IDEAS home Printed from
   My bibliography  Save this article

Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change


  • Martin, Hal
  • Hanson, Andrew


We simulate changes to metropolitan area home prices from reforming the Mortgage Interest Deduction (MID). Price simulations are based on an extended user cost model that incorporates two dimensions of behavioral change in home buyers: sensitivity of borrowing and the propensity to use tax deductions. We simulate prices with both inelastic and elastic supply. Our results show a wide range of price effects across metropolitan areas and prospective policies. Considering behavioral change and no supply elasticity, eliminating the MID results in average home price declines as steep as 13.5% in Washington, D.C., and as small as 3.5% in Miami-Fort Lauderdale, FL. Converting the MID to a 15% refundable credit reduces prices by as much as 1.4% in San Jose, CA, San Francisco, CA, and Washington, D.C. and increases average price in other metropolitan areas by as much as 12.1% (Miami-Fort Lauderdale). Accounting for market elasticities produces price estimates that are on average 36% as large as standard estimates.

Suggested Citation

  • Martin, Hal & Hanson, Andrew, 2016. "Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 12-23.
  • Handle: RePEc:eee:regeco:v:59:y:2016:i:c:p:12-23 DOI: 10.1016/j.regsciurbeco.2016.03.006

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    1. Voith, Richard & Gyourko, Joseph, 2002. "Capitalization of federal taxes, the relative price of housing, and urban form: density and sorting effects," Regional Science and Urban Economics, Elsevier, vol. 32(6), pages 673-690, November.
    2. Andrew Hanson & Hal Martin, 2014. "Housing Market Distortions and the Mortgage Interest Deduction," Public Finance Review, , vol. 42(5), pages 582-607, September.
    3. David Albouy & Andrew Hanson, 2014. "Are Houses Too Big or In the Wrong Place? Tax Benefits to Housing and Inefficiencies in Location and Consumption," Tax Policy and the Economy, University of Chicago Press, vol. 28(1), pages 63-96.
    4. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1253-1296.
    5. Andrew Hanson, 2012. "The Incidence of the Mortgage Interest Deduction: Evidence from the Market for Home Purchase Loans," Public Finance Review, , vol. 40(3), pages 339-359, May.
    6. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, vol. 95(2), pages 334-339, May.
    7. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 729-752.
    8. Christian A. L. Hilber & Tracy M. Turner, 2014. "The Mortgage Interest Deduction and its Impact on Homeownership Decisions," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 618-637, October.
    9. Hanson, Andrew, 2012. "Size of home, homeownership, and the mortgage interest deduction," Journal of Housing Economics, Elsevier, vol. 21(3), pages 195-210.
    10. Hendershott, Patric H. & Pryce, Gwilym, 2006. "The sensitivity of homeowner leverage to the deductibility of home mortgage interest," Journal of Urban Economics, Elsevier, vol. 60(1), pages 50-68, July.
    11. Rapaport, Carol, 1997. "Housing Demand and Community Choice: An Empirical Analysis," Journal of Urban Economics, Elsevier, vol. 42(2), pages 243-260, September.
    12. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2006. "Urban growth and housing supply," Journal of Economic Geography, Oxford University Press, vol. 6(1), pages 71-89, January.
    13. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    14. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
    15. Hanushek, Eric A & Quigley, John M, 1980. "What Is the Price Elasticity of Housing Demand?," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 449-454, August.
    16. Green, Richard K. & Vandell, Kerry D., 1999. "Giving households credit: How changes in the U.S. tax code could promote homeownership," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 419-444, July.
    17. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-242, May.
    18. Poterba, James M. & Sinai, Todd, 2011. "Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing," National Tax Journal, National Tax Association, vol. 64(2), pages 531-564, June.
    19. Robert M. Dunsky & James R. Follain, 2000. "Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 683-718.
    20. Mayo, Stephen K., 1981. "Theory and estimation in the economics of housing demand," Journal of Urban Economics, Elsevier, vol. 10(1), pages 95-116, July.
    Full references (including those not matched with items on IDEAS)

    More about this item


    House prices; Housing subsidy; Mortgage interest deduction;

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:regeco:v:59:y:2016:i:c:p:12-23. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.