John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... When Ron Woodcock owned a home in Florida, he was able to write off about $2,000 a month in mortgage interest payments, a huge tax benefit and a major incentive for owning a home. Woodcock, who moved to the Denver area several years ago and is a broker at RE/MAX Southeast, doesn’t believe he is unique.
“I think the tax write off is why most people own homes,” Woodcock said. “It is tremendously important to most people. Look what happened when the $8,000 tax credit went away at the end of April. The market just fell off a cliff.”
That is why Woodcock, and other experts, are upset that there is even preliminary talk of chipping away at the mortgage deduction by the bipartisan White House commission looking at ways to cut the federal deficit. The preliminary proposal would scrap mortgage deductions of more than $500,000 on primary residences, as well as on second homes and lines of credit. Some fear that would just be the first shot in what would amount to a firing squad aimed at all mortgage interest write offs.
Bad timing
“Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for homeownership,” Michael Berman, chairman of the Mortgage Bankers Association said in a statement. “The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”
Scrapping the mortgage deduction would worsen Colorado’s foreclosure crisis, which remains near record levels, said Shannon Peer, director of housing counseling at the non-profit Brothers Redevelopment Inc. in Edgewater.
“We’re in a market where appreciation is still a long way down the road,” Peer said. “Already, we have a lack of buyers getting into the market. If you take way the one of the existing benefits of owning a home, that is not going to help our home sales.”
Fuel more foreclosures
It will also create more foreclosures, he said.
“Absolutely,” Peer said. “We will see more people walk away from their homes and the number of strategic defaults are likely to increase.”
Ryan Carter, a broker with 8z Real Estate, said while he is sympathetic to the need to reduce the deficit, but attacking the time-honored home mortgage deduction is not the way to do it.
“The timing is certainly poor,” given the fragile housing market, Carter said. “It is kind of cutting off your nose to spite your face. I think it is very narrow-minded. It is kind of hypocritical, because the government has the tax write off in place as an incentive to encourage home ownership. Despite peaks and valleys, owning a home is still one of the best long-term investments most people make. And an important part of making the investment secure is the write-off. This will erode the value of homes. Without it, why not just rent?”
Walter Molony, spokesman for the National Association of Realtors, said the giant trade organization is not releasing a statement on the preliminary proposal, because it seems a bit premature.
“The report (from the White House commission) is not going to be released until Dec. 1, so we will wait to see what it says,” Molony said. “But we will certainly continue to work with policy makers to protect and encourage home ownership, and preserving the mortgage deduction is certainly part of that.”
Asked by InsideRealEstateNews whether he is surprised that it is even on the table, he said he is.
“I think it is pretty well understood that the mortgage deduction is very important. Considering today’s market, the timing to even be talking about it would not be good.”
Molony said that he believes the last time the Congress seriously floated the possibility of removing or reducing the mortgage deduction was in the 1990s.
“We did an analysis back then that it would reduce the value of an average home by about 15 percent,” Molony said.
Barbara Lambert, CEO of the Denver Board of Realtors, said she has not received any calls from members, regarding the proposal.
“The bipartisan deficit reduction committee has 18 members, and 14 of those must agree on a recommendations, and they will not release their recommendations until after Dec. 1,” Lambert said. “So it is a bit premature. Certainly, the NAR opposes cutting the deductions.”
Not only is the mortgage interest deduction one of the incentives that motivates home ownership, but removing it would do nothing to simplify the tax code, she said. Cost-savings through simplification of the tax code is another goal of the commission and many in Congress
“The deduction is one of the simplest things,” when filing taxes, Lambert noted.
Many consider the mortgage write off sacrosanct.
“Ice cream from the baby”
“It would certainly be taking the ice cream away from the baby,” said Tom Cryer, a broker with the Kentwood Co. “People are pretty much addicted to it.”
He said that the mortgage deduction is sound public policy, because it encourages a socially responsible act of living on a home. Numerous studies over the years have found that overall, homeowners tend to vote more, their children are more likely to graduate from high school, and they are more likely to become involved in community issues, than renters.
“My mantra is reward good behavior, and that results in more good behavior,” Cryer said. “So often, government spending and tax policies rewards bad behavior.”
Because of that pattern, Cryer is not confident at all that the mortgage interest rates will be preserved. Even if they survive this round, he thinks they could end up on the chopping block later.
Politicians live in dream world
“The trouble is when politicians get elected and go to Washington, D.C., they live in this dream world,” Cryer said. “They are immediately vested in their pensions, they get a health-care plan that you and I can’t buy at any price, and they never wait in line and have to go through security at airports. Until we have a ruling class that is not a ruling class, I do not have too much hope.”
And he’s skeptical that removing the write off would even boost the government’s coffers, as consumer spending likely would be greatly curtailed.
“If you take $2,500 in after-tax write-offs out of someone’s pocket, that is money they are not going to spend at Red Robin, or the IPod store, at a Rockies game or at Home Depot,” Cryer said.
He said that without a doubt, eliminating the write-offs would hurt the already ailing housing market in the short-term, although he said in 10 years the market might still enjoy about the same levels of home ownership as it does today.
“It clearly takes one of the tools out of our toolbox,” to sell homes,” Cryer said
He said that while the mortgage deduction is entrenched, Cryer said he could live with a flat sales tax to replace the income tax and most current tax write offs.
“I want something that absolutely makes it fair across the board,” Cryer said.
But hammering the mortgage interest write off does not accomplish that goal, he said.
“The timing is certainly bad,” Cryer said.
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All these people who are quoted are disgusting.
“Don’t screw with my pet tax break, screw with some other guy’s.”
Bastards. Every one of them.
We can phase it out.
Reduce it be 5%/year for 20 years. Gives buyers and sellers plenty of time to adjust.
In the meantime, the people quoted above should be tar and feathered.
Mr. Barnes is, of course, correct on all points.
This is why there will never be any meaningful budgetary reform in this country. Everyone has their own sacred cow.
When I saw the headline touting the collective opinion of “experts”, I anticipated numerous thoughtful analyses by unbiased economists and tax analysts. Instead I was treated to the self-serving whining of a bunch of real estate brokers looking to continue the same policies that gave us the housing bubble in the first place. Real estate brokers, colluding with greedy mortgage brokers, crooked and incompetent appraisers and our heroes Chris Dodd and Barney Frank, are largely responsible for the current housing debacle. Then this sordid bunch connived to further their interests with the $8,000 tax credit paid for by magic Obama money. Now they believe that chanting “home ownership” is all that is necessary to rebut any rational argument for restoring fiscal sanity to our nation’s tax policy. Each “expert” has a dog in the fight – remember, it is always a good time to buy a house, so long as a real estate broker earns a commission.
“I think the tax write off is why most people own homes.” Really, Mr. Woodcock? I always thought most people owned homes because it was preferable to living in discarded refrigerator boxes under a viaduct.
A pox on all of you.
In 34 years as a broker I have not once heard from any purchaser that the mortgage interest deduction was their reason for purchasing a residential property. It is wrong to continue to treat this as a sacred cow when we need to focus on getting rid of the federal debt and every aspect of our society needs to give back something, be it a specific deduction or curbing entitlements. So please stop being an echo chamber on this issue. J Burke Broker