It is the economy stupid

Last week I read about how mortgage applications were down because

uncle sam taxes

interest rates went up.  It was just a theory of course but I think home sales and mortgage applications are down because of the economy. Rates are still below 5% and lower than they were during the peak years of the housing boom when home prices were higher than they are now.  I think high unemployment is having a far greater affect on the housing market than interest rates are.

How can it be that both home prices and interest rates have gone down and home sales have not gone up?  Income taxes have  gone down since the peak years of the housing boom.   The combination of lower taxes, lower interest rates and lower home prices should make for the perfect storm and housing should be selling like crazy yet it isn’t. 

People will spend money on housing when they have jobs even if interest rates sky rocket to say 6%.  

Yet there is one more hurtle or perceived hurtle to the recovery of the housing market the proposed changes in the mortgage interest tax deduction which is part of a bigger national deficit reduction plan.

These are the current limits on the mortgage interest tax deduction:

Deductible for itemizers; Mortgage capped at $1 million for principal and second residences, plus an additional $100,000 for home equity

Here are the proposed new rules:

12% non-refundable tax credit available to all taxpayers; Mortgage capped at $500,000; No credit for interest from second residence and equity

The important question is would the proposed changes to the Mortgage interest tax deduction discourage home ownership?  Would home sales plumet because of it? Is the average St. Paul home buyer going to be negatively impacted by this, or will people want to buy homes again when they have jobs?