It may be yet another reason why younger Americans are choosing to rent: Buying a home is unlikely to offer them any tax break. That is thanks to near-record low mortgage rates and an increase in the standard deduction. Add them up, and the math doesn’t compute for savings.
“It has removed one of the main reasons people had urgency to buy,” noted John Burns of California-based John Burns Real Estate Consulting. “High rent should be a kick in the pants, lowest interest rates should be a kick in the pants, but I think if you were getting a tax break too, I’m sure we’d see more entry-level buyers.”
The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers. According to Burns’ analysis, a typical first-time homebuyer, financing 95 percent or less of a median-priced U.S. home (around $200,000) pays less than $12,000 in mortgage interest and property taxes annually. That is not enough to hit the itemization level. Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal.
“It’s interesting, nobody is mentioning tax savings as a reason to buy anymore in focus groups,” added Burns.
The mortgage interest deduction is one of the largest federal expenditures at about $70 billion a year, but it does very little to boost homeownership because it favors wealthier buyers, purchasing more expensive homes.
In 2012, 77 percent of the benefits went to homeowners with incomes above $100,000, while close to half of homeowners with mortgages, most of them middle- and lower-income families, receive no benefit from the deduction, according to the Center on Budget and Policy Priorities.
In a 2013 paper, the CBPP advocated eliminating the mortgage interest deduction and replacing it with a mortgage interest credit:
A mortgage interest credit would provide more help than today’s deduction to most middle- and lower-income homeowners with mortgages, while trimming subsidies for upper-income owners. As a result, it would likely do more than the existing deduction to help families that would otherwise struggle to afford the costs of homeownership.
Members of Congress are often hesitant to touch the issue of the mortgage interest deduction because it is so popular with higher-income homeowners. Housing affordability for young Americans, however, continues to deteriorate, as rents rise and the supply of starter homes falls.