Proposed Changes to the Mortgage Interest Deduction

The Anchorage real estate market will take a hit if changes to the beloved mortgage interest deduction includes a reduction from $1,000,000 to $500,000, as currently being proposed by Congress. Although still up for debate in the U.S. House and Senate, there’s probably at least a 50/50 chance that homeowners with a mortgage over $500,000 will lose their interest expense deduction beyond the proposed new cap. Particularly hard hit will be the real estate markets in California, New York and Seattle which have had record high inflation in double digits the past couple of years. But Anchorage is also going to share in the pain. Over 25% of the active listings in MLS are over $500,000. So far in 2017, there have been 20 homes sold over $1 million and 4 are pending. There are also currently 20 single family homes for sale over $1 million. I guess you can say ‘So what? Buyers who can afford a million dollar home can afford to pay a little bit more. That doesn’t affect me.’ But, in reality, it will have a dampening affect on the entire market. Buyers who were previously considering moving up, may elect to take a step back and choose to remodel rather than move. Any time the tax rules change or mortgage rates increase, the market slows and takes three to four months to adjust. Anchorage has a lot of higher end relocation buyers due to its oil based economy. The medical and aviation professions are also some of our higher end buyers over $500,000.

Jerry Howard, CEO of the National Association of Home Builders was quoted last week as saying, “There are 7 million homes on the market right now that are over $500,000 and that the cap would devalue the homes. When housing values start to go down in one market, it spreads to the next and the next…. and the first thing you know you have a housing recession.” During the past ten years, home ownership rates in the U.S. have plummeted to just over 63%, down from 68%. Here in Alaska, rates are hovering around 65% but down from 70% in 2004. The last thing the housing industry needs right now, locally or nationally, is a change in the mortgage interest deduction. Soon the housing industry is going to have to cope with a rising interest rate. I know I have predicted mortgage rate increases for the past four years but with a new Fed chairman, I’m not alone in believing it is inevitable before the end of the year. Construction costs are also rising due to lack of material and labor shortage. The graying of America is not just in the suburbs but amongst the construction trades. Generation X and Y’s wanted to be lawyers instead of plumbers. If you want to buy a newly constructed home in Anchorage next year, expect to pay over $500,000.

One big fear is that this is just the beginning of the end of the mortgage interest deduction for all homeowners. And, if that happens, the American dream of home ownership will be in real peril. Homeownership provides an opportunity for the accumulation of wealth for the working and middle class. It promotes civic participation and community responsibility as well as social stability. And it also serves as an engine for economic growth.

The one good caveat for the mortgage interest reduction plan is that homeowners with existing mortgages over $500,000 will be grandfathered in. So, if you are contemplating a move-up, now is the time to act.