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

Abstract

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. (JEL H24, H31, R21, R31)

Do Mortgage Subsidies Help or Hurt Borrowers?

“…The overall effect of mortgage subsidies on the incentive to own versus to rent is thus ambiguous. The available research on the effect of MID on homeownership rates suggests that the overall effect of these subsidies on homeownership rates is small (Glaeser and Shapiro, 2003;Bourassa and Yin, 2008;Hilber and Turner, 2014;Sommer and Sullivan, 2016). The conclusion of these studies suggest that most of the response to MID is expected to occur along the intensive margin of house demand, which I considered in my framework.…”

“…Hilber and Turner (2014) argue that the capitalization into house prices offsets the reduction on homeowners' rental rates brought about by MID. Furthermore, Sommer and Sullivan (2016) study the impact of MID on a quantitative macroeconomic model with endogenous tenure choice, rents, and house prices. Counterfactual analysis in the Sommer-Sullivan model shows that eliminating MID will increase homeownership rates, instead of reducing them.…”

“…The authors use a structural spacial model to quantify the redistributional impact of this pricing of mortgage credit across regions. Other studies have used quantitative macroeconomic models to evaluates the effect of MID, other mortgage subsidies, and tax provisions that affect housing demand (see, among others, Gervais, 2002;Jeske, Krueger, and Mitman, 2013;Sommer and Sullivan, 2016). These studies find that MID, or other mortgage subsidies, reduce welfare and increase house prices in models in which these prices are endogenous.…”

The effect of homeownership on the option value of regional migration

“…To calibrate the interest rate for savings and for mortgage debt, I follow Sommer and Sullivan (), who use the constant maturity Federal Funds rate, adjusted by headline inflation as measured by the year on year change in the CPI. They obtain an average value of for the period of 1977–2008, and I thus set .…”

Distributional Implications of Government Guarantees in Mortgage Markets

“…5 Several papers in this area, such as Chambers, Garriga, and Schlagenhauf (2009);Floetotto, Kirker, and Stroebel (2016); Gervais (2002);Jeske, Krueger, and Mitman (2013); or Sommer and Sullivan (2015) analyze distributional effects of housing policies. This paper contributes to this literature in many aspects.…”