Reducing Tax Deductions Could Hit Property Values

By: Eduardo Porter; David Leonhardt: REALTOR® Magazine Online
Housing market experts say the proposal by a White House advisory panel to reduce residential mortgage deductions and eliminate tax deductions for property taxes would have a negative impact on property values for millions of homeowners, especially those living in high-priced markets in California and the Northeast.

The Mortgage Bankers Association cautions that the plan will become "a tax increase" for many working families; while the NATIONAL ASSOCIATION OF REALTORS®, which forecasts a 15 percent decline in home prices nationwide, frets that it will be disastrous for the housing market.
"Almost any economic analysis will conclude that there will be some downward effect on prices, especially at the top of the market," concedes James Poterba, an economist at the Massachusetts Institute of Technology and a member of the president's panel. "The question is how large it will be."

A study from the Center for Economic Policy Research in Washington, D.C., shows that homeowners in expensive markets who attempt to keep their monthly house payment steady could see prices decline by more than 20 percent, and significant losses for owners of high-priced homes in cheaper markets could occur as well.

The hit that homeowners are expected to take would be somewhat softened by the panel's plan to phase in the reforms over a five-year period.