The mortgage interest deduction (MID) is going to be modified and probably substantially reduced by the Trump tax-scheme changes. I'll address that issue here, probably for the last time.
Before delving into the issue, I'll simply state that the changes will be good for the economy, housing, the real estate-related exchange traded vehicles, and the structure of fiscal policy in the U.S., contrary to what the real estate industry folks say.
There will, however, be social ramifications of the probable changes that are important to note.
The economic justification for maintaining the MID as it is currently structured has been absent for many decades, but because of the lobbying power of the real estate industry, the political capital that an executive administration would need in order to gain congressional support for implementing a change has always been considered too expensive.
That changed following the last housing crisis and the increase in sovereign debt issuance it required in order to counteract it; which gave rise to the Tea Party and related groups, and the push for reduced government debt.
I've dealt with those issues in previous columns and suggest reading "A Taxing Situation for Homeowners" and "Don't Fear Mortgage Interest Deduction Talk" as the history, situation, logic and numbers I discussed in them are the same today.
The germane point now is that the initial post-housing crisis proposals to reduce the MID have entered the "Overton window" of political possibility, and were going to be pursued by both presidential candidates and their respective parties. It is not simply a Trump or Republican issue.
Although it's not clear yet exactly how the MID will be changed, it is probable that it will be something like halving the caps and reducing the number of eligible properties per tax filer to one from two. In conjunction with that, the standard deduction will be increased.
The result will be that the 20% of mortgagors who itemize deductions for tax purposes will absorb the loss of the MID and most probably experience a net tax increase as a result.
That group is largely represented by professionals, such as doctors, lawyers, accountants, engineers and similar. Although this group also includes small-business owners, because they have the capacity to take advantage of corporate tax deductions that most professionals with W-2 income can't, they will be largely unaffected by the change.
Although the reduction in the MID will actually be beneficial for the economy and housing market in the long run, because the belief in its benefits is so ingrained, especially for the buyers of higher-end homes purchased with mortgages, it is most probable that this group will postpone purchase decisions as they become aware of the proposed changes to the MID.
The single company most negatively impacted by such action is Toll Brothers (TOL) . Although Toll's sales, selling prices and stock price have all been rising recently, I think this is indicative of an unawareness by buyers to the coming probable changes to the MID, and the fact that those changes will not only not have a grandfather clause but may be backdated to include 2017 in order to meet the revenue-neutral requirements of fiscal conservatives in Congress.
As the media begin to discuss the issue, along with increased lobbying efforts by the National Association of Home Builders and the National Association of Realtors, awareness of it will increase and home purchases in the $750,000 to $2 million range should dramatically decline this spring.
Although this may cause some first-time homebuyers to postpone purchases due to an unfamiliarity with the issue and an unawareness of the fact that it doesn't affect most of them, the biggest issue facing the first-time homebuyer market this spring remains the recent spike in mortgage rates.
The combination of rising mortgage rates and the reduction in mortgage interest deductibility should have a negative impact on the housing sector broadly during 2017, and this should result in a decline in the price of all the builders.
This should also be exacerbated by the post-Trump election euphoria and the expectations for an immediate economic resurgence being sobered by the reality of the fiscal problems facing the Trump administration, especially as the debt ceiling must be addressed again this March.