To generate revenue and decrease deficit, some want to curtail or halt mortgage-interest deduction
As the federal government grapples with the budget deficit, proposals have been made to change the tax code as a solution to generating increased tax revenues.
Included in those proposals has been to curtail or eliminate the mortgage interest deduction. And Santa Clarita Realtors and home-mortgage experts say they’ve lined up in support of the efforts to stop any changes from occurring.
The National Association of Home Builders, or NAHB, testified during a Senate Finance Committee hearing on tax-reform options Thursday that any move to alter the tax deduction would have a disproportionate impact on younger, middle-class families, who would see their ability to become homeowners significantly diminished.
“How housing is treated in any future tax reform will shape the economy going forward,” said Robert Dietz, an economist and assistant vice president for NAHB.
“We believe that any policy change that makes it harder to buy a home or delays the purchase of the home until an older age will have a significant long-term impact on household wealth accumulation, and the make-up of the middle class as a whole,” Dietz said.
Tampering with the mortgage interest deduction would undermine an already fragile housing market and wreak havoc on the tenuous economic recovery by hurting housing demand, which would place downward pressure on home prices, the organization said. The move would leave more homeowners underwater and trigger even more foreclosures.
Housing and real estate industry professionals and organizations have spent the past year rallying against any changes.
Chances of passing
Asking local real estate and home-mortgage experts how likely it is that Congress will eliminate the home-mortgage deduction, all agreed the chances are slim to none.
“The mortgage-interest deduction is one of those ‘third rail’ items, like touching Social Security or Medicare,” said Jeffrey Milat, mortgage loan consultant with Augusta Financial of Newhall.
“I don’t think it’s likely that this will pass,” Milat said.
While admitting Congress does need to find revenue to make a dent in the budget deficit, Robert Mickalson with Realty Executives Valencia agrees.
“I’m skeptical that they will eliminate the mortgage interest deduction, either all together or partially, especially before a 2012 election year,” Mickalson said. “It would amount to a tax increase for many Americans.”
Realtors Connor MacIvor and Dwight Hawkins agreed, and took slightly stronger positions.
“I hope it is less than the chances of a snowball surviving in hell,” said MacIvor of RE/MAX Realtors of Santa Clarita.
Local agents have worked hard to write letters and send emails, he said. Realtors are passionate about any attempt to change to the mortgage deduction.
“I don’t think Congress will do away with the deduction, as it would cost them their jobs,” said Dwight Hawkins with Realty Executives in Valencia.
If the deduction were eliminated, it would cause a tremendous dip in homeownership and prices, Hawkins said.
“I don’t see Congress eliminating the interest deduction,” said Mike Meena of Augusta Financial. “But, if they did, we would see a triple dip in real estate prices across the board in prices under $1.5 million.”
The mortgage-interest deduction helps clients qualify to buy homes, Milat said. Essentially, one-third of their payment is reimbursed by the lower taxes they end up paying.
What if?
But what if a mortgage-interest deduction were enacted? Local experts weighed in on what the impact to the market would be.
“If this legislation is passed, I would see a further deterioration in the condo market,” Milat said.
A lot of first-time buyers enter the housing market via condominiums, which have significant homeowner association fees, Milat said. Without the mortgage interest deduction to offset these, this segment of the market being negatively impacted.
As for the resale market, MacIvor estimates any change could affect as much as 50 percent of the market.
“In addition, I foresee rental and lease prices increasing due to the reduction of interested homebuyers,” MacIvor said.
Eliminating the mortgage interest deduction could significantly affect first-time homebuyers, who tend to have smaller down payments than seasoned homebuyers, Mickalson said.
In the early years of a loan, the majority of all amortized mortgage payments, goes to interest, he said.
“First-time homebuyers who are highly leveraged with a mortgage could be most impacted by the absence of a mortgage interest tax deduction, which works to reduce the effective mortgage payment,” Mickalson said.
If the mortgage interest-tax deduction is eliminated, however, Mickalson doesn’t believe it will deter most people from buying a home.
“I do believe, however, that it could lead homebuyers to consider purchasing less-expensive homes to offset the effective cost of owning a home, after tax benefits are considered,” he said.
Economic stimulus
Many people think government bailout money and loans when they hear the words “economic stimulus,” but when it comes to the new home and resale real estate market, jobs and money spent in local communities are at stake.
“Over 40 percent of my clients are investors who take into account the tax benefits of an investment,” said Sam Heller with Keller William VIP Properties in Santa Clarita.
And most residential clients ask their tax advisers about what the advantages of purchasing a home are before they even call a Realtor, he said.
Sales and property taxes help support local communities, paying amenities that improve the quality of life for Santa Clarita Valley residents.
New-home construction has been on life support for the past three years as scores of homes went into foreclosure or homeowners struggle to hang on to homes with underwater mortgages.
“I was in the advanced stages of building about 23 homes in Acton,” Heller said. “Last week, I canceled because it is obvious that the Congress lives in their own world.”
Canceling the project means no graders, surveyors, framers, roofers or plumbers, Heller said. Citing a domino effect, no new home also means fewer furniture manufacturers, delivery people, delivery trucks manufactured, salespeople and sales.
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