One of the reasons there is talk about getting rid of the mortgage interest deduction is

[cthulu2016]

35. I think we may be talking past each other

I am not questioning what you are saying in practical household terms. My objection is strictly macroeconomic. We need not disagree because I don't think we are talking about the same thing.

When I read you OP my thought was, I agree with this on its own terms, that the HMID is less significant to individuals today for a variety of reasons.

And if you are saying that that current reduced effect is offering a political window for the RW to talk about the deduction (I think you are), I agree with that also.


I am just saying that the loss of the HIMD any time this decade would be a macroeconomic disaster.


If someone buys as much house as they can get for $1000/month then the quality of that house will change a lot based on interest rates, but the amount of their deduction during the first few years of their mortgage will not be as variable because either way it's going to be 90% interest to start off with.

(The significance of the first few years of a mortgage is that everyone has the first year, less people the second, less the third and so on. The first year is the commonest year. Also, as the deduction decreases over time, inflation should be mostly making up for the higher real payments as more principal is addressed, so if the mortgage payment is fixed the relative cash flow value of the mortgage-minus-HMID will be reasonably flat if the bank did a good job of predicting inflation when they wrote the mortgage.)

Anyway... the point is that inherent value of the property to a new buyer is an intrinsic component of the value of the property, as long as the HIMD exists. And anyone who buys the property will be a new buyer, and will be deducting 90% of their mortgage for years.

So if we eliminate the HIMD, as a thought experiment, the first effect that comes to mind is cash flow. Homeowners would face a tax increase of some size, small or large depending on their circumstances.

But to me, the more dangerous problem is that every home in America would have a lower value, immediately. And that would be a decline in property as a class.

Anything asset that could have previously qualified for the HIMD would be less valuable to a potential purchaser. (Including properties with no current mortgage at all.)

So that even if the loss of cash (tax increase from loss of HIMD) on one end was made up for by an equivalent tax break on the other end—that John and Jane Q Public save exactly the same amount on their income taxes from a rate reduction as they previously saved from the HIMD and lose no annual net cash—the loss of the HIMD has still made their house less valuable because a renter gets the same tax rate reduction as a homeowner gets.

The renter does not gain that benefit by buying.

And because of the peculiarities of the current economy arising from a collapsed housing bubble we face a protracted path to recovery because residential construction cannot lead us out of it. (Residential construction usually leads us out of typical business cycle recessions because real estate is rate sensitive and responds first to monetary stimulus.)

So anything that makes property, and property in particular, intrinsically less valuable across the board would be particularly harmful in our current balance-sheet mini-depression circumstance.

Put another way, if I had to take one trillion dollars out of the US economy in 2013 somehow, reducing home prices realized by one trillion dollars would be a particularly bad way to do it. Not quite as bad as subtracting one trillion in wages, but very bad nonetheless.