With the federal budget deficit at the top of the congressional agenda, Congress has been making noises about eliminating the Mortgage Interest Deduction,(MID). Some economists who are in favor of eliminating the deduction say it could add some 470 billion dollars to federal government coffers, and would make a significant contribution to deficit reduction, while discouraging excessive borrowing of home equity.
On the other side of the argument is the National Association of Realtors, whose chief economist, Lawrence Yun stated during a recent MID conference, "it’s a misconception that only the wealthy benefit from the MID, when in reality it benefits primarily middle and lower income families. Almost two-thirds of those who claim the MID are middle-income earners and 91 percent of people who claim the MID earn less than $200,000 per year."
Yun also stated that “Doing away with the MID shouldn’t be thought of as removing a tax break for homeowners, but rather increasing taxes on the middle class,” he said. “Furthermore, housing equity has been a major source of funds for small businesses, and any change to the MID will greatly hamper their ability to create jobs.” (source realtor.org)
But a new report dated July 2011, published by the Reason Foundation, (who also attended the Mortgage Interest Deduction conference held by Mr. Yun and the National Association of Realtors), contends that the real truth is that the MID is not accessible to most first time home buyers and that there is no correlation in the housing data to show that the MID has any real impact in promoting additional home sales.
One reason cited in the report is the fact that the majority of lower income home buyers do not have enough income to itemize their taxes. The report states that only 33% of all tax filers actually itemized deductions on their 2009 tax returns. And 20% of those who did itemize their taxes in 2009 did not claim a mortgage interest deduction.
The report points out that only 25% of all income tax filers in 2009 claimed the MID. And those filers were in the higher income brackets, not the median and lower income groups that make up the majority of first time home buyers. The report further contends that the MID is used by higher income earners as a "housing subsidy" and benefits those with incomes above $200,000 per year. There is much more to this report. If you'd like to read the entire report, it's available here.
Well known economist Barry Ritholtz has also weighed in on this topic on his blog, at ritholtz.com. In an article titled "A Brief History Of The Mortgage Interest Deduction", he makes the following comment: "The deduction on interest was never intended to be a salve to the middle class. It was not designed to encourage home ownership. Indeed, when the interest rate deduction was first considered, home financing was non-existent, and home ownership was not thought of as a public policy. It is not part of any grand scheme of social engineering, as some have called it. It simply has existed since the Federal Income tax came about a century ago. Indeed, the entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible."
While the argument will likely continue to be a part of congressional deficit reduction negotiations, there is strong documented evidence that the Mortgage Interest Deduction is not essential to a housing recovery.
Reason.org contends in their report that the MID may have actually been one of the factors that contributed to the housing market melt-down, by allowing higher income earners to rationalize that borrowing more and more money against their homes was a good thing, when clearly, the higher levels of debt collateralized by home equity loans was a major cause of the increase in foreclosures which eventually snow-balled into the market melt-down.***