As Congress looks at ways to boost revenues, the Sacred Cow of all write-offs, the Home Interest Tax Deduction has become vulnerable. The argument in favor of eliminating the interest write off is that no other western nation has it and it doesn’t seem to affect their home sales. Further that with interest rates so low, it’s not that much money anyway, and since the maximum loan amount is capped at $1m already, removing it all together shouldn’t be that big a deal. As you can imagine, as a real estate professional, this thought makes me shudder.
Considering where we are in our housing recovery, it seems to me that any move to dissuade would be buyers at this time, makes little or no sense. But even thinking beyond our current economic condition, as we always should when considering major policy reform, I worry that we would find ourselves a nation of renters instead of homeowners. That land holders and property owner-families today, would keep the family home, but that future generations without tangible financial benefits, might pass on home purchase as investment vehicle and even invite further foreign ownership. After all, if it’s cheaper to rent, why buy? Sure, there’s the pride of ownership argument; the American Dream of home ownership… yet if we take away a principle benefit of home ownership as an investment vehicle, the write off – and it is a principle benefit – then doesn’t it stand to reason that demand will be affected at least to some degree? And if demand is diminished doesn’t that also affect long-term appreciation? And if long-term appreciation is muted, what then is the tangible investment value in something that consumes so much of our income, while returning so little or nothing in return? Oh of course if we stay in the home for 30 years and pay it off, we would then have some years of low cost housing, but how likely is that? In fact should interest rates rise to mid 1990’s levels of say, 9%, who would buy a home at all? I suppose we could be more like the Chinese and save and save and pay cash for our real estate, but what would that do to the health of our banking industry if people stopped borrowing, how would banks make any money? And what of the construction industry? I suppose we would probably see an increase in apartment construction, since we have to live somewhere, but residential construction and all the ancillary businesses from cabinet makers to cabinet hinge makers, would see their businesses decline. We are seeing the effects of a housing industry in decline right now with the oversupply of homes and thus lack of new construction and building permits: lots of unemployed construction workers.
It is possible that a complete overhaul of the tax code would free up trillions of dollars of capital and make everyone wealthier. But even if this were true, would people still want to buy such an expensive asset as real estate, if they saw little appreciable change in the asset’s value? I suspect not. If you look at the historical value of real estate in America, homes did not go up in value. Farms did, oil fields did, but homes didn’t really start going up in value until after WWII. A good trial attorney will tell you, what makes them good is never asking a question that they don’t already know the answer to. Do we really want to risk so much, without really knowing the outcome? I think not.