Mortgage Interest Deduction Is Great For Realtors, Not So Good For Homeowners

With all of the recent negotiations around the fiscal cliff scheme, one of the National Association of Realtor’s sacred cows has come under scrutiny.  We’re talking about the mortgage interest deduction of course.  Contrary to what the NAR might have you believe, the mortgage interest deduction is not necessarily beneficial for the average American homeowner.  The mortgage interest deduction provided $83 Billion in savings to taxpayers according to 2010 figures from the Reason Foundation.  A 2011 report from the Joint Committe on Taxation pegged the cost of the mortgage interest deduction at $96 billion per year for years of 2010-2014.  With only a quarter of all federal filers claiming the mortgage interest deduction, it begs the question of just who benefits from this popular program.

The mortgage interest deduction is undoubtedly popular in the White House.  It’s estimated Mr. Obama himself saved about $13,000 in taxes by virtue of a $47,564 interest expense on their $1.65 million dollar home in Chicago which the Obama’s purchased in 2005.  Obviously the President is aware of the benefits of the mortgage interest deduction.

The National Association of Realtors vigorously defends the mortgage interest deduction.  It’s part of NAR’s stated policy agenda, and NAR president, Gary Thomas, recently chimed in on the issue.

“Until Congress introduces specific legislation, there’s nothing to say about any proposed changes to the mortgage interest deduction…“However, it has always been the N.A.R.’s position that the mortgage interest deduction is vital to the stability of the American housing market and economy, and we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest.”

The Reason Foundation’s effort to unmask the mortgage interest deduction provides an interesting look into the flaws of our current housing policy and our increasingly financialized economy.  While the deduction of mortgage interest is advertised by many as a good reason to own a home, very few homeowners bother to look at the actual numbers and see if the terms they are entering into will actually benefit their bottom line.  As the Reason study suggests, the benefits of the deduction are affected by a variety of factors.  Not surprisingly, income levels and age seem to have the biggest impact on the mortgage interest deduction.  Higher income families receive the largest benefit from the deduction because they tend to fall into a higher tax bracket.  Similarly, older taxpayers, particularly those 65 and over, receive little benefit from the deduction because they have usually paid down or paid off their mortgage.

Here’s another highlight from the Reason Foundation study:

“Clearly, how one measures “tax savings” has a substantial impact in determining how much benefit the MID provides. Taxpayers earning $45,000 a year save only $114 a year from taking the MID, compared to $746 for those earning $150,000. However, those lower income taxpayers get a tax savings of 9 percent, compared to only 6 percent for the higher income earners. So for low-income households that qualify for the MID, there will be a slightly higher impact on behavior.”

I particularly like the reference to behavior.  I think this impact on behavior is one of the key reason’s the mortgage interest deduction has survived as long as it has.  Consumers have proven to be less than logical when it comes to decisions impacting their finances, and home ownership still has a firm hold on the American psyche. I have no doubt that the allure of the mortgage interest deduction has persuaded more than a few home buyers to take out mortgages that were beyond their means.  Call it another example of buyer’s remorse if you will.

Another argument against eliminating the mortgage interest deduction is that it will cause home prices to fall and sink an already fragile housing recovery.  Again, the NAR is only surmising a guess, and we’ve seen how good their economists are at accurate predictions.  They completely missed the housing collapse, touting the benefits of buying a home even while the housing market was about to crater.  The NAR apparently doesn’t want to acknowledge the Reason Foundation study, or the sales data from other developed nations which don’t offer a mortgage interest deduction and have similar home ownership rates.  Canada is one such example.  Recent Canadian home prices also demonstrate you can have a perfectly good housing bubble without a deduction for mortgage interest.  LOL!

The evidence shows that the mortgage interest deduction benefits wealthy home owners the most, particularly those who have large home mortgages.  Banks and the National Association of Realtors Benefit from the mortgage interest deduction because it helps support higher home prices, even if that means making homes less affordable for average Americans. In our overly financialized economy, the mortgage interest deduction provides a convenient policy tool to promote home ownership while also helping to push the volume of financial transactions higher.  It’s another relic of our consumer-crazed debt-based cuture.  Charles Hugh Smith might call it a symptom of a previously successful model which has now become unsustainable.

The unfortunate truth is that our leaders have made promises they can’t keep.  They knew the promises would be broken when they made them, but now that some of their more affluent constituents might end up paying to keep only a handful of the promises intact, the federal budget deficit is all the rage in the Washington/Wall Street circles.  Now everyone is supposed to demonstrate shared sacrifice.  That’s what capitalist pigs like Mr. Blankfein would have you believe anyway.  I find all the drama about the supposed fiscal cliff to be rather self-serving.  Funny, I don’t remember these CEO’s offering up their bonuses for the past few years, and they were all too eager to accept  handouts from the Fed and Treasury to help balloon the deficit.   In an ideal world, I would rather see a concerted effort on the part of government to to unmask the shadow banking system and the $trillions in offshore tax havens instead of all the fuss over the mortgage interest deduction. We could plug the federal budget deficit overnight by closing the loopholes of blind trusts, shell corporations and secret jurisdictions that siphon money out of the real economy.  It never hurts to dream, Right?

As a practicing Realtor in the real world I’d like to see the mortgage interest deduction continued, but modified to align with new goals of fiscal prudence.  We need to be assisting working class and middle class families in any manner possible. I could also make a perfectly valid case for why the mortgage interest deduction has outlived its useful purpose.  The evidence suggests most American home owners would do just fine without it.  Just don’t try telling that to the National Association of Realtors.  As Upton Sinclair once said, “It’s difficult to get a man to understand something when his salary depends upon his not understanding it.”