Housing advocates yesterday warned lawmakers during a Senate Finance Committee hearing that tinkering with the mortgage interest deduction would harm current home owners and make it harder for younger, middle-class families to buy homes.
At the hearing, “Tax Reform Options: Incentives for Home ownership,” industry experts weighed in on the importance of home owner incentives like the mortgage interest deduction.
Proposals to limit or remove the mortgage interest deduction have emerged from efforts to reduce the federal deficit by raising taxes. If the mortgage interest deduction was eliminated, the typical itemizing home owner could lose an average of $3,000 each year, according to data from the NATIONAL ASSOCIATION OF REALTORS®.
The Congressional Budget Office says getting rid of the mortgage interest deduction would generate $215 billion by 2021. President Obama has suggested paring back the mortgage interest deduction for home owners with incomes above $250,000.
NAR and other home ownership advocacy groups oppose the president’s plan. “We believe that any policy change that makes it harder to buy a home, or delays the purchase of the home until an older age, will have a significant long-term impact on household wealth accumulation and the make-up of the middle class as a whole,” National Association of Home Builders Economist Robert Dietz said in testimony before the Senate Finance Committee.
In the short term, tampering with the mortgage interest deduction would undermine an already fragile housing market and wreak havoc on the tenuous economic recovery by hurting housing demand, which would place downward pressure on home prices. In turn, this would leave more home owners underwater and trigger even more foreclosures, he said.
NAR President Ron Phipps, in a written statement, added that Congress shouldn’t be doing anything to harm the housing market. “While progress has been made recently in bringing stability to the housing market, it isn’t recovering at the rate it should be and is far too fragile to sustain any tax increases,” Phipps said. “Congress must do no harm; raising taxes on America’s home owners by changing the tax rules that apply to home ownership now or in the future will further stall the housing recovery and critically erode home values.”
Even those in favor of altering or eliminating the mortgage interest deduction warned the panel that changes needed to come slowly. “Any changes should happen only with the utmost care and significant transition periods,” said Sen. Orrin Hatch (R-Utah).
Retired Senator John Breaux, who chaired the President’s Advisory Panel on Federal Tax Reform during the Bush administration, told the committee to think carefully before doing anything that would affect housing market dynamics in a depressed housing market.
Richard Green, director of the University of Southern California’s Lusk Center for Real Estate suggested waiting until the housing market stabilized and Fannie Mae and Freddie Mac emerged from receivership before taking any action on the mortgage interest deduction.
The panel also discussed eliminating the mortgage deduction for second homes, something Dietz said could harm the local economy in second home and vacation markets.
“We aren’t just talking about well-known coastal markets, but also small towns in states such as Colorado, Florida, Maine, Michigan, New Hampshire, and Vermont,” said Dietz. “And nearly every state has areas with significant numbers of second homes; 49 states have a county where at least 10% of the housing stock consists of second homes.”