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Implications of US Tax Policy for House Prices, Rents, and Homeownership

  • Kamila Sommer
  • Paul Sullivan
American Economic Review
vol. 108, no. 2, February 2018
(pp. 241-74)
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Abstract

This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.

Citation

Sommer, Kamila, and Paul Sullivan. 2018. "Implications of US Tax Policy for House Prices, Rents, and Homeownership." American Economic Review, 108 (2): 241-74. DOI: 10.1257/aer.20141751

Additional Materials

JEL Classification

  • H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
  • H31 Fiscal Policies and Behavior of Economic Agents: Household
  • R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
  • R31 Housing Supply and Markets