Tuesday, July 26, 2011


A few months ago, I received an urgent "Call to Action" from the National Association of Realtors.  The mortgage interest deduction, a key driver for home ownership and an indisputable benefit to homeowners, was under attack.

At the time, I felt there was no way the government would eliminate (or even reduce) the MID.  It simply plays too large a role in the overall value of housing, and with the GSE's (Government Sponsored Enterprises) Fannie Mae, Freddie Mac and FHA touching 90% of all mortgages being made today, I could not see the government putting a gun to its own head.

As more and more time passes, I'm starting to think I was wrong. 

Very connected industry insiders are saying there's now a "75% chance" the mortgage interest deduction is going to be scaled back by the end of 2011.  It will probably start with a cap on the deduction, limiting the deduction to the first $500,000 or $750,000 of one's mortgage, but the precedent will have been established.

The government isn't broke... it's $15 trillion in debt.  And the demand for new sources of revenue is simply too strong to think that housing is going to escape unscathed.  If the mortgage interest deduction is scaled back, I think it will be at least a few years before the issue is revisited, but the damage this will do to the high end of the market is undeniable.

As I have stated in post after post this year, we are living in a very segmented economy with a very segmented housing market.  The million dollar market in Denver, which already has 40 months of inventory, is going to get hit even harder.  The "trickle down" will roll all the way down to homes at or near the $500,000 range... I simply cannot see anything priced above this level holding value in the years to come.

If we are getting poorer as a nation, the demand for so-called "cheaper stuff" is going to increase.  And housing is part of this equation. 

There is already zero inventory below $250,000, and since it's no longer profitable to build, nothing new is coming online.  The population continues to increase by 3% to 4% per year, and people will always need places to live. 

Landlords are already feeling the "boom effect" of a poorer population.  Rents are rising because demand for affordable renting housing is hot.  It's only going to get hotter over the next few years, until rents become so high that the scales of affordability tip back toward homeownership as the more affordable alternative.

All this is to say that change is a constant, wealth is under attack, and you need to be able to read the tea leaves to figure out how to protect and provide for your family. 

High end housing is in big trouble, and the upcoming reduction of the mortgage interest deduction is going to make it worse.