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

40 Pages Posted: 7 Oct 2015

See all articles by Hal Martin

Hal Martin

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Andrew Hanson

Marquette University- Department of Economics

Date Written: 2015-10-06

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.

Keywords: house prices, housing subsidy, mortgage interest deduction

JEL Classification: H24, R21, R28

Suggested Citation

Martin, Hal and Hanson, Andrew, Metropolitan Area Home Prices and the Mortgage Interest Deduction: Estimates and Simulations from Policy Change (2015-10-06). FRB of Cleveland Working Paper No. 1516. Available at SSRN: https://ssrn.com/abstract=2670349

Hal Martin (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Andrew Hanson

Marquette University- Department of Economics ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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