See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

Mortgage interest deduction: More discriminatory than beneficial

Right now, low mortgage rates mean smaller interest payments over the life of your mortgage. With the federal mortgage interest deduction, homeowners have the ability to deduct some of that interest every year on their taxes. But is the ability to deduct mortgage interest a worthwhile incentive for you to own a home? Chances are that it depends.

Back in April, we had an economics professor from Rice University explain to us the pros and cons of the mortgage interest deduction because a recent HSH.com survey revealed that over 28 percent of homeowners said they “weren’t sure” if the mortgage interest deduction mattered to them or not.

This time around, we’ve asked Dr. James Spencer, Ph.D., professor of City & Regional Planning, and Chair of Clemson University’s Department of Planning, Development, and Preservation, to shed some new light as to why the oft-lauded mortgage interest deduction may have done more harm than good.

Q: Is the mortgage interest deduction simply an advantage only to wealthy homeowners or is it also an incentive for middle- and lower-class families to buy homes?

Answer By
Dr. James Spencer, Ph.D.

A: As a scholar interested in poverty, communities and housing, I come to this issue with an emphasis on how the home mortgage interest deduction affects the most poor – and also ethnic, racial and immigrant minorities -- in the U.S. because this is a group that has been most negatively affected by U.S. federal housing policy.

The mortgage interest deduction has been a point of blame for some analysts, saying that it has intensified spatially concentrated poverty. This tax-code policy allows homeowners to deduct their mortgage payments from their taxes, thus creating incentives for homeownership at the higher end of the housing market. It provides no comparable incentives for investment in low-income housing. Most of the limited stock of low-income housing is in poor neighborhoods, and it contains little social mix. According to Oliver and Shapiro’s 1994 analysis, housing policies, such as the home mortgage interest deduction, have been a major cause of asset differentials between the underclass and the rest of society.

Housing crisis/recovery plays a big role

After the 2008 mortgage (and larger economic) crisis, homeownership has become further out of reach for most working class people, thereby further emphasizing the policy's disproportionate benefits to the wealthier classes, especially as more and more of those working class people are renters.

There is also an important political aspect to this policy, whereby the real estate industry is a big lobbyist and supporter of the mortgage interest deduction, arguing that to remove it would depress home sales and thereby undermine the broader economy. In addition to this political pressure, voters in most elections are disproportionately homeowners with a very material interest in maintaining the deduction.

A change in policy

In general, I think the policy needs some significant alteration or new complementary policy (e.g. a comparable tax benefit for renters, or a tax benefit to mortgage holders who do not itemize deductions – i.e. a tax credit). These would be good amendments and additions, but if they significantly undermine the current beneficiaries, we could be in for a VERY contentious debate that might result in status quo (something like gun control in recent years).

The question in my mind is whether policy can be developed that would create the benefits for the lower-income households, as well as preserve the needed comfort level of the current beneficiaries (many of them did, after all, make very large investments in real estate, counting on the deduction). Of course, this means even greater reduction in tax revenues, but at least the beneficiaries would be more weighted to those who need it the most.

Not the best way to incentivize homeownership

One final note on the oft-argued point that the deduction is an incentive for homeownership:

While that might work in theory, and for the upper levels of the income distribution, it's important to keep in mind that the policy was not intended for this when it was created back in 1913 – only in the 1980s was it reoriented to do this. It was a way to make home businesses easier to deal with on your taxes.

So, if we really want to incentivize homeownership (something that can be very good, if it is done with sufficient education on the risk of homeownership debt), then we might be better off developing a policy to do this rather than trying to make the argument that the home mortgage interest deduction serves this purpose.

Think Tank

James Spencer,
Professor of City and Regional Planning at Clemson University
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