Can we please get rid of the mortgage tax deduction now?
The mortgage tax deduction provides a huge amount of what turns out to be disposable income for the middle and lower-middle class. Take that away, and the ripples in the economy would be massive. Similarly, all current house prices would be trimmed by at least 20%, and most likely more than that due to how the tax deduction is able to help with principal payments. If we have another 20% trim of house prices across the board, you're looking at -- at the very least -- a return of the great recession. As mortgage rates are already at their lowest point, there's not much further down they can go to compensate for the sudden lack of demand that will occur.
Spending money gone. House price chopped in half, sending more people underwater. Mortgage interest rates nowhere to go. That's a trifecta of disaster.
When I've had a mortgage, I've never taken the standard deduction. When I've not had a mortgage, I've never itemized.
It should be a "shelter is a basic human need" deduction.
First - property taxes, depending on the state, are fairly high. In my case, this largely offsets the mortgage deduction - though not completely (maybe 75%). People talk about how the mortgage deduction is welfare for the middle class (and up), but there are also a lot of heavy taxes involved in owning property.
Second - there's a difference between getting rid of a bad policy and never implementing it. If the mortgage deduction were a new proposal, I'd be opposed to it. Here's the problem - the government decided to "encourage" home ownership with a big deduction. New buyers factored it into what they could afford, and are now heavily dependent on it. Should the government now say "oh, on second thought, no, we shouldn't have encouraged you to do this after all, so we'll be pulling that rug out from under you now"? It would be very destructive. To me, this is a good illustration of how difficult it can be to remove a bad policy once it becomes very entrenched.
Slowly phasing it out could work. Alternatively, removing the mortgage deduction and property tax at the same time would probably reduce the impact (if taxing discourages ownership, then we'd remove the encouragement and discouragement at the same time). Problem with this is that property taxes fund local government and the mortgage deduction is a federal deduction.
Why should they have both, at the expense of others?
It's welfare for the middle class, by another name. It ain't going away.
If it makes you feel any better, the home owner in reality gets practically none of the money. Since everybody gets the deduction it just causes everyone to have to bid that much more in order to be the highest offer. And the higher prices don't really spur new home construction to compensate as you might expect, because the areas with high demand are largely urban areas with minimal available undeveloped land and zoning regulations that often prohibit the construction of higher density housing that would relieve pricing pressure. The result is that the big winners are banks, which end up making larger loans and collecting that much more government-subsidized interest.
I feel much better now.
Also, I don't see why we as a society should want to subsidize loans that take 30 years to pay off, which are most used by the relatively well off anyways. It effectively enslaves people, or at least radically reduces the space for choice and entrepreneurial activity. Similar thing happens with student loans.
[1] This even includes, partially, rental prices. If the market rate for a dwelling that's to be rented is driven higher, those costs are passed on in large part to the renter, especially in areas where housing elasticity is low (i.e. it's relatively difficult to add more units or houses e.g. SF, NYC). It's so bad that I really have a hard time figuring out who wins from the deduction. Except for the banks, of course.
It's really pretty much just the banks. You get some other movement around the edges though. For example, it promotes urban sprawl, because the higher home prices make more new home construction in the suburbs cost effective, which can be to the benefit of construction companies. And people who move from areas with higher housing prices to areas with lower housing prices benefit to the detriment of those who do the opposite, because the windfall they get when they sell their home is larger than it would be otherwise -- which again promotes urban sprawl, because it increases the financial incentive for existing urbanites to move to the suburbs, and creates a similar effect for renters because higher real estate prices mean higher rents but the renters don't get the deduction so they have to move farther away from the cities to find affordable rental properties.
The money that banks lend doesn't actually exist.
When Alice takes out a mortgage in order to buy a house from Bob, the bank doesn't go into its vault and find a bundle of cash and pull it out to give it to Bob. They just fiddle some bits in their computers so that it says they now owe Bob $500,000 (i.e. Bob now has $500,000 in his checking account) and Alice owes them $500,000 (i.e. they own Alice's mortgage for $500,000), and the two numbers cancel out which makes the accountants happy.
The bank is not required to actually have the $500,000, all they have to have is enough cash to satisfy the depositors who actually want to withdraw their funds as physical money, which is hardly anybody. (In reality there are a bunch of complicated rules about how much money banks have to have possession of in comparison to how many deposits they hold, but suffice it to say the amount is a small fraction of the total.)
And if Alice and Bob have different banks then the same thing happens except that now two banks fiddle bits in their computers so that the computers also record that one bank owes the other bank money in much the same way, which generally gets canceled out almost immediately when some other Alice and Bob engage in a different real estate transaction where the seller's bank and the buyer's bank are reversed.
>Sure they get a cut through interest rate differentials and origination fees, but most mortgages get purchased by investors.
Now you're talking about entirely different investors who invest in mortgage derivatives. But it isn't clear that they benefit from the interest rate subsidy. There is no obvious reason why the originating bank couldn't just increase the price of the mortgage by the value of the interest rate subsidy when selling it. Moreover, the purchasers of mortgages are often just other banks anyway.