much Ado About Nothing

Obama's new commission on reducing the debt, The National Commission on Fiscal Responsibility and Reform, have voted not to send their proposals to Congress. The bipartisan committee has put together a proposal to save $4 trillion over 10 years, but only 11 out of the 18 members voted to pass it through. The proposal would have been presented to Congress had 14 of the members were to approve. The report was released at the first of December and is only 66 pages.

The plan called for elimination several tax deductions, cutting social security (or raising the age), raising gas tax (15%), cutting Medicare by $400 billion and discretionary spending by over $1.6 trillion by 2020. Among the tax deductions to go is the mortgage interest deduction, which allows homeowners to deduct their interest payments on their mortgage from their taxable income. The proposal is to turn it into a tax credit with a cap on eligible mortgages at $500,000 and eliminating tax benefits for home equity loans and second homes

NAR, the National Association of Realtors, has responded to this proposal saying that the interest deduction is fundamental to the stability of the already ailing housing market. However, proponents of this say that lower income homeowners and the government will be able to save tons of money over time.

Currently, if individual taxpayers itemize their deductions they can deduct their interest payment on mortgages of up to $1MM for their first and second home as well as for their home equity loans up to $100,000. Most people who itemize their taxes tend to be wealthier people while most in the lower middle and lower will go with the standard deduction. With the Bush tax cuts for the wealthy on the chopping board, understandably the wealthy can be seen as targeted, but like it or not, the middle class can use all the help it can get right now. By converting the mortgage interest deduction to a tax nonrefundable 12% tax credit, everyone would be able to take advantage of this savings (you don't have to itemize as you would to receive your deduction). Also, cutting the mortgage interest to $500,000 instead of $1MM could leave some richer people with a larger tax bill.

Still, like it or not, the mortgage interest deduction has not been paramount in people making the decision to buy a home, so demand would not be directly affected. US wide last quarter shows a 2% drop in home prices. In San Diego, home prices grew from last month however volume was way down which indicates a future market downturn. If the deduction were to turn into a credit it would surely affect higher priced houses more than lower priced house. In San Diego, 75% of the volume we are experiencing are for homes under $500,000, so the more expensive homes would be devalued even more so than they already are from lack of demand but this may be good news for the majority of home values.

Anyway, this is all much ado about nothing because its not going to pass anytime soon, not while Republicans have the house anyway. Even if it did pass, I do not think there is much to worry about, buy within your means and get educated on your tax breaks and benefits from home ownership. Know what you are getting yourself into.