Mortgage Tax Deduction Myths
May 18th, 2010 - 24 Comments
Recently on Just Listed, the news website of the Pennsylvania Association of REALTORS, Smeal’s Austin Jaffe outlined eight myths about the mortgage interest tax deduction. They are:
1. The deductibility of mortgage interest is relatively recent in origin.
2. The current system treats all borrowers the same.
3. The current system, by providing tax deductions for borrowers, makes housing a good investment.
4. The current system helps young homeowners via the mortgage deduction.
5. The deduction of mortgage interest is a worldwide phenomenon.
6. Deducting mortgage interest is a stabilizing force in housing markets.
7. The mortgage interest deduction is the largest tax break available to households.
8. New proposals in Congress will limit or eliminate the mortgage deduction.
Read more about these myths in Jaffe’s post on Just Listed.
Tags: Jaffe, Real Estate, Taxes
This entry was posted on Tuesday, May 18th, 2010 at 12:08 pm and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.24 Responses to “Mortgage Tax Deduction Myths”
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While these are good academic points, home ownership has generated the greatest personal wealth for the median American citizen. Where else can the common man get 20 to 1 (or even 5 to 1) leverage at fixed low long-term interest rates (… with the ability to walk away from the deal if it doesn’t work …) when you have to pay the “imputed rent of homeowners” in any event!
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Even if you ignore the deductability of interest & property taxes, home ownership is generally an outstanding long-term investment!
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… and I’m not even a Realtor saying this …
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John,
While I am not sure what a good “academic point” is, home ownership as a wealth generator is definitely under question these days. Consider the multitude of sub prime borrowers who had no business owning more housing than they ever could afford and then borrowed more and more. I think it is fair to say that mortgage finance provided households with effective vehicles to SAVE. It is the saving opportunities that are valuable for wealth accumulation to be sure.
Re: Leverage. We have witnessed the damage that leverage can do especially at high LTV rates. The problem is that from 1995 until 2006, home prices rose at unprecedented rates as the bubble was forming. After 2006, prices were in free fall. In a longer, historical perspective, housing has proven to be no better an investment than any other asset, perhaps worse where the supply of housing was easily expanded. Long-term, we should expect housing to be an average investment at best. Real estate is no longer the religion it used to be!
These are not my opinions; these are the results of what the real-world data tell us. One should not expect much appreciation in the years ahead either: the forecasts are for very low or no appreciation for several years.
AJJ
Austin,
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I was wondering if anyone would jump on my “lack of commitment” remark …
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For the past few months, I’ve been wondering whether the historical analogy for our times can be found in 1975 (exiting a deep recession) or 1933 (after the initial crash, but before the long, deep decline). I’ve been leaning toward 1933. In light of that … I can’t be too optimistic about any investment!
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EVERYONE should only buy what they can afford … and only enter into long term commitments when they are sure that they can honor those commitments. People are labeled “sub-prime” because they buy what they can’t afford and do not have the personal integrity to honor their financial commitments. Perhaps they are victims of a lack of personal financial education … educators, are you listening???
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Housing is, after all, a relatively illiquid investment that you need to be committed to for the long term. The transaction costs of selling real estate are significant!
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At the same time, if you have secure employment and manage your personal affairs responsibility, this could be a good time to buy … as there is definitely blood in the streets … though there could be rivers of blood yet to come.
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My daughter and her husband recently bought a three bedroom house close to Cornell University’s campus … with their monthly payments slightly higher than the two bedroom apartment that they were renting … after getting significant price concessions from the seller. They feel that the location of this property will help retain the purchase price they paid … and the government subsidy (first time home buyer tax credit) covered most of the down payment.
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Before their purchase, I counseled them on my 1933 perspectives. They could qualify individually on either of their incomes … which appear to be secure for at least the next 5 years. With the tax credit, they have a very small amount of principal tied up in the transaction. The benefits of the additional space outweighed the risk of any additional loss of equity possible in a continued decline. If the government uses inflation as a way of neutralizing its debt, it could become a very good deal for them with their 30 year mortgage fixed at less that 5%.
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After all … stocks have remained flat over the past 10 years … and are plummeting below that level as I write this. You can’t live in your stocks!
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Your observation of “worse where the supply of housing was easily expanded” is the most significant in my opinion. It should always be mentioned in the same breath as “location, location, location” by every Realtor. Individual real estate marketplaces must be evaluated on their individual merits.
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I’ve recently driven through the suburbs North of Atlanta … where there is a new office and residential development “over every hill”. The only problem is that “there were too many hills” … with lots of “see through” office buildings and abandoned homes.
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This a sharp contract to my home market of Northern New Jersey, where “there is no new land” … and residential prices have held more constant. In commercial space, we’ve changed our tenant profile from having a few large tenants to renting individual offices and have filled our office space at higher effective rents.
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I can’t speak for others, but for me, my home and commercial real estate has been the best performing part of my individual investment portfolio … though in the short term, the road will be bumpy for all investments!
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We live here in California, I remember in 2003 that I did not read the newspapers for few weeks and one day when I was reading the real estate section, I realized that the prices of homes have increased sharply, to me the prices that I was aware of seemed like old history. With that sudden increase in prices, everyone we know who did not have a house was looking for a house, still the prices were not as high as in 2005 and 2006. During this period people would line up and for a condo the price difference between the first in line and the 5th in line can reach 15,000 to 25,000 in a condo with a time difference of 30 minutes. This recession was made by so many people, not only the sub-prime mortgage lenders but also by builders and developers who got used to inflating the price every few seconds, add to that real estate professionals who were flipping homes and the end result is a catastrophe in US in general and in California in particular. That lesson should be taught and never forgotten.
I hate when people use the “I” word to describe a primary residence purchase. The 1st thought should be to purchase a dwelling in an area you are comfortable living in for an extended period of time. Most of these so called investors don’t even crunch the numbers before pulling the trigger. Real investor would worry about paint color and proximity to local fares. Primary residence is a shelter 1st. I’m helping homeowner Short Sale homes in New Orleans because of the investment mentality.
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.
@John Meyers
I respect a man who can come right out and say “with the ability to walk away from the deal if it doesn’t work.”
North of the Border in Canada, Canada Mortgage and Housing Corporation, who insures mortgages with downpayments less than 20%, has started to go after borrowers for damages. Albeit, our collapse had house prices drop only 10-15% from the peak in some of the worst hit areas of Canada.
Totally agreed! Wiping out the interest deduction is absurd.
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