Possible Changes to Mortgage Tax Deductions Could Cause a Housing Crash
Most homeowners would agree that “Make America Great Again” doesn’t involve a U.S. housing crash. But that’s exactly what may transpire if certain changes in the tax code come to pass. Proposed changes to the personal tax code include eliminating most tax write-offs, including mortgage interest. Realtors around the country are in uproar.
The downstream effects wouldn’t just affect a few individuals. Over 30 million taxpayers claim $70.0 billion worth of mortgage interest deductions. The ability to write-off provided an important incentive to own a home. The change in rules could prevent perhaps half of taxpayers to stop itemizing claims. The people most affected would be new homeowners and prospective home buyers. In other words, the people with the most mortgage interest outstanding. (Source: “U.S. tax change proposals anger builders, realtors, charities,” Reuters, August 14, 2017.)
Meanwhile, the National Association of Realtors (NAR), is not impressed. They are warning that playing with mortgage deduction rules could cause “home values everywhere to plunge.” Estimates provided by PriceWaterhouseCoopers (PwC) indicate they could fall 10% in the short run, with larger drops in high-value areas. This could result in underwater mortgages, like a bad replay of the movie we saw a decade ago. (Source: Ibid.)
Whether this is hyperbole, an accurate portrayal, or something in the middle, it’s not positive for homeowners with large mortgages outstanding. This is the last thing young people need, especially with prices rebounding at the post-U.S. bubble highs. Household formation trends are already going the wrong way for this demographic.
Consider that for the first time in 130 years, more young people live at home than with their partners. A 2016 survey by the Pew Research Center found that 32.1% lived with their parents, while only 31.6% lived with their partners. (Source: “For First Time In 130 Years, More Young Adults Live With Parents Than With Partners,” NPR, May 24, 2016.)
Some of this trend can be attributed to changing attitudes (i.e. fewer people are getting married). But no doubt the rising costs of home ownership and stagnant wages/lack of widespread livable incomes are wreaking havoc also. Then, there’s the student debt.
Some $1.31 trillion is currently on the books—a record. Many students are graduating from school with six-figure debt loads. Even worse, many of these same former students are discovering that good entry-level jobs are hard to come by. This forces graduates to take less-than-ideal employment, with future expected salaries below expectations. In many cases, the lack of confidence in future salary expectations is leading many young people to delay purchasing a house.
Should the U.S. government implement plans to remove mortgage tax deductions, this will place added pressure on new homeowners. The cost of owning will simply be more expensive. It will be more difficult for young couples to afford the costs of home ownership without slipping further into debt. That’s something young people are increasingly unwilling to do.
Perhaps the NAR has a point, even if some hyperbole is baked into its talking points.