Mortgage Interest Deduction Reform Worked; Sky Isn’t Falling

Last year, Republican legislators stood up to the behemoth of housing lobbying groups which exert heavy pressure on the public process by curtailing the so-called third rail of tax policy, the mortgage interest deduction.

Last week’s Joint Committee on Taxation (JCT) tax expenditure estimates are a reminder last year’s tax reform effectively reduced the deduction. According to JCT, the mortgage interest deduction will decline 38 percent this year. By 2019 the deduction will fall almost 50 percent from its 2017 levels.

The reformed deduction applies to $750K in mortgage debt for loans. This is a change from its former configuration, where the deduction applied to $1.1 million in mortgage debt. The act grandfathers in existing homeowners who bought under the assumption they would be able to use the deduction before mid-December. 

Though industry lobbyists predicted the sky would fall, it hasn’t happened. That’s unsurprising if you follow economic research on the mortgage interest deduction.

For one thing, research suggests the mortgage interest deduction has no impact on homeownership rates. Last year Nobel Prize-winning economist and co-founder of the Case-Shiller housing index Robert Shiller argued capping the deduction would have a “rather small effect” on homeownership rates and the housing market.

Indeed, since tax reform U.S. homeownership rates have stayed flat and the number of houses sold this year is greater than the number sold during the same season last year. Meanwhile, “home-price growth showed no sign of slowing down” despite predictions by some economists home prices would fall as a result of reform. It makes sense housing market indicators haven’t changed, given very few homes are sold in excess of $750K and housing supply is tight even at the top of the market.

The sky isn’t falling, and JCT estimates show the mortgage interest deduction is on its way out. That’s good news for the housing market and prospective homeowners.