The debate on tax reform is starting to heat up with various proposals being debated, and many policies are being considered for the chopping block. One of them is the mortgage interest deduction (MID). I’ve covered the previous research before, which shows the deduction doesn’t increase homeownership, and now a new paper sheds further light on the losers and winners from this subsidy.
The paper comes from Christian Hilber and Tracy Turner, who compare the effect of the MID in areas with tighter regulatory restraints on housing supply, i.e. inelastic supply, to areas with less regulatory constraints, i.e. elastic supply. The idea is that in areas where supply is slow or non-responsive to increases in demand, the MID may just drive house prices up instead of increasing homeownership, and may even decrease home ownership among some groups.
Using national data from 1984 to 2007 they found that the MID did not increase overall homeownership. In areas with light land use regulation they found that homeownership among higher income families was increased, and in tightly regulated housing markets homeownership was decreased for all income groups except the lowest. The effects, both positive and negative, generally range from 3% to 5%. Regardless of the regulatory environment, homeownership among the lowest income group was not affected at all by the MID.
The authors estimate that it each additional homeowner created by the mortgage interest deduction costs the government $53,590, a number they rightly call “staggering”.
An important implication of the findings is that in urban areas, where land use regulations are typically more restrictive, homeownership is likely to be negatively impacted.
We spend around $100 billion a year on this subsidy, and to the extent that it’s defenders are correct and homeownership does have positive externalities, it is actually making urban areas worse off. Even if we want the questionable goal of encouraging homeownership, recent research from the Cleveland Fed has argued that down payment subsidies are a more efficient way to do it. If we can phase the mortgage interest deduction out slowly so that there is limited disruption to housing markets, this policy really should be the first on the chopping block.