It is impossible to turn on the news right now without hearing about the Fiscal Cliff. The Fiscal Cliff is a series of laws that go into effect on January 1, 2013. These laws will significantly raise taxes across all income brackets, while making equally consequential cuts in spending. In order to resolve this financial crisis, some are calling for the elimination of the Mortgage Interest Deduction as a compromise. The timing for this call could not be worse as we are just starting to move in the right direction. Many do not realize that housing and new home construction were responsible for pulling us out of six of the last eight recessions. The mortgage interest deduction is vital to stability in the real estate market and its continued recovery.
The Center for American Progress, a liberal think tank, recently released a plan on tax reform and deficit reduction. The plan calls for raising the top marginal income tax rates, the top capital gains rates and eliminating the mortgage interest deduction. The plan calls for a gradual phase in of the elimination, but the psychological effects would be significant. This is important to watch as the policies of the Center for American Progress often mirror those of the current Administration.
The largest effect of the plan would be on home prices. The drop in home prices due to the elimination of the mortgage deduction has been estimated to be between three and fifteen percent. I also expect that it would make it more difficult for first-time homeowners to purchase a home due to the increased cost of ownership. For the 40% of Americans who don’t own their home, I would expect their rents to increase.
A complete elimination of the deduction is politically infeasible and would be destructive to the economy and our overall recovery. Government policy is partially to blame for the state of current housing crisis. Let’s hope that our Representatives in Washington help us fully recover from the first crisis, before we start another.
I urge you to contact your Senators and Representatives today and ask they stand against any plan that would eliminate the mortgage interest deduction.
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