PERHAPS YOU naively thought that, at 14 percent, home mortgage interest rates had gone about as high as they could. Maybe you were even under the impression that, if they went any higher, the savings and loan associations would erupt, like so many volcanoes, scattering the neighborhood with bits of gilt-edged, charred paper. But that turns out not to be right. The city's largest savings and loan association, Perpetual Federal, began issuing mortgages Wednesday at 17 percent. The current inflation is changing not only the value of people's money, but the ways in which people think about money and value.
A mortgage rate at 17-percent has sinsiter implications. A mortgage is a very long-term debt, and a mortgage at that price indicates that both the borrower and the lender expect inflation to stay very high for quite a while. High interest has slowed down real estate speculation, but not nearly as effectively in previous periods. Buyers are getting more acute in seizing tax advantages. Suppose that a hypothetical buyer is in an income tax bracket somewhere around 50 percent and signs a mortgage at 17 percent. Since buyers can deduct the interest from theur income taxes, the effective rate in this case becomes a more tolerable 8 1/2 percent.
The Congressional Budget Office recently pointed out that Congress could severely discourage this kind of stratospheric borrowing by putting a limit of $5,000 on the mortgage interest deduction. That would also, incidentally, raise nearly a billion dollars a year in new revenues -- not an insignificant contribution toward balancing the budget. But, unfortunately, there is little chance that Congress will lay violent hands on such a sacred cow as the mortgage interest deduction. If the buyer is actually carrying only half of the interest rate, and the general inflation continues at 8 or 9 percent a year, the real cost of a 17 percent mortgage, to the buyer, becomes approximately zero.
But it takes a continued high rate of inflation throughout the life of the mortgage to make this black magic work. Stopping inflation would end the steady appreciation of the property's value. It would also end the automatic cost-of-living increases in pay on which buyers count to lighten the burden of those mortgage charges over the years to come.
Inflation rewards the debtor, and increasing numbers of Americans are seeking to beat the inflation game by going deeply into debt. But the strategy requires continuing inflation to help pay off those debts. People who gamble on continued inflation are not likely to vote for presidents and Congresses committed to putting the brakes on. The longer this wave of inflation continues, the more difficult and divisive the remedies will become.