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Metropolitan Area Home Prices and the Mortgage Interest Deduction: Estimates and Simulations from Policy Change

Author

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  • Andrew Hanson
  • Hal Martin

Abstract

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 percent in Washington, D.C., and as small as 3.5 percent in Miami-Fort Lauderdale, Florida. Converting the MID to a 15 percent refundable credit reduces prices by as much as 1.4 percent in San Jose, California, San Francisco, California, and Washington, D.C., and increases average prices in other metropolitan areas by as much as 12.1 percent (Miami- Fort Lauderdale). Accounting for market elasticities produces price estimates that are on average thirty-six percent as large as standard estimates.

Suggested Citation

  • Andrew Hanson & Hal Martin, 2015. "Metropolitan Area Home Prices and the Mortgage Interest Deduction: Estimates and Simulations from Policy Change," Working Papers (Old Series) 1516, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1516
    DOI: 10.26509/frbc-wp-201516
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    Cited by:

    1. Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2021. "Heterogeneous expectations, housing bubbles and tax policy," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 555-573.
    2. Hal Martin, 2018. "The Impact of the Tax Cuts and Jobs Act on Local Home Values," Working Papers (Old Series) 1806, Federal Reserve Bank of Cleveland.
    3. Ghoddusi, Hamed & Afkhami, Mohamad, 2019. "Valuation of mortgage interest deductibility under uncertainty: An option pricing approach," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 102-122.
    4. Hanson, Andrew, 2020. "Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit," Journal of Urban Economics, Elsevier, vol. 118(C).
    5. Serena Fatica & Doris Prammer, 2018. "Housing and the Tax System: How Large Are the Distortions in the Euro Area?," Fiscal Studies, John Wiley & Sons, vol. 39(2), pages 299-342, June.
    6. Bishop, Kelly C. & Dowling, Jakob & Kuminoff, Nicolai V. & Murphy, Alvin D., 2025. "Tax policy and the heterogeneous costs of homeownership," Journal of Urban Economics, Elsevier, vol. 147(C).
    7. MeiChi Huang, 2021. "Regime switches and permanent changes in impacts of housing risk factors on MSA‐level housing returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 310-342, January.
    8. Dawkins, Casey J., 2023. "The geography of US homeownership tax expenditures," Journal of Housing Economics, Elsevier, vol. 59(PA).
    9. David Splinter, 2019. "The Mortgage Interest Deduction: Causes of Fluctuations in a Procyclical Tax Expenditure," Public Finance Review, , vol. 47(5), pages 807-827, September.
    10. Yongsheng Jiang & Dong Zhao & Andrew Sanderford & Jing Du, 2018. "Effects of Bank Lending on Urban Housing Prices for Sustainable Development: A Panel Analysis of Chinese Cities," Sustainability, MDPI, vol. 10(3), pages 1-16, February.
    11. Wagner, Gary A. & Rork, Jonathan C., 2023. "Does state tax reciprocity affect interstate commuting? Evidence from a natural experiment," Regional Science and Urban Economics, Elsevier, vol. 102(C).
    12. Hembre, Erik & Dantas, Raissa, 2022. "Tax incentives and housing decisions: Effects of the Tax Cut and Jobs Act," Regional Science and Urban Economics, Elsevier, vol. 95(C).
    13. Austin J. Drukker, 2021. "Implications of a Mortgage Interest Credit for the United States," Public Finance Review, , vol. 49(4), pages 573-588, July.
    14. Maxence Valentin, 2024. "Subsidizing housing with deductions," Journal of Economic Surveys, Wiley Blackwell, vol. 38(4), pages 1490-1515, September.

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    Keywords

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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • 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

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