Mortgage-interest deduction could be on the table in ‘fiscal cliff’ debate

He said it is possible that any price declines could prove minor over the long term, and that the housing industry itself ultimately would benefit if the country were on a firmer fiscal footing.

“I think we’re going to get tax reform, and the [mortgage-interest deduction] is going to be part of it,” Zandi said. But he said any changes should be phased in over a period of years.

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At the White House Wednesday, President Obama addressed a group of Americans whose taxes would go up if Congress failed to extend the middle class tax cuts.

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Neither the White House nor lawmakers have shown an inclination to scrap the deduction, which has been around in some form since 1913. Unlike some other deductions, it remained intact in the last major tax overhaul, in 1986. It is the most high-profile housing-related tax incentive, but not the only one. For instance, homeowners can deduct their local property taxes and are exempt from some capital gains taxes when selling a residence if they have lived there long enough.

Some researchers have argued that the tax break actually does little to boost home ownership, given that people affluent enough to benefit from the deduction are likely to buy homes even without it.

“It’s a clunky subsidy for home ownership,” said Ted Gayer, co-director of the economic studies program at the Brookings Institution. “It also subsidizes things we don’t want to subsidize, like borrowing a lot of money for your home. . . . It’s a tax credit for people who have large mortgages.”

Any efforts to shrink the mortgage-interest deduction are likely to face stiff opposition from real estate agents, home builders and others who argue that millions of middle-class Americans also benefit. Few special-interest groups are better equipped to wage an all-out campaign than the real estate industry, which has defended the tax break for decades as a driver of home construction and a key motivator of home ownership.

“It has always been NAR’s position that the [mortgage-interest deduction] is vital to the stability of the American housing market and economy,” Gary Thomas, president of the National Association of Realtors, said in a statement. “And we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest.”

David H. Stevens, chief executive of the Mortgage Bankers Association, said many people in his industry expect that the mortgage-interest deduction will be part of the long-term debate over fixing the nation’s budget woes, and he acknowledged that it could face changes as part of an overhaul of the tax code.

But what he and other industry advocates don’t want, Stevens said, are sudden or drastic
changes to current policy as part of a last-minute effort to avert the “fiscal cliff” on Jan. 1. He said such a move would threaten the fledgling housing recovery, cause harm to the larger economy and put a dent in the pocketbooks of many middle-class Americans.

“We are by no means knee-jerk, reactionary on this subject,” Stevens said. “The greatest concern we have is that in a rush to deal with the fiscal cliff before the year’s end, it could lead to an environment where less-thoughtful decision-making could occur. . . . This is something that has to be managed extremely carefully. This could be stepping over dollars to save pennies if we do it too soon.”