As the President and Congress attempt to avoid the “fiscal cliff” scheduled to take effect a week from today, most leading housing economists and housing experts believe only high end housing prices would suffer if the mortgage interest deduction were limited to mortgages of $500,000 or less and eliminated for interest paid on second mortgages for second homes, a possibility in the final negotiations to avoid the fiscal cliff.
In a survey of 105 economists, real estate experts and investment and market strategists conducted by Pulsenomics LLC for Zillow, Inc. during the first two weeks of December, some 55 percent said cutting the deduction on mortgages over $500,000 and eliminating second home mortgage interest altogether would have little to no near-term impact on overall home prices and 42 percent said it would have a moderate impact. Among higher priced homes, 84 percent said restricting the deduction to mortgages less than $500,000 would have a moderate or serious impact on prices.
The mortgage interest deduction saved taxpayers $82.7 billion in 2010, the latest data available. For the past two budgetary cycles, the Obama Administration has recommended limiting the MID to taxpayers making less than $250,000 a year. President Obama’s deficit commission proposed lowering the limit on mortgage principal eligible for a deduction to $500,000 from the current $1 million, removing any break for interest on a second home and turning the deduction into a tax credit capped at 12 percent of interest paid.
According to the Joint Committee on Taxation, a congressional committee, households making $100,000 or more a year constitute 54.9 percent of those claiming the MID, and they receive 78 percent of the deduction’s total benefits. Only 32.6 percent of income tax returns in 2010 had any itemized deductions, and 20.8 percent of those did not claim any mortgage interest. As a result, just 22.9 percent of tax filers used the MID in 2010. This has been a relatively stable historical trend, with between 21 and 26 percent of taxpayers claiming the MID each year since 1991.
The Zillow survey did not ask economists their view of reducing the income level eligible to qualify for the deduction, but rather to consider limiting the size of the mortgage. The survey also asked their views on capping all itemized deductions, including the MID, at $25,000 per year; and eliminating the MID over a multi-year period. Eliminating the MID entirely was seen to have the biggest negative impact on high-end home prices over the long-term, with 70 percent of respondents saying they expected such prices to fall moderately or significantly under such a scenario.
“If adopted, any measure to limit or repeal the MID will result in distinct price impacts over time and by market segment, and our survey data are consistent with this view,” said Pulsenomics Founder Terry Loebs. “For example, in the event that the maximum MID-eligible mortgage amount is reduced from $1 million to $500,000 and the deduction allowance for second homes is eliminated - an ingredient of the Simpson-Bowles proposal - the majority of respondents expect high-end home prices to fall while U.S. home prices overall experience little or no price impact.”