Mortgage interest deductions? Not a bad idea after all

Shahar Rotberg and Joseph Steinberg

Journal of Monetary Economics, 2024, vol. 144, issue C

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.

Keywords: Mortgage interest deduction; Rental supply elasticity; Rent-to-income ratio; Homeownership; Welfare (search for similar items in EconPapers)
JEL-codes: H20 R21 R31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:144:y:2024:i:c:s0304393224000047

DOI: 10.1016/j.jmoneco.2024.01.004

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