The Geography of Housing Subsidies

We investigate the spatially heterogeneous impact of the US federal mortgage interest deduction (MID) on the location and tenure decisions of households. We develop a general-equilibrium model at the county level featuring an endogenous itemization of housing subsidies. Despite being an important tax expenditure, repealing the MID would only slightly lower homeownership rates while leaving welfare mostly unchanged. The policy is ineffective because it targets locations with congested housing markets, creating a spatial shift of the housing demand toward areas that capitalize the subsidy into higher prices. We provide evidence that a repeal of the MID is to be preferred to an increase of standard tax deductions as recently implemented under President Trump's administration.