The Mortgage Interest Tax Deduction Sacred Cow

Yesterday at 3:30 pm MST I received an email with an all-ready-to-roll call-to-action campaign designed to blitz Washington DC with the sound of reason. The cause at hand: the mortgage interest tax deduction was on the fiscal responsibility chopping block. Sparing you the details of how to turn into a human robo-phone, here’s the pitch to call:

“I’m disappointed that anyone in Congress — or on a Presidential Commission — would even suggest limits to the Mortgage Interest Deduction. Mortgage interest has been deductible for nearly 100 years, and the proposed changes will affect all 75 million home owners in the United States. We must act now to make sure the MID is not changed.

“Ever since the Deficit Commission announced its conclusions, the news media have been buzzing about the report. And what do they emphasize? Proposals to limit or even eliminate the Mortgage Interest Deduction. I’m concerned because all this does is scare the public — and potential buyers — away from the housing market. The last thing the housing industry needs right now (and for the foreseeable future) is another bucket of ice water to be thrown on the market. People who hear these news reports don’t differentiate between a proposal and a done deal. They just know that a tax provision they actually understand and rely on is under siege. This is just unacceptable.”

Well, what is this proposal that will “affect all 75 million home owners in the United States?” It would roll back the mortgage interest tax deduction for non-primary residence loans, home equity loans, and mortgages in excess of… $500,000.

This fashionable 59 year-old Frenchman could get a job emailing me. But that would be work. And he's not doing that again in 11 months.

Yep, $500,000 primary residence loans still get a mortgage tax deduction. Last I checked, that’s the MAJORITY of mortgages in the United States and the SUPER MAJORITY of mortgages presently being issued in the present market. What is so incredibly disappointing is that this is exactly the type of  hyperbole from the real estate industry that got America into the real estate mess 4 years ago (“buy now or be shut out forever”… rue those words and please learn from them!). Instead of focusing on the really central issues effecting real estate markets (uh, like trust, hoped-for futures, job creation), or even better, taking a position of fiscally responsible leadership, the NAR argument is essentially “don’t throw coldwater on the already unenthusiastic.” It’s like saying “stop reporting negative economic news, even if it’s true.” Instead, an email blitz equivalent of French Pensioners complaining that they can’t retire until their 62 shows up in 1.1 million inboxes.

If the consumer really knew the costs and the ins-&-outs of the mortgage interest tax deduction, seeing it used to carve up the deficit might actually make consumers enthusiastic.

Your over $500,000 Mortgage Interest Deduction? That's right. It's Toasted.

The reason for this post is twofold. One, I need a creative outlet to vent my frustration that NAR is such an enormously powerful lobbying organization and this is how it blows it’s trust asset with the public: by whining about a sacred cow that is projected to cost the American public $131 billion in 2012. I for one think that strategy will backfire in building consumer trust for a profession that requires huge amounts of trust. The second reason is that your mortgage interest tax deduction is probably safe, and that MID annually costs our government about what each year cost in Iraq. The seven-year commitment in Iraq cost $751 billion. Those quick on your toes can figure out that the mortgage tax deduction costs more on an annual basis then the most expensive war operation ever mounted in world history. Simpson and Bowles are intellectually bankrupt NOT to suggest cutting the MID. The budget for all of HUD in 2011 is around $45 billion. As far as fiscal responsibility, the MID is the fatted cow. With a phased-in implementation, this is one of the most logical line items in the government’s budget to attack.

Thus the phone blitzkrieg on Washington from the special interest group I have membership in.

The argument that it will dampen sales is 1.) dumb and 2.) false. NAR’s own data proves it is false. Last year, 47% of all buyers were first-time buyers. The average age of a first-time buyer was 30 years old. These are young pups on their third or fourth career already. Think about that for a second. The average 30 year-old is on their 3rd full career. Seven years out of college, three major work changes. Now, when polled how long they thought they would live in their home they responded on average, that they planned on 10 years of life in that home. Ten years is bordering on an eternal length of time for any 30-something. Does this tell us that the 30-something has eyes focused on only the now, or just as much on the future? The future is just as important to this 30-year old, and a bankrupt nation impacts that future pretty significantly. In today’s market, they are 47% of all buyers, and, less than 1% of them had mortgages over $500,000. The majority of repeat buyers expected to live in their home 15 years. Less than 5% obtained mortgages in excess of $500,000. Sounds like that market isn’t drying up anytime soon.

The reason people are not buying homes is because they do not see the future clearly. Another name for this is: fear. I am not so cynically wrapped up in my profession to think that the average consumer equates some rich person’s loss of their mortgage interest tax deduction to the same kind of fear that surrounds their job, their career, their kid’s school district, their ineffective city government, or the rat-infested foreclosed home next door. We are at the point where the economic ideas to buy can not get any better: Colorado Springs is down 17% from peak, home buyers today have 28% more money leverage due to interest rate declines then they did at the peak of the blistering market in June 2006. That means buyers have 45% more power, have desperate sellers in some cases and 4800 single family homes to choose from during the low-tide of inventory known as December. That’s the economics of the situation. The data says buying is logical. The reason people are not buying is not illogical. It is fear. What keeps people from buying are the broken fundamentals of the economy: trust, a clearer future, job creation. Actions that get the country going in the right direction help everyone. Without getting political, a fair-shake rebuilds trust. Slashing the national debt improves the future. Trust and future give employers reasons to hire.

Okay, but it throws icewater on the high-end recovery, at least in the short-term, right? Again, not necessarily true. There is math and then there is dumb math. Buying a house and paying interest on a debt to obtain a $0.30 on the dollar tax credit is stupid. It doesn’t make any fiscal sense. “Hi, I paid $40,000 in mortgage debt this year. I could have paid $30,000. But I paid $40,000. So give me my $12,000 in tax credit.” Yeah, it’s nice, and it is a benefit of homeownership, but that above math doesn’t make sense. Counseling people to defend their right to participate in dumb math sounds a bit, um, well, devious is not the right word, but not exactly above board. It sort of reminds me of the first episodes of Mad Men when they’re working on the Pall Mall account and can no longer advertise that they are healthful tobacco products and come up with “it’s toasted.” That’s why the over $500,000 mortgages will be exempt. Cut those numbers in half: still valid. The majority of Americans with mortgages have less than $500,000 mortgages. Since this is in the proposal phase, I’d be willing to bet that they also account for the pricey Northeast, CA and WA and make corresponding adjustments for conforming loan limits just as jumbo loans are $417,001 in CO, but over $700,000 in these pricey areas.

But the icing on the cake is this: the rich are coming back on their own, and to prove they don’t give a rip about the mortgage interest deduction (or perhaps they’re rich because they’re smart and they see the numbered days for the MID), they’re paying cash. Crazy market stat: at the end of the hyped-up financing run in 2007, there were 27 million dollar MLS sales in the PPAR MLS in 3rd quarter. Six of those were cash. This was the last quarter of easy, stupid, money, adjustable, interest-only, piggyback 2nds on everything died a quick, ruthless death in September, 2007 and Jumbo loan rates went up 2% overnight shutting down the market for cheap cash on McMansions. Interestingly, unemployment locally then was around 4%. Third quarter of 2010 saw 12 million dollar MLS sales in the PPAR MLS and how many were cash? Seven. That’s only one more than than the same quarter three years prior, but on a percentage basis was twice as large. Unemployment now locally is over 9%. Anecdotal information, a colleague at Selley Group builds high-end homes, with an average price of over $700,000. He has seven contracts over $700,000 in the last 90 days… everyone of them cash.  My point is: there is no mortgage interest deduction for any of these cash buyers… because there’s no mortgage. If NAR wanted to get the high-end really rolling, a “cash is sexy” campaign might be more effective than browbeating about the possible demise of the MID.

The only way out of this economic mess is if consumer activity begins to churn on it’s own two feet, if everyone acts cooperatively to help the big three goals of economic activity get a move-on (trust, clearer future, job creation), and those that are in a position of influence and education use their gifts accordingly. Encouraging dumb math as a way out of the recession when it favors only your profession doesn’t help. If anyone should be freaking out about the Simpson-Bowles recommendations it’s the accounting profession. Hand in hand with the MID ideas are lowering the tax rates and creating only three tax brackets so that lucrative deductions can be removed from returns. Yeah, common sense ideas like simplifying the tax code and not spending money in order to get it back on deduction (hmmm, is there a pattern here?) is prevalent in these bipartisan brainstorms. Thoughtfully examining the proposals en masse might be a service to ourselves and our constituents.

But I admit… it would be fun to prance around in Che Guevara t-shirts waving red flags with slogans painted on our pants.

One response to “The Mortgage Interest Tax Deduction Sacred Cow

  1. If the mortgage deduction is eliminated the motivation to own a home would fall, especially where home values are not appreciating. Special interest groups will oppose even the smallest change.

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