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Rumors are swirling that mortgage interest deduction reform is “on the table” for the White House and House Republicans. Is that a good thing or a bad thing? In order to answer that question it is first necessary to determine whether the deduction works as intended.
Most studies find the mortgage interest deduction has no impact on homeownership rates, and at least one study finds that eliminating the deduction would boost homeownership.
In our forthcoming chapter on international homeownership in The Routledge Handbook of Housing Policy and Planning, Mark Calabria and I discuss the deduction’s impact on homeownership rates. For years, the mortgage interest deduction has been justified under the pretense that it supports homeownership.
Spoiler alert: empirical evidence suggests it does not. Most studies find the mortgage interest deduction has no impact on homeownership rates, and at least one study finds that eliminating the deduction would boost homeownership.
People generally find this counterintuitive. Why wouldn’t a subsidy for homeowners increase the amount of homes owned? A simple way of thinking about it is that some people are like Person A: they are both financially qualified and want to buy a home. People like Person A will buy a home with or without the subsidy.
On the other hand, some people are like Person B: they are not financially qualified to buy a home or do not desire homeownership. The mortgage interest deduction does not address the reasons Person B is financially unqualified (income instability, weak credit, or poor savings) or the reasons that Person B doesn’t desire homeownership (maintenance, debt, reduced geographic mobility).
Vanessa Brown Calder is a policy analyst at the Cato Institute, where she focuses on social welfare, housing, and urban policy.