Paul L. Caron

Tuesday, July 25, 2017

WSJ: Mortgage Interest Tax Break Has ‘No Effect’ on Homeownership, Study Finds

Wall Street Journal, Mortgage Interest Tax Break Has ‘No Effect’ on Homeownership, Study Finds:

The mortgage interest deduction, a sacred cow in the U.S. tax code, does nothing to promote homeownership, according to an academic paper released Monday [Jonathan Gruber (MIT), Amalie Jensen (University of Copenhagen) & Henrik Kleven (Princeton), Do People Respond to the Mortgage Interest Deduction? Quasi-Experimental Evidence From Denmark], a finding that undermines one of the core justifications for the tax break.

Letting taxpayers deduct mortgage interest encourages them to buy bigger homes and more expensive homes — but it doesn’t change that fundamental decision about whether to buy in the first place.

“Over multiple time periods, and considering multiple empirical strategies, we find no effect of the tax policy change on whether households own or rent,” wrote the authors, Jonathan Gruber of the Massachusetts Institute of Technology, Henrik Kleven of Princeton University and Amalie Jensen of the University of Copenhagen.

The paper uses data from Denmark in the 1980s, where the combination of a tax policy change and available housing data allowed the authors to observe a sort of natural experiment. Denmark isn’t the U.S., and there may be cultural or economic differences that make the comparison inapt. Still, the findings confirm what economists had already thought about the U.S. deduction, Mr. Gruber said in an interview Monday. Past cross-country studies have found little difference in homeownership rates between places that allow a deduction and others that don’t....

The paper’s finding lands with a thud in the current political debate, right as lawmakers are considering the biggest revamp of the tax system since 1986. The mortgage interest deduction – only available to the roughly 30% of households that itemize their deductions – will reduce government tax collections by $72.4 billion in fiscal 2018, according to the congressional Joint Committee on Taxation....

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AMTbuff That has not been my experience. Lenders set income qualifying parameters based upon how hungry they are for loans. The old 30% rule flew out the window a long time ago.

Posted by: Dale Spradling | Jul 29, 2017 7:06:34 AM

lenders do not take into consideration tax savings when qualifying for a loan, so it doesn't matter.

But their maximum percentage of income limit is set considering deductibility. For the same lender risk without deductibility, the threshold would have to be set lower.

Posted by: AMTbuff | Jul 27, 2017 6:00:50 PM

Rural, lenders do not take into consideration tax savings when qualifying for a loan, so it doesn't matter. BTW, just FYI, the real impact of interest rates is counter intuitive. When interest rates fall, buyers start dragging their feet hoping rates will fall further. Then when interest rates tick up, they pull the trigger. Humans will not be the last rung on the evolutionary ladder.

Posted by: Dale Spradling | Jul 27, 2017 5:16:18 AM

Bear in mind everyone that the mortgage interest deduction has caused housing prices to rise. They would fall without it. Most economists believe that the deduction, on balance, probably does make home ownership more affordable, but only very modestly.

Posted by: Mike Petrik | Jul 27, 2017 4:43:00 AM

Matthew, I think you'll find there isn't much affordable housing anywhere near Potomac ... unless you want to create a multi-hour commute and live in a place someone gets shot nightly, like DC South East or North East. Bethesda ain't cheap. Montgomery County ain't cheap. So if you are forced to make a major move to buy a house you can afford, something tells me you may delay buying a house. Particularly in an environment of uncertain employment, which is just about everyone these days, but particularly Millennials first entering the housing markets.

Posted by: ruralcounsel | Jul 27, 2017 4:02:55 AM

Ruralcounsel, I disagree. Anyone who's in the ballpark of living in Potomac can find a house down the road instead.

Posted by: Matthew Bruckner | Jul 26, 2017 11:33:03 AM

But Dale, isn't losing the mortgage interest deduction going to impact the size of a down payment and the size of the monthly mortgage payment? People factor in whether they get a deduction for that interest or not when they decide what they can afford, no? And people who have that interest deduction are likely to be using Schedule A, not taking the standard deduction.

Posted by: ruralcounsel | Jul 26, 2017 11:20:07 AM

Duh. As a former homebuilder, I can tell you the only thing that counts is affordability. How much is the down payment and what is my monthly nut? Remember when everybody said killing the consumer interest deduction would tank the economy? I'd be wiling to give long odds that completely eliminating Schedule A would have zero effect on the economy.

Posted by: Dale Spradling | Jul 26, 2017 7:38:28 AM

The discussion shouldn't be about home mortgage interest, as much as it should be allowing the deduction on second, third and fourth homes. If you're well off enough to own a another home, you certainly don't deserve any tax help.

Posted by: gnelson | Jul 26, 2017 5:35:28 AM

So it still impacts the housing market, but more in terms of pricing (or the max price which a new home buyer can afford) than the decision to enter? Which is some areas, probably results in the same thing, because housing stocks don't change from expensive to cheap very quickly. For example, Potomac, Maryland isn't going to have a sudden shift in housing stocks from mansions to 2-bedroom starter homes.

Posted by: ruralcounsel | Jul 26, 2017 4:08:13 AM