Defenders of the mortgage interest deduction (MID) framed changes in the GOP tax plan as a dagger in the heart of the American Dream and possibly an anchor on home prices. They managed some concessions, but the bill passed and now all that remains is to wait and see the consequences – intended and unintended.
From a local perspective capping the MID to $750,000 of mortgage debt will have very little affect – if you take this year’s sales as a benchmark. Those sales are just an example because everything before Dec. 14 is grandfathered.
Thanks to some research and a heat map by Attom Data Solutions we know that during the final months of 2017 there were 77 home purchases (1.4% of all sales) in the Northeast Tennessee portion of the Tri-Cities region with mortgages over the new MID limit. And almost all of them were in Washington and Carter counties. Washington County VA was the only SW Virginia county with purchases above the new limit.
Here’s how those high-end purchases broke down by county.
Washington TN – 41
Carter – 29
Sullivan – 4
Greene – 3
Washington VA – 3
Washington County TN ranked 11th in Tennessee with the number of the high-end purchases in Attom’s study.
Here are the top five counties and the number of high-end purchases:
Shelby – 456
Williamson – 346
Davidson – 321
Rutherford – 128
Grainger – 104
Thirty-nine of Tennessee’s 95 counties had no loans this year above the new MID cutoff.
Nationwide the new tax lowers for MID to 3.9% of homebuyers.
Of course, banks love the jumbo loan like those that were targeted by the GOP tax plan, and it’s possible the new rule will crimp the 2018 high-end sales volume. But most homeowners won’t feel the bite.
What’s more worrisome is the new doubled standard deduction could take a big bite out of the number of people who itemize and that would wipe out other deductions. In other words, for many taxpayers, there’s less of an incentive to itemize.
According to the National Association of Realtors, the final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after Dec. 14, 2017. Current loans of up to $1 million are grandfathered and are not subject to the $750,000 cap. Neither limit is indexed for inflation.
The final bill repeals the deduction for interest paid on home equity debt through December 31, 2025. Interest is still deductible on home equity loans or second mortgages if the proceeds are used to substantially improve the residents.
In the larger MID policy argument, Yale economics professor and Nobel laureate Robert Shiller doesn’t think the MID really matters to the housing market. He does think it matters to rich people and bankers.
“That is going to be a substantial hit to people who are paying a lot of property taxes, and it might be a consideration that you make before you buy a big mansion in some high property tax state,” Shiller told one reporter.
Some advocates warned a MID cap would push home prices down. But much of the back-and-forth over the MID is based the assumption that people with act rationally. But, as Shiller points out, people are not rational when it comes to housing. The human factor — the emotional aspect of most people’s single largest investment, a home — is far greater than the market stimuli that are accorded such importance, he says.
“At the national level, it’s not likely to affect very many people; however, in some high-housing costs markets it is a concern because they will be significant numbers of people who will be affected,” said Joseph Kircher, senior economist at realtor.com.
This time next year, we’ll have a better handle on what the results – or unintended consequences – of the GOP tax plan will have on the housing market.
The mortgage interest deduction was created in 1913. It was a byproduct of Congress making interest deductible when it passed the first income tax.