Housing Is Safe From Washington
Deductibility of home mortgage interest is a hot potato in the current U.S. tax cut and reform debate. It always has been. In 1986, zealous reformers wanted to eliminate the deduction, but realtors and all their backers descended on Congress and the idea dropped dead.
But this time around, even if the impending tax changes become law, the measure is unlikely to have a meaningful effect on mortgage interest deductibility for most, or depress home prices or the booming housing market. Perhaps that's why the surge in the share prices of homebuilders, with the S&P Homebuilding Select Industry Index up more than 16 percent since late August, seems well-supported and may continue.
The subprime mortgage crisis and subsequent nationwide drop in housing prices reduced the status of owning a home. Although it recovered to 63.9 percent from the 2016 trough of 62.9 percent, the homeownership rate is well below the 69.4 percent peak in 2004. Multifamily housing starts have rebounded and now exceed the pre-crisis 300,000 annual rate level. That's because Americans with weak credit scores, job insecurity, little money for down payments and worries of further housing price weakness rented apartments instead of buying single-family homes.
Nevertheless, single-family housing, driven by first-time buyers, is reviving. Memories of the subprime bloodbath are fading and employment gains have been solid, even though real wage increases continue to be subdued. This year through October, new home sales rose 8.9 percent when compared with the same period of 2016. Sales of houses in the $200,000 to $300,000 price range favored by new homeowners jumped 35 percent compared with October 2016. Sold but not completed houses rose 30 percent in October from a year earlier. In a sign of demand, there is a 4.9-month supply of new houses on the market at the current sales rate, down from almost six months during the summer.
The earlier rush to apartments drove up rental costs while weak house prices and falling mortgage rates reduced debt service as a share of income. So, it’s now relatively more attractive to buy than to rent. The National Association of Realtors Housing Affordability Index is higher than in the early 2000s. This index is based on a family with a median income buying a median-priced house with a 30-year fixed-rate mortgage.
Against this backdrop, the Senate tax bill leaves the mortgage interest deduction unchanged, and the House version reduces it from mortgages of $1 million or less to $500,000 or less. But only 10 percent of those who deduct mortgage interest had annual incomes over $200,000 in 2009, and the average deduction was $6,650. Also, high-cost houses are concentrated by geographic area, especially in California, as are incomes and mortgage interest deductions.
Furthermore, of the almost 20 million mortgages originated from 2012 through 2015, just 5 percent were larger than $500,000, the cut-off in the House bill. About 2.8 percent of all mortgage loans and 7.7 percent of new mortgages exceeded $500,000 last year. Also, with the proposed doubling of the standard deduction, those taking the mortgage write-off would drop to 4 percent from 21 percent, according to the Tax Policy Center.
Mortgages larger than $500,000 are geographically concentrated. National Low-Income Housing Coalition data show that in 39 states, the percentage of mortgages over $500,000 was less than 3 percent; in 19 states, it was less than 1 percent. The 10 states with the greatest number of mortgages larger than $500,000 are, in order, California, New York, Virginia, New Jersey, Texas, Massachusetts, Illinois, Maryland, Washington and Florida. These 10 states accounted for 81 percent of the national total. California alone accounted for 45.7 percent.
Burrowing further into the data, the share of mortgages larger than $500,000 was greater than 10 percent in just 48 counties -- 1.5 percent of the total. These counties accounted for 67.4 percent of all mortgages larger than $500,000 nationwide. Fourteen of the counties were in California and accounted for nearly 44 percent of the national total.
It is possible that in order to get the backing of legislators from high housing-cost states, Congress will give them limits over $500,000 on mortgages whose interest costs can be deducted. Fannie Mae and Freddie Mac already have higher limits on mortgages they insure in expensive housing areas, giving borrowers access to lower-cost mortgage money than from private lenders. In 2009, in response to the housing crisis, Fannie Mae and Freddie Mac increased the limit on loans they insure from the nationwide standard of $417,000 for a single-family house to $625,000 in “high-balance” loan areas such as Southern California, the northern Virginia suburbs of Washington, D.C., and New York City. There are 234 designated high-cost areas in the U.S.
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