Tuesday, November 16, 2010

Mortgage Interest Deduction re-visited.........

Steve Harney, a sage commenter on things real estate (see the
 KCM blog here), argues below for retaining the mortgage
interest deduction:

"It has been proven that home ownership is critically
important to American culture. A home is more than just a
financial investment. It is a parents’ investment in their
children. It is a family’s investment in their community. It is
the people’s investment in America. With housing attempting
to recover from its most trying time, it seems ludicrous to
remove one of the most enticing reasons to own a home."

"Even if we just look at this from a purely financial
perspective, it makes no sense. There are thousands of families
struggling to pay their mortgage every month. Many of these
homes are in a negative equity situation. Many in this situation
have already decided to strategically ‘walk-away’ from their
mortgage obligation. Others are sacrificing in different areas
of their families’ lives in order to continue to pay their
mortgage. Taking away the mortgage tax deduction could be
the straw that either financially or emotionally breaks that
camel’s back. How many new foreclosures will be created?
How will that impact the values of neighboring properties?
This makes no sense financially."

This is one of those cases where I have to respectfully disagree.

Several points, opinions actually:

    1.   The mortgage interest deduction is always appreciated
          in my household come April 15th.

    2.  The tax code is the "great manipulator" of human

    3.   Deductability of interest encourages and subsidizes debt.

     4.   Ever rising- rapidly rising- housing prices significantly
           jeopardize "the American dream of home ownership".

     5.   The subsidy from mortgage interest deductions has played
           a key role in the increase of housing prices, especially at
           the top end of the market.

This blog has consistently argued that the Realtor community's
unyielding defense of this "sacred cow" simply encourages the
defense of all sacred cows, thereby making structural changes to
a tax system that really, really, really needs structural change,
nigh unto impossible.

There is no better time than now. 

Will the elimination of the mortgage interest deductions lead to
more foreclosures?  My guess is some, but not many.
It is those folks whose income has been drastically reduced by
the recession who are most at risk of foreclosure.  A deduction
against income may be irrelevant in many of those cases.

Yes, there will be an impact on values. But what better time to
deal  with it?  Home prices are falling now. Buyer's are- at least
in our neighborhood - aware of this. They will only buy if they
perceive value.  Uncertainty clouds perceptions.

The economy will not greatly improve until all of the excesses of
the bubble years are wrung out of the market. The sooner we
get it over with, the sooner things will improve.

The greatest benefit to home owners, prospective home owners,
and the real estate industry will be the return of our economy
to a stable foundation that allows for sustainable growth.  A
stable foundation is not based on the Tax Code.

Given all the challenges facing the economy, it sure would be
refreshing to hear that the real estate industry is willing to take a
leadership role in solving some rather serious structural problems. 

Unyielding defense of the mortgage interest deduction will most
assuredly leave us with more of what we have now. 

It's that vision thing.

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