FROM ECONOMIC FOCUS

Volume 13, Issue 11
For the week of March 13, 2009
AN ATTACK ON "A SACRED COW"
There is a number of economists who are advocating that home mortgage interest deductions be radically revised.
Edward L. Glaeser, a professor of economics at Harvard recently published a piece on the New York Times blog Econimix that suggests it is time to reevaluate the "sacred Cow" as he puts it, home mortgage deductions.
According to Glaeser a wide range of economists are faulting the deduction for several reasons:
1. "Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets...that leverage means that a housing price swings can easily wipe people out."
2. "The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets...the only effect is to make prices go up"
3. "The deduction is wildly regressive." Thus the higher the mortgage interest amount the higher the deduction.”
4. "The deduction encourages people to buy larger, single-family detached home, and that increases carbon emissions and pushes people oft of cities. The deduction encourages people to buy more expensive homes, which are generally bigger homes. Bigger homes use more energy."
5. "The home mortgage interest deduction is poorly designed to encourage homeownership, which is, after all, the alleged desideratum."
Glaeser then proposes:
"Enact legislation now that will gradually decrease the cap on the mortgage principal for which homeowners can deduct interest payments by $100,000 a year over the next seven years until it hits $300,000."
"The effect during the next two years should be sufficiently small that it will be unnoticeable in the current environment. Ending the madness of encouraging Americans to be everything on housing, we can hopefully reduce the odds of a tragic repeat of the current boom-bust cycle."
In an extensive search of the factors contributing to the current housing crisis mortgage interest deductions didn’t even rate a mentioned, except in academic circles.
To the contrary, interest deduction has proven to be an encouragement for and an exclusive benefit of homeownership. The deduction has also proven to be a stabilizing factor in homeownership. It has been a central pillar in the housing industry for many years and there is no evidence of any negative impact on the housing market. However, tweaking with the benefit could very well have a disastrous effect.