Skip to content

Study Finds the Mortgage Interest Deduction to be Ineffective at Increasing Ownership

3 min readBy: Mark Robyn

The mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. (MID) is an income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. preference that allows taxpayers to deduct from income the interest paid on a home mortgage. Proponents for the MID often offer the justification that it increases homeownership rates, which they say has positive benefits for society. But most economists seriously question the benefits of MID and many believe homeownership is greatly over-subsidized.

A recent paper, The Impact of the Mortgage Interest Deduction on Homeownership Decisions, takes a look at the state and federal mortgage interest deductions and their effects on homeownership rates. The study’s authors, Christian A.L. Hilber of the London School of Economics and Tracy M. Turner of Kansas State University, find that “on average, the MID has no statistically significant impact on homeownership attainment,” and so “conclude that the MID is a costly and ineffectual policy for boosting homeownership and social welfare.”

While the authors find no net effect on ownership rates, there are effects on individual homeownership decisions. Focusing on land use regulations the authors find that in more tightly regulated areas (where the supply of owner-occupied housing cannot easily expand with increases in demand) the MID actually reduces homeownership rates for all but the lowest income group. Theory suggest that this is because the tax benefit becomes incorporated into prices and actually increases the price of housing. In areas with more relaxed land use regulations the authors find that the MID boosts ownership rates for higher income households but not lower income households. The authors find that lower income families are unaffected by MID regardless of the regulatory environment.

The authors’ note that:

The implications of the MID for redistribution are striking. The fact that the subsidies have an adverse effect on homeownership attainment in the more regulated markets, implies that an increase in the subsidy rate only serves to make existing (typically higher-income) homeowners better off and existing (usually lower-income) renters worse off. In less regulated places we do find the intended tenure transitions but, again, only for the higher income groups.

They also note that while research has suggested that there are positive externalities associated with homeownership, the places where home ownership is thought to provide the highest social benefit, namely urbanized areas, are the very same areas where the MID reduces homeownership rates.

In other homeownership-subsidy news, on September 30 the New Jersey General Assembly failed to override Governor Christie’s veto of a new homebuyer credit. The credit would have been worth 5% of the home price, with a maximum of $15,000, on any purchase of a home. It plan would have cost $100 million over three years. Christie, along with the legislators who declined to overturn his veto, should be applauded. A tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for home purchases is bad tax policy and a waste of taxpayer dollars.