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The Benefits of the Home Mortgage Interest Deduction

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  • Edward L. Glaeser
  • Jessse M. Shapiro
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    Abstract

    The home mortgage interest deduction creates incentives to buy more housing and to become a homeowner, and the case for the deduction rests on social benefits from housing consumption and homeownership. There is little evidence suggesting large externalities from the level of housing consumption, but there appear to be externalities from homeownership. Externalities from living around homeowners are far too small to justify the deduction. Externalities from homeownership are larger, but the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners. The irrelevance of the deduction is supported by the time series which shows that the ownership subsidy moves with inflation and has changed significantly between 1960 and today, but the homeownership rate has been essentially constant.

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    Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1979.

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    Date of creation: 2002
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    Handle: RePEc:fth:harver:1979

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    Cited by:
    1. Kurz, Claudia & Hoffmann, Johannes, 2004. "A rental-equivalence index for owner-occupied housing in West Germany 1985 to 1998," Discussion Paper Series 1: Economic Studies 2004,08, Deutsche Bundesbank, Research Centre.
    2. Jonas D. M. Fisher & Martin Gervais, 2009. "Why has home ownership fallen among the young?," Working Paper Series WP-09-01, Federal Reserve Bank of Chicago.
    3. Edward L. Glaeser & Matthew E. Kahn, 2003. "Sprawl and Urban Growth," NBER Working Papers 9733, National Bureau of Economic Research, Inc.
    4. Casper Ewijk & Bas Jacobs & Ruud Mooij, 2007. "Welfare Effects of Fiscal Subsidies on Home Ownership in the Netherlands," De Economist, Springer, vol. 155(3), pages 323-336, September.
    5. Cho, Sang-Wook (Stanley), 2010. "Household wealth accumulation and portfolio choices in Korea," Journal of Housing Economics, Elsevier, vol. 19(1), pages 13-25, March.
    6. Stephen Cauley & Andrey Pavlov & Eduardo Schwartz, 2007. "Homeownership as a Constraint on Asset Allocation," The Journal of Real Estate Finance and Economics, Springer, vol. 34(3), pages 283-311, April.
    7. Martins, Nuno C. & Villanueva, Ernesto, 2006. "The impact of mortgage interest-rate subsidies on household borrowing," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1601-1623, September.
    8. Sang-Wook Stanley Cho, 2007. "Accounting for Lifecycle Wealth Accumulation: The Role of Housing Institution," Discussion Papers 2007-27, School of Economics, The University of New South Wales.
    9. Thomas Hemmelgarn & Gaetan Nicodeme & Ernesto Zangari, 2011. "The Role of Housing Tax Provisions in the 2008 Financial Crisis," Taxation Papers 27, Directorate General Taxation and Customs Union, European Commission.
    10. Jordan Rappaport, 2005. "The shared fortunes of cities and suburbs," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 33-60.
    11. Raj Chetty, 2004. "Consumption Commitments, Unemployment Durations, and Local Risk Aversion," NBER Working Papers 10211, National Bureau of Economic Research, Inc.

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