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Mortgage interest deductions? Not a bad idea after all

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  • Rotberg, Shahar
  • Steinberg, Joseph B.

Abstract

Mortgage interest deductions and other homeownership subsidies are widely believed to be harmful because they redistribute resources from lower-income renters to higher-income homeowners. We argue that renters actually benefit from these policies in general equilibrium for two reasons. First, the rental supply curve is relatively inelastic, which means that rents fall when these policies reduce rental demand. Second, many renters spend most of their income on housing, and these renters gain substantially from rent decreases. We calibrate a quantitative model to match empirical evidence on these factors and show they are strong enough that subsidizing homeownership actually increases welfare.

Suggested Citation

  • Rotberg, Shahar & Steinberg, Joseph B., 2024. "Mortgage interest deductions? Not a bad idea after all," Journal of Monetary Economics, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:moneco:v:144:y:2024:i:c:s0304393224000047
    DOI: 10.1016/j.jmoneco.2024.01.004
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    More about this item

    Keywords

    Mortgage interest deduction; Rental supply elasticity; Rent-to-income ratio; Homeownership; Welfare;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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