Homeowners interest deduction and Obama. A rant.

The president last night targeted the homeowners interest deduction as an example of a provision which helps only the wealthy.

Here is my analysis of the homeowners interest deduction:

The way it functions, is you can deduct from your income any amount you pay in interest on your home. This basically equals a taxpayer subsidy for home buyers, since they are essentially paying a percentage of your interest, in whatever amount your marginal tax rate is.

(Suppose your tax rate is 28%, then if your interest is 2k per month, you are saving $560, which is obviously being made up by other taxpayers.)

So who benefits from this?

If you buy a house, you don’t benefit at all. Because the price you are willing to pay for a house, is the calculation of its monthly payment. And everyone else is also making the same calculation. So if a 300k house now has a 28% higher post-tax monthly payment, people who used to pay 300k, will now only be willing to pay 250k. And since that is true of the whole market, prices will fall. So the buyers break even on this.

People who owned houses when the law was originally passed, were the ones who benefited. And probably the ones who lobbied for it.

Repealing the law will only make home prices fall more, and is basically a transfer of wealth from all current home owners, to the feds.

(How about the lenders in future transactions? I need to think about that.)

Are all current homeowners wealthy? Is there a reason we think they should now bear this penalty?

The other people who gain from the deduction, are people who refinance, since they essentially get a taxpayer subsidized loan. These people are usually poor.