Ezra-

There's an emotional component here--as people move into their 30's and forties, they often feel that they do not want to be subject to landlords' whims; they have more furniture and appliances that are hard to move around, etc. And if you have kids, moving is even less fun.

Someone was mentioning that the amount of rent people are willing to pay (outside of NYC) really tops out around $2500/month. You can't just buy a big mansion and try to find people willing to pay $4000 to $5000/month in rent, typically. Since the mortgage deduction serves to put homeowners on equal footing with landlords (in theory), it might be worthwhile to limit the interest deduction to the first $400-500k of a loan (adjusted for inflation).

This could both blunt the effects of the home interest deduction while providing a disincentive against zoning rules that require huge houses to be built on lots.

This could both blunt the effects of the home interest deduction while providing a disincentive against zoning rules that require huge houses to be built on lots.

I don't think zoning rules REQUIRE that huge houses be built; that's the marketplace at work.

In my state, the cost of land by itself is so high that a builder can't make money (unless he is subsidized in some way) unless he is building a house that is going to cost upwards of $300,000 when it's sold. A moderate house is still going to cost over $200K because the land itself costs $130,000. And people want to feel like they are getting their money's worth, and square footage is a way to measure that.

My husband and I rented for 10 years, and we had to move 10 times - because the building were in got sold, because our jobs changed, because we had kids and we needed to live someplace with better schools, because of terrible neighbors, etc.

When we finally bought, we got a nicer place than anything we had ever lived in (although still moderate by todays standards at 1700 s.f.) and it cost us significantly less each month than renting. Home ownership helped us move from the working class to the lower middle class. It's beneficial for many people to be homeowners, so I like the mortgage deduction.

Households at the margin of choosing between renting and owning are not, for the most part, itemizers. The deduction has no effect on their choice, and thus does almost nothing to promote homeownership.

I'd like to see the evidence for this, because the deduction did affect my choice to buy a home instead of renting.

Economic theory would suggest that there can be no long term profit in owning versus renting. When it looks like there are, demand for owning rises, driving housing prices up, reducing any potential profit. In the long run, owning and renting should cost the same. (Note many people compare rents and mortgages, which overlooks all the other costs of home ownership).

Owning had (at one time) the factor of forcing yourself to save (via the equity buildup), but with easy 2nd mortgages, even that's pretty much gone.

The mortgage deduction drives prices of ownership up, until there is no defacto savings from it. It just feels good to owners to claim they get it.

Only the home builders and mortgage lenders profit from the deductions.

You know, I used to hate the mortgage deduction too--back when I was a renter. What: rent doesn't come out of my income just like a mortgage does? But then I became a homeowner--or rather, I became joint owner, with my husband, of one half a 100-year-old duplex. And I'll tell you: the money we spend in basic maintenance and upkeep way outstrips what we get from our mortgage deduction. Ezra, I've seen you complain about mortgage deductions before, but I haven't seen you address this aspect of the issue--that homeowners, if they're even semi-responsible about upkeep, are making a substantial contribution to the maintenance of the country's housing stock for future generations. While I agree that the mortgage deduction as currently configured does make for some of the perverse incentives you're describing, it also gestures towards acknowledging homeowners' contributions to residential infrastructure and public safety. I know that, just speaking personally, I would be in trouble financially if it was suddenly eliminated. And it's not because we bought a McMansion or anything close to it. Maybe it's because we bought an old house, but I suspect newer houses have their own sets of issues. Speaking just personally, the mortgage deduction makes it just conceivable that when we need to replace the roof, or replace a broken furnace, or replace a broken hot water heater and bring the venting up to code, or do a safe asbestos abatement, or build a new back porch when the old when crumbles into dust, or trim the 100-year-old trees before they fall on the neighbor's car--*all* of which we've had to do in the past four years--we might have a prayer of finding the money to do so. (See: wage stagnation--fix that and then talk to me about mortgage deductions.)

You could say that the mortgage deduction just increases the cost of housing, but the point is: the house cost what it cost when we bought it. Eliminating the mortgage deduction now would be to impose a serious increase in the cost of our housing after the fact. Yes, we factored in the mortgage deduction when we bought the house. And that deduction now takes a bit of the sting out of getting socked with emergency repairs. Renters are rarely responsible for expenses on the scale that homeowners are. Possibly, in our case, the mortgage deduction also kept our neighbor's car from getting smushed.

I think you're right on some counts, but I don't get the impression that you've thought through the whole picture.

I'm in the LA area. And Ezra knows what housing policy has done around here. The middle class can't afford houses (unless they got in 10 years ago).

The current policy, in effect, sends tax revenue to the banks, rather than to the government. Once that perk runs out, the incentive is to move to a more expensive house, taking that equity with you.

Now it's all crashing down. One bright spot in this dismal, dismal picture is that middle class people might not have to rent forever in places like the LA Basin.

In Canada, you get a tax deduction for renting, the way you get one for interest here.

1. Owning a home is hedge against inflation.

2. Some incentives are bad for renters.

Those fuckheaded no-money-down infomercials have created a fair few bad landlords. That, combined with the culture of flipping, is supported by the mortgage interest deduction.

My husband and I rented for 10 years, and we had to move 10 times - because the building were in got sold, because our jobs changed, because we had kids and we needed to live someplace with better schools, because of terrible neighbors, etc.

But that's partly a product of a market and tax system that treats rented homes like rented cars, and implicitly classes long-term renters outside big cities as downbeats.

(If you've got the career stability to put down roots, well, good for you.)

Home ownership is really a cultural thing, backed up by the tax system, and I've always found the continental European attitude towards housing attractive: it's somewhere to live, it's not an investment, it's not an inheritance, it's not an ATM. If you buy, you buy for keeps; if you rent, the market's big enough that you'll likely end up somewhere decent.

Until the Tax Reform Act of 1986, all consumer interest was deductible: student loans, auto, credit cards. In the short term the elimination of consumer interest deductibility for all loans except mortgages made it much cheaper to borrow for a house than for anything else, which skewed consumers to spend more for housing than their true preferences would reflect. Over time, it led to rising housing prices, as sellers captured the added value of the cheaper money available to finance house purchases.

PS- the notion that mortgage deductibility is somehow a consciously arrived-at "backbone" of housing policy is a retroactive construction. Until 1986, mortgage deductibility was just one example of interest deductibility. The housing industry was a powerful enough lobby to prevent repeal of mortgage deductibility, whereas the student loan industry, for example, was not. (Of course, repeal of mortgage deductibility would have resulted in a fall in housing prices, because the effective monthly payment would have risend - and no politician wanted to cause a fall in home values, as homeowners do tend to vote.) As a justification for the special treatment of mortages, we got this fanciful story about the unique importance of mortgage deductibility to encourage homeownership.

PS- the notion that mortgage deductibility is somehow a consciously arrived-at "backbone" of housing policy is a retroactive construction. Until 1986, mortgage deductibility was just one example of interest deductibility. The housing industry was a powerful enough lobby to prevent repeal of mortgage deductibility, whereas the student loan industry, for example, was not. (Of course, repeal of mortgage deductibility would have resulted in a fall in housing prices, because the effective monthly payment would have risend - and no politician wanted to cause a fall in home values, as homeowners do tend to vote.) As a justification for the special treatment of mortages, we got this fanciful story about the unique importance of mortgage deductibility to encourage homeownership.

I'd like to see the evidence for this, because the deduction did affect my choice to buy a home instead of renting.

I think a lot of people in the lower income tax brackets over estimate the value of the mortgage tax deduction. Lets look at a hypothetical.

Let's say we have a married couple with a combined income of 100,000 per year. They have just purchased a house with $200,000 in mortgage debt. Their loan is a 30 year fixed at 6.25%. They would in their first year pay 12,433 in interest.

Now the standard deduction they would have taken if they didn't have mortgage interest to itemize is 10,700. The difference between the two is $1733. They are in the 25% tax bracket, and either deduction will not take them out of it, so with the mortgage interest deduction they save an extra $433.25 in taxes.

Now the picture is somewhat more complicated then this. They would also get to deduct their property taxes, let's say they pay $1,000 in property taxes. They would save another $250 in federal taxes. They would also get to deduct their state income or sales task. I'm going to use Colorado’s rate which is 4.63% That would be another 4k in deductions, and would save them about $1,000 more on their federal taxes.

So all told they have saved 1,683 or so on their federal taxes compared to the standard deduction. That's not bad, but it's not exactly great either. In order to save this they had to pay $12k in interested ant $1k in property taxes. They also will have to get home owners insurance, so that will probably be around $1,200 a year.

So if your comparing owning to renting, your monthly mortgage, plus your property taxes, need to equal what your rent payment was for you to actually get any sort of advantage from the mortgage tax deduction (since your federal tax savings will about pay for the home owners insurance.)

Now remember this is their best year for the mortgage interest deduction, every year after this they will pay less interest as the principal is paid down. At some point over the life of this loan they will in fact probably no longer have enough deductions to justify itemizing.

Also remember that a couple making a $100k a year is not exactly on the margins, and if this couple was only making 70k a year the numbers look even worse.

More justifiable is having the principle deductible. But having just the interest encourages, as one poster said, interest-only loans and flipping once the principal kicks in.

But I was told by a couple real estate types that I could afford quite a bit more than my max rent because I could write off all the interest I was paying. That's an incentive to buy, or so it seemed. (Though I was suspicious and was glad I was the way the market turned out.)

A couple making 100k in LA barely, perhaps barely, can afford a house.

We paid a larger percentage of our income towards rent than we do towards our mortgage. The mortgage deduction was not a factor in our decision, we had decided on our housing budget, and we bought a house within that budget.

The main point of home ownership, for me, was that it was something that was mine, and in the event of some sort of crisis, we could use the house, even if it was just a matter of selling it.

What part are you talking about, interest or taxes? The property tax portion of the deduction is by far the largest portion of the deduction here in Austin. Since Texas has no income tax our property taxes are breathtakingly high. Remove that and Texans are truly screwed. Of course, to many outside this state that is a feature not a bug.

"Mortgagees" in the last quoted paragraph should, of course, be "mortgagors". Mortgagees are the creditors, not the debtors.

I happily take advantage of the mortgage-interest deduction, even though I know it is monumentally stupid as social policy. Why part of my housing cost should be, effectively, subsidized, while none of the renter's housing cost is likewise advantaged is impossible to justify or even convincingly explain.

But the notion that the poor sod trying to decide whether to stop renting and buy something is unaffected by the deduction is nonsense. The poor sod may not be itemizing now, but if he or she isn't itemizing after buying a home he or she is getting some really lousy advice.

Further, what is absent from much of the discussion above is equity. I bought my current principal residence in 1996, in the depths of the last Barry administration in Washington when the market was very weak. Even with the bursting of the housing bubble, my little condo is worth probably four times what I paid for it. The renter who moves out has nothing; I get a couple hundred thousand dollars.

And my cost of housing, when figuring in the condo fee and the mortgage-interest deduction and the property tax and the property-tax deduction most definitely went down when I moved from the rental building next door into my condo. Then, six years later, I bought a second home up in the mountains of Virginia, and I get to deduct the mortgage interest on that too!

All of this is daft as policy, but a pretty sweet deal for me.

An esteemed economist once told me that Germany had the right set of policies regarding property and taxes, but damned if I can remember what those policies are. He also said that getting rid of the mortgage deduction would be next to impossible because it is now built into the price of a house. Getting rid of it would cause the value of the US housing stock to fall by a certain percent, which would be difficult to pull off.

I had a rather nasty and crabbed co-worker at one point who would bitterly complain that people on welfare were just living off her hard work. I pointed out that the value of the home mortgage deduction was about the same average amount as a poor person might get in benefits. Therefore, she was living off the hard work of the bag-checkers of America. I was astonished at the venom with which she asserted that her mortgage deduction was EARNED and her reward for being a homeowner while people on food stamps were no good lazy bums.

Entitlement programs, indeed.

Contrary to what Crook believes, the deduction figured prominently in the discussion about whether we could afford our house -- and for the record, we bought far less house than lenders said we could afford.

That said, the author of the piece claims that the deduction has no effect on the decision to buy, and thus does nothing to encourage home ownership. Yet, in a Goldbergian twist of logic, the mortgage deduction "fuels overspending"? So I guess only naughty people care about the deduction.

Sorry, but that's just bullshit.

And you'll change your tune if you ever buy a house, Ezra. You're smart, wise, even, but you're young.

Jamey,

I think the point is that the mortgage interest deduction has already been factored in to the price of houses by the market. Because people can deduct the interest, they can afford to pay more for houses. Therefore the prices of houses increase. If the goal was to make houses more affordable, then you have failed because you also increased the price of houses.

The point is that the interest deduction enabled you to be able to afford the house you bought. But if there was no interest deduction, the house you purchased would have cost significantly less, and you probably still would have been able to afford it.

If you want to increase home ownership it would be far more effective to target first time buyers with down payment grants, mortgage insurance subsidies, and counseling. It would be much cheaper, it would do far more to increase rates of home ownership, and it wouldn't subsidies people that already have house so they can re-fi to by cars, and go on trips, and remodel their houses.