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Eliminating or curtailing the mortgage interest deduction would have a disproportionate impact on younger, middle-class families, who would see their ability to become home owners significantly diminished, with sober implications for their longer term financial prospects, NAHB told Congress on Oct. 6.
"How housing is treated in any future tax reform will shape the economy going forward," Robert Dietz, an economist and assistant vice president for NAHB, testified during a Senate Finance Committee hearing on tax reform options to provide incentives for homeownership.
Most Americans consider homeownership to be their single best long-term investment and a primary source of wealth and financial security.
According to the 2007 Federal Reserve Survey of Consumer Finances, the median net worth of a home owner is $234,600, compared to $5,100 for renters.
"We believe that any policy change that makes it harder to buy a home, or delays the purchase of the home until an older age, will have a significant long-term impact on household wealth accumulation and the make-up of the middle class as a whole," said Dietz.
In the short term, tampering with the mortgage interest deduction would undermine an already fragile housing market and wreak havoc on the tenuous economic recovery by hurting housing demand, which would place downward pressure on home prices.
In turn, this would leave more home owners underwater (owing more on their home than it is worth) and trigger even more foreclosures.
Strong Public Support
The mortgage interest deduction is a cornerstone of American housing policy, provides benefits for home buyers at all income levels and retains overwhelming public support.
In a New York Times/CBS News poll conducted in June of 2011, 89% of the respondents said that homeownership is an important part of the American Dream and more than nine in 10 opposed doing away with the mortgage interest deduction.
Public support runs strong, despite misleading claims that the deduction benefits only wealthy taxpayers and only a small number of home owners utilize the deduction because they must itemize their deductions in order to claim it.
Setting the record straight, Dietz told lawmakers that 70% of the tax benefits go to middle-class home owners who earn less than $200,000.
He added that a deduction that reduces the net cost of monthly house payments is particularly important to younger home buyers, who typically have large home loans and less equity and are paying mostly interest in the early years of the mortgage.
Dietz said that arguments that most home owners do not itemize and cannot benefit from the deduction are false.
"Out of 75 million home owners, 35 million claimed the mortgage interest deduction in 2009," he said.
"This fails to take into account the millions of taxpayers who are renters and one day aspire to own a home of their own and the roughly 25 million who own their homes free and clear and used the deduction in the past. The bottom line is that 70% of home owners with a mortgage have claimed the deduction."
Other Housing Tax Incentives
Dietz also stressed the importance of several other housing tax incentives, including the Low Income Housing Tax Credit, which is the most successful affordable rental housing production program in the nation's history and produces approximately 90,000 full-time jobs per year.
The second home deduction is also important for many who do not think of themselves as owning two homes.
"For example, the second home deduction facilitates moving when owning two homes during the tax year and also permits existing home owners to claim interest on a construction loan for a future home," said Dietz.
Eliminating the mortgage deduction for second homes could threaten the economic viability of second home and vacation markets.
"We are not just talking about well-known coastal markets, but also small towns in states such as Maine, Vermont, New Hampshire, Michigan, Colorado and Florida," said Dietz.
"And nearly every state has areas with significant numbers of second homes,” he said. “Forty-nine states have a county where at least 10% of the housing stock consists of second homes."
Home owners are also allowed to deduct interest on up to $100,000 of home equity loan debt.
Half of all home equity loans are used for remodeling and home improvement, which provide jobs and are important activities for a nation with an aging housing stock.
As policymakers look to create jobs and boost economic growth, housing has an important role to play, said Dietz.
"Building 100 single-family homes creates more than 300 full-time jobs," he said. "Housing can act as a catalyst for job growth and an economic recovery because home building employs such a wide range of workers."
Register for the NAHB Fall Construction Forecast Webinar, which will provide attendees with up-to-the-minute analysis of the latest housing numbers and market trends right to their desktop. The webinar will be held from 2:00-4:00 p.m. ET on Wednesday, Oct. 26.
Speakers David Crowe, NAHB chief economist; Joel Prakken, senior managing director and co-founder of Macroeconomic Advisers; and Robert Denk, NAHB’s assistant vice president for forecasting and analysis, will address issues affecting the housing industry and the economy — including which housing markets may be improving and why; whether acquisition, development and construction credit is becoming more available; and if house prices are back in line with incomes and what it means for housing.
The fee is $29.95 for NAHB members and home builders associations and $49.95 for non-members.
For more information and to register, visit www.nahb.org/cfw.
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