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Eliminating the mortgage deduction could have a domino effect

The move could hurt the recovering housing market and rob cities of money for resident services

Posted: July 7, 2013 2:00 a.m.
Updated: July 7, 2013 2:00 a.m.

A home, for sale by Realty Executives of Valencia, on Galbreth Court in the Hasley Hills area of Castaic. If the mortgage interest deduction is axed, the move could hurt a recovering housing market and rob counties and cities of revenues used to provide services to residents. Photo courtesy of Realty Executives


The negative domino effect would extend beyond the recovering housing market if Congress were to eliminate the mortgage interest tax deduction, Santa Clarita Valley Realtors and other financial experts agree.

As part of ongoing talks over U.S. tax reform, Congress has been debating making major changes to — if not eliminating outright — the mortgage interest deduction.

The tax deduction costs the United States $70 billion a year in revenues, according to the Center on Budget and Policy Priorities. Others peg the cost to the U.S. coffers as high as $100 billion per year.

Both the National Association of Realtors and California Association of Realtors have called on Congress to “do no harm” to existing and future homeowners.

“Home prices would fall over the country, which would destabilize the economy,” said Paul Gonzales with Troop Real Estate.

Declines in ownership

While the average deduction taken by tax filers varied from state to state, the Pew Center found that northeastern states and parts of the West — including California — had the highest average per-filer deductions.

If the mortgage deduction is eliminated, home ownership could decline 30 percent to 40 percent, Gonzales said.

The action would be equivalent to a major tax increase for homeowners.

“The mortgage interest deduction is a sacred cow,” he said.

Other local Realtors have mixed views as to the degree home ownership would decline.

The effect would catastrophic, said Erika Kauzlarich-Bird with Triple D Realty.

But others, like Paris and Connor MacIvor with Remax of Santa Clarita, don’t believe a decline in home ownership will be as drastic.

Based on studies they’ve read, the two Realtors believe the desire to own a home goes beyond the immediate financial incentive.

“Home ownership provides emotional, financial, and personal stability,” providing “basic human needs,” Connor said.

And buyers don’t all make a home-buying decision based on becoming eligible for a deduction, said Kathy Salisbury with Triple D Realty in Stevenson Ranch.

Taxation translation

Even if home ownership didn’t sink catastrophically, the move could mean a longer-term financial hit, said Mike Meena, president of August Financial in Santa Clarita.

“Many Americans have trouble saving for retirement,” Meena said. “They can at least pay off their homes and use that equity as another retirement vehicle and income source.”

Eliminating the mortgage deduction could reap the government short-term revenue, but in the long run, Meena said, it could be forced to care for people when they are older — “and they will have to take care of them for much longer,” Meena said.

Once people lose the deduction, said Dwight Hawkins with Realty Executives in Valencia, it would be harder for many to buy a home.

“And, when housing prices decline, it could change a neighborhood,” Hawkins said.

Other tax impacts

Home ownership rates in Santa Clarita are 71.6 percent, according to census statistics.

The California Legislative Analyst’s Office estimated Santa Clarita collected, on average, $140 per resident in property taxes during 2009 to 2010.

Thirty-one percent of the city of Santa Clarita’s general fund is based on property taxes collected by Los Angeles County, said Darren Hernandez, Santa Clarita deputy city manager.

“Repealing the deduction would be bad for homeowners and it would be bad for cities and school districts that rely on property tax revenue,” Hernandez said.

Such a change could potentially drive down home ownership rates, drive up the cost of financing, and push down the value of real estate, he said.

Quality of life

While Proposition 13 — the 1978 property taxation limit enacted by voters — put a ceiling on the assessed value of a property, it did not set a floor limit, Hernandez said.

A major drop in property values — and thus taxes that can be collected — would mean an even greater blow to communities, he said.

Fewer owner-occupied residences would have a negative effect, Hernandez said.

“There is a positive correlation between higher owner-occupancy rates and the quality of a community,” Hernandez said. “People who own their homes tend to be more invested in the property they occupy.”

Another impact, he said, is that a big portion of peoples’ net worth is the value of their home. If values drop, so would individuals’ net worth, he said.

And fewer people owning their own homes would mean less spending on items for the home. Such spending generates revenue for cities to provide services to residents — like police services, parks, schools and overall quality-of-life enhancements to the community.



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