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Affordable Housing & Tax Pt. 1: Current Conditions; Home Mortgage Interest Deduction

Tim Shaw  

· 12 minute read

Tim Shaw  

· 12 minute read

Amid rising home and renting costs and supply shortages, experts have become increasingly critical toward the effectiveness of existing housing tax programs, spurring policy discussions what role the Tax Code can, or should, play in incentivizing affordable housing.

This article, the first in a two-part series, assesses the current state of the housing and rental markets relative to before the COVID-19 pandemic. It then explores criticisms policy analysts have with one of the major existing housing tax benefits, the home mortgage interest deduction, as well as alternatives to broaden assistance to owners and prospective buyers. The next article will delve into the supply side with the Low-Income Housing Tax Credit and potential frameworks of a renter tax credit.


Housing market. According to Federal Reserve Economic Data (FRED), the median sales price of houses sold in the US during the first quarter of 2024 was $420,800, up $107,800 from the first quarter of 2019. The median peaked at $479,500 in the fourth quarter of 2022.

In March, National Economic Council Director and Vice-Chair of the Federal Reserve Lael Brainard remarked at the Urban Institute that multiple factors contributed to current housing affordability challenges.

First, residential construction “collapsed” during the “Global Financial Crisis” after a four-decade boom that enjoyed wages keeping pace with housing costs. Construction rates “never really recovered” when only 585,000 units were completed in 2011, said Brainard. Second, new construction favored more expensive homes after the financial crisis as demand for starter homes outpaced supply.

“The combination of a missing decade of homebuilding after the GFC and historically high demand led to unsustainable growth in rental and for-sale home prices that prevented many Americans from building savings and wealth,” she said. “On top of that, the pandemic changed patterns of demand, in effect exporting the housing crisis from the coasts and large urban centers to the rest of the country.”

The National Association of Home Builders (NAHB) updated its 2024 housing affordability metrics, posting on May 17 that an estimated 49% of households cannot afford a $250,000 home. Its methodology takes into account mortgages, property taxes, and insurance.

Rental market. A Joint Center for Housing Studies report by Harvard University researchers found that although rent growth has recently “slowed substantially,” the damage done during the COVID-19 pandemic “propelled cost burdens to new heights.” In 2022, 22.4 million households that rent spent over 30% of their monthly incomes on rent and utilities, a common threshold used for determining who is considered cost-burdened. Of cost-burdened renters, 12.1 million had over half their incomes go towards housing costs.

“As a result, the share of cost-burdened renters rose to 50 percent, up 3.2 percentage points from 2019. The financial strain has been felt across the income spectrum,” the Harvard researchers wrote. “Since 2019, cost-burden shares have risen the most for middle-income renter households earning $30,000 to $44,999 annually (up 2.6 percentage points) or $45,000 to $74,999 annually (up 5.4 percentage points).”

At the same time, the supply of rental units available to those with incomes under $24,000 who would only pay $600 a month, the “maximum amount affordable” to this group, fell by 2.1 million since 2012, adjusted for inflation, to 7.2 million units. “The spike in asking rents during the pandemic accelerated the trend, with more than half a million low-rent units lost just between 2019 and 2022,” read the report.

Home Mortgage Interest Deduction

Current law.  With these factors in mind, what does the federal Tax Code offer in the form of housing cost relief, and to what extent does it incentivize housing for low- and middle-income families? The home mortgage interest deduction (HMID) is one of the longest-running tax programs available to homeowners, established in the Revenue Act of 1913. It has since undergone several revisions.

Under current law, homeowners who take out a mortgage can generally deduct mortgage interest payments on a loan secured by a primary or secondary residence, subject to several limitations. First, the HMID is only available to those who itemize their deductions on their federal income tax returns. Second, mortgage interest payments are only deductible “to the extent the loan proceeds were used to buy, build, or substantially improve your home,” as stated in IRS Publication 530, which covers various tax considerations for homeowners. Third, the limit for the maximum deduction depends on when the mortgage was taken out given changes made by the Tax Cuts and Jobs Act of 2017 (TCJA, PL 115-97).

“For mortgage debt incurred on or before December 15, 2017, the combined mortgage limit is $1 million ($500,000 for married filing separately),” explained a Congressional Research Service (CRS) document on the HMID. “For mortgage debt incurred after December 15, 2017, the deduction is limited to the interest incurred on the first $750,000 ($375,000 for married filing separately) of combined mortgage debt.”

The CRS provided examples of non-deductible debt, including home equity loans used for paying off credit cards, going on vacation, or college tuition. It also observed that since the TCJA also almost doubled the standard deduction and capped the state and local tax (SALT) deduction to $10,000, taxpayers are more inclined to take the standard deduction, forgoing the HMID. These provisions are scheduled to expire at the end of 2025.

Policy issues. A primary critique of the HMID is who ultimately benefits. “The lower itemization rate and the fact that higher-income homeowners have larger mortgage balances on average means that the benefits of the mortgage interest deduction disproportionately accrue to taxpayers at the upper end of the income distribution,” the CRS said.

Will Fischer, senior director of housing policy at the Center on Budget and Policy Priorities, told Checkpoint in an interview that “the mortgage interest deduction is a particularly bad and inefficient and wasteful way to subsidize homeownership because it’s designed in a way that gives more benefits to people with more expensive homes.”

Claimants “also tend to be people with higher incomes who have less need for help affording housing,” Fischer added. Specifically, he said two-thirds of the benefit go to those with incomes over $200,000.

Federal spending on the HMID and the capital gains tax exclusion for home sales worth up to $250,000 (or $500,000 for married joint filers) exceeds the budget for the “three major federal rental assistance programs put together” — namely housing voucher, public housing, and project-based programs — Fischer clarified. (Part Two of this series will go into more detail on Fischer’s advocacy for funding rental programs to address those with the most immediate housing needs.)

The HMID only benefits those able to become homeowners and secure financing in the first place. A report from the Tax Policy Center (TPC) released in April raised the issue of racial discrimination in the housing market and mortgage industry. Because of prevalent systemic “racial hostilities and discrimination,” Black and Hispanic families are less likely to own a home a home or have access to upfront capital to buy a home.

According to the TPC, nearly 75% of white families owned a home in 2019 compared with 45% of Black and 48% of Hispanic families. Across income groups, a “gap persisted between the average value of homes” between white and minority groups. The report also found that white families were more likely (47%) to have a mortgage compared to Black families (28%) and Hispanic families (32%). However, the loan-to-value ratios were higher for Black families (0.77) than others.

Bias in lending also prevents the HMID from reaching non-white households. “Asian, Black, and Hispanic families are more likely to be denied mortgages than White families,” the TPC said. “But even if race is not observed by the lender, other factors … may increase the likelihood that a mortgage application is rejected. For example, credit bureau data reveal that Black and Hispanic families are more likely to have low or missing credit scores, delinquencies, bankruptcies, and high levels of debt contributing to the racial differences in the likelihood of obtaining a mortgage.”

In 2019, the TPC estimated the average HMID value was $199 for white families, $88 for Black families, and $66 for Hispanic families. “Overall, Black and Hispanic families received just 54 percent and 38 percent, respectively, of the average benefit for all families. White families got 21 percent more than the average.”

Another concern with the benefit is it does not encourage homeownership and therefore does not justify its price tag. According to research by Tax Foundation Federal Research Manager Scott Eastman (and former Intern Anna Tyger), “research suggests the [HMID] does not increase homeownership rates.”

Eastman added there “is also no relationship between homeownership rates and the proportion of the population that itemizes, suggesting taxpayers do not rely on the HMID to afford a home.”

After the expiration of the TCJA provisions, the cost of the deduction is expected to jump from $30 billion to over $80 billion per year, analysts from the Bipartisan Policy Center (BPC) — Emma Waters, Owen Minnott, and Andrew Lautz — forecasted. Both the CRS and the BPC agree there is no evidence that the program was designed with the purpose of incentivizing homeownership, nor does it.

“The ability to afford a down payment is the primary barrier to homeownership for low- and moderate-income households, and the [HMID] does nothing to address upfront costs,” the BPC said. “Critics … claim that, instead of incentivizing potential homeowners who otherwise would not buy a home, the [HMID] encourages larger and more expensive homes, as it allows households who can already afford a down payment to take out a larger mortgage than they otherwise would.”

Alternative Proposals

Mortgage interest credits. A commonly floated idea for fixing the HMID is replacing it with a credit so that it would not be limited to itemizers. Eastman said that research “has also found replacing the HMID with a credit that reduces federal revenue by the same amount would better target homeownership subsidies to lower-income taxpayers, with refundable tax credits providing the most benefits to the bottom quintile of taxpayers.”

The credit could be a fixed amount, Eastman continued, and not based on a percentage of a taxpayer’s mortgage payments. That way, the Code would not encourage financing higher valued homes than taxpayers can afford. The BPC agreed with the idea of a credit, but its proposal, crafted by the Domenici-Rivlin Debt Reduction Task Force in 2012, would set the credit at 15% of mortgage interest paid, up to $25,000. The credit would be refundable but not applicable to second homes. In 2016, the Congressional Budget Office (CBO) presented its own 15% option, gradually phased in over six years to eventually replace the HMID.

This option “would increase the tax incentive for home ownership for lower- and middle-income taxpayers who might otherwise rent,” the CBO said. “Increased home ownership can also put people in a better position for retirement because they can tap into their home equity for any unexpected expenses. In addition, expenses associated with home ownership remain relatively stable, which matches well with retirees’ typically fixed income.”

Alternatively, the HMID could simply be eliminated. The CRS suggested a 20-year phase-out to “mitigate any negative consequences for the economy and housing market.” Existing homeowners could continue to enjoy the deduction until it sunsets.

First-time buyer credits. NAHB CEO Gerald Howard testified before the House Ways and Means Oversight Subcommittee in 2021 also calling for the HMID to be replaced with a credit but also an accompanying supplemental benefit for those buying a house for the first time.

“NAHB supports a bold reformulation of the current homeownership tax incentives, shifting from a deduction to a tax credit that is targeted to lower- and middle-income Americans,” read Howard’s testimony. “Additionally, a permanent, first-time home buyer tax credit would complement this shift and could provide some relief to the challenge of accumulating a down payment.”

President Biden’s 2024 State of the Union address outlined several affordable housing policy proposals reflected in the Treasury Department’s “Green Book” for fiscal 2025. Several provisions would bolster tax incentives on the supply side that will be discussed later, but Biden also called for a $10,000 credit for first-time buyers, split into two $5,000 annual installments for the first two years.

“This is the equivalent of reducing the mortgage rate by more than 1.5 percentage points for two years on the median home, and will help more than 3.5 million middle-class families purchase their first home over the next two years,” claimed a White House release.

Additionally, Biden wants to provide a one-year credit worth $10,000 to middle-class families who sell their home to “another owner-occupant.” This would apply to homes “below the area median home price in the country” and would apply to an estimated 3 million families, the White House said.

Howard Gleckman, senior fellow at the TPC, said in a TaxVox blog post that Biden’s fiscal 2025 budget “misses an opportunity” to repeal the HMID in favor of a homebuyer credit. “In principle, the homebuyer credit encourages people to purchase homes, whereas the [HMID] subsidizes those who borrow to purchase a house,” said Gleckman. “And under current law, it really only subsidizes those who borrow a lot.”


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