WASHINGTON -(Dow Jones)- President Barack Obama's plan to scale back the popular mortgage-interest deduction, a sacred cow of the U.S. housing market, drew a scathing response from two powerful lobby groups.

The National Association of Home Builders and the National Association of Realtors issued statements condemning the proposal in withering terms Thursday, after it was unveiled earlier in the day as part of the White House's fiscal 2010 budget blueprint.

NAR President Charles McMillan also sent a letter to Obama to criticize the idea.

"There is never a good time to propose something that undermines the basic foundation of homeownership, but given our current housing crisis, this has to be the worst possible time," McMillan wrote in the letter, according to a press release issued by the group.

The mortgage-interest deduction has created a longstanding preference for homeownership in the U.S. tax code, as rent isn't tax deductible. Economists say the tax break tilts U.S. consumers toward buying rather than renting a home.

The Obama proposal would limit the mortgage interest deduction for taxpayers in the highest brackets. The Realtors contend the change will hurt not only the roughly 2% of taxpayers targeted by the proposal, but also deal a blow to home prices broadly. The home builders argue it will hurt families in costly housing markets.

"This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast," NAHB Chairman Joe Robson said in a statement.

The home builders association also sharply criticized an Obama proposal to tax as ordinary income the so-called "carried interest" earned by fund managers in the private equity and real estate industries. Currently it is taxed at the lower capital gains rate.

The tax change would hurt apartment and commercial real estate developers at time when they are already reeling from the real estate downturn, the group warned.