2nd Home Mortgage Deduction – Which States Will Feel the Most Pain

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For the majority of Americans who don’t own second homes, why should they care if the second home mortgage deduction is eliminated? With more than 11 million residential mortgages underwater, the loss of the second home mortgage deduction could have ramifications to a housing market still struggling to recover.

To illustrate this point, our Second Home Mortgage infographic shows the areas of the country that might be most affected. Using 2010 Census data, we highlighted the states with the highest percentage of second home ownership, the greatest number of second homes and the percentage change since the 2000 census.

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Which states are most vulnerable?

While we found it interesting that Maine has the highest percentage of second homes, we were not surprised to learn that Florida has by far the largest number of second homes, and Nevada has had the greatest percentage increase.

Also, not surprising is the increase in underwater mortgages in those states. According to CoreLogic, a market research firm, Nevada leads the nation with over 60% of their homes with mortgages worth less than what they owe. Florida is third with 44.2% of their mortgages underwater. The greatest impact will be felt in the pockets of communities within these states where most of the homes are non-primary residences.

Vacation resorts that are not necessarily retirement destinations may feel the most price pressure. Ocean City, Maryland, for instance is a fine place to visit in the summer, but not teeming with seniors or retirees. Maryland’s residential market is also under pressure with almost a quarter of their mortgages underwater. Second homeowners may need to replace mortgage deductibility with rental income and other offsets like depreciation and expenses to help them make their mortgage payments.

How and how much:

A rebound in home prices continues to be a long way off. Homeowners with negative equity are now back to 2009 levels with 22.8% of all residential mortgages underwater nationwide. Any additional costs, like the loss of the second home mortgage deduction may be enough to keep would-be buyers away. The impact will be found in the smaller line of people willing and able to buy the home.

As one looks to qualify for the mortgage on a second property, lenders will need to incorporate the new higher non-deductible cost and disqualify those who exceed acceptable standards.

Then there is the actual increase in cost.  Based on a 4% 30-year mortgage, homeowners will find the following cost increases based on the size of their mortgage and their tax bracket:

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These additional costs may not sway most to give up on their dream of owning a place in the mountains or at the shore.  But a time when we remain skeptical of a housing rebound, and with many primary residences underwater on their mortgages and lenders holding their funds ever so tightly, these additional costs add up to greater pressure on second home prices over the coming years.

My hope is that our infographic starts a conversation about second home ownership in each state, and particularly the communities in each with a larger number of second homes. Since 49 states have counties where second homes account for at least 10% of all homes, these communities, some already under the strain of foreclosures and weak sales are certain to feel the loss.