Economy & Business

The Mortgage Deduction and the ‘Middle Class’

The GOP’s new tax plan would limit the mortgage-interest deduction to the first half a million dollars in principal. The Washington Post has a piece saying this hurts the “middle class,” prominently quoting real-estate brokers with an obvious financial interest in the deduction. The New York Times says it “would hit middle-class teachers or office workers looking to buy starter houses in high-priced, economically vibrant areas such as New York City and Silicon Valley.”

In other words, there are places where half a million dollars won’t get you very far. The problem is that these are are not places where the middle class lives.

The Post story reports the median sale price in Bethesda, Md., at more than $850,000. But in 2012, CNN ranked Bethesda the top-earning town in the country. As of 2015 the median household income was nearly $145,000, more than twice the nationwide median and more than 50 percent above the median for the D.C. metro area.

Better data points come a couple paragraphs later in the Post story: “In the District, 35 percent of all mortgages are for more than $500,000. In Maryland, 9 percent of mortgages are for more than $500,000; in Virginia, 8 percent are.” In other words, people working in D.C. have plenty of options, even inside the city, when it comes to buying a house that will fall under the new limit. (Full disclosure: My wife and I own a home in Herndon, Va., though I mostly work from there rather than D.C.) Regarding New York, the liberal economist Dean Baker noted this morning that if you put 10 percent down, you can buy a house in the top third of the price range for the New York City commuter zone and still take full advantage of the limited deduction.

Baker also points out that since the principal declines with each payment, oftentimes deduction losses would be limited to the earlier years of the loan. Someone with a $600,000 mortgage would lose one-sixth of the deduction at first, but would lose nothing once the principal fell to the $500,000 limit.

I’ve long been fascinated and perplexed by the question of how federal policy should account for differences in cost of living, and it’s definitely true that $500,000 will buy you more in a small town than it will in a trendy urban downtown or a ritzy suburb. But you don’t need more than a $500,000 mortgage to live a middle-class lifestyle, even in the New York or D.C. areas.

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