Recently there have been some news stories about politicians who may be considering the abandonment of the mortgage interest deduction. This tax deduction has been around for decades and allows homeowners to itemize their mortgage interest on their primary residence, second house and even home equity loans from their income.
It's clearly a benefit for current home owners who are levered up, and for realtors--because this deduction helps to make homes more affordable, and hence results in higher selling prices on real estate. However, with governments spending much more money than they're currently bringing in I figure that political leaders will consider either doing away with mortgage interest deductions, or else setting up some rules that limit the perk---These limits could include income limits, or rule out the tax savings from mortgage interest on second homes or equity lines of credit.
One important question that home sellers and buyers should be asking themselves is--"Can this happen?" I think it can. The next important question will be, "What does that mean for future home prices?" Clearly, if you take away what is effectively a subsidy on buying home -- all else equal -- the future transaction prices will have to fall. This is one of many reasons why I think it might still pay to be a renter for a few more years and enjoy the flexibility and optionality that renting provides.
From an economic perspective, the goal should be equal tax treatment of housing and other forms of investment. Unequal tax treatment of housing encourages speculative behavior, increases price volatility, and crowds out more productive forms of investment, all to the detriment of growth and macroeconomic stability.
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