The home Mortgage Interest Deduction – who benefits the most?

Figure 2 from Federal Involvement in Real Estate.

The federal government spends billions each year in the real estate market through a web of costly programs with an uneven impact on homeowners, renters and communities. Smart Growth America’s recent report Federal Involvement in Real Estate surveyed 50 federal real estate programs to better understand where this money goes, who is benefiting (and who isn’t) and which programs are particularly in need of a closer look.

One of the costliest tax-expenditure programs for housing is the home Mortgage Interest Deduction (MID). Created in 1913, the federal government commits an average of $80 billion each year to this program intended to promote homeownership. Our recent report explains that while the MID does promote increased spending on housing, it does not necessarily increase rates of homeownership. Compounding this problem, the deduction in its current form may be skewing the real estate market in unintended ways.

A recent article in The American Prospect examines some of these problems. First up, the MID’s bias toward higher-income households:

Who benefits the most from the messiness? Surprise: the rich. 30 percent of households claiming the deduction claim it on a second home – like say, a vacation home. Lower-income families have a harder time claiming the deduction, because it requires itemized taxes.

Households using the MID on a second home risk driving up demand for real estate and undermining widespread ownership. Meanwhile, scarce federal resources are being used to help purchase second homes while homeowners who do not itemize their taxes receive no such assistance.

The article goes on to note that renters are particularly ill-served by the current set of policies:

The median income for renters is only $30,934, less than half that of homeowners. Yet there are no equivalent tax deductions for renters, even though increasing rent costs and a lack of affordable rental housing units for low-income people indicate there’s a clear need.

Given that over 35 percent of U.S. households are renters, it raises the question whether the MID is really accomplishing it’s intended goals and if all Americans are getting a fair shake.

It is clear the federal government heavily influences the U.S. real estate market, but more must be done to ensure this funding effectively meets the nation’s current and future needs. Click here to tell Congress it’s time to examine real estate funding and coordinate these programs around a clear set of goals and policy objectives.