A new paper from the Urban Institute explores the question of whether mortgage interest deduction (MID) reforms would hurt the economy and undermine the value of owner-occupied homes.
A careful look at current housing market conditions reveals several factors that would likely dampen the market wide effects of MID reform:
Mortgage interest rates are currently so low that the value of the MID is small by historic standards.
Rents are currently high relative to house prices, increasing demand from investor owners that might substitute for any decline in demand from homeowners.
Affluent homeowners with high wealth could pay off a portion of their mortgage debts, thereby reducing their interest costs, to compensate for a cut in the MID, rather than reducing their demand for housing.
Because the stock of owner-occupied housing would gradually adjust in response to changes in tax policy, eliminating the MID may have little effect on housing prices over the longer term.
Moreover, many MID reform proposals would not simply eliminate the deduction, but restructure it in ways that primarily affect the highest-income homeowners or just those with the biggest mortgages.
For example, a Zillow.com study estimates that a $25,000 MID cap would have its biggest impacts in ZIP codes with mean home values over $850,000. Other proposals that shift the MID to benefit low- and moderate-income buyers could actually stabilize and increase prices of lower-priced homes, whose values continue to lag.
The findings conclude that:
Predictions of dire consequences are overstated, but that more research needs to be done;
While earlier studies showed that eliminating the MID as well as the property tax deduction would reduce housing prices in areas with more high income residents in the short term, more recent research since the mid-2000s show no connection between house prices and MID; and
Further, most MID reform proposals would modify, not eliminate, the tax break for homeownership.