Explain how the strength of the economy as a whole could affect the marginal benefits and the marginal costs associated with a decision to purchase a home.
How does the removal of the tax deduction on mortgage interest affect the housing market?
How do other changes in government spending and taxes affect your decision?
The marginal benefits and the marginal costs associated with the decision to purchase a home can be affected by the condition of the economy because of the actions of the government in their attempts to stabilize economic conditions. For example, if the banks are allowed to lower their reserves, they can make more money available for lending to potential home buyers. This would result in a decrease in interest rates and encourage borrowers to shop for homes (Mankiw, p. 654). There are times, such as now, when interest rates are low in an attempt to stimulate the economy when buyers may still be fearful of the commitment simply because the future of the economy is so uncertain.
If you remove the tax deduction for mortgage interest you take away the biggest incentive to purchase a home. A person such as me, over 50, will most likely never pay off a mortgage so why would I take the risk of committing to a mortgage if it won’t provide any sort of tax break? I can rent and leave the responsibility of repairs and maintenance to the landlord. Even younger adults would be hard pressed in our current economy and lack of employment security to put themselves in a position to have a mortgage they may not be able to pay when there is no tax break.
Changes in federal income tax rates would also affect my decision. If taxes are made higher, I have less money in my paycheck to spend on a house payment as well as the up keep. If taxes are lowered, then I would be more likely to consider making a commitment to home ownership.