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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 457185  
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 10:01 PM
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Thanks for all of the excellent comments. A few additional points:

1) I agree with NOTEHOUND that eventually interest rates will rise. I am just not sure we will still be alive to see it. And this is from someone with a 900 year life expectancy! (Obscure reference to my cousin YodaGreen in Star Wars.)

2) When rates rise, the argument is mostly unchanged. “Rich folks” on the coasts will get the vast majority of the tax benefit. The Six-Pack family might get a $100 per month subsidy, while the “Rich folk” family might get a $1,000 per month subsidy. Middle America still subsidizes the coasts.

3) Dave raises an interesting point, in essence saying that very few people gain a financial advantage by having the deduction. A few years ago I had this debate with someone that is now a US Senator. The end result is that the markets will reach equilibrium, regardless of tax policy. It just might take a long time. Same thing for interest rates. If all of a sudden mortgage rates were 10% and interest was not deductible, it would certainly put a damper on the industry. Anyone remember the early 1980’s? Eventually the bid-ask spread will be crossed. Incomes will rise, homebuilders will find a way to build lower price houses. Land prices will go down. Do you think Americans would just say “I guess nobody will be able to buy a new house for the next few decades?” Certainly not. The gap will be bridged.

4) I do disagree with Dave about whether this is a wealth transfer from non-deducters to deducters. I think the deducters are able to buy larger/nicer homes with the deduction than without. Let’s assume the deduction goes away and the price of the houses fall. Maybe they still live in the exact same house, but unless their income also falls, that homeowner will certainly pay more taxes. He will send more money to Uncle in Washington.

5) All of the comments that some states have income taxes and/or high sales taxes are correct. I had to make some broad generalizations to illustrate the point. I was considering doing the exercise for all 50 states using median incomes and median house prices. I decided not to spend the time, because I do not think it adds anything substantial to the argument.

6) CHALLENGE TO ALL METARITES: My bet is you can ask 10 homeowners how much per month their house payment is and at least 9 out of 10 can quickly answer. Your mission should you decide to accept it, is to ask the same 10 homeowners, how much they save on taxes per month due to the mortgage deduction. I am willing to bet that at most 1 out of 10 can answer off the top of their head AND BE IN THE RIGHT BALLPARK. I am also willing to bet that most of them will give the WRONG answer, which would have to be verified by re-computing their income tax without the deduction. In many, many cases, I have learned that people think they are getting a much larger benefit than reality. Try it and see. I do wish REALTORS would provide a more accurate story to prospective home buyers.

7) One other tax act under consideration approaches this in a slightly different way. They leave all of the itemized deductions in place, but cap the maximum total for all of them. I have heard numbers ranging from $17k up to $50k. If it ends up being close to the $17k, an awful lot of “rich folks” are going to be mighty upset and pay more taxes.

8) Like every other tax issue in Washington, there is very strong opposition to changing anything from various constituencies. NOTEHOUND is correct that the REALTOR lobby is incredibly diverse and powerful. Once again, I am not advocating one side or the other. I just wish the politicians and public understand the real issues before they decide.

Thanks,

Yoda
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