If you or your kids are planning on buying a home during the next 10 years or beyond, your legislators in Washington are about to make it very difficult if not impossible.
At risk today is the tax deduction on your first mortgage, which enables most Americans to afford a home in the first place.Owning a home, as 64.5 percent of American families do, has been called the American dream, but actually it is much more. Since the days of Thomas Jefferson, owning a home has been the foundation of our political and economic stability. Widespread home ownership is one of the qualities that makes this nation unique and the envy of the world.
If Congress further limits or removes the deduction, it could be the beginning of the end of a major part of our economic system and democracy as we know it. If the majority of Americans no longer have a financial stake in the land, much will change and it won't be good.
In twin bills now awaiting Congressional review, HR-2147 and HR-2146, Congressman William Lipinski (D.-Ill.) is pushing for limiting the deduction of interest on home mortgages to the first $500,000 of a loan. At first blush this may not seem to affect many people. But think of your grandchildren, your children and even yourself 20 years from now when you want to retire. Consider this:
Prior to 1987 there were no restrictions at all on the deduction of interest paid on home mortgages. In that year, Congress set the limit at $1 million. The limit was way beyond the reach of most Americans and nobody really cared.
Proponents of the $1 million limit then said they were only taxing the rich. Critics said Congress was taking the first bite out of the sacred cow - housing.
In the early 1970s, "Ted Kennedy supported lowering the deduction to $20,000 or less, his definition of wealthy at the time," said Tim Hansen, legislative aid on the bills for Rep. Lipinski.
In 1970 the average home cost about $26,000; according to the National Association of Home Builders (NAHB) in Washington, D.C. Back then, no one dreamed that today the average price would be $150,000. If Kennedy had been successful, for all practical purposes there would be no mortgage interest deduction today and a generation of homebuying Americans would have been locked out of their houses.
If your house is worth $150,000 today, it could be worth $750,000 to $1 million by the year 2010, if you use the same NAHB rate of increase. That means that if you retired and wanted to trade up, or simply move into a comparable house at another location, you couldn't, unless you could do without a tax deduction on the first $500,000 - providing Congress did not again lower the mortgage deduction limit or remove it entirely.
"It's clear, eventually there will be no deducting of any interest paid on a mortgage," said Roland Barstow, chairman of Chicago-based Bell Federal Savings, one of the nation's most profitable S&Ls.
Congress is not thinking ahead. In the great rush to enhance revenues (read raise taxes) they will prevent Americans after the year 2000 from buying homes, all because our legislators haven't the political courage to cut waste and unnecessary spending.
"The interest deduction is critical to making homes affordable for most Americans and it must be protected," said Burton C. Wood, staff senior vice president of the Washington, D.C.-based Mortgage Bankers Association of America.
THE COUNTER BALANCE. Lipinski's bills claim to have a balancing counter offer. The bills would allow for the establishment of IRA-like accounts for housing purchases - an excellent idea.
"We want to help the average American buy a house and not subsidize the wealthy," said Lipinski. That's the good news.
The bad news is that the contribution limit for a couple filing jointly, under the Lipinski bill, would be only $4,000 a year with a $20,000 total limit on the account no matter how long you saved. At that rate, would-be homebuyers could never keep up with rising housing costs.
In addition, even with the full $20,000 today, after paying six or eight thousand in closing costs and other new home expenses, homebuyers would be left with only $12,000 to $14,000 for a down payment. This would be enough for 10 percent down in most geographic areas today, but that's not where most people live.
This already is of no help for buyers in the major metro areas. Today the average price of a home is $208,000 in the New York area; $227,000 in Los Angeles; $293,000 in San Francisco; $166,000 in Chicago; $200,000 in Boston and $191,000 in Washington, D.C.
If you lived in these high-cost housing areas, you most likely would have to rent for the rest of your life, or build a log cabin very deep in the woods.
The proposed IRA-like housing account is a sound idea that should be expanded upon. However as it now stands, when it comes to preserving America's sacred cow, this IRA would be useless.
If the loss of your tax deduction concerns you, write to Gary S. Meyers at 308 W. Erie St., Suite 300, Chicago, IL 60610 and we'll pass your letters on to Congressman Lipinski.
Reader questions will be answered and may appear in this column, when mailed to Gary S. Meyers at 308 W. Erie, Suite 300, Chicago, Ill. 60610