How does the removal of the tax deduction on mortgage interest affect the housing market?
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. Here's how. When the economy is growing, a consumer may feel that the purchase of a house is a good decision to make, because it gives them exactly what they desired. Which is a house that suits there needs. In this process the consumer is not thinking about what he or she would have to spend on a mortgage. They would be expecting the economy to grow not fall. Therefore, he or she may feel that the marginal benefits are greater than the marginal costs. When the economy falls and there is a recession the consumer may feel that the decision to buy is all wrong. Marginal costs refer to the change in cost over the change in quantity. Marginal benefits refer to the change in benefits over the change in quantity. This causes a preference to save money or not to spend at certain periods of time.
The removal of the tax deduction on mortgage interest will reduce demand for houses. If there is no benefit such as this to buying a home, many consumers will feel that there is no point in getting a house. The government will do what ever they feel is best for the country, but when you look at certain things in our country such as tax deductions. They have the power to draw a consumer.