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Will Obama Eliminate Mortgage Interest Deduction?

Most homeowners bought their first home knowing how much money they would save with the incentives derived from the mortgage interest deduction.  A lot of questions persist and this is clearly hurting the housing sector.  MBA reported the home purchase loan applications are way down again, so you have to wonder about the poor timing of the government’s discussions of eliminating this popular interest deduction for homeowners.

Talk about changing the nearly hundred year home loan interest deduction is hindering the already frail housing market. Most economists believe that if the interest deduction disappears, it could make property values drop another 15%. It is having a chilling effect on some potential homebuyers. Unfortunately, some consumers already believe that the deduction will not be available to them. The federal deficit reduction commission’s recommendation has sown the seeds of uncertainty, as even current homeowners fear that they will not be able to claim the deduction and that their homes will lose even more value.

Historically, the real estate industry has generated 15-18% of U.S. gross domestic product. During the 2001-03 recession, real estate was one of the few growth sectors in the entire economy. Even now, despite serious problems in both housing and commercial real estate, the industry accounts for about 15% of GDP. Many experts have stated that we will not return to better economic times unless and until real estate markets stabilize.

30 year rates hover 4% and 15-year mortgage rates are still available at 3.5%.  Many consumers have started to scramble to get approved for a low rate home loan or fixed rate refinance.

Most Americans oppose the National Commission on Fiscal Responsibility and Reform’s proposal to either limit or eliminate the mortgage interest deduction. The current system is well understood and free of the complexities that affect other types of investment. The tax system does not cause homeownership. People buy homes to satisfy many family, investment and social objectives. The tax system facilitates ownership merely supporting it by making it more affordable. In fact, the “standard” income tax deduction is a bigger subsidy to those who don’t itemize than the mortgage interest deduction is to those who do.

You should not underestimate our nation’s passion for homeownership, notwithstanding the current recession. Calling homeownership The American Dream is not just a slogan, but rather a bedrock value. Owning a piece of property has been central to American values since Plymouth and Jamestown. Homes are the foundation of our culture, the place where families eat, learn and grow together, the basis for community life.

Economic experts consistently predict that an immediate or even a phased loss of the mortgage interest deduction would cause the value of existing homes to fall by as much as 25%.The average homeowner’s loss of value would be 15%. This is simply unacceptable.  News reports saying that Congress threatens to repeal or limit the mortgage interest deduction will keep potential homebuyers renting instead — further delaying the much-needed real estate recovery that can stimulate the overall economy.

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