Mortgage Interest Deduction–Is It Necessary?

One of the options in the Bowles-Simpson Deficit Reduction Plan includes the removal of the mortgage interest deduction that homeowners currently enjoy on their taxes. Many in my industry are opposed to the removal of this deduction because they are afraid it will further cripple the housing market. I have not been a fan of government intervention in the housing market for a lot of reasons (see my past blogs) yet I find myself in the curious position of defending this current deduction.

For the first time in American history, the current generation will not be more prosperous than previous generations. We need to leave our children a better legacy. We need to leave them a government that is not in debt, a job market that is equally as innovative and robust as the one we have enjoyed, and homes and communities that provide a safe and stable atmosphere where families can learn and grow and thrive.

I have shown hundreds of foreclosed houses and vacated short sales over the last couple of years. It is still shocking to me to see what was once a beautiful home destroyed by the homeowner prior to vacating. Even if a previous homeowner has not purposely destroyed a house, it is my experience that a house vacated under financial duress immediately succumbs to the elements—bugs take over, bad smells emerge, wood rot sets in, mold thrives—almost as if the house knows it is no longer loved. Another type of house that tends to fall into disrepair quickly is a house that is tenant occupied instead of owner occupied. Of course there are exceptions to every rule, but in my experience, someone merely paying rent does not maintain, clean, or seem to care about the home they live in as much as someone who is paying a mortgage.

Drive through any community that has been ravaged by foreclosures, and you will see the bigger impact that this has on shopping centers, schools, the safety of neighborhoods, property values, and community moral.

Today, we have a housing market where foreclosed homes make up at least 25% of each local market—homes that are vacant, possibly destroyed, probably in disrepair. Some local markets have an even higher percentage of foreclosures, and this percentage does not include short sales which are often vacant and suffering from the same conditions. Today, we have a housing market where very few people are in a position to buy so many of today’s buyers are investors who will be renting their investments out to tenants. Those people that are able to buy are choosing instead to rent. Why aren’t qualified buyers buying? Because they are afraid to commit to a mortgage when they are not sure their job is safe. Because they have no desire to buy a home that is going to lose equity. Because they do not want to be saddled with a house that they cannot sell if family or job or circumstances create a need to move. Because houses take a lot of work and money, and most people have very little of either these days.

If today’s housing market continues, we will be a nation of renters, not homeowners. This is not the legacy I want to leave for my children. I do not want my children starting their own families in homes that have not been loved and maintained, or in communities where residents do not have a stake in what happens to their home or community. While we do not want homeowners that cannot afford the homes they buy, we clearly do need owner-occupied homes, and that means we need more buyers that are not investors. There is no one magic bullet that will solve the current situation. The job market needs to stabilize and start producing more jobs. Consumer confidence needs to return. The economy needs to strengthen so it can support growth. Until these things happen, there are very few buyers that will want to commit to a mortgage let alone qualify for one.

I have faith that in time, these things will happen, but it will do little to erase the stigma that is now attached to homeownership. At the same time we are focusing on getting the debt under control, stabilizing the economy, and growing jobs, we also need to make sure we are laying a foundation that encourages homeownership—not irresponsible, everyone-deserves-a-home homeownership, but financially responsible homeownership so that we do not continue to have whole towns that are wiped out because the surrounding neighborhoods are no longer desirable to live in.

In more normal days, as buyers were weighing the pros and cons of renting versus owning, the mortgage interest deduction was a huge factor in the math equation. While homeownership was often more expensive when you added in the real estate taxes, HOA fees, maintenance costs, insurance, etc., the substantial tax break that the mortgage interest deduction offered was often enough to off-set the difference between renting and buying. At a time when we desperately need responsible buyers to ensure the stability and continuity of home and community, now is not the time to remove one of the last, logical, financially sound, reasons to buy.