Will Tax Reform Hurt Housing Market?

A proposal coming out of the White House to raise the standard tax deduction would be welcome news for most taxpayers, but some in the housing industry fear it could discourage new homeowners.

Among the changes being proposed is an almost-doubling of the standard deduction -- from $12,600 to $24,000 for a married couple filing jointly.

The Tax Policy Center predicts more than 80 percent of taxpayers would opt for the standard deduction, rather than itemizing to get a tax break on their mortgage interest.

What that could mean is buyers shying away from a new house because they don't see the financial payoffs to the investment.

"We're going to have to come up with a whole new justification for homeownership," Steve Huffman, director of government affairs from the Tucson Association of Realtors said during a recent presentation to the Southern Arizona Mortgage Lenders Association.

"If the standard deduction doubles, fewer people will want to be tied or anchored to a house," he said. "It will change people's behavior and attitude toward homeownership."

The mortgage interest deduction costs the federal government about $70 billion a year.

The ability to itemize it would still be on the books, but likely go unused by many taxpayers, Huffman said.

"I don't know that we should be afraid of it," he said. "But we should be aware of it."

The cost benefits of writing off mortgage interest has been waning since the housing crisis because falling interest rates made the deductible dollar amount minimal, John Burns, CEO of Irvine, Calif.-based John Burns Real Estate Consulting, wrote in an analysis titled, "Homeownership no longer has tax savings."

He believes the higher the standard deduction, the lower the rate of homeownership in the country.

"Every April 15, the most financially qualified renters in the country used to feel the pain of not owning by writing a check to the IRS," he said. "For most, that is no longer the case. The lack of tax savings is just one of numerous reasons why homeownership is the lowest it has been in decades, and we believe homeownership is headed lower."

He said the tax savings has been eliminated from the calculation of rent-versus-buy decisions.

Fewer homeowners could create downward pressure on home prices.

That would be especially tough for local homebuilders who are struggling to compete with a hot resale market.

Currently, about 12 percent of home purchases in Pima County are for new homes.

The market would be more stable if that percentage rose to 25 or 30 percent, said David Godlewski, president of the Southern Arizona Home Builders Association.

Across the country, homeownership levels are at 50-year lows.

But tax and mortgage consultants say owning a home is still preferable to renting.

"Homeownership is more than a tax deduction," said Randy Hotchkiss, owner of mortgage consulting firm, Hotchkiss Financial Inc.

"It may be an issue with high-income net worth people who think up all kinds of ways to minimize their tax liability," he said. "But I don't think many people buy a house because the mortgage interest is tax-deductible."

The main questions he gets from homebuyers are about affordability, down payments, area schools and work commute time, Hotchkiss said.

"A lot of people want to get into a house," he said. "We're coming off of a bad economy, but it's getting better and will continue to get better."

CPA Michael Flowers, with the local firm Flowers-Rieger & Associates, agreed and said he still counsels clients to buy a home.

"There are many, many reasons to be a homeowner," he said. "In the long run, homeownership should provide you with some equity."

And, aside from the mortgage interest, taxpayers can itemize and deduct the cost of points paid on a mortgage loan, real estate taxes and late payment fees.

For homebuyers moving from out-of-state, moving expenses can also be deducted, Flowers said.

"Besides, you can do what you want with your home," he said. "You can change the backyard or change your house colors.

The National Home Builders Association, Mortgage Bankers Association and the National Association of Realtors are all opposed to what they call an "an attempt to devalue the mortgage deduction."

The industry groups fear falling enthusiasm for buying a home.

Any fretting would be premature, Flowers said.

"We don't pay a lot of attention to what's supposed to happen," he said. "We wait for it to happen and we'll adjust once we know."

The new U.S. Treasury secretary says tax reforms will be in place by August.

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