Morning Report: Discussing the mortgage interest deduction

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Stocks are flattish this morning on no real news. Bonds and MBS are up. 

It should be a quiet week with respect to market-moving data and Fed Speak. New York Fed Governor William Dudley speaks at noon today, and that is it for the week. William Dudley is set to retire in mid-2018.

Work on tax reform continues, with both the House and the Senate drafting their own bills. Blue state Republicans (especially in CA, NY and NJ) are fighting to save the state and local tax deductions. The House hopes to vote on the bill next week. My sense is that the path to passage is so narrow that it will be a largely symbolic bill designed more to achieve a legislative victory than to reform taxes. I also think the estate tax will survive in order to save the state and local tax deduction. 

White House economic advisor Gary Cohn says that he doesn't think eliminating the mortgage interest deduction will affect the housing market. “The ability to deduct interest is a component that allows you to buy a bigger house, not what drives you to buy a house,” Cohn said during a Bloomberg Television interview Friday. It will affect the luxury market (especially in areas like the Northeast, where the luxury market is already weak),  but with the median house price around $245,000 limiting the mortgage interest deduction to $500,000 won't affect most MSAs. If you wanted to eliminate the MID at a point where it will cause the least amount of pain, now would be the time to do it, simply because low interest rates are making the interest portion of the typical mortgage payment small by historical standards. Back when interest rates were super high in the early 80s, almost 100% of your first year's mortgage payment went to interest. Today, about 70% is interest. 

The National Association of Realtors weighed in on the mortgage interest deduction as well, and they are against changes to it, as you would expect. They commissioned a study earlier this year that predicted a 10% drop in home prices and that homeowners with incomes between $50,000 and $200,000 would see an average increase in taxes of $815. 

One wrinkle to the change in the MID is that it applies to newly-purchased homes. So, if you haven't moved, your existing MID would not change. That will make depress existing home sales at the margin, but I can't see people staying put simply because of tax treatment of mortgage interest. People move for various reasons, but tax treatment usually isn't one of them. Regardless, if this provision stays, the death of the MID will have a much less dramatic effect than people are forecasting.