We have to admit we’ve been trying our best to block out the news over recent weeks of President Bush’s proposal to do away with the home mortgage deduction–we get a pit in our stomach whenever we think about it. Like many recent purchasers of homes in hot coastal markets (which, by no coincidence are teeming with Liberals), elimination of this tax break would have a fairly drastic effect on our ability to stay in our home.

The pundits are talking about how such a change would bring home values down by 10-20%, but we think they are only taking into consideration the change in demand; in markets like New York, where many people have stretched over recent years to buy a home, the result could be much more dramatic on the supply side, as thousands of families could find themselves in the position of being forced sellers. The definitions of “rich” used to set the minimum hurdle rates for the small deductible portion of a mortgage that would remain are woefully out-of-whack with reality in cities like New York where most people spending $1 million on a home are far from wealthy. The larger impact on the economy–from a decline in real estate tax revenue to population decline–could be devastating under that scenario.

Let’s say someone earning $180,000 a year ($15,000 a month pre-tax, maybe $9,000 a month after) purchased a house at some point in the last few years for $1,250,000, putting down $250,000 and taking a $1 million mortgage. Let’s also say she’d gotten a 6%, 30-year mortgage, making her monthly payment roughly $6,000. For the sake of simplicity, let’s say taxes and maintenance, etc., add up to another $1,000.) Under current rules, her after-tax housing expense would be more like $5,000 than $7,000; the proportions get even more extreme if she has some rental income–maybe $3,500 versus $5,500. The difference in what’s left over to pay for groceries, utilities, tuitions, etc. is $5,500 versus $3,500–huge when you’re talking about a family of 4 or 5.

Now, we don’t think there’s any defensible intellectual reason that home ownership should enjoy the privileged status it does in our tax code, but to change the rules of the game at this point when millions of people have made the largest financial decision of their lives based on one set of ground rules would be a bait-and-switch of monster proportions. Some experts say the chances of these changes getting through are low, but, in the meantime, we’re going to have to go back to living in denial. The alternative is too much of a downer.

Goodbye, My Sweet Deduction [NY Times]