Our readers are divided over how eliminating the mortgage interest tax deduction (MID) will impact home prices, according to our recent poll. Nearly half of voters — 45% — believe prices will decrease but eventually level out, while 42% think home prices will continue to decrease over time. Only 14% voted home prices will be unaffected by removing the MID.
Thus, while a combined 87% agree MID elimination will cause home prices to decrease, readers are undecided on the long-term pricing trajectory.
The MID’s inequitable benefits
The MID was enacted to encourage homeownership by subsidizing low- to middle-income homeowners through a tax deduction on interest paid on mortgages, called qualified interest. Mortgage interest is deductible from income as an itemized expense when the mortgage:
- funded the purchase price or paid for the cost of improvements to the owner’s principal residence or second home; and
- is secured by either the owner’s principal residence or second home. [Internal Revenue Code §163(h)]
Proponents in the real estate industry hold the MID in high esteem, claiming it is a critical tax law that achieves its goal of ensuring the affordability of homes.
However, despite the MID’s largely positive reputation, the tax law has been known to disproportionately benefit high-income homeowners, sellers and lenders, rather than the low- and middle-income homeowners it was meant to assist. Further, the MID has been shown to contribute to income inequality, as it favors and is primarily claimed by wealthy homeowners.
How does the MID disproportionately benefit wealthy homeowners, sellers and lenders?
First, claiming the MID requires a homeowner to itemize their deductions — a type of tax filing used only when the homeowner’s income and total deductions are high enough to outweigh the benefits of claiming a standard deduction. Low- and middle-income homeowners whose incomes cannot support a larger mortgage amount typically do not itemize their deductions and, thus, lose out on the benefits of the MID.
The basic rule for the MID is: the wealthier the homeowner, the more home they purchase, the bigger the tax savings.
Second, the MID encourages homeowners to increase the mortgage amount they are willing to take on in the hopes of reducing their financial burden through a tax deduction. However, most of these homeowners never claim the deduction at all, instead passing the benefits onto lenders and sellers through inflated mortgage principals.
The MID and home prices
While the MID acts as a tax savings for the wealthy, it simultaneously baits homeowners to overextend their finances to replace the lost revenue. The MID thus inflates home prices, increasing the amounts both lenders and sellers receive on a sale.
Rather than acting as a tax subsidy for the average homeowner, the MID ultimately redistributes personal wealth via mortgaged homeownership. Homebuyers pay for the resulting price inflation through the purchase price of the home as profits go directly to sellers and lenders.
Curiously, though our poll results indicate readers are aware of this artificial price inflation — admitting elimination of the MID will cause a reduction in home prices — the majority of readers also voted in a separate poll that the MID does not drive up home prices, with only 42% agreeing the MID causes price inflation.
These conflicting poll results suggest some reader uncertainty about the pricing effects of the MID on the real estate market.
However, one thing is clear: the MID has significant sway among real estate professionals and homebuyers. Though the MID’s critical shortcomings disadvantage the average homeowner, prevailing support for the MID means it is unlikely to be eliminated from the tax code.
A more practical resolution is reform of the MID to redirect the benefits from wealthy beneficiaries to mid- and low-income homebuyers — the intended recipients of the MID benefits. Until then, the MID will continue to inflate profits for sellers and lenders, while low- and mid-income homebuyers pay the (home) price.
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Mostly, FT is the adult in the industry of cuckolded real estate agents married to CAR/NAR.
Thank you and my sincere compliment to FT, for another clear-eyed analyzation of real-world factors. Done simply and elegantly. We see repeatedly from FT’s insights, especially the always wonderful Carrie Reyes, that the “trouble” with being an adult as FT’s voices are, we then hear the whine of the confused commenters who will doubtless level their guns FT’s direction for skewering a sacred cow such as MID, or effects of deportation on real estate. FT’s sober reasoning is lost on those confused readers despoiled by relentless CAR propaganda.
The confused real estate agents are unable to reason with you, and instead they’ll use your sensible reporting as a jumper cable to start their engines of rage.
I so look forward to reading FT and am thankful for you in more ways than I will say.
Sorry for not proof reading my stance against first Tuesday’s author of this proposterous article… Would not let me go back and edit.. there aren’t as many Realtors as first Tuesday would like to think that share it’s political views…
It’s okay you don’t proof read. You don’t proof think either.
A rational and properly working brain would “never” subscribe to such absurdities. This is the problem with first Tuesday and it’s author’s. The “wealthy” homeowner that gets vilified for what you say is dis-proportionate. Pays “more” for the initial investment, pays “more” for property tax, pays “more” for utilities, maintenance, and upkeep.. hence they have a larger savings in interest deduction. Actually pretty simple philosophy. I could write a novel as to why the author of this ideological mindset is soo wrong but it would fall on deaf ears. One of the chapters in your continuing education classes spews of fallisy about how unfair chapter 13.. again could write a novel to deaf ear author’s.. prop.13 also protects those who are on fixed income in their retirement years, helping them to be able to stay in their homes. One question? If I owned two homes, (300K) each, paying the same on two homes, with the same MID deduction as a singular (600K) home with the same income, would that be dis-proportionate as well? The politics infused with first Tuesday and it’s author’s really discredits our profession, and ultimately undermines the it’s credibility as a continuing education source. Here’s some age old wisdom.. Ecclesiastes 10:2 for those who have an ear.. let them hear…
I liked the way the article recognizes that most of the benefits of the MID goes to lenders and relatively wealthy sellers. In coastal CA development is limited by land availability and endless obstacles to new construction. Home prices rise until demand is sufficiently reduced to meet supply. Increasing a buyers ability to pay has little impact on supply. Mostly it just increases prices.
I grew up in Indiana surrounded by corn fields. If you wanted to build a house you could always find a farmer to sell you an acre or two for a very modest sum. There the MID actually increases supply and helps the home buyer.