Mortgage Interest Deduction Circa 1913

The Mortgage Interest Deduction has been a part of the United States Income Tax system since 1913 – that is almost 100 years of benefiting the American Dream of Home Ownership.  It is also currently on the chopping block.   What would happen locally if this deduction were eliminated from tax code?  I believe, as many others do, that it would have an immediate and significant impact on home values.  For most families and individuals their home is the greatest asset they own!

Peggy Fox with WUSA- 9 television interviewed me on this topic recently.  We used an example home that the Huckaby Briscoe Conroy Realty Group currently lists for $675,000 in Herndon, Virginia.  A conservative approach was utilized, whereby the purchaser for that home put 20% down and obtained a 30 year fixed rate loan at 5% interest rate.  (Smaller down payments and different mortgage options are possible, but we chose the most basic approach.)  That typical buyer would then expect to deduct the mortgage interest expense from their income taxes.  Without the deduction more of their income would be sent to Uncle Sam, thus decreasing their purchasing power by $58,500.  That means that without the current mortgage income tax deduction, the same buyer would only be capable of paying $616,500 for the home.  This means a reduction in purchasing power by 5-10% from this change alone.  Proportionally to what buyers can and will afford, we can roughly conservatively expect home values to go down by 5-10% as well.

This would have an immediate impact on all current home buyers and sellers.  When the purchaser looks at the total amount of dollars that can be attributed to housing expenses, the mortgage interest deduction is a key component in that calculation.  Next it would impact all current homeowners that deduct the mortgage interest expense on their income taxes.  Without that ability to leverage, it is in effect a tax increase for homeowners after almost 100 years of deductions.  This would mean that current home owners would immediately have less money that they can allocate for other expenses such as education, health care, transportation and savings.  Approximately three-fourths of American homeowners take advantage of this deduction, thus this change would impact a large majority of Americans.

Some argue that the mortgage interest deduction is a benefit for the wealthy.  That argument is easily dispelled, because the deduction is limited to mortgage amounts up to $1,000,000.  According to City-Data.com, the estimated median 2009 home value for McLean, Virginia was $762,039.  With our conservative 20% down example, that translates to a loan amount of $609,631, well below the $1 million mark.  Even with only 5% down, the loan amount would still be below $1 million for most homes in McLean.  Contrary to popular belief, this deduction benefits the middle-class more than any other group and reducing or eliminating it would immediately affect the economy for us all.

Link to the Peggy Fox with WUSA-9 television story on April 14, 2011:  http://www.wusa9.com/news/local/story.aspx?storyid=146848

Karen Briscoe with the Huckaby Briscoe Conroy Realty Group, Keller Williams is a knowledgable expert in the real estate world of Northern Virginia.  Whether it is for buying or selling real property, Karen can be reached at 703-734-0192 or Homes@HBCRealtyGroup.com.  Or visit the HBC Realty Group website for more information at www.HBCRealtyGroup.com.