I think most economists believe that the mortgage interest deduction is a bad idea. It biases capital investment into housing and out of the business sector, thus depressing growth and productivity. At the same time, the contraction in housing prices is a key factor holding back consumption and GDP growth in the near term. It’s reasonable to assume, therefore, that nothing will be done to scale-back the mortgage interest deduction any time soon.
In a June 15 forecast, UCLA economist Ed Leamer noted that rising home prices had fueled higher consumption and growth in past recoveries. High joblessness today, however, is depressing home buying, which depresses consumption and GDP growth. “The result is an economic Catch-22,” he says.
On June 14, the Federal Reserve Board released a working paper that examines the tendency of households to increase their consumption in response to a rise in their housing wealth. Increases in housing wealth deemed to be permanent are estimated to raise consumption by between $3.40 and $9.10 annually for every $100 increase in housing wealth.
On June 14, the Joint Center for Housing Studies at Harvard released the 2010 edition of its annual State of the Nation’s Housing. Among the points: by the end of 2009, 1 in 7 homeowners owed more on their mortgages than their homes were worth, foreclosures exceeded two million, and the share of household spending more than half their income on housing was close to a record high.
On June 11, the Federal Reserve Bank of New York released a study of homeownership that adjusted official data for homeowners with negative equity that are expected to eventually become renters. Excluding such people from the homeownership rate reduces it by 5.6 percentage points.
A May 25 report to Congress from the Federal Housing Finance Agency details the financial status of Fannie Mae and Freddie Mac. Their losses totaled $93.6 billion in 2009, almost all of which occurred on mortgages originated between 2005 and 2007.
Also on May 25, the Tax Foundation published new data on the percentage of federal tax returns claiming the mortgage interest deduction by state. Maryland reported the highest percentage, North Dakota the lowest.
On May 22, Brent White of the University of Arizona law school defended the morality of homeowners who strategically default on their mortgage loans. He says family obligations are superior to one’s contractual obligations.
On May 13, HUD Secretary Shaun Donovan suggested that modification of the mortgage interest deduction may be necessary for deficit reduction.
An April study from the Tax Policy Center presents revenue and distributional data for several options for eliminating or modifying the mortgage interest deduction.
A March study by Federal Reserve Bank of Boston economist Daniel Cooper looked at the funds homeowners took out of home equity between 2001 and 2007 and their disposition. Contrary to popular belief, homeowners did not consume the bulk of extracted funds and saved or invested most of them or used them for home renovations. Shorter version here.
Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006)
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June 15: Focus on National Security
June 14: State and Local Budget Blues
