In yesterday’s Wall Street Journal, talk radio host Hugh Hewitt has an op/ed titled “Policy Purity is Bad Politics.” In it, he argues against capping the mortgage interest deduction.

I’ll comment on three things:
1. His economic analysis,
2. His political analysis,
3. My own puzzle about realtors’ views on this.

1. His economic analysis.

Hewitt’s economic analysis is approximately correct. He quotes the statement of economist Richard McKenzie, who has often written the Econlib Feature Article, to the effect that “the value of every home in America would decline by 10% to 15% the day after the deduction is capped.” I don’t know if he has quoted Richard correctly. My guess is that Richard was analyzing not a cap on the interest deduction but a complete elimination of the interest deduction. If the cap were a very low number, say, on the order of $5,000 per year (which would be the interest, at 4%, on a $125,000 loan), then Hewitt is roughly correct. If the cap is a high number, on the order of, say, $20,000 per year (the interest, at 4%, on a loan of $500,000), he’s incorrect. The cap would hurt owners of higher-price homes but because the majority of homes are valued at under $600,000 (this allows for a loan of $500K and equity of $100K) they would not be much affected. And it probably wouldn’t be the next day. House prices, unlike prices of widely paid stocks, are sticky. But it probably would happen within a year.

One major problem, though, is that Hewitt’s argument could be used to argue against almost any major tax reform in which reduction of deductions is traded for lower tax rates. In fact, Hewitt, in this very article, proceeds to do that, arguing against limiting deductions for state and local taxes.

2. His political analysis.

Hewitt writes that Americans live:

in homes they bought at a value based on the existing deduction, in states whose taxes were partly offset through the federal code. Change those rules and what’s left of the GOP in high-tax states will be gone.

But two of the highest tax states are California and New York, and there’s little of the GOP there anyway. (Hewitt and I live in what is effectively a one-party state, California.) So a cap, say, of $20,000 on mortgage interest and a cap on the deductibility of state and local taxes (the latter include property taxes) would disproportionately hurt the owners of high-price homes. Where are those pricy homes disproportionately located? In coastal California and urban New York, which, as noted, is where the GOP is already very weak. So a cap would be seem to be potentially a smart political move, not a dumb one.

3. Why do realtors oppose the cap on mortgage interest deductibility?

Hewitt points out that after President-elect Trump announced Steven Mnuchin’s nomination, Mnuchin said that the administration planned to “cap mortgage interest, but allow some deductibility.” Hewitt writes, “That instantly energized the 1.2 million-strong National Association of Realtors against the tax reform.”

I don’t doubt Hewitt’s statement. The NAR has always been one of the strongest defenders of the mortgage interest deduction.

What I wonder is: Why? You might say that it’s because the 6% they get on sales of homes gives them a lower amount when the homes sell for a lower amount. Maybe that’s it and end of discussion. But offsetting this factor is that the equilibrium of home ownership changes. People who find that the cap makes owning a home too expensive would try to sell. Other people who might buy are people wanting to pay a large down payment and take out a small loan. So there would be more buying and selling transactions. This means more commissions for realtors. It’s not obvious to me that on net realtors would be hurt.

Of course, it’s also true that many realtors buy houses and condos on their own accounts. I can think of a number of realtors in the Monterey area of whom that’s true. So maybe much of the NAR opposition is due to the fact that many of them would take a capital loss. That might be one’s first reaction. But probably almost all of these properties they buy on their now account are ones they rent. And when you rent, you get to deduct the mortgage interest and the property taxes from the rent. I doubt that Mnuchin’s proposal would change that.

So I’m still left with a bit of a puzzle.

HT2 Mark Barbieri.