At the end of last year, there was much talk about eliminating the federal tax deduction on mortgage interest as part of a deal to avoid the nation plummeting over the fiscal cliff. In the end, the allowance survived, although a cap was imposed on high earners.
However, the January fiscal cliff was just the first of what may be many budgetary precipices, and there remains a significant possibility of the deduction being lost in coming months or years. If you've been listening to some lobbyists, you might believe this would result in realty Armageddon, with home sales and prices tumbling, while the number of existing mortgages that end up in foreclosure rockets. But that is a highly unlikely scenario.
Deducing from Deductions
The most important reason why the housing market would be scarcely affected is that the perceived value of mortgage interest deductions is way, way higher than the real value.
Let's test that with a guessing game. How much do you think the average middle-income earner benefited from this particular deduction in 2011? $3,000? $1,500? No, it was, according to Bloomberg, $139. That's $2.67 a week or 38 cents a day.
Now, with the economy recovering at a rate that makes glaciers look reckless, there may still be families out there who would miss $2.67 a week. But aren't most of them likely to be among the many who don’t get the deduction anyway, because they don’t itemize?
The Tax Policy Center estimates that 70 percent of all taxpayers opted for a standard deduction in 2010. And that's the second reason why losing the mortgage interest allowance probably won't have much impact on current and future homeowners: it's likely only a minority claim it.
Low Mortgage Rates Much More Crucial
It's true that the loss of the deduction would have a more noticeable impact on richer folk, both because they're more likely to itemize and because the sums involved are generally larger. Indeed, The Joint Committee on Taxation estimates that very nearly $8 in every $10 (78 percent) claimed for this particular tax allowance in 2010 went to families with incomes exceeding $100,000 a year -- and 32 percent benefited those with incomes over $200,000.
Is it likely that the richest citizens of this, the wealthiest nation on Earth, are going to deny themselves home ownership for the sake of a tax break of less than $4,000? Or, for that matter, that middle-earners are going to forego homeownership because they face a $139 hike?
No. Far more critical components in homebuyers' thinking are current home mortgage rates -- along with home prices and household income. And it's no coincidence that these are the three components (averaged out nationwide) that make up the National Association of Realtors' (NAR's) Housing Affordability Index.
On Jan. 9, the NAR revealed that 2012 will end up "a record year for housing affordability conditions.” The organization predicts that last year's high levels of affordability could fall this year. In the words of its chief economist Lawrence Yun:
Rising home prices and a gradual uptrend in mortgage interest rates will offset improvements in family income, but 2013 likely will be the third best on record in terms of household buying power. A window of opportunity remains open for buyers who can qualify for a mortgage.
The Best Mortgage Rates May Be History
Yun is just one of many economists who expect the all-time low mortgage rates we've recently seen to crawl -- along with house prices -- upwards in the near- and medium-term. If you find that a spur to trading up or buying your first home, you can check out mortgage rates and terms using LendingTree's home affordability calculator. Just don't lose any sleep over mortgage interest deductions.