Study finds key tax break has adverse effect on homeownership, social welfare

Mar 30, 2011 By Greg Tammen

The American dream of owning a home with a white picket fence may stay a dream for many, according to a recent study by a Kansas State University economist.

Tracy Turner, associate professor of economics at K-State, and Christian Hilber, a professor at the London School of Economics in the United Kingdom, completed a study on America's mortgage interest deduction and how effectively it promotes homeownership.

The mortgage interest deduction, also called the MID, is the second largest tax break in the federal tax code and is meant to promote homeownership by allowing itemizing homeowners to deduct the annual interest payments they make on their primary residence and second home real estate loans. For the 2011 fiscal year, the deduction will account for an estimated $104.5 billion in revenue loss for the U.S. Treasury.

However, since the Reagan administration, the deduction has been viewed as a vehicle for promoting homeownership, Turner said.

"In urban places suffering from neighborhood instability, underperforming schools, low social capital and poor governance, increasing homeownership rates may improve conditions in these communities. This is because when households own their housing, they have more of a stake in the success of their communities," Turner said. "But in these urban places the MID is doing the opposite; it's actually lowering the likelihood of owning a home."

The duo's study analyzed household data collected from 1984-2007 by the Panel Study of Income Dynamics.

Findings showed that the mortgage interest deduction boosts homeownership rates only in areas with an abundant housing supply, like the Midwest -- but only for higher-income households. In denser urban cities with limited housing available, the deduction actually has a negative impact, reducing homeownership and instead inflating housing prices.

According to Turner, the finding is consistent with : tight land restrictions mean that the higher demand for owner-occupied housing – because of increases in the mortgage interest deduction -- will only bid up house prices without expanding the house stock, which in turn means higher down payments.

Consequently, though households may be able to make monthly payments, low-wealth households can't afford the elevated down payment. These high house prices, and therefore higher transaction costs, also make homeownership a less attractive option to mobile households that may not be looking for a long-term purchase.

Turner and Hilber's initial study, "The mortgage interest deduction and its impact on homeownership decisions," is currently being revised for journal publication.

Most recently Turner presented the findings in October 2010 at an invitation-only research symposium on the future of housing and finance. The symposium, "Mortgage Foreclosures and the Future of Finance," was hosted by the Federal Deposit Insurance Corporation/Federal Reserve Bank. It included opening remarks from Ben Bernanke, chairman of the U.S. Federal Reserve, who touched on the importance of homeownership and its role in improving communities.

Explore further: How long do firms live? Research finds patterns of company mortality in market data

Related Stories

Most mortgage meltdowns not caused by subprimes

Oct 22, 2010

Subprime mortgages were not the main reason behind the housing crisis that started in 2009 and continues to bedevil the faltering U.S. economy, according to a University of Michigan study.

Study explores real factors behind declining housing prices

Sep 04, 2007

Housing prices are likely to fall further, but not for the reasons usually cited, according to an "Economic Commentary" published by the Federal Reserve Bank of Cleveland and co-authored by University of Wisconsin-Madison ...

Research reveals likely housing winners and losers

Oct 12, 2010

There is a great deal of uncertainty and speculation about the direction of the housing market in the UK and the USA -- both for home-owners and renters. Social Scientists funded by the Economic and Social Research Council ...

Credit crunch hits cash-strapped homeowners

Dec 11, 2008

Homeowners have drawn on their biggest asset, the roof over their heads, not to fund 'champagne moments' but to get through hard times; that's the finding of a preliminary study by Durham University.

Recommended for you

Outside CEOs could rejuvenate struggling businesses

16 minutes ago

CEOs hired from outside a company tend to spend more money on research and development, while CEOs hired from within are likely to make large, strategic acquisitions, new research from the University of Missouri ...

Do government technology investments pay off?

Mar 30, 2015

Studies confirm that IT investments in companies improve productivity and efficiency. University of Michigan professor M.S. Krishnan wondered if the same was true for government.

Study finds assisted housing works, but it could be improved

Mar 30, 2015

Two researchers from the University of Kansas Department of Urban Planning have just completed a study on the locations of assisted housing units and assisted households across the nation. It examines one of the key issues ...

Economist probes the high cost of health care

Mar 27, 2015

When Zack Cooper arrived at Yale as assistant professor of public health and economics, he gained access to a first-of-its-kind dataset. Working with the non-profit Health Care Cost Institute, Cooper and ...

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.