Would lower mortgage interest deduction worsen housing inventory woes?

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The lower mortgage interest deduction cap in House Republicans' tax bill would create a disincentive for existing homeowners to sell and add to already tight housing inventory concerns, according to Black Knight.

"Limited data is available to examine the effects of removing an existing tax incentive on borrower's purchase behavior," said Ben Graboske, executive vice president in Black Knight data and analytics division, in a press release. "One thing that seems clear is that a reduction of the MID could further constrain available housing inventory."

Some of the almost 3 million borrowers with original loan balances above $500,000 may want to hold onto their homes to keep their current interest rate deduction, according to Black Knight's Mortgage Monitor report, which adds analysis to industry data released in an earlier First Look report each month.

The House bill would reduce the $1 million MID cap to $500,000 and grandfather in pre-existing loans at the higher MID cap.

So existing borrowers in that group who also have amortizing loans new enough to still be making sizable interest payments could find it more advantageous to hold on to existing loans.

Interest dominates payments until roughly halfway through a standard 30-year mortgage's life, and many but not all borrowers prepay their loans for various reasons before then.

If the lower MID cap were put in place and interest rates remained flat, prospective home buyers getting new loans above $500,000 could pay $2,600 to $4,200 more per year than they would have under the old MID cap, according to Black Knight.

The median U.S. home price is well below $500,000. But several state and local markets have significant numbers of homes priced above $500,000.

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Mortgage interest deduction Tax reform Purchase Housing market Black Knight