Do Mortgage Subsidies Help or Hurt Borrowers?

47 Pages Posted: 14 Oct 2016

Date Written: 2016-10-05

Abstract

Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price responses attenuate efficiency losses. My results provide broader methodological insights into the welfare analysis of credit policies.

Keywords: Public economics, Mortgage subsidies, Incidence, Optimal taxation, House prices, Mortgage interest deductions, MID

JEL Classification: H22, R21, R28

Suggested Citation

Rappoport Wurgaft, David Elias, Do Mortgage Subsidies Help or Hurt Borrowers? (2016-10-05). FEDS Working Paper No. 2016-081. Available at SSRN: https://ssrn.com/abstract=2852295 or http://dx.doi.org/10.17016/FEDS.2016.081

David Elias Rappoport Wurgaft (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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