The Deficit Commission’s Trial Balloon: A Few Good Ideas, and Two Horrible Ones that Deserve to Die
The interest tax deduction does absolutely nothing for the economics of home ownership over time and may actually hurt the fundamentals. The effect that it has is to raise prices since higher prices are subsidized through the mortgage interest deduction. People look at the after tax effects and can pay higher prices and therefore this becomes the new normal. In other words, housing prices will naturally adjust (down) to a level where they are similarly affordable as what they are with the subsidy. Prices will be lower, decreasing risk for the economy in general. There will be less debt and more equity in American housing stock in general. Lower housing prices will also free up investment capital to other productive uses. Its just better to get rid of it.
Of course, the mortgage interest deduction could be reduced on a longer term schedule such as over 25 years so that it does not affect those current owners as dramatically as eliminating it at one time.
