Mortgage Deduction Reform: Regionally Biased?

In a previous post I noted one principal objection to the Bush panel's suggested reform of the mortgage interest tax break: the basic (although not severe) unfairness of changing the tax treatment of housing after a lot of wealthy folks had factored the deduction into their purchase of expensive homes.

There's another criticism that's getting more play on the East and West coasts: if you're going to put a cap on the mortgage interest deduction, you have to factor in regional differences in housing costs. The Bush panel's recommendations would do just that, by using Federal Housing Administration loan limits (which vary by region) as the mortgage cap. But in some super-high-end areas in California and New York, the FHA limits are well below median home prices, as this article notes:

The FHA limit varies by region, but in the Bay Area and most of coastal California is $312,895... far short of the typical mortgage needed to buy a house in the Bay Area, where the median price for an existing single-family home was $726,900 in the second quarter, according to the National Association of Realtors.

But this line of criticism is missing the whole point of the deduction. The idea is to encourage homeownership, not dream-homeownership. I would love to live in San Francisco. I can't afford to, and that's sad. But the idea that I should get a federal tax cut to help me relocate to just the right neighborhood in my favorite city is so wrong it's offensive.

Sorta related: take a gander at the pages on the FHA website where you can look up the applicable loan limit for your area. There are a lot of numbers here, which means you'd need a multi-page table in the tax forms to make this work. That's hardly a disqualifier for what is otherwise a fine reform idea-- it's just to point out that while some elements of the Bush panel's plan might help achieve tax simplification, this isn't one of them.