As the housing market strives to adjust to profound changes caused by the Great Recession, Congress is poised to address two issues that could have a significant long-term impact on the market: tax reform and restructuring of the housing finance system.
Unfortunately, the tax code provisions relating to homeownership—most important the mortgage interest deduction—are in the crosshairs as Congress looks to generate billions of dollars in additional revenue.
In the near future, Congress will consider various proposals to eliminate the deduction, reduce it, or perhaps replace it with a tax credit of some sort.
Eliminating the mortgage interest deduction would have a devastating impact on individual homeowners, the housing industry, and the economy. It would impose a large tax increase on millions of middle-class homeowners, weaken demand for housing, cost the economy hundreds of thousands of jobs, drive down home values, and erode household wealth. It could even push the housing sector back into recession.
Every 1 percent decline in home prices reduces household net worth by about $180 billion nationwide; a 6 percent drop in home values would wipe out $1 trillion in household wealth. Lower home values also would shrink the tax base of local communities and force more homeowners underwater.
Curtailing the Low Income Housing Tax Credit—the most successful affordable rental housing production program in U.S. history—also would have serious consequences. In addition to serving the housing needs of families earning 60 percent or less of area median income, the tax credit generates about 95,000 jobs and $7.1 billion in economic income each year.
The bottom line is that any revenues going into the Treasury as a result of eliminating or limiting the mortgage interest deduction or tampering with the low income housing tax credit would be more than offset by the broad economic disruption that such ill-advised and counterproductive action would cause.
Another challenging task on the Congressional agenda is reform of the nation’s housing finance system. The NAHB believes any reform effort should ensure that the federal government continues to provide some degree of backstop for a reliable and adequate flow of affordable housing credit in all economic and financial conditions.
We have proposed gradually phasing the government-sponsored enterprises, Fannie Mae and Freddie Mac, into a system capitalized by the private sector and supported by a federal backstop. The federal government’s exposure would be limited, and private capital and insurance reserves would be depleted before any public funds were used to shore up the mortgage market.
Congress currently is considering proposals for reform of the nation’s housing finance system that are light years apart. Legislation in the Senate would provide for a federal backstop much like the NAHB advocates. Legislation in the House would not provide for a federal backstop to the market; the private sector would bear all responsibility. The House legislation also would make dramatic changes to the Federal Housing Administration, greatly diminishing its role in both single-family and multifamily housing.
Ultimately, such a plan would limit homeownership opportunities for many people, drive up the cost of homeownership, and constrict the housing market in countless other ways.
The NAHB is working hard to ensure that members of Congress understand the serious, negative consequences that would arise from eliminating or altering the mortgage interest deduction as well as the deep support for this long-standing covenant between the federal government and the public.
We look forward to working with lawmakers to create a sustainable housing finance system that will ensure stability and liquidity and that supports both homeownership and rental housing.