Saturday, April 6, 2013

The Mortgage Interest Deduction Doesn't Pass the Smell Test

This of course isn't news, but I think it's worth reminding people of now and then. Jared Bernstein's On the Economy has a nice post on it, click through to the graph. Here's a taste (his criteria are a little more complex then my suggestion of just thinking about deductions as checks cut by the government, but it makes sense too):

The MID is widely believed to subsidize home purchases that would mostly have been made anyway, so it scores high on the inefficiency criterion.  And since it costs the Treasury about $70 billion a year in forgone revenue, it’s expensive.  As the figure shows, it’s distributionally upside down, so it scores no higher on fairness.   In fact, it’s a trifecta loser on my three original criteria.  Of course, once if you add in political feasibility, it’s a much tougher call, though Fischer points out that numerous analysts have proposed reforms that mend the MID without ending it.

Not that I see any changes being made any time soon. I hear adds supporting the deduction rather frequently on the radio when I check traffic in the morning (and Detroit is probably about the last place that needs the deduction, what we need are more generous and stable rent subsidies given the uncertainty of unemployment for many folks around here). I also here incessantly from lowers at BNIs and other networking groups about events to show support for this deduction and other inefficient housing policies. Supporters of this terrible policy are very well organized and it doesn't help that I've talked to an awful lot of intelligent, educated people who believe buying a house is essential to "stop throwing money away."*

* Of course, with the rent to owning cost ratio where it is owning a home is often a good choice around here; however, I hear from a lot of people who plan to move within a 5 year time frame which tends to be rather high risk financially when closing costs and other risks associated with home ownership are taken into account. I say this despite growing up in a family that moved a lot and did well on home sales despite moving every 3ish years, we were lucky and my parents had some experience as realtors. I doubt this is the case on average with this time frame, outside of the real estate boom years anyway.

[Edit: Added missing link]


  1. At least around here (Northern California), all of the ads lauding the mortgage deduction seem to be sponsored by mortgage lending companies. Who have, to put it mildly, a vested interest in keeping the number of borrowers high. Especially if they can sell on the actual mortgages, thus removing their risk.

    I do wonder how much of our national enthusiasm for home ownership is born of the perception that, outside of major cities anyway, families own homes. Whereas single people are the ones who have apartments (i.e. rent). So might part of it be, at heart, a belief that families are a positive social good?

    Then again, the idea of home ownership as an investment might be a reflection of a view that dates at least back to Will Rogers: "Buy land. They are't making any more of it." (Guess he never visited Hawaii....)

    1. That's a good observation, a link between families and housing would explain some of the cultural tenacity. Unfortunately I think the link is more symbolic than actual.