The problem isn’t that the mortgage interest deduction encourages home ownership, it’s that home ownership encouraged the interest deduction. The first suburbs were developed in the early 19th Century, as horse-drawn streetcars appeared. The development of electric streetcars in the 1880s stimulated develoipment of even more suburbs with more single-family housing. Remember, the federal income tax didn’t become law until 1913.
The 30-year, fixed-rate mortgage (and the tax advantages that came with it) wasn’t even introduced until the 1930s. After World War 2, the G.I. Bill guranteed low-interest mortgages to veterans. So it was the low cost of housing and the ability (whether by streetcar or automobile) to commute to work that led to suburban growth. Deductible interest was, if anything, a secondary factor.
There’s more to wanting to own a single-family home than just an interest deduction. Otherwise, condominium ownership levels would be much higher.
This is an argument against encouraging home ownership. Encouraging people to concentrate their wealth in a single, illiquid asset is a terrible idea. 2008 should be proof enough of that.
The home mortgage interest deduction has several strong negatives which I think greatly outweigh its positives.
It encourages people to purchase even more housing than they can afford - this is a phenomenon I’ve witnessed with my co-workers (nearly all of which jumped on the McMansion bandwagon in the 2000’s). I heard many of them openly claim that one of the main reasons they were buying a house that cost 4, 5, or even 6-7 times their annual gross income was due to the “tax write-off, baby!” There are people who make half what I do who bought houses which cost more than 5 times what my house did, and thanks to the housing bubble bursting they have a 6-figure negative net worth. If they lose their job, they’d be on the street in 6 months. But hey, everyone gets to see their awesome “snout house” in their New South Afrika Acres subdivision!
Which leads to the next point, which is by encouraging people to buy more house than they should be affording, they are forsaking other retirement plans and planning, betting everything on the incredibly risky policy of treating their house as a piggy bank. This also encourages a destructive community pattern of playing “abandon ship” at age 65, which causes neighborhoods and communities to suffer.
The home mortgage interest deduction is not fair to struggling lower-income people stuck in apartments.
If I were in charge, I’d eliminate the home mortgage credit within 5 years, dropping the deduction by 20% each year, and I would eliminate the property tax deduction on any house above $150,000 in value, scaling by inflation as time went on. I’d keep some of the savings to repay the enormous deficit, and apply some of it to help low-income folks find good housing. After a while we would finally see middle-class people saying things like “gee, maybe we really don’t need $10,000 granite countertops, walk-in cigar humidor, or a four-car garage with built-in car wash,” and ending the McMansion insanity.
I don’t get this point. With a mortgage interest deduction people can afford to buy more house than without it. I doubt this is the reason people buy more house than they can afford. These are two separate issues.
This is true with or without an interest deduction.
Almost 50% of households pay no income tax. How is an interest deduction unfair to lower-income people in apartments if they are paying zero income tax to start with?
My mortgage is small and I pay early each month, so my amount of interest paid is so low that I’ve never been able to take advantage of any deduction. I’ve always been pretty cynical about the whole thing as a giveaway to the wealthy.
When speaking about a particular policy that interferes with the free market, there is the term “market distortion” - it’s meant to suggest that the market is generally free, but that this particular policy is affecting that. Other aspects of the market may not be affected at all by that particular policy.
That might be so - but there’s no indication that the current federal mortgage interest deduction actually encourage home ownership.
The US is one of the few countries which allows deducting mortgage interest on private homes. However, the US home ownership rate is on par with other western countries. For example, the home ownership rate in Canada is about identical to that of the US - at around 68% for both (see this article by Fareed Zakaria from 18 months ago).
So if you’re in favour of a tax break that tends to favour the rich, you’ll have to come up with a better argument than it helps increase the rate of homeownerhip.
You barely get running water for a property under $150 in value. You definitely aren’t going to get granite countertops, a humidor, or a single car garage, much less a four car one.
While I can possibly see not ending the property tax deduction and the mortgage interest deduction for future home sales, I think that strategic default would become an even more attractive option if those deductions were taken away from current homeowners. The last thing that we need is for people who are already underwater and paying mostly interest to have one more reason to say “this isn’t worth it.”
With interest rates as low as they have been, the mortgage interest deduction is hardly the economic incentive that is driving people to buy too much house. :rolleyes: With mortgage interest rates on overage around 6% over the last decade, (even lower currently) the annual tax benefit on an extra $250,000 of house would only be approximately $3,750 a year (assuming a 25% tax bracket). Not really enough to justify an extra $1,500 a month in mortage payment.
But let me give an example. I recently helped change out a broken water heater in a condo. By “condo” I mean an “owned apartment”, one unit in a building of 12 such units. All the water heaters in the building were installed at the same time, and about 2/3 have failed this year. Because they are condos, each owner has to individually find a contractor and hire said contractor to replace each water heater as it fails.
Which, let me tell you, is all good for contractors looking for work in this economy.
It’s a bit more of a problem for the couple of senior citizens living on fixed incomes, though - one poor lady had to wait a week or two in order to get the money to replace her busted water heater.
Now, contrast that with a different, potential scenario.
The building is a 12 unit rental building. The management one day notices “Holy crap! All our old water heaters are failing!” Management finds a contractor to replace ALL of them, negotiates a group rate for new water heaters and labor, they’re all replaced within the same week, some even before they fail, for a lower total cost to do all the work in the entire building.
More efficient.
I could probably come up with more examples. And, admittedly, the residents of the 12-unite condo building could have united to do the same thing… except very often they don’t.
Maybe in crazy cuckoo land you can’t. Around here $150,000 homes just 5 minutes from our “tech corridor”, in zero-crime areas, which are perfectly nice, 3 BR and new appliances and finishings, sit vacant. I know - I live in one (well, OK, mine isn’t vacant because I live in it, duh).
Keep your rolleyes to yourself. First off, I reported that people told me they were doing it for that reason, and second, you set up a strawman argument with that extra $250,000 - I never mentioned an amount, only that it had an influence on it. Third, even with your strawman, it still has an influence.
Wonder why so many people suddenly get edgy when I propose getting rid of the deduction and helping out folks in general with housing assistance?
Let me lay my argument out in a language which I hope folks can understand, and hopefully this will reduce the brickbat swarm.
When I see my coworkers yammering about how they didn’t think they could afford McMansion X, which is going to get them granite countertops etc. before they got the mortgage deduction…something’s wrong in America.
When I know folks who are hard up this year, unemployed or not, who get no tax assistance or break for renting, and combine this thought with the thought of folks making $500,000 a year getting to claim a mortgage interest credit…something’s wrong in America.
IIRC the home mortgage deduction already has a cap on it - $1,000,000 in debt. How about instead of wiping it out, we reduce it to something more reasonable, such as the first $150,000? Or in a nod to amarinth, correct for State-average housing costs? And then apply the savings to the government to help low-income people, those facing foreclosure, just…shoot, help those who need it, rather than people like me and my coworkers who do not need it?
Yeah, my mom’s house is valued at $80k, and has huge square footage and three bedrooms. Now, granted, it has only one bathroom, the kitchen layout is horrible, and it leaks heat like a thermally-conductive sieve, but it definitely has running water.
For the moment I’ll concede your other points, but this one is just an example of rationalization. If your coworkers didn’t have an interest deduction, they’d brag about that really great deal on an ARM (ignoring the interest bump that will hit them in a year or two) or the great deal they negotiated or something else.
Something is wrong with America, but it’s an issue of buying more house than you need or can afford, with or without a subsidy.