The negotiations regarding the fiscal cliff include the mortgage interest deduction:

Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers…

Such a move would be fiercely opposed by the real estate industry. The industry has played a crucial role in defending the tax break, even as other countries with high homeownership have phased it out…

One of the reasons the mortgage tax break is so vulnerable is that both Democrats and Republicans have recently favored capping deductions, including both President Obama and the recent Republican presidential nominee, Mitt Romney…

Taken on it own, the deduction limit wouldn’t make a huge difference. But it can play an important role in a broad plan to cut the deficit, and shows a willingness to tackle once sacred cows. The tax numbers suggest it may not be hard to structure deduction limits in a way that leaves most middle-income households untouched.

This is not a new idea – people have been suggesting for a few years now (see here) that the mortgage interest deduction tends to help the wealthiest the most. Capping the deduction would still provide a benefit for less wealthy homeowners and boost the housing market. Yes, homebuilders and real estate people may not be able to construct and sell as many large and expensive homes that provide higher profit margins and commissions but there are plenty of other arguments against such homes beyond the mortgage interest deduction (see the green argument and the moral argument). Wealthier Americans are probably still going to buy homes, because they have the money and there is still an American cultural push toward homeownership, whether the mortgage deduction is there for them or not.

There are other countries in the world with higher rates of homeownership even with the federal government’s decades-long support of homeownership. The data is a few years old but check out these figures reported by National Association of Home Builders: a number of European countries have higher and lower rates of homeownership. Of course, American homes tend to be larger than European homes and I’m reminded of quick suggestion in Suburban Nation that Americans may have the best private realm, referring to our homes, in the world.

I assume a capped deduction would also limit or remove the deduction for the purchase of second homes?

Perhaps the biggest thing to note here is that the mortgage interest deduction was indeed was once a “sacred cow” but tough economic times lead to new measures.