Mortgage 'Attack' Could Mark Sea Change: Shiller

The possibility of the U.S. curbing mortgage interest deductions could prompt a sea change from buying houses to renting, influential economist Robert Shiller told CNBC's "Futures Now" on Tuesday.

Professor Robert Shiller
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Professor Robert Shiller

As part of the reform proposals being discussed in a possible deal on the "fiscal cliff", some have advocated eliminating or reducing the mortgage deduction – one of the tax code's most cherished provisions offered to home buyers at all income levels. (Read More: Mortgage Interest Deduction, Once a Sacred Cow, Is Under Scrutiny.)

"This sudden attack on the mortgage deduction is news," the Yale University economist and housing expert told "Futures Now."

"I think five or ten years ago, we would have thought it impossible, so there wasn't any risk of this elimination priced into the market until now," he added.

Some economists say the deduction helped give rise to the housing bubble, which ultimately culminated in the crash that nearly felled the global financial system. As a result, Shiller believes that an elimination of the tax provision could bring an end to the culture of home buying that sent real estate values — and mortgage debt — skyrocketing to dizzying heights.

"We've already seen that trend developing, there's a lot more rentals being manufactured and people are switching toward renting," the economist said. "That wouldn't bode well for the owner-occupied housing market."

Shiller — who has a closely watched housing market gauge bearing his name — is famous for his dire predictions about the health of the U.S. home sector prior to the 2008 crisis.

Highlighting differences that exist between states that are recovering and others still suffering from high foreclosure rates, Shiller told "Futures Now" that the housing market's recovery was likely to remain plodding but incremental — with more mortgage defaults likely.

Persistently high unemployment and low growth in wages "are reasons to be skeptical about this recovery," Shiller said. "People that haven't resolved their economic situation yet and we have threats from abroad. I still think it's a risky market."

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