The Opening Salvo of the Housing War: Mortgage Interest Deduction

Men, they're coming for the mortgage interest deduction! This means war!

NAR has finally gone to the mattresses over Federal policy. Some time ago, I wrote that the mortgage interest deduction may be phased out or limited as part of Obama Administration’s new “sustainable housing” policy. At the time, I’ve heard quite a few people say, “It’ll never happen”. The thought was that the public loves the MID so much, they feel entitled to it, just like Social Security and Medicare. Plus, NAR is such a powerful political operation that no politician would ever dare touch the MID.

Well, the White House Deficit Commission unveiled its recommendation today, and guess what? The MID is most definitely on the table for outright elimination or significant limitation. From Housingwire:

Of the many proposals inside the document, the most contested one for the housing industry will be the mortgage-interest tax deduction. The commission proposes for the deduction to be limited to principal residences only and that eligible mortgages be capped at $500,000 instead of the $1 million current cap. The commission also proposed a 12% nonrefundable mortgage-interest tax credit for all taxpayers.

As expected, NAR criticized that part of the report, suggesting that eliminating or limiting the MID would cripple the housing market, drag values down another 15% or so, and so on. Investors who have been coming back into the market, at least for foreclosures and short sales, might need to redo all of their financial models based on the tax subsidy for mortgage interest not being there anymore. Buyers will need to redo their rent-vs-buy calculations. All sorts of bad things for housing, at least in the short-term, will come about.

Then earlier today, I see that NAR has put out a Call to Action to its members to call their Congresscritters to defend the MID. This is merely the opening battle, so how this issue gets resolved should signal how the rest of the Housing War of 2010-2012 will go.

War Means Diplomacy Has Failed

One troubling sign is that NAR had to resort to a Call to Action in the first place. NAR has a very large building in downtown Washington DC, and is ranked as one of the biggest lobbying organizations in the country. As the Dallas Morning News reports:

Real estate agents, homebuilders and mortgage lenders have aggressively courted lawmakers over the years, in part to avert a need to fight actively to prolong the deduction.

The National Association of Realtors has donated nearly $38 million to congressional candidates in the last two decades – more than all but three other interest groups, according to federal records compiled by the Center for Responsive Politics, a campaign watchdog.

And Realtors alone have spent $13 million on lobbying just this year.

And yet, NAR needs its members to start besieging their representatives’ phone banks with angry phone calls. The behind-the-scenes meetings with Administration officials, with Congressional staffers, with Senators, and so on must have failed. It’s the only conclusion one can draw.

The language in the Commission’s report itself is ominous:

In the weeks and months to come, countless advocacy groups and special interests will try mightily through expensive, dramatic, and heart-wrenching media assaults to exempt themselves from shared sacrifice and common purpose. The national interest, not special interests, must prevail. We urge leaders and citizens with principled concerns about any of our recommendations to follow what we call the Becerra Rule: Don’t shoot down an idea without offering a better idea in its place.

After all the talk about debt and deficits, it is long past time for America’s leaders to put up or shut up. The era of debt denial is over, and there can be no turning back. We sign our names to this plan because we love our children, our grandchildren, and our country too much not to act while we still have the chance to secure a better future for all our fellow citizens.

One can only imagine how much “advocacy groups and special interests” the Commission and its members and their staff must have heard from in the weeks and months leading up to this Report being released. I suspect that the terms of the proposal on the MID — for example, keeping it but capped to $500,000 on a primary residence — was a concession by the Commission. Previous proposals I had read and heard of usually came in at $250,000 — eminently plausible given that the median home value in American is about $178,000.

So to war we go. It will become a political contest.

Don’t Get Cocky

Normally, NAR marches off to war full of brio — sort of like the U.S. military — with victory all but assured. After all, what politician wants to get on the bad side of $13 million a year, and $38 million in campaign contributions? So the NAR members — that’s most of you who read this blog — will sort of yawn, and ignore it. The ones who do call will call, then sit back and wait for news of victory.

Not this year. Not in this political environment. Not in this economic environment. Don’t get cocky.

For starters, politicians recognize that there is a world of difference between grassroots and astroturf. In any other election cycle, the threat of NAR members in their home district pissed off at them because of the MID thing would halt any politician in his tracks. In this one, particularly in light of the disfavor into which housing has fallen (thanks in some part to media efforts to drive the narrative), a politician really has to consider whether he wants his primary challenger to paint him as a tool of the Realtor lobby.

This is especially true when Tea Party hostility to spendings and deficits runs extremely high.

As a political matter, the MID is not exactly the easiest thing to defend to either the Left or the Right.

To the Left, concerned as they are with paying off unions, government employees, and various low-income groups, “spending” some $100 billion a year in the form of tax subsidies to the wealthy is not exactly going to be popular. For example, here’s a column on this exact topic from The New Republic, which says:

From the numbers above, it’s clear that the benefit derived from the deduction is almost perfectly increasing with income. Low- and middle-earners are less likely to itemize their returns, which makes them unlikely to benefit from the mortgage-interest deduction. And because they make less money, they pay taxes in a lower bracket—meaning that every dollar in deductions reduces their tax bill by less than it would for someone in a higher bracket. Calling the mortgage-interest deduction a middle-class tax break essentially requires us to define someone in the 80th or 90th percentile of earnings as middle class. But they’re not; when you make more than 80 percent of the country, you’re rich, even if you don’t want to admit it.

I don’t think a whole lot of Democrat groups will be clamoring to keep the MID, while other programs like Social Security and Obamacare go under the knife.

To the Right, whose general bent is towards “get the government out of the market”, a $100 billion a year subsidy for housing is unlikely to get a whole lot of popular support among the activists and the Tea Party crowd. For example, the new Senator-elect from Wisconsin, Ron Johnson, is a Tea Party favorite. He’s on record as being willing to consider the MID as part of a larger fiscal overhaul:

“I have never lobbied for some special treatment or a government payment,” Johnson said, speaking from his Oshkosh plastics factory conference room. “When you subsidize things, it doesn’t work through the free market system very well.”

We asked if that applied to home mortgage interest deductions, and whether that popular program should be eliminated. Johnson said his goal is to lower taxes and simplify the tax code, and, as part of that, he wouldn’t rule out doing away with the interest deduction.

“If that means horse trading with reductions of certain deductions I’m willing to take a look at all of the options,” Johnson said.

This is just one guy out of a hundred in the Senate, but I do not think this sentiment is uncommon amongst the new crop of Republican/Tea Party representatives in the next Congress.

NAR and the housing lobby may still prevail on this, but it’s not a slam dunk. That possibly 100,000 REALTORS (because let’s face it, if even 1 out of 10 NAR members cared one whit about something like this, that should be considered a success) would call and write letters via an orchestrated astroturfing campaign by NAR is not as scary as it might have been even three months ago. Even the most unedumacated voter would probably think REALTORS lobbying to keep tax subsidies for housing is a wee bit self-serving.

I do know this. This battle may be won by NAR and its allies (NAHB, Mortgage Bankers Association, etc.) if the membership of all of those organizations take the political fight seriously. That means a whole lot more than answering the Call to Action. It will certainly be lost, however, if the members pay no attention to it, take it lightly, believe that “they” will never touch the MID because it’s so popular, or assume “someone else will take care of it”.

And If This Battle Is Lost?

Suppose for a moment, however, that NAR loses this one, and the MID goes down for the count. What then?

First, the aura of invincibility that NAR currently enjoys will be destroyed forever. If Congresscritters worry today about crossing the powerful housing lobby, after getting defeated on something as big as the MID, that fear goes away. In the next battle — whether that be eliminating Fannie/Freddie (definitely on the agenda for many of the incoming Republicans), or shifting most of the subsidies away from housing to rentals, or a national SEC-like regulator over house listings — Congress and the White House are likely to be far less afraid of the housing lobby.

Second, NAR itself will be at a crossroads. Having a million members means very little if only 1/10th of them come out when it is time to fight. The very definition of “NAR Member” will need to be re-examined if NAR should lose such a high-profile, high-stakes political fight because of the apathy of its membership. (The same goes, incidentally, for State and local Associations; if the only reason why people “join” you is to get access to the MLS, you are not a real trade association, sorry.)

Third, as the result of the first two consequences, if NAR loses this battle over the MID, I expect either one of two things: (a) a re-energized NAR, with a smaller membership base but one that is on fire, focused and dedicated to policy matters, that will come out roaring in 2012 during the Presidential election year and grabs back the reins of power; or (b) a depleted NAR that accepts itself as a tier-two political power in Washington, and devolves into a sort of a social club for real estate agents which gives out some awards, offers some group discounts to its members, and holds a really nice party twice a year.

Yeah, the stakes are that big. This is a big, important fight.  Now, sure, I may be blowing things out of proportion again, y’know, just to “stir things up a bit” and so on… but then, you thought that back when I warned about Federal housing policy, no?

This is shaping up to be an interesting 2010/2011.

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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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22 thoughts on “The Opening Salvo of the Housing War: Mortgage Interest Deduction”

  1. Giving an incentive to debtors, not savers, is stupid.I understand that there is short term pain – but long term, there is a HUGE benefit to incentivize people to save & invest, not take on more debt.(I’m talking about homeowners, not people smartly investing in real estate)

    As info, in Canada mortgages are paid with after-tax dollars. Our system does not encourage people to take on bigger mortgages (well, we encourage this by the government insuring way too many loans, keeping rates really low, just like in the US)

  2. There is no chance 1 out of 10 members will jump in on this ‘fight’. As you well know, an insanely large portion of the membership does zero to one transactions a year. They certainly aren’t going to be inspired to action. So will we be looking to our active, busy, producing agents for involvement? And at a rate of 50%? 100%? Yeah, not likely to happen.

    I may have been one that scoffed at the idea of the MID going away. But, I’m really fascinated by the fact that when housing, and our overall economy, is faced with one of the most dire crises we’ve ever seen, we’d find a way to further diminish the incentives for home ownership and investing. I hope these plans account for the fact that there will be further declines in values, more distress, and a even more protracted recovery, for housing and the overall economy, should this come to pass.

    As for taking on a short term pain for the longer term greater good, I’m not sure that the economy is poised for more pain. Consumer confidence is at such a low, I’m just not sure people are willing to suck up more short term pain. They have about as much as they can manage, and so far, without much good news on the horizon.

    • “find a way to further diminish the incentives for home ownership and investing”

      Why it is good for taxpayers to give other taxpayers an incentive to buy a house?

      If you want a house, buy one. As Jeff says below, if you buy it for the MID . . .

  3. It seems to me that everybody and just about everything tied to government subsidy is going to be bloodied. It’s a sea change. Watching the CNBC this morning and they were talking about how while we’re slashing and cutting and figuring out how to shrink our way to health, China announces they will invest XTrillion to spur research and development. I don’t know the answers, I don’t like it, but if we don’t get our government shit together, it won’t matter either way. In the mean time….

  4. The proposal isn’t to *eliminate* the MID, as many are already starting to say. People need to read, and think. They also need to understand that if they ran their checking account like the federal government does, they’d be bankrupt and destitute.

    And that’s exactly where the federal government is headed if something isn’t done. Swiftly.

    I haven’t even read the NAR “Call to Action” so I probably shouldn’t even comment. But I would be surprised if it doesn’t smack of Chicken Little and project untold gloom, doom and horror if we don’t all take action to save the MID as it exists today.

    If people (and I mean EVERYONE, not just motivated NAR members) really want to keep the MID as it is today, then they ALL need to act.

    But you know what? I bet more make a stink out of the suggested 15 cent/gal increase in the gasoline tax or the three year freeze on federal employee wages than raise a concern over the MID. The proposed change to the MID really won’t affect the average citizen as much as it sounds like, but a gas tax increase of 15 cents may lead to a revolt –or at least a hell of a lot of whining.. And a federal wage freeze for three years will make it relatively easy for private sector employers to do the same thing.

    Oh, wait. Someone reading this wasn’t aware of the gas tax and wage freeze recommendations? Not surprising. While 1 in 10 NAR members *may* respond to the call to action (or 1 in 50), I bet far less than that ratio of U.S. Citizens will bother to read the recommendations or pay any attention to what the fed does with them. That’s part of what’s caused this mess in the first place — no one pays attention to what Washington is doing, too many don’t care, and apathy reigns free.

  5. It is interesting that now is the time selected to attack the MID. The housing market is still weak, so why would anyone want to further hurt the housing market and economic recovery by changing this policy NOW?

    Maybe it does need to be changed, but I would ask why now?

  6. A first time buyer purchases a home for $200,000 with 20% down, and a 4.25% fixed rate loan. Their household income is about $65,000 — a tick below the national median for married, both working. They’re fortunate if the MID saves them $2,000 in taxes, fed/state.

    If they wouldn’t have bought the home without the MID, they’re too stupid to live.

  7. Rob, this is a total overreaction with only the wealthy at risk of losing a deduction and limited damage to the housing industry in general. Plus, Congress can’t agree on anything.

    • When you say “this”, you mean NAR going to the mattresses, or my post? I don’t think my post is an overreaction, since NAR did actually sound the 4-alarm bell; since NAR has put such a major stake in the ground on the MID, losing this is, I think, really significant. My own position on the MID is that I’m willing to consider getting rid of it or limiting it, if I get something else out of it. For example, the Commission wants to reduce the income tax rate across the board. Drop my taxes from 35% to 29% and you can have my MID.

      But the industry will be hurt by this, of that there is little doubt, is there?

      • Rob, no your post is not an overreaction, when I said “this”, I was referring to the NAR and so many people in the housing industry calling the loss of MID a catastrophe since housing has barely recovered and people won’t buy homes any more because of the loss of the deduction. That’s utter bs and they shouldn’t have bought a home because of MID or they shouldn’t have bought a home because of the home buyer tax credit. I’ve even seen people saying all those first time homebuyers are now going to be upset with the loss of the deduction and that we have to fight for them and unless one or two bought McMansions, most of the first time home buyers will be unaffected by the $500k limit on a primary residence.

  8. “One troubling sign is that NAR had to resort to a Call to Action in the first place.”

    Remember that NAR has issued Calls to Action in the past year for lower profile issues like government-backed flood insurance and rural housing loans. They don’t pull out the Calls to Action over just the huge issues like extending and expanding the homebuyer tax credit.

    Maybe there’s less to this Call to Action than meets the eye. In talking to my members, I sense there’s a feeling in certain circles that NAR needs to be doing *something, anything* about this non-proposal (remember, the body with the power to approve this recommendation probably won’t be able to garner the votes to endorse it, and Congress isn’t bound to do anything with it — as if they could agree to anything, right?!). Maybe that’s why NAR has this Call to Action out.

    It’s almost certainly an attempt to raise awareness among the members for the real battle ahead, too.

    • Maybe you’re right, Ben. I may be influenced by statements and examples in the past about the MID. For example, when NAR launched, it was pitched as a way to galvanize homeowners in case the MID is threatened as an example. The MID has been on the radar for months, if not years; it seems impossible to me that NAR has not been working on this behind the scenes for months, if not years. That’s why I thought this Call to Action was different than the others.

      And I’d love some more info on the “body with the power to approve” that won’t be able to garner the votes. You mean Congress? I think it’s pretty obvious that after 2010 elections, Congress will do something; they might not do this thing but I think it’s pretty farfetched to think they’ll do nothing and have to face a pissed off electorate in 2012.

      As Jay pointed out above, of all of the proposals in the Commission Report, the MID is probably the one with the biggest bang-for-the-buck from a budget standpoint, with the least defensible political position.

      But, like I said, maybe you’re right. I do have a question though. If the MID is not the “real battle”, what do you think IS the “real battle ahead” for which the MID is but the rehearsal?

      • The “body” is the Deficit Reduction Commission, whose report has sparked this whole discussion. They’re not likely to vote to approve these recommendations according to the experts. Even if they do, Congress is under no obligation to do anything with their recommendations.

        I think there will probably be a “real battle” over the MID, but this isn’t it. To borrow a phrase from NAR, there’s currently no specific proposal to change the MID — it’s all talk at this point. But once there’s a bill about the MID in Congress being debated, you’ll probably see NAR drop the gloves.

  9. I’ve heard lots of screaming about this and think the implications would be negative to housing, particularly when a large percentage of the population (even the upper middle class) is living so tightly, but come to think of it, this feels like a 3rd rail issue and I doubt congress has the balls to pass such an elimination or reduction of the MID. That said, nothing surprises me anymore.

    • If you look at all of the “third rail” issues in this report (Social Security and Medicare, to name two), and the seriousness with which at least the GOP freshmen take the problem of debt and spending… I think 2011 will see some sacred cows slain.

      • I don’t disagree with you Rob, but with the real estate market teetering on the brink of disaster, I’m pretty sure the powers that be will find other cows to kill first.

    • “the implications would be negative to housing”

      What are the implications to your country’s economy to continue to subsidize private ownership of property? Is incentivizing people to take on more debt going to help people recover from this crisis – the same crisis prompted by people taking on too much debt ?

      • I’m not sure that hitting housing while it is bloodied to a pulp is exactly the best idea, Benjamin. From my understanding, this has been around for almost 100 years — the MID isn’t what prompted people to take on too much debt, it was merely a small piece of the puzzle. Politicians promising homeownership to all Amercians, reckless lenders, and many other factors were all at play here.

        We certainly need to cut the debt, but there are plenty of other forms of spending that won’t have the concussive force that the ending of this could have on housing, and as a result, the rest of our economy.

  10. Lots of screaming and jocking for political positioning. I however think when it comes down to a vote in the House, NAR, lobbyists, Representatives wanting to stay in office and a massive groundswell, will prevail the current status quo – home mortgage interest deductions will NOT going bye-bye any time soon.

    Its speculative removal will create an estimated saving in the ballpark of $130 billion – a small drop in the bloating national debt that is rapidly climbing to $20 trillion. There are bigger and more important fish to fry.

  11. Lets see… removal/adjustment of the MID hits the hardest on those with higher tax brackets, and with larger loan balances and interest expense bills. So that puts more pressure values in higher cost neighborhoods.

    I guess I’d just swap houses with my neighbor and take the write-off through depreciation.

    But given that the 01-03 era tax cuts were just extended, I don’t see this coming into play any time too soon… interesting debate though.

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