Killing Mortgage Interest Deduction Would Cause 10% Home-Equity Loss + Hurt First-Time Home Buyers

[Editor's note: 1031Gateway supports the efforts of groups like www.SaveThe1031.org, which is exposing the devastation this tax reform proposal would unleash on our economy and mobilizing Americans to make their opposition known to Congress in order to stop this bill. Please visit www.SaveThe1031.org and fill out their form to directly send individual letters to your representative and senators in Congress, urging them to fight for the 1031 exchange.]

"Technically, [the House GOP Tax Blueprint] would keep the mortgage interest deduction in place. But with such a high standard deduction, very few people would choose to itemize. That would kill the tax advantage of having a mortgage, leading home prices to fall. People who paid more than $24,000 a year in mortgage interest would still get some benefit from the deduction, meaning that the luxury housing market would be comparatively unaffected."

"...a recent analysis from a Federal Reserve Board economist suggested that killing the mortgage interest deduction entirely could cause a 6.9 percent average drop" in values.

"Let's say they fell less than half that much, by 3 percent. That would mean a $6,000 property value loss, equal to about 14 years' worth of the tax break they'd receive under the Ryan plan.

It gets worse, though. Houses tend to be heavily leveraged assets, so a small drop in value can erase a good chunk of a homeowner's equity. Let's say our hypothetical family owned 30 percent of their house, or had $60,000 in equity, with $140,000 on their mortgage. That 3 percent price drop would leave them with a $140,000 mortgage and $54,000 in equity—a 10 percent home-equity loss, all in exchange for a pretty meager tax cut.

That could have consequences for the rest of us, by the way. Economists have found a pretty strong “wealth effect” associated with housing: When prices go up, homeowners spend more; when prices drop, they spend less. A sudden contraction in the housing market can cause the whole economy to clam up."

"Some have suggested that lowering home prices a bit would be a good thing, especially for young buyers, since housing costs are absolutely insane in many parts of the country.

I think that's a bit optimistic. Falling home values might make down payments more affordable. But the Fed Board analysis I pointed to earlier suggests that if the mortgage deduction goes, first-time homebuyers will be hurt more long-term by the higher borrowing costs than they’ll be helped by lower prices"

"...we need to [reform the tax code] while minimizing the harm to homeowners who've made major financial decisions based on the current tax code."

"Yes, Homeowners Really Will Get Hosed by the Republican Tax Plan", Slate. Jordan Wiessmann.

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