Eliminating the mortgage tax deduction could boost homeownership

(3) Implications of US Tax Policy for House Prices, Rents, and Homeownership

Kamila Sommer and Paul Sullivan

This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.

Here is the link to the AER piece.

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Taking care of your own property is a paying job.

I'm gay!

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"repealing the preferential tax treatment of mortgages would depress homeownership." It didn't in Britain.

"From whom do kings of the earth take toll or tax."
For whom do the shekels and drachma collect in puddles? For the man who where gloves.

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Has a similar study looked into the effect of property taxes on home values and ownership rates?

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Is the basic purported mechanism that repealing the mortgage interest deduction would cause home prices to decline (or grow more slowly)?

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I'd be somewhat surprised if it had much effect either way. The mortgage interest deduction was not much used by marginal homeowners who buy lower-end homes. Only about 30% of Americans itemized their tax deductions -- I can't find a number, but among lower income homeowners, that fraction must be very small. I might expect, though, housing prices to soften at the high end. Wealthy people may grow less willing to put money into fancy real-estate given the loss of tax advantages for both mortgage interest and property taxes.

Agree. I can see this putting a damper on people buying a bigger house just in case. If your marginal tax rate is 33%, then a 4% interest loan will feel like a 6% interest loan if you itemized, and lost your interest deduction.

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I suspect it would also have a depressing effect on demand for 2nd houses. Allowing that deduction was clear subsidy to the upper middle class and above, and not coincidentally to members of Congress who commonly have 2 houses (one in their district, and the other around DC).

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I'm just going to put this into the "we made a model and got some results" folder and just ignore it.

Basic micro analysis of removing mortgage interest deduction: house prices would decline, but as long as demand slopes downward and supply slopes upward, the price the buyer pays would increase (sense the subsidy causes a wedge in the price the seller receives and the buyer pays). (this assumes everyone who buys takes the deduction).

If it goes against basic micro (and somethings do), one should probably discount the finding.

But they use a "realistic" model so maybe we should believe them.

On the other hand, there has just been too much hand wringing about the mortgage interest deduction. Via this article https://www.cnbc.com/2017/11/02/tax-bill-is-a-mixed-bag-for-new-homeowners-as-deduction-is-slashed.html the percentage of taxpayers taking the mortgage interest deduction is only 21 percent. You probably won't depress homeownership rates mainly because those people benefiting from the mortgage interest deduction would own their house anyway. It's the intensive margin (price paid for the house) that will be effected, not the extensive margin (whether to buy a house). I'd bet the homeownership rate wouldn't fall more than 1 percentage point if the subsidy were completely repealed.

"Basic micro analysis of removing mortgage interest deduction: house prices would decline, but as long as demand slopes downward and supply slopes upward, the price the buyer pays would increase (sense the subsidy causes a wedge in the price the seller receives and the buyer pays). (this assumes everyone who buys takes the deduction)."

The mechanism in the paper appears to be that the reduction in list price reduces the downpayment required to qualify for a loan, and therefore allows more lower-income people with liquidity constraints to enter the housing market. This mechanism can operate even if the total cost of purchase (including loan servicing) has increased.

That's an interesting mechanism, but lower down on the income scale (and home price scale) the mortgage interest deduction is not used. If it is not a realistic option, then it won't affect the price of the house. Families making $40k/year aren't going to itemize the interest on a $150k mortgage. At today's interest rates and 2017 tax rates (married filing jointly), let's say they itemized the interest throughout the entire loan (a strong assumption given how much the principal makes up in later mortgage payments). The present value (at a 5 percent interest rate) of the 30 years of subsidy is about $18,500. The mortgage interest deduction adds a max value of $18,500 to the house. Say that the family puts down 20 percent (as the down payment gets lower, my case gets stronger). By getting rid of the mortgage interest deduction, you decrease the price of the house at most by $18,500 and decrease the down payment by $3700. So instead of a $30k down payment, the family now only needs a $26,300 down payment. That's not chump change to this family, but will it lead to a measurably permanent higher home ownership rate? I don't think so.

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"We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible." What? The authors have a heavy finger on the scale. Decreasing both mortgage debt and home prices would be a good thing, but eliminating the mortgage interest deduction would have a large negative impact on those near the median income level while having little or no impact on those in the upper income levels or lower income levels; indeed, with the new higher standard deduction, for those below the median income level, any drop in home prices would be a plus since they won't be itemizing anyway. It's the saps in the middle that are screwed: their current home values drop while their taxes likely will go up. Of course, there are a lot more folks below the median income level than near it or above it, so it's a net plus for those poor bastards, although it comes at the expense of the great American middle class. Have a nice day.

"but eliminating the mortgage interest deduction would have a large negative impact on those near the median income level while having little or no impact on those in the upper income levels or lower income levels"

Quite the reverse, I'd say. Those at the median are not itemizing now, so they wouldn't be affected. Higher income folks are the ones who itemize and who would be hit both by the elimination of the mortgage interest deduction and by the loss in property values that resulted from the change.

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rayward wrote, "Of course, there are a lot more folks below the median income level than near it or above it." Is that mathematically possible?

Larry, the "median" is the middle value of a set, not the average (or "mean"). In a set of numbers 1,2,3,5,7,12,14 the mean is 5 (the middle number of the set) whereas the average is 6.28

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I'm much more interested in the hypocrisy behind Democrats that want to means test Social Security but were livid when Trump means tested the state/local tax deduction for federal returns.

Please name the democrats who want to do this. Because they don't exist. I would bet a majority of republicans would be against this as well.

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Indeed—let's hear who these Democrats are.

As far as I know, our progressive brethren are firmly against means-testing Social Security, on the grounds that this would tend to diminish support for the program among upper-middles. They don't want to see SS changed from something like Medicare, which rich and poor alike would object to cutting, to something like Medicaid, which can be cut without personally affecting the people who tend to vote and to contribute to political campaigns.

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Very doubtful this is true.

It's quite possible that their assumptions, estimates, forecasts, parameters, etc. are incongruent with the real world. Change the World.

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If this is true I want it implemented right after I sell my house.

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Eliminate deductibility of interest for both individuals and businesses and you will promote ownership capitalism instead dentist.

I grew up when the nearly universal ethos was debt was at best a necessary evil.

However, businesses generally borrowed to fund inventories and buy productive assets, and to free up cash to pay workers. Thus interest on debt was a normal business expense for low risk equity capital. E.g., A/R, productive real estate, etc.

But many individuals were also businesses, capitalists, who bought real estate for its productivity, the ability to generate income from rents, or hosting work places. The difference between a family and a big corporation like GE was simply a matter of scale.

For simplicity, individuals were allowed to deduct all interest on debt backed by productive capital assets just like GE deducted interest on debt backed by productive capital assets.

Half or more of homes generated income, either from in home businesses or from rentals. When I grew up, renting rooms or renting the other half of a duplex or the apartment, or apartments in the home, was extremely common. My peers in our 30s talked about, and in a number of cases bought houses as rental properties, sometimes to afford to buy desirable property, or sometimes as part of a long term investment. Buy a starter home, expand it, then buy a bigger home and split the old home into two units to rent paying all those costs while helping pay the new mortgage.

But no one could borrow money to buy food or pay rent, unless you used a loan shark. Buying a car or refrigerator or TV in credit meant the repo man came and took it back to the store that arranged the store credit.

It is ironic that conservatives first normalized debt to buy food or go on vacation, and then eliminated the tax dodge for going into debt.

Conservatives flipped the script from capitalism to debtism.

" conservatives first normalized debt to buy food or go on vacation"

Citation?

It was those conservative institutions, BankAmericard and Master Charge.

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It was those conservative institutions: FHLMC, FNMA, SNMA, HUD, etc. that normalized NINJA loans, Alt-A loans, liar loans.

Even worse! Those evil, hate-filled conservative institutions were run by execrable alt-right types like Henry Cisneros and Andrew Cuomo.

Fun fact, in their hey-days (years prior to 2008), FHLMC and FNMA were the hugest political contributors to Democrat pols and community organizations.

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Why do we care if someone does or does not own a home?

Pretty sure it's part of the "Working Families Who Are Families Who Work Are the Most Important Families in the USA Because of all the Work They Do For Their Families" slogan that the Dems have been regurgitating for forty-five years and recently won the 2016 election for Hillary Clinton.

This.

Also, home ownership is the main route by which wealth is created in the USA.

Because you can either pay thousands upon thousands in rent, or you can pay thousands upon thousands in mortgage interest, but a pretty fair fraction of that is bouncing back into your net worth, especially once you're a decade in and inflation is starting to kick in.

a man owns a home so he can visit a bar with a clean conscience. Then he can ask for the check and look at the bartender and the bartender with his square eyes will look back with faith of a grain of mustard seed.

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Home ownership is a lousy way to store wealth. The first rule of investment is "Diversify". If I put my money into an index fund, or an assortment of stocks and bonds, then I'm not going to lose everything if one of those issues goes down. I might lose everything that I invested in Enron, but if that's only 5% of my portfolio, I'll keep the remaining 95%.

Using one's house as one's primary or only asset is putting all of one's eggs in one basket. Consider the auto worker who bought a house in the booming industrial city of Flint, Michigan; or the blue-collar workers who bought houses in Ferguson, Missouri, in its pre-diversity days; or the people who bought expensive houses in the California canyons, and who've just been informed that their fire insurance won't be renewed...

Your not including the rent payments to yourself in the value of the home. Yes, some places are bad places to buy, ex post. But I'd bet buying in any city with a population above 100k is a good idea ex ante. You lock in your rental rate for the rest of your life. Think of those retirees who were suckers to buy a house and now their rent payment consists of property tax and maintenance... oh wait... that sounds like an excellent idea.

Also, who said you can only choose between stocks or housing for investment? Do both... you know... diversify.

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It's nice not to have to move every two years as landlords decide to double the rent, renovate the property, or move themselves in. In addition, I want this wall over there and that bathtub over here...difficult in a rented place. Finally, it's a hedge against rising rents over the long term.

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Sure, it's easy to see why various individuals might want to own their own home. It's not quite as easy to see why this should be a concern of society collectively as expressed in government policy.

Bingo!

The sole purpose of taxation should be to raise necessary revenues to cover necessary (limited) governmental services.

Taxes are too damned high.

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Also, eliminate property zoning.

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Over the course of a loan the average homeowner will pay back as much if not more than than borrowed. So, a $120k loan over 35 years will wind up actually costing around $240k - more when you figure in insurance, taxes, etc. That's at around 4% interest.

Oh, for those of you calling the mortgage interest deduction a subsidy I urge you to head back over to the dictionary. The government/taxpayers aren't subsidizing my family. They're just not taking as much from my family. When y'all start paying over $40k a year in taxes, and you're still living paycheck to paycheck, I'll at least try to listen you your rhetoric.

I'll take my argument against off the table when all property taxes are eliminated, and I mean all of them.

Liberals' of translation "subsidy" the government letting you keep more of its money, i.e., the government owns you. It all makes sense when you see things that way.

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"So, a $120k loan over 35 years will wind up actually costing around $240k – more when you figure in insurance, taxes, etc. That’s at around 4% interest."

1. Why 35 years?
2. "actually costing around $240k": you're not discounting. Those are just nominal future dollars. The present value of the loan is $120k, and that's how much it costs you today.

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This irrational madness promoting the virtues of home ownership must stop.

A real, meaningful kind of investment of a nation, it's institutions, and people is one which allows all of them to do their work better.

A home in the sticks promotes none of that, unless it's a garage in Silicon Valley.

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I would depend more on the comparison of Canada and the US to study the impact of home mortgage payment deduction than this study . Canada does not allow it.

There does not seem to be a consistent difference between US and Canadian homeowners ship rates. US homes are larger on average, and I've long attributed that to the point that Americans were wealthier. But, maybe the real reason US homes are larger is that tax deductions does encourage building larger houses at the upper end of the income scale.

+1

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First they came for the non-mortgage interest deduction and sales tax deduction.

Then they came for the mortgage interest deduction and state and local tax deduction.

Anyone care to bet how long the remaining $10,000 will last.

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