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mortgage_interest_deductionFew in the real estate brokerage community think the latest proposal to cap mortgage interest deductions will actually become law in Washington.

The Speaker of the House—an anti-tax Republican and leader of the same party of the plan’s author, Rep. Dave Camp, the chairman of the House Ways and Means Committee—dismissed the plan as soon as it was unveiled in February. Camp is calling for an ambitious overhaul of the tax code that would reduce seven income tax brackets to two and cut the corporate tax rate—while reducing other popular tax breaks such as the mortgage interest deduction (MID), which is currently capped at $1 million of the borrowed amount. The National Association of REALTORS® and countless broker/managers across the nation were quick to condemn the plan as well.

All of the opposition to the cap will most likely be too much for Camp to overcome, but that’s not what most brokers are worried about. The fear is that all the headlines about it will seep into the psyche of the American homebuyer—particularly those in higher-income areas, where a $500,000 mortgage is considered average or even below average—and dissuade them from buying because cutting that tax deduction would throw off the whole cost analysis.

“The news absolutely drives buying decisions even if there’s no news there,” says Drayton Saunders, president of Michael Saunders & Company, a leading real estate brokerage on the west coast of Florida. “Even if it never sees the light of day, it’s one more thing if it enters the macro-news cycle. It has a drag effect on the normal flow of what would be happening in the housing markets, and to me, that’s bad.”

Saunders reports that the Florida market is starting to heat up again along the coast, and most of the interest has been coming from traditional places, such as people relocating from the Northeast. But unlike some of the past transplants who were looking for sleepy retirement communities, today’s new Floridians are seeking more exciting urban experiences and proximity to job centers. According to Saunders, the building of new housing complexes with such amenities is a significant part of the region’s long-term growth strategy—and they’re likely going to put prices over that $500,000 threshold that people are beginning to fear even though it’s not likely to take effect.

“That million-dollar condo buyer moving from metro New York or Boston will be at a general price point that we need to sell. It affects that part of the community where we want to grow, the downtown market where we want people to move. This is just one more thing that a Florida buyer has to consider, and that’s concerning,” explains Saunders. “In the post-bubble world, we don’t take anything as background noise. At the leadership level, you have to follow these things.”

The proposed mortgage interest deduction cap is sparking fear in other high-end markets as well, including California and the Tri-State Area around New York City. In these markets, it’s not unusual for homebuyers to seek a mortgage of more than $500,000. “That’s like a starter garage in San Francisco,” says Saunders.

Ed Krafchow, executive vice president of Better Homes and Gardens Mason-McDuffie Real Estate, says the plan would be extremely unfair to the higher-end markets like the one he oversees in Northern California, a market where a multi-million dollar house would only be worth $500,000 in Texas or parts of the Midwest.

“Our average sales price within the company is something most of the country would be wildly jealous of,” he says. “Everything around here is at least in the $700,000 – $800,000 price range.”

Krafchow reports that his company recently listed a two-bedroom condominium in San Jose for $750,000 and it quickly sold for more than $900,000.