Tax policy changes could make homeownership a reality for more Americans

Changes to U.S. tax policy could make the dream of homeownership more affordable to many Americans, according to a new study by researchers at the Johns Hopkins Carey Business School. Using a new dynamic lifecycle model to analyze housing demand and various tax policies, the researchers predict replacing tax deductions for mortgage interest with refundable mortgage interest credit would increase homeownership rates by 5.9%. In addition, these gains in home ownership would be concentrated among low- and middle-income households and young home buyers.

The study, “Tax Preferences and Housing Affordability: Explorations using a Life-Cycle Model,” is published in the SSRN Electronic Journal.

“The housing market is very difficult to model, as the supply and demand dynamics are much more complex than for other commodities,” said Michael Keane, a professor at the Carey Business School and leading expert on lifecycle modeling.

“We developed a model that accounts for all the complex dynamic factors that influence people’s decisions on buying and selling homes, and that gives us a more complete picture than previous models.”

Keane says that while the mortgage interest deduction does make housing ownership more affordable for low- and middle-income people, the tax break also encourages wealthy people to buy larger houses. He and his co-author, Xiangling Liu, a researcher at the University of New South Wales, used their dynamic lifecycle model to analyze the impact of converting the mortgage interest tax deduction into a tax credit.

For their analysis, the researchers simulated providing a flat 24% credit to a homebuyer’s mortgage interest that did not depend on the borrower’s marginal tax rate. In this model, wealthy households in the 37% bracket would get the same tax benefit as a lower-income household.

“What we find with this policy is that you would continue to encourage low- and middle-income home buying while eliminating the unintended and regressive consequence of encouraging wealthy households to buy larger houses,” said Keane.

The researchers also examined what would happen if mortgage interest deductions were replaced with a tax credit for all taxpayers.

“According to our model, everyone in the economy would actually be better off, but home ownership would drop slightly,” Keane explained. He notes eliminating the mortgage interest deduction could cover the cost of a 5% cut in the marginal rates on income tax for all taxpayers. While all taxpayers would benefit, Keane says homeownership rates would drop as some low-income buyers would no longer be able to afford a home.