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Would mortgage tax reform slow sprawl and gentrification?

The co-chairs of the deficit commission created by President Obama released several proposals this week as a starting point for a conversation about deficit reduction. One of the proposals drastically reduces the largest home ownership subsidy, the mortgage interest tax deduction.

Photo by Dean Terry on Flickr.

The proposal would lower the mortgage cap within which mortgage interest is deductible from $1 million to $500,000 and eliminate the deduction for second homes and home equity loans. Such a structural change in housing incentives could have big consequences for sprawl, gentrification and other housing and land use patterns.

Sprawl: This subsidy encourages people to build more expensive homes, which are generally bigger, detached, single-family homes. Reducing this subsidization of home sizes would thus lead to greater density as a natural outcome of the free market.

Gentrification: A common response to the argument that reducing this subsidy will reduce sprawl is that it will also reduce urban infill of condos that are more expensive than existing housing. While this may concern some urbanists, I think this would be great. Poor and working class neighborhoods would upgrade their housing stock more organically, without the sudden displacements of existing residents that can occur through government-subsidized luxury condos.

Furthermore, by encouraging people to leverage themselves to the hilt, this subsidy helps undermine communities when home buyers bet big on the housing market and lose. This is true whether the buyers move into new sprawl developments in Prince George's County or infill in Columbia Heights.

The idea that the mortgage interest deduction boosts home ownership rates is a myth, as numerous economists have demonstrated. But simply comparing home ownership rates by country makes the same point.

Home ownership by country.

The United States is one of only four developed countries that allows homeowners to deduct mortgage interest. And the other three (Sweden, Switzerland and the Netherlands) tax imputed income from home ownership.

Clearly, offering the most generous housing subsidies in the developed world is not the key to boosting home ownership.

Before 2010, most opponents of the mortgage interest deduction considered it a sacred cow. But with the deficit commission's co-chairs attempting to insert real solutions into the deficit debate and Tea Party-supported members of Congress talking big about deficit slashing, perhaps this massive subsidy is no longer off the table.

Ken Archer is CTO of a software firm in Tysons Corner. He commutes to Tysons by bus from his home in Georgetown, where he lives with his wife and son. Ken completed a Masters degree in Philosophy from The Catholic University of America. 


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1) Comparing homeownership to availability of M.I.D. without more ignores a huge number of confounding variables. It may be true or not true, but using ownership rates along doesn't demonstrate it.

2) Removing the MID could also have the opposite effect--people may seek less expensive housing that is exurban. The change will simply make housing more expensive (at least for expensive housing), but I don't see a way to predict that leading to more dense development. It's not as if during the recent housing boom when housing prices went way up people opted exclusively for denser housing in the city; they also opted for sprawl. Why would removal of the MID, which also effectively increases housing costs, have a markedly different effect?

Note: I see strong arguments for removing or limiting the MID, but I don't think encouraging new urbanism are among them. In fact, the panel's proposal to increase the gasoline tax by 25c is more likely to have an urbanizing effect.

by ah on Nov 12, 2010 11:26 am • linkreport

Will it reduce urban infill of condos? Perhaps. But luxury apartments? I don't think so.

Reducing or eliminating the mortgage interest deduction will help make renting a more attractive option. This is a good thing for cities in many ways.

by Alex B. on Nov 12, 2010 11:27 am • linkreport


The MID encourages the purchase of larger homes. Eliminating that incentive is a plus for cities, where you will naturally have less square footage to work with. There is also a powerful connection between the type of housing structure and the type of ownership (i.e. owner-occupied, condo, rental, etc). Getting rid of the MID means renting is more attractive in relative terms, which is a good thing for cities since they have far more rental housing stock.

The Austin Contrarian sums up some of the issues:

Federal housing policy -- particularly the mortgage interest deduction -- has different effects depending on the market. In elastically-supplied markets like Houston or low-demand markets like Detroit, the mortgage interest deduction increases consumer demand and stimulates the construction of more housing.

In high-demand, inelastically-supplied markets, though, the benefits of the mortgage interest deduction flow to existing homeowners. The mortgage interest deduction paradoxically makes housing in these markets less affordable.

High-demand, inelastic supply - that's DC, alright.

by Alex B. on Nov 12, 2010 11:38 am • linkreport

I was having a discussion about this today with my coworkers. Instead of the billions of dollars in tax revenue forfeited for the mortgage tax deduction we should subsidize activities that make us more productive, specifically, higher education and clean energy (perhaps the purchase of electric vehicles or financing for solar panels).

The mortgage tax deduction is highly regressive. Even with all the alternative ways to finance the purchase of a home, homeowners are still more affluent than renters.

Second, and more importantly, the mortgage tax deductive discourages labor market flexibility. We should be doing everything we can to promote economic dynamism and the mortgage tax deduction does the absolute opposite of this. If you own a home (rather than renting) you're going be much less likely to move for a new job in Boston, LA, or Denver, for example than if you rent and don't have these barriers to exit.

Third, by making housing artificially cheap, more money is spent and invested in housing than other more productive investments such as technology or business facility and equipment purchases.

Although not popular, there is bi-partisan support from William Buckley's National Review ( to the New Republic ( for reducing or eliminating the mortgage tax deduction. Here's another article from the Atlantic this past year about the mortgage tax deduction:

by Ben on Nov 12, 2010 11:39 am • linkreport

What a stupid idea. $500K will not get you a huge McMansion in the DC area--but a tiny bungalow in the good school districts. And a home equity loan can be necessary if you buy a fixer-upper inside the Beltway for a lower price and need money to rehab the house with.

If this were to go through, it would boost demand for homes just under the cap and for those way over the cap--i.e., it would bump up demand for cheaper condos (already in short supply) and for McMansions in the exurbs. Few will want to take the financial hit of a home priced just over $500K.

In the end, it means another hit against the middle class; those in cheaper homes won't be affected, and those in mansions won't care.

If you want to make rent tax-deductible as well as mortgage interest, that makes sense; it's not really profit if you have to spend it on a roof over your head.

by JB on Nov 12, 2010 11:40 am • linkreport

We've had a policy for 30+ years that home ownership is good. Like all policy, it may have reached a "good-by" date. Marginal cost of increasing home ownership by a few percent not only leads to aggressive developers, loans, but the curse of exurbia.

That being said, a policy change for making renting more acceptable would be beneficial to cities. Home ownership has a lot of costs: repair, landscape, etc. Apartment living has few of those.

That being said, a policy change designed to make houses less valuable, when the biggest problem we are facing is most Americans feel very poor with decreased housing values, isn't likely to be very popular.

by charlie on Nov 12, 2010 11:43 am • linkreport

@Alex B. - No, the MID encourages the purchase of *more expensive* homes, not larger homes. Depending on the housing stock and consumer preferences, especially in a place like DC, more expensive does not necessarily equal larger. The typical tradeoff in DC is between a smaller house/condo closer to the center of DC versus a larger house in a more "suburban" area for a similar price. Different people weigh the benefits/costs of each differently, but removing the MID simply means that the actual cost of each changes, but the relative costs do not.

by ah on Nov 12, 2010 11:45 am • linkreport

You'll pry my mortgage interest deduction out of my cold, dead hands.

by Fritz on Nov 12, 2010 11:49 am • linkreport

@ charlie: You nailed the current problem with removing the MID, it will have the immediate effect of reducing the value of every home in the country, since prospective purchasers will not be able to count on a big tax break increasing their take home pay after purchase. Getting rid of the MID at this point will definitely push more home owners underwater.

That said, I think the MID was mistake to enact in the first place, and I'm not sure whether removing it in an appreciating housing market would be better or worse than cutting it now.

by @charlie on Nov 12, 2010 11:50 am • linkreport

Shit, guess I'll be putting my rowhouse back on the market. Apartment it is.

by Steve on Nov 12, 2010 11:51 am • linkreport

Maybe I am wrong about this but doesn't the MID sort of serve as a back door tax rate cost of living adjustment?

A family income of $100,000 can buy you a lot of house in Denver but you are unlikely to find anything inside the Beltway in what most people would consider a good school district with that income.

I realize there is a bit of chicken and egg here in that the MID in some way enables higher housing prices but I still believe supply and demand are the bigger determinants in our region and without the MID (and the ability of our family to own just 1 vehicle that we don't drive that much) our family would not be able to afford to own a home in DC.

by TomQ on Nov 12, 2010 11:52 am • linkreport

So I just recently bought a house a bit over the $500k cap. Do I get to do deductions on the $500k portion or am I SOL?

by NikolasM on Nov 12, 2010 11:54 am • linkreport

As a renter, I love it!

I feel bad enough not being able to afford to buy; knowing that richer people are ALSO getting a big tax break on their housing costs just adds insult to injury.

by Erica on Nov 12, 2010 11:56 am • linkreport

You local governments will also love it -- policies that drive down property values -- no matter how fiscally responsible -- also have problems for places that rely on property tax as a major component of their funding basket.

by charlie on Nov 12, 2010 12:04 pm • linkreport

Long run, killing the MID is a wash from a consumer standpoint. As noted, no MID = lower prices, as people lose effective income purchasing power, causing prices to drop or stagnate until income inflation catches up (which is an effective price drop).

You can avoid part of the interim transition "underwater"/default problem through some "grandfather" mechanism. The worst, and least politically viable would be to actually grandfather the MID on existing loans. Better would be to do some form of conversion to a one time tax credit equivalent to the effective value of the deduction, which can be carried over in tax years. In effect, an equation which works out the equivalent value of the deduction over time on a loan if you dropped in a lump sum against principal. The tax revenues take a large short term hit, for a long term improvement.

by John on Nov 12, 2010 12:06 pm • linkreport

@Ben -- The last deficit panel (only a couple years ago!) recommended replacing the MID with a mortgage interest credit.

The thinking is that a credit, as opposed to a deduction, is available equally to everyone rather than favoring homeowners in a higher tax bracket. The credit would also be capped at a much lower amount, which is adjusted for regional housing price variations.

(see chapter 5)

by ah on Nov 12, 2010 12:09 pm • linkreport

@ ah You're exactly right about expensive vs larger. When I bought my house, I had lots of realtors and bankers try to convince me to spend more than I was comfortable with. "You'll get it back on the tax deduction". One of the reasons I chose the realtor I used as a buyer's agent is that she specifically did not use this argument with me (or any other argument to convince me to increase my budget, for that matter).

The MID is a great example of unintended consequences. It artificially inflates housing prices, and encourages buyers to spend more than they can normally afford.

@ charlie You're assuming the decrease in property taxes wouldn't be made up for by the increase in AGI.

by jcm on Nov 12, 2010 12:10 pm • linkreport

It encourages less expensive homes, not smaller homes and not necessarily urban homes. If families need/desire bigger homes, they could move further out where -- roughly speaking -- prices tend to be lower. So it could increase sprawl.

by Gee on Nov 12, 2010 12:10 pm • linkreport

@NikolasM - Since Nancy Pelosi has already said this recommendation is DOA, I wouldn't worry yet.

But, the current limit is $1M. What that means is that you can deduct interest on a pro rata amount of a loan over $1M. So, if you have a $1.5M loan then you can deduct 2/3 of the interest. No reason to think it would work differently if the limit were lower, so in your case you would be able to deduct 99% or so of your interest.

by ah on Nov 12, 2010 12:11 pm • linkreport

We can sit and debate philosophy, but doing this right now (or any time in the next ten years) would utterly DECIMATE the economy - home values are already set to decline along with the inevitiable increase in interest rates (3% interest rates are terrible time to purchase any home, by the way). Couple this with a lessening or elimination of the MID and housing prices - condo, urban, mcmansion, mid-cent modern...would ALL plummet.

Folks purchase properties largly based on a monthly payment, not the price, and a MID reduction or elimination would effectvely increase most peoples' monthly payments. Incoming buyers would in turn need to lower their asking prices to budget their expenses as well - you'd be talking a 20% fall in home prices on top of what is on the way with interest rates doubling to 7% norms.

Not possible now, maybe in 10 years after all the underwater properties in Cali, BosWash, Florida, PcNW, and AZ/NV come back to treading water.

by stevek_fairfax on Nov 12, 2010 12:12 pm • linkreport

@Stevek - If the MID is eliminated, the only sensible way to do it is to phase in the elimination over time. For example, it could be phased in over 10 years so that in year 1 you could deduct 90% of interest, year 2 80% of interest, and so on. That would avoid a massive single-year displacement. Of course, one can tinker with those numbers--maybe phase in over 20 years, or just 5.

by ah on Nov 12, 2010 12:22 pm • linkreport

@JCM; I'm looking at local jurisdictions that survive on property taxes and sales tax. Increase in AGI wouldn't help them, although it might help on the state level where that income is captured.

Removing the deduction for high income people might also work. Makes little sense for high income folks to tie up their wealth in housing. Effectively, that is what AMT does but you could tie it in more directly.

by charlie on Nov 12, 2010 12:22 pm • linkreport

@ first blush your argument makes sense, but I think the real motivator for high housing costs in DC have to do with supply and demand. Life in the outter suburbs is not what the Beaver's family had in mind. There comes a tipping point where potential suburban buyers will reconsider living near dark skinned people becasue the negative effects of living in Dale city out weigh their fear of minorities. Add to that the job market in the DC area and the demographic that attracts and it's no wonder Metro accessible zip codes continue to see a price increase.

Back to the 500k cap, I think while there will be a period of adjustment in the market, it will eventually put areas floating around that pricepoint like Takoma DC, Brightwood, Petworth etc in a more competative situation. If not, you're welcome driving 2(+) hours one way from wherever.

by Thayer-D on Nov 12, 2010 12:23 pm • linkreport

@stevek agreed this would probably be one of the worst things to do to the housing market at this time. Back in 04/05 when stuff was heating up a phased in reduction would have been perfect and possible tempered the large crash.

Until growth recovers acceptible levels, this would end up pulling money out of the economy at a time when it's very much needed.

by m on Nov 12, 2010 12:23 pm • linkreport

I haven't yet decided what I think of the proposal overall.

One of my initial reactions however is that it would NOT help lower rental prices because now (w/MID) a landlord can charge a rent that covers the monthly payment (as stevek_ffx points out) to break even @mo. but the profit comes at the end of the year with the MID on the property.

W/o the MID a landlord would need to up the rent to cover operating costs/make a profit. So the cost to the renter would end up being the same, maybe higher. Unless property taxes were decreased to accompany the lower appraised value of the property, then mo. payment would be decreased. But as charlie points out local municipalities can not lose that much revenue. It would have to be made up somewhere, like raising property tax rates.

by Tina on Nov 12, 2010 12:27 pm • linkreport

The fact that this deduction can be applied to SECOND HOMES has always baffled me. Is this supposed to protect the ubiquitous "family farm" that some of us have on Cape Cod or the Outer Banks?

by aaa on Nov 12, 2010 12:31 pm • linkreport

I'm not quite sure what the secondary effects of eliminating the MID would be, but since it will never ever, ever happen, I don't spend too much time thinking about it. The total elimination of Medicare will probably happen before the repeal of the mortgage deduction.

Not saying that's fair, just that it is what it is.

by oboe on Nov 12, 2010 12:36 pm • linkreport

As a homeowner myself, I of course want to keep the MID, in large part because the decisions we made about what we could afford presumed we'd have 30 years of the MID. And as someone without a Home Equity Loan or Second Home, eliminating the interest deduction on these seems reasonable. I could understand that tourist destinations, like any of the Delaware beach communities, might strongly object.

I was under the impression that already in the tax code, you could only deduct interest from a Home Equity Loan that corresponded to principal that went to improvements on the house itself--if you took out a loan and bought a boat, the interest wouldn't be deductible.

by thm on Nov 12, 2010 12:38 pm • linkreport

what if -- to test impact on sales -- Feds were to grandfather existing MID claimants who purchases/refinanced under the old rule and applied a new MID limit to all new purchases or refinances? Wouldn't have the revenue benefit, but it would make the impact of removing MID from the tax code clear and can be followed with a more decisive plan.

by w on Nov 12, 2010 12:40 pm • linkreport

this would probably be one of the worst things to do to the housing market at this time

But what if there is a connection between (a) the fact that the U.S. subsidizes home buyers' ability to leverage themselves to the hilt more than anyone else and (b) the swings in the U.S. housing market that caused the collapse of the world economy?

I don't see a return to the pre-recession economy as the solution. We need a new normal, one that is more sustainable. And phasing down the MID from $1 million to $500,000 over 10 years seems like a good step.

by Ken Archer on Nov 12, 2010 12:44 pm • linkreport

@Tina: my understanding is that the MID only applies to a homeowner's primary residence (and apparently, their vacation home.) It does not apply to an investment rental property. So eliminating the MID would not raise rental prices.

by Erica on Nov 12, 2010 12:48 pm • linkreport

I'd be all for this. As it stands, this is the most regressive and defenseless parts of the tax code.

But if people object to removing it so much, I'd be happy if everyone that used this deduction had to put up a sign on their front door that says: This house is subsidized by the federal government. Maybe it would change a few minds about who exactly is on the government dole.

by Reid on Nov 12, 2010 12:57 pm • linkreport

I can't see how this encourages renting: If the country ownership data show that the homeownership rate is not affected by the MID, then conversely, the rental rate is not affected by the MID either, since very roughly the rental percent = 100% - owner percent.

As a fan of Christopher Alexander's A Pattern Language, I reflexively agree with his argument:

People cannot be genuinely comfortable and healthy in a house which is not theirs. All forms of rental - whether from private landlords or public housing agencies - work against the natural processes which allow people to form stable, self-healing communities.


Do everything possible to make the traditional forms of rental impossible, indeed, illegal.

But I'd guess that any sort of program that tries to make home ownership easier across the board generally ends up raising the prices for everyone, so there's a windfall for those who bought before the program. It's sort of foolish to presume that prices would just stay the same after giving everyone the same incentives to buy. But by the same token, take away any sort of programs, it's a reverse windfall for everyone who has a house, as prices and values would fall.

by thm on Nov 12, 2010 1:05 pm • linkreport

@w - That still harms prices. Prices are determined by what buyers are able to pay, which would be reduced.

by ah on Nov 12, 2010 1:24 pm • linkreport

@ charlie That's a fair point. It'd be interesting to see some data re: the possible effects.

by jcm on Nov 12, 2010 1:24 pm • linkreport

Regarding more expensive vs larger homes:

There is indeed a correlation, because not all housing types are owned at similar rates. Home ownership rates for single-family detached houses is far higher than urban, dense apartments (which would be owned as condos).

In my opinion, the effects are detrimental to urban areas - the MID increases home values and hurts affordability, it's biased against renters in areas that predominantly rent, it's highly regressive, etc.

That doesn't mean there aren't other ways to change - for example, shifting from a deduction to a tax credit might help, offering a similar program for renters to deduct something from their taxes, etc.

It's a good conversation that needs to happen. If that's one benefit of the economic downturn - that sacred cows like this are on the table - then that's at least one positive development.

by Alex B. on Nov 12, 2010 1:25 pm • linkreport

@Tina; you are assuming a model of a private landlord.

In an urban environment, it makes a lot of sense for corporate landlords to take over. They don't get a deduction.

I wouldn't be surprised to see a model more like Canada or Spain, where you a lot of tiny city apartments being built as "starter" homes. Again, probably not a suitable model either -- requires constant newcomers to prop up those values. But going to the original point, that might be better for cities/urban areas.

by charlie on Nov 12, 2010 1:27 pm • linkreport

@Erica -yes, an investment property for a private landlord (individual not corporate) gets the MID, plus deductions for any costs for improvements, plus deductions for depreciation.

@charlie, yes, I am thinking of the model of a private landlord. True, this model is a small proportion of rental unit apartments. I would guess that most leased houses are owned by individuals rather than corporations. I wonder what the proportional distribution is in DC/metroDC?

by Tina on Nov 12, 2010 1:44 pm • linkreport

@ Reid - Would you require the same of food stamp recipients, welfare recipients, drivers, and people who get health care benefits through their employers?

In fact, maybe every person should be required to wear a sandwich board listing the implicit/explicit subsidies they receive from the government, and the approximate annual amount.

by ah on Nov 12, 2010 2:11 pm • linkreport

@Tina, Erica et. al.

Mortgages for rental properties are deductible as a business expense, so changes to the MID wouldn't affect them in that way.

by Steve S on Nov 12, 2010 2:12 pm • linkreport

@Alex B. - While there may be differences in ownership rates of apartment-style housing versus single family, the question is whether that results from MID or something else. I suspect something else. Apartments exist because there are a number of people for whom ownership is either undesirable or unavailable (i.e., insufficient income or capital). There is going to be a bias towards smaller/less expensive homes for such people.

by ah on Nov 12, 2010 2:15 pm • linkreport

I would like to see repeal of MID, but doing so in increments. Its a big tax hike for many people and would definitely cause disruption. For example, go from 100% to 0% over 10 years. This would allow existing homeowners and the market to readjust.

by SJE on Nov 12, 2010 2:35 pm • linkreport


No, that's not the question at all. The MID applies to everyone, whether they're buying an urban condo or large-lot McMansion. I'm not asserting that those differences are because of the MID - I'm asserting that there are differences in the ownership rates of those types of housing, and therefore the MID is biased against urban housing options because of the different rates of ownership (i.e. lower rates of ownership) in urban areas.

Urban home ownership is lower not just because of urban populations - even areas with similar wealth characteristics have lower ownership rates - but because of higher prices and more complicated ownership structures - dividing up a condo is more complicated than owning a single family detached house fee simple.

by Alex B. on Nov 12, 2010 2:43 pm • linkreport

Great piece. The tax system also penalizes rental housing, making it more expensive.

by ccort on Nov 12, 2010 2:49 pm • linkreport

@ccort - how so?

by ah on Nov 12, 2010 2:52 pm • linkreport

@ccourt Great piece. The tax system also penalizes rental housing, making it more expensive.

Maybe not ... It may actually instead just put it at a level playing field with rental housing ...

Interest expense (and every other expense) is ALWAYS deductable for ALL investments ... including for rental housing. I.e., you the renter may not be getting a deduction for the mortgage interest on your taxes, but you're indeed benefiting from the fact that your landlord can deduct the interest he/she pays. While it may mean 'more profit' for him, it also means he can charge less in rent and still make a profit. So, no, it doesn't penalize rental housing, it makes it more affordable.

Now of course the question comes up 'Is it good public policy to encourage homeownership'. It's always been thought it is, because like anything where the resident/citizen/'person' has some skin in the game better and more efficient results are almost guaranteed. Ever see big housing projects (like off the freeways in NYC) where in the middle of winter on the coldest days the windows are wide open? Well, if you think the landlord is paying the heating bill and your rent doesn't go up if you use more heat, what incentive do you have to keep the windows closed ? ... or to maybe turn the thermostat down to a chilly 65 degrees and bundle up? (And this is just one example of many.)

Additionally, while a more mobile workforce may be good for employers (sometimes), how good do you really think it is for the communities they only 'visit' rather than make 'their home'? All you have to do is look around you and notice how much work gets done in our communities by people who have a stake in those same communities. DC wouldn't function very well without all the volunteer efforts it benefits from. This also leads to more stable communities where less in the way of social service costs and the like are needed to be paid for out of taxes.

That's not to say that we don't all go through a period (or two or three or four) in our lives where renting makes more sense for us 'as individuals' than buying, but it does mean that longterm, the communities we live in are more stable when there are more people there with less of an ability to 'get up and move' ... People who will stay and work to make things better ... instead of just 'moving away' to find something better. Personally, I'd think the draw of moving away for better opportunites is inversely related to the draw of working off of established relationships (personal and business) the further one is along their 'lifespan'. And it makes sense if you think about the fact that the younger you are the more opportunities are out there for you and the longer the time you have to work those opportunities to fruition vs. the older you are the more you have 'past history' of people and places around you to leverage for better opportunities ... and the less you have of 'making it somewhere else'. Inverse relationships. I'd think the MID just tends to bring the point where the 2 competing draws meet. It tends to make homeownership both do-able and 'desireable' at a younger age than would otherwise happen. And I'd suspect that if you filtered for 'age' for homeownership percentages in the chart that is above, and were able to remove the differences occuring because you're looking at countries with older average populations, you'd find that we're in a better position in that sense ... in that we have more people at a younger age 'having skin in the game' and being encouraged by the weight/anchor of a mortgage to work harder at fixing where they're at vs. just being fancy free and footloose and abandoning their communities for better opportunities elsewhere.

Removing the MID won't happen.

by Lance on Nov 12, 2010 3:26 pm • linkreport

*I'd think the MID just tends to bring the point where the 2 competing draws meet more to the 'earlier along the life span' part of our lives.

by Lance on Nov 12, 2010 3:34 pm • linkreport


I agree that the recent trend towards urban and commute friendly neighborhoods and increased prices is simply a supply/demand issue. But nonetheless, if the relative price of such neighborhoods increase people shift away from them on the margin.

Simply based on anecdotes -- i.e., my own wild-@ssed speculation -- most middle/upper class parents are pretty risk adverse with their children and schooling. It is possible that some closer-in areas could get gentrified and I suspect that some would. My guess is that the effect would be small; but YMMV.


by Gee on Nov 12, 2010 3:54 pm • linkreport

@Lance: I wonder if reflexively NIMBY ANCs and community groups are a function of people (that is, nearby owners) who are practically desperate to defend their property values because they're so over-leveraged that they're effectively living inside their life savings. If our tax policy didn't penalize renters so heavily people wouldn't face an unfair incentive to buy.

I'm not sure this is what's happening, just something I've wondered about.

by Steve S on Nov 12, 2010 3:58 pm • linkreport

Just wanted to add ...

Obviously, I'm applying a particularly static model here. Lots of things can happen in the long run.

by Gee on Nov 12, 2010 4:01 pm • linkreport

@Steve S, I'd guess that most of the folks David likes to call Nimbys have been in their homes 20 yrs ... maybe more. Additionally, most people moving to their 2nd or 3rd or other house are transfering equity over . Something like 35% percent of all homes in US are mortgage-free. So, I would sincerely doubt that over leveraged is a factor in why people who own are mire likely to be invested in their communities than those who don't .

by Lance on Nov 12, 2010 5:18 pm • linkreport

Eliminating the deduction is a bad idea from liberals who would like to see the US become like Europe where most people do not own tangible assets and rent their places of residence, leading to demand for public housing and increased social benefits. This liberal agenda to take over private life in the US was rejected in the past election and if anything I hope the US is moving in the opposite direction. Cut defense and intelligence. We should invest in America, not third world nations that hate us. Let them kill themselves and starve to death.

by Cyrus on Nov 12, 2010 5:35 pm • linkreport

Eliminating the deduction is a bad idea from liberals who would like to see the US become like Europe...

Yawn. Thanks for your contribution to what was an otherwise enlightening and well-mannered thread.

by oboe on Nov 12, 2010 5:48 pm • linkreport

@Lance: I'm confused by your reasoning. If the MID really benefitted renters as much as homeowners, then it would completely fail to fulfill its stated purpose. At some point, homeowners come out ahead.

Its main effect seems to be to push up the cost of housing by making it artificially "cheap" relative to other investments.

BTW, the solution to the landlord/renter split incentive for energy conservation is to give whoever is paying the bills the control of the thermostat and a say in appliance choice! I lived in an apartment once much like the "big housing projects" you describe where indeed, I had to keep the windows wide open in winter - because I had no control over the indoor temperature and my 3rd floor apartment would have been 95 degrees otherwise. Believe it or not MANY renters are the ones pushing and pushing our landlords to make energy efficiency investments, but because they don't pay the bills they have no motivation to do so.

by Erica on Nov 12, 2010 7:31 pm • linkreport

I may have missed it, but has anyone brought up the fact that the MID is only available to those who surpass the standard deduction on their income taxes. Less of an issue among homeowners in the DC market, by there are many low to moderate income homeowners with a mortgage around the country who do not receive a penny from this tax break. Instead, they have to buy into a market that is artificially inflated without the government life raft that wealthier households receive (or alternatively they are prevented from buying in the first place). I can't think of any other federal policy that so blatantly redistributes wealth UP the income scale.

It also costs us (along with the capital gains deductions) over $120 billion per year, dwarfing any of the federal housing policies geared toward those who need help with basic shelter.

I'm, frankly, getting a little tired of all of the "too big to fail" arguments about how the wealthy just can't do without their government kickbacks - or else the whole economy will be blown to smithereens. There are ways to structure a phase-out carefully. I'm not buying it.

by Daniel on Nov 12, 2010 8:26 pm • linkreport

@Erica I'm confused by your reasoning. If the MID really benefitted renters as much as homeowners, then it would completely fail to fulfill its stated purpose. At some point, homeowners come out ahead.
Its main effect seems to be to push up the cost of housing by making it artificially "cheap" relative to other investments.

#1 What it does is help put it on equal footing as rental housing. The mortgage interest (and most other expenses) related to rental properties IS deductible ... and doesn't even have to surpass a 'standard deduction' like personal mortgage interest. (The landlord gets to pay less 'effective' financing costs .. .and the renter therefore can pay less in rent .. with the landlord still making the 'rate of return' they'd expect to get. Efficient markets will steer this landlord toward a rate of return commiserate with his risk.) The MID, just puts someone purchasing a property in the same shoes (in this respect) as someone renting it and getting the benefit of the write off.

#2 Buying a place to live is NEVER an 'investment'. It is an expense. And the aim is to reduce the amount of that expense ... (And you really need to look at it over the course of a lifetime since the equity gained in one home usually gets rolled over into the next home. The end of objective is to minimize the total housing expenses (including maintenance etc) over a lifetime ... and not to 'get a return' on one's money as one does with an investment.

by Lance on Nov 12, 2010 9:32 pm • linkreport

@Erica At some point, homeowners come out ahead.

I don't disagree with your assertion here ... It's just that they don't 'come out ahead' because of the mortgage interest deduction. They come out ahead (in the long term) because of the stability owning a home makes possible AND the opportunity it affords to volunteer your time and efforts to making your community a better place. Ask people who've lived in Dupont or Logan a long time if they think 'the neighborhood getting better' has anything to do with the increase in their property values. (Remember that little more than a generation ago, Dupont had streets known as 'Stab Alley' (1700 block of Corcoran Place) and others known for their heroin markets and 'crack houses' (1700 block Swann Street) ... And Logan/14th Street (which used to be DC 42nd Street with prositutes and XXX video places) had similar problems going back even more recently than Dupont's. The folks who lived there then and still live there now have had a substantial increase in their property values. And you shouldn't dismiss the work they put into their own properties and their neighborhood as a major reason for this. And, yes, the MID helps, in that it helps people 'have skin' in their community and its future. They can't just 'move away' when times get hard ...

by Lance on Nov 12, 2010 9:45 pm • linkreport

*It's just that they don't 'come out ahead' because of the mortgage interest deduction alone. (I.e., it's not the financial benefit per se, but the 'having skin in the game' aspect that makes it valuable.

by Lance on Nov 12, 2010 9:47 pm • linkreport

With regards to the MID, keeping more of ones own money is not a government subsidy.

A tax deduction isn't a payment from government. It's simply the government confiscating less.


by Kaleel on Nov 12, 2010 11:25 pm • linkreport

Kaleel, that's just semantics though. The issue is that the deduction is available to a certain set of people for a certain purpose, and not to others for other purposes. Therefor, extra taxes are collected from others to off-set the break. It's the exact same thing as just paying out directly. The federal government does this all the time to encourage or discourage certain behaviors.

by Daniel on Nov 13, 2010 9:21 am • linkreport

Alternatively, we could slash the MID for all new mortgages. Set a date (i.e. Jan 1, 2012), and all mortgages after that date have a much lower MID than those before. That way we're not 'changing the rules' on all the people who currently have mortgages.

by Tom on Nov 13, 2010 12:19 pm • linkreport

The problem with MID is (here and in the Netherlands, where it was a major election subject) is that it is an unlimited deduction. The original point of the MID was to help first-time home owners. That was a good idea. The problem is that landlords still get the deduction on their 15th rental property. It makes no sense to give a tax deduction to people in the rental business.

Having heard all kinds of arguments my feeling is that the best solution to save money on the MID is to cap it at a level that allows first time home owners to actually buy a home (so a million or so) and require that the tax payer actually lives at the home (which would effectively limit the deductions to one house per family). In short, you want help young folks starting a family to buy a home, but not subsidize Bill Gates' fifth vacation home.

A big problem though it to get from where we are to where we want to be. Home-owners with multiple homes will scream murder if they loose their subsidies, while nobody pays attention to renters and poor people who can't buy a home now due to inflated home prices.

by Jasper on Nov 13, 2010 12:37 pm • linkreport

Great idea, Tom. There may be a rush of homebuying before the deadline, but that couldn't really hurt too much. It's not much different than trying to lock in a good interest rate before rates go up.

Jasper, sounds like you're describing how the capital gains deduction is currently set up. Must be your primary residence, must stay in for at least two years. Sounds good, but I wonder if giving the deduction to rental owners may help renters to some degree, as they pass some of this savings on in terms of lower rents.

by Daniel on Nov 13, 2010 1:52 pm • linkreport

@Cyrus: "Cut defense and intelligence."

Well, I see you've already started cutting intelligence - how much have you lost? Let us know how it turns out.

by dcd on Nov 13, 2010 2:34 pm • linkreport

@Jasper, the MID is only for homeowners ... primary and secondary homes. The mortgage deduction for rental owners is the same as any expense deduction for any investment/business ... it is a cost of doing business and ALWAYS allowed ... How else would you calculate profit (on which to apply tax rate)?

by Lance on Nov 13, 2010 3:44 pm • linkreport

btw, it used to be that ALL interest expense was deductible on your tax return ... even though personal expenses as a rule are not deductible. Under Reagan, it got restricted to only MID being the only personal expense that is deductible. (Investment expenses are ALWAYS deductible.)

by Lance on Nov 13, 2010 3:46 pm • linkreport

@Tom That way we're not 'changing the rules' on all the people who currently have mortgages.

You're still changing the rules ... unless you can sell the mortgage with the house ... cause otherwise the house is now suddenly worth less ... (the real cost of the house is the 'after taxes' cost).

by Lance on Nov 13, 2010 3:48 pm • linkreport

@charlie: A lot of the new condos being built in Canada (especially Toronto/Vancouver) are rented out. It is far more common to rent out apartments than houses in general, thus eliminating the mortgage interest deduction should have the effect of increasing the demand for apartments and decreasing the demand for houses.

by Andrew on Nov 13, 2010 4:24 pm • linkreport

In Canada, where I am from, mortgages have never been deductible and homeownership is higher in Canada than the US. They also pay it off much faster as a result, so pay less for a house, because don't have years of interest onto of price. Also when you think about it if you are in the 30% tax bracket for every dollar of interest you pay, Uncle Sam only gives back 30cents. You still have come up with the other 70cents of interest. Not a great deal.

The whole problem with the US is many people look at a house as an investment instead of just a place to live. Many places in the US did not have the huge run up in prices, so never experienced the housing bubble.

by SP on Nov 13, 2010 5:06 pm • linkreport

Would it slow sprawl and gentrification? I don't think you've made a convincing case, given that housing is generally cheaper farther from the city -- so it might drive some buyers farther out.

Regardless of that, should we subsidize rich peoples' houses (and second houses)? No. Should we subsidize overleveraging? No.

The urbanist elements of this have more to do with reducing subsidies of homeownership generally, which encourages more renting and more geographic flexibility. Others can debate the desirability of those.

by Gavin on Nov 14, 2010 4:45 am • linkreport

Pandora's MID box has been opened. Many argue that it should be closed. The question is, how do you implement such a massive change without decimating the economy?

A mortgage is 30 years, so I would think that you could not phase it in any faster than that, but even if you were to phaseout at that snail's pace, you would STILL see values drop 15 or 20% right out of the gate. You would need a transition system of subsidies to replace the existing on, I am afraid, or to wait until there is another housing bubble and use the phase out as a mechanism to slow the bubble down.

by stevek_fairfax on Nov 14, 2010 9:20 am • linkreport

@steve_fairfax, You make a very good case about needing a gradual phase-out ... if getting rid of the MID is considered a 'good' thing. The easiest way to do that would be to just leave the cap at $1 M. There was a time when $1 M bought you a mansion in Beverly Hills or a townhouse in manhattan. Everything else was far cheaper. Nowadays, in our urban areas it buys you nothing more than an upper-middle class home ... definitely not a mansion. Give it 10 - 15 - 20 years, it'll buy you 'just' an average home anywhere in the US ... Give it another 50 years, and you'll be hardpressed to find 'anything decent' at that price.

So, if we really want to get rid of it, all we need do is not touch the cap ... I.e., just leave it at $1 M forever ... And the upside is that prices won't 'fall instantly' since the market has already internalized that $1 M cut-off ...

by Lance on Nov 14, 2010 9:47 am • linkreport

The $1 million MID limit is not the price of the home, but the total lifetime amount of deduction you can take. So that depends on the size of the mortgage, interest rate and term.

Lance's idea of leaving it in place will indeed eventually lead to it becoming more progressive as homes become more expensive and the average amount of interest one pays in a lifetime keeps going up. And it would serve to help the first-time home buyer, because that's when the deduction would be available: at first.

I would not be opposed to ratcheting that down, though, to speed up the transition.

by Steve O on Nov 15, 2010 12:55 am • linkreport

The MID allows you to deduct the interest paid on mortgage debt of up to $1,000,000. You can also deduct interest on a mortgage for a second residence so long as you don't earn more than 15 days worth of rental income from it. The total is still $1,000,000. In order to do this, you have to itemize. Here is where I think the real meat of the problem is. The standard deduction for a married filing jointly is $11,400. That means that (including the deduction for property tax) you would have to have just north of $150,000 in debt at 6% interest before you would see one cent extra deduction by itemizing. In a country where the median existing home price is $171,700, it's no wonder that a third of all homeowners don't even take take the deduction. Furthermore, as rates go down you have to take on more debt making the deduction less valuable and as rates go up, you have to take on less debt making the deduction more valuable. This means that the deduction is pro-cyclical reducing the support to consumption when we want more consumption and adding support to consumption when the government doesn't need to be subsidising more consumption.

Now for my suggestion. First, Make the deduction above the line i.e. don't require the tax payer to itemize to get the deduction. Second, make the cap for the deduction based on the interest you pay not the amount of debt you have and reduce it so that it is revenue neutral. Assuming a 6% interest rate $500,000 would get you a $29,832.97 deduction in year 1, my wild ass guess for the cap would be $30,000 worth of interest. This would mean that the tax revenue the government is forgoing would actually have the effect of making home ownership more attainable for first time home buyers, maintain the deduction for all homeowners (someone with a $1M mortgage would still get to deduct $30k), eliminate the pro-cyclical nature of the existing deduction, and reduce the government subsidy for high priced shelter.

I don't have the Congressional Budget Office at my fingertips so obviously the cap would have to be adjusted to actually be revenue neutral (or even positive).

by JohnB on Nov 15, 2010 5:51 pm • linkreport

@John B: convert it to a refundable credit of 15% (or whatever the tax bracket is for up to $75,000 or so) of the interest on the first $500,000 of primary residence mortgages.

by Michael Perkins on Nov 15, 2010 6:44 pm • linkreport

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