Following our rant earlier this month, we were interested to see the article in the Sunday Times business section weighing in on the topic of the deductibility of mortgage interest:

It has long been an article of faith among policymakers that homeownership produces a big beneficial spillover to society at large. In the 1920’s, Herbert Hoover said a family that owned a home had “a more wholesome, healthful and happy atmosphere in which to bring up children.” Franklin Delano Roosevelt said that “a nation of homeowners is unconquerable.” The government’s use of tax incentives to encourage homeownership has a cost, however. The mortgage interest deduction and other subsidies will cost the government roughly $716 billion in lost taxes over the next five years, the president’s tax panel said. And the subsidy distorts incentives to invest, pulling money into housing from other parts of the economy. So, are Americans getting value for their money?

While there seems to be some agreement that home ownership is desirable, there are those that feel that we may be oversubsidizing it and that the subsidy may be having an adverse effect on inner cities where it could be widening the gap between rich and poor.
Buy a Home and Drag Society Down [NY Times]


What's Your Take? Leave a Comment

  1. It’s amazing how the collectivist mentality permeates many responses. There are so many aspiring central planners on this board. You all have the supposed answers that will solve “our” problems. Oh, well.

  2. More expensive homes would not get hit as hard as medium-priced home for the simple reasons that: 1) mortgage deduction is already capped at $1 mln (many higher priced homes change hands for all-cash deals, unlike medium-priced homes that almost always have a mortgage) and 2) the govt already reduces the mortgage deduction for very high income earners (all deductions are phased out the higher in income you go).

  3. I may not be typical, but the effects of eliminiating/capping the mortgage deduction might make me more likely to buy more house, not less.

    I own a townhouse now. This is a very simplified version of my real-world numbers, but suppose my house were worth $1M, I have a $300K mortgage on it, and I’m interested in a house that’s worth $1.5M. If I sold and bought today, I’d have $700K proceeds to put down (leaving out closing costs for simplicity’s sake) and would need a $800K mortgage on the new house.

    Say the tax changes bring down prices 25% acrosss the board. Now my house is worth $750K and the house I want to buy, $1.125M. With $450K proceeds, I’d now have a $675K mortgage after trading up. Granted, that mortgage would be less tax-advantaged, but I don’t think the difference would be enough to make me stay put.

    Obviously the calculation depends on a lot of things, such as one’s income and tax bracket, and whether prices really do decline across the board. But however well this hypothetical works, the point is that if higher-priced homes really do decline, I’m not sure that’s an incentive to buy less house, particularly if you already have less equity. Sure, it may make better sense to put the money elsewhere as an investment, but I’m not buying my house as an investment.