Archive for February, 2010

Will the Obama Mortgage Interest DeductionCap Curb Vacation Home Sales?

February 15, 2010

 

The Obama administration’s proposed fiscal 2011 budget proposes to limit the value of itemized deduction for persons making an annual salary of $200,000 ($250,000 for couples) basically eliminating the mortgage interest deduction.

Since the economic development strategy of many communities along the Lake Michigan shoreline rely on the growth of vacation/second  homes, will a cap on itemized tax deductions result in less demand for vacation homes? 

Probably YES!

 

Assuming the “cap” is enacted eliminating or reducing vacation/second home mortgage interest tax deduction, several economic forces will impact the vacation/second home real estate market:

1. The number of eligible buyers will shrink reducing the size of the vacation/second home market.

2.  As market demand lessens, vacation/second home values will plateau or lessen.

3.  New construction of vacation/second homes will likely be less, sized to a smaller market demand.

4.  Consumers will be more concerned with price and value when shopping for a vacation/second home.

5.  Vacation/second homes now will be viewed as a family recreational cost no longer as an investment that will appreciate in the future. 

6.   Cost of second home ownership will compete with other family expenses and recreational pursuits such as vacations. 

7.  The market for vacation/second homes will bifurcate into two distinct segments – a  price conscious lower-end market and a higher-priced upper end market. 

8.  Real estate tax revenue for local governments derived from vacation/second homes will stabilize and possibly lessen.

This is not to say  the trend of vacation/second home development sought after as an economic development strategy will vanish.  However if the administration limitation on tax deductions for mortgage interest and possibly vacation home real estate taxes is successful, it will surely will give pause and reconsideration to many purchasers of vacation and second homes.