Republican Tax Cuts Could Put Homeowners Underwater

The Republican tax-plan will hurt Americans who vote Democrat the most. Reuters

A Republican proposal to limit the tax deduction for mortgage interest would cost middle-class urban homeowners thousands of dollars every year and could destabilize the housing market.

The GOP plan—which critics say cuts out the very heart of the American Dream of homeownership—would maintain the current and extremely popular tax deduction on mortgage interest, but only on new mortgages below $500,000, down from the current $1 million.

The change would especially affect would-be homeowners in urban centers where the average home costs well above $500,000. The median home price is $1.27 million in Manhattan and $1.5 million in San Francisco. The high sale prices suggest excessive wealth, but many urban homebuyers are decidedly in the middle class because costs of living are far higher in those regions.

As such, the change in the mortgage deductability is neither good as a tax policy nor as a housing policy, Bill Gale, co-director of the Tax Policy Center, told Newsweek.

"This will negatively impact both existing and new home prices, it will hurt home ownership rates and it's a double hit for people living in urban areas because of the proposed cuts on state and local tax deductions," he said.

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A mortgage interest deduction facilitates homeownership, but in order to receive the deduction, homeowners must itemize their deductions rather than taking the standard deduction. In 2017, the standard deduction for a head of household was $9,350 but the Republican tax plan would double that.

But the increase in the standard deduction won't likely be large enough to compensate for the lost of the interest deduction, which is claimed by 70 percent of American homeowners—85 percent of them earning less than $200,000 a year.

Cutting the deduction would hurt people of color in particular, if home prices sagged as expected. Wealth from equity in a home constitutes 51% of total wealth of the average white household, but 71% for black households. Homeownership has long been central to the American Dream, but also has been a key generator of wealth for middle class families.

The mortgage deduction has been in place as long as there has been an Internal Revenue Code and its value is capitalized into the price of most houses. A drop in home values of just 5% cause by the change to the deduction could destroy $1 trillion in household wealth for the roughly 75 million homeowners in the United States.

Some politicians say that the cuts are politically motivated, intended to hurt those who don't vote Republican. Middle-class homebuyers living in high-cost cities will be hit hardest and large urban areas typically vote Democrat in elections.

"It's clear this is a hostile political act aimed at the economic heart of New York with no basis on the merits," New York State Governor Andrew Cuomo wrote in a letter to President Donald Trump.

Southern states, where home prices and tax rates are low, would largely remain unaffected by the proposal. The region overwhelmingly voted for Trump in 2016.

"Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and, from a cursory examination, this legislation appears to do just that," said National Association of Realtors President William Brown, in a statement.

Not all economists agree. To some, the reduction in mortgage deductability is good, progressive tax policy.

"The reality is that this only hurts the high-end of the market," claimed Aaron Terrazas, senior economist at Zillow. "Most buyers don't even take the deductions into account when shopping for a home."

Republican Tax Cuts Could Put Homeowners Underwater | U.S.