Here’s a way to bring down high housing prices by 10 percent nationwide: Eliminate the mortgage interest tax deduction.
Okay, that wasn’t exactly the point that Lawrence Yun was trying to make during a homeownership forum at the U.S. Department of Housing and Urban Development on Thursday. The chief economist for the National Association of Realtors, Yun came out strongly in favor of the mortgage interest deduction when a question touched on the subject. In fact, he said that eliminating the deduction would lead to “home value destruction of 10 percent.”
That sounds bad! But there’s a less dire way to frame such an apocalyptic scenario. Right now, homeowners can expect a generous payout from the federal government, courtesy their fellow taxpayers, for as long as they pay for a mortgage. Their good fortune translates into higher costs for renters and would-be homeowners. So, striking the mortgage interest deduction could also be read as making homes 10 percent more affordable.
Eliminating the mortgage interest deduction would also mean extending a benefit to the majority that, under the current dispensation, flows to the minority. Most households (70 percent) do not benefit from the mortgage interest deduction. Those that do tend to be stable, high-income households. And they simply don’t need government support.
That’s why United for Homes—a coalition of some 2,300 different national and state member organizations, led by the National Low Income Housing Coalition—is lobbying Congress to make the $70 billion mortgage interest deduction the tip of the spear in any tax reform effort. United for Homes supports a two-prong plan for reforming the reduction: First, reduce the amount of a mortgage eligible for the deduction from $1 million to $500,000. (The Wall Street Journal editorial board calls for an even lower cap of $250,000.) Second, convert the deduction to a tax credit, thereby adding another 15 million homeowners to the ranks of the lucky duckies.
But if the mortgage interest deduction is truly the motor oil greasing the “engine of American inequality,” as Matthew Desmond wrote in The New York Times Magazine, why not scrap the whole thing altogether? The problem, of course, with taking a government handout away from the rich is that it will enrage the rich, who will rush to fund and elect candidates in races against incumbents who stood by and did nothing as Congress redistributed their Free Parking money.
“I would just like to reframe it as, ‘Homeownership for who?’” Christie Peale, executive director for the Center for New York City Neighborhoods, explained at the HUD forum. “The majority of the folks that we work with don't itemize on their taxes and so they're not able to take advantage of the mortgage interest deduction. When we have this conversation, I think it's really important to be clear about who's able to really leverage that resource.”
Peale added, “If we're really trying to get people into affordable homeownership, we can change the way that we're doing that contract so that it's easier, more accessible, for folks to get maybe a tax credit instead of the MID.”
Any effort to reform the mortgage interest deduction would need to be gradual: fractional steps over a long time horizon. Not just to avoid the economic trauma of stripping some 10 percent of the value out of people’s homes, but to prevent political fallout. Tax reform of any sort still seems like a long ways off for the unpopular GOP Congress and the embattled Trump administration. And dislodging the mortgage interest deduction may not be a part of that process under any circumstances. A House Committee on Ways and Means hearing on tax reform last month didn’t even broach the subject. The Trump administration has already proposed eliminating the National Housing Trust Fund, one of the mechanisms by which the gains of high-income homeowners could be spread to low-income renters, per the United for Homes proposal to reinvest the savings produced by the reform.
As it works now, the deduction is a tilted benefit, generationally and geographically. Homeowners in high-cost, high-income California corridors recouped about 20 percent of the national aggregate benefit of the deduction in 1999, according to a 2004 paper released by the National Bureau of Economic Research. For wealthier, older homeowners who have already won the game of life, reforming the mortgage interest deduction might indeed look like the destruction of their wealth. This is a potential predicament for retirement security: The percentage of homeowners ages 65 and older who still carry mortgage debt has shot up from 22 percent in 2001 to 30 percent in 2011, according to the Consumer Financial Protection Bureau. For homeowners 75 and older, that figure nearly tripled, rising from 8 percent to 21 percent. However, as this AARP memo explains, the mortgage interest deduction is of dwindling importance for most retirees, since homeowners who are farther along into their mortgages are paying less in interest, and therefore would receive less support in the form of a deduction.
If you’re a wealthy homeowner in a high-price housing markets, the mortgage interest deduction is a great deal, which explains why Treasury Secretary Steven Mnuchin affirmed in March that it’s not going anywhere. That’s too bad for the other 70 percent of Americans who have to pay for it.
This post has been updated.