The Council of Economic Advisers

November 2017

September 29, 2017

Evaluating the Anticipated Effects 

of Changes to the Mortgage 

Interest Deduction
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 1

Executive Summary

November 2017

The U.S. Treasury estimates that in FY2017 American taxpayers deducted $65.6 billion in mortgage 

interest from their Federal tax liabilities (U.S. Department of the Treasury, 2017). Continued use of the 

mortgage interest deduction (MID) is likely to be affected by two key provisions of tax reform currently 

under debate. First, the doubling of the standard deduction is likely to reduce the number of tax units 

that itemize deductions, thereby prompting a lower use of the MID. Second, the current proposal in the 

House changes the mortgage cap on which interest can be deducted from $1 million to $500,000.

Changes in the number of itemizers are projected to be large under the increased standard deduction, 

falling from about 26 percent to 8 percent of filing tax units. This would indicate a substantial change in 

the use of the MID. At the same time, we estimate that the share of potential homeowners in the United 

States who would be affected by a change in the mortgage cap from $1 million to $500,000 is only 7

percent. The effects of the changing cap are concentrated in high-priced housing markets and at higher 

ends of the income distribution. 

More broadly, although the stated goal of preferential tax treatment for mortgage interest is to increase 

homeownership, the empirical evidence indicates there is no significant positive effect of the MID on 

homeownership rates. This implies that changes in the standard deduction that serve to reduce the use 

of the MID are unlikely to lower homeownership rates. Moreover, because the program incentivizes 

homeowners to buy larger and more expensive houses, it results in inflated home prices in many 

regional markets. As a result of the subsidy’s upward pressure on housing prices, the MID may artificially 

depress homeownership by putting homeownership out of reach for many households, implying that a 

reduction in the potency of the MID may actually serve to increase homeownership. 

Applying recent empirical estimates of the MID’s impact to the current proposed legislation, we 

conclude that minimizing the use of the MID may lead to a modest fall in home prices. In the most recent 

estimates in the literature, the full, unexpected elimination of the MID corresponds to an estimated 

housing price reduction of 2 percent immediately and a total of 4 percent in the long run. This modest 

price reduction results in an increase in homeownership over the long term by encouraging home 

buying. To be clear, the estimates in the literature are based on a full elimination of the MID; the 

proposals before Congress stop well short of full elimination. While we cannot precisely estimate the

scale of the current proposals relative to full elimination, they certainly will be more limited. Thus, we 

consider these estimates to be an upper bound on the anticipated effects from Congress’s proposed 

tax reforms.

Finally, we should note that the tax reform proposals may impact disposable income in other ways that,

in turn, impact the demand for homeownership. For example, people may have higher disposable 

income post reform. We abstract from these details and focus exclusively on analyzing the reform 

proposals that directly affect the MID. 
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 2

1. Tax Cuts and Jobs Act

Both Senate and House tax reform bills propose to nearly double the standard deduction (from $6350

to $12,000 for single filing households and from $12,700 to $24,000 for married filing jointly households) 

and eliminate most itemized deductions, with notable exceptions of the mortgage interest deduction

and the deduction for charitable donations.1 Moreover, the House bill proposes to lower the cap on 

mortgage debt incurred after November 2, 2017 from $1M to $500,000 on which a homeowner can 

deduct the associated interest paid from their federal tax bill. The House bill also restricts the deduction 

to the primary residence. The Senate bill retains current law for these last two provisions.2

In the discussion below, we focus on two main elements of these bills. First, we look at the increase in 

the standard deduction that decreases the value of the MID for all households, but in particular those 

who choose to no longer itemize under the new regime. Second, we look at the cap proposed by the 

House on new mortgages, which will impact fewer households overall but may be particularly relevant

to a number of cities where home prices are much higher than the national average. 

2. Distributional Impact of Changes to the MID

On average, according to IRS statistics, about 26 percent of tax units itemize their deductions. The MID 

provides no tax benefit to nonitemizers, and nonitemizers are concentrated at the lower end of the 

income distribution. Moreover, because the MID – as its name indicates – is a deduction from income 

(and not, say, a flat credit against taxes owed), the benefit is larger for households in higher marginal 

tax brackets and for those purchasing higher-priced homes. In sum, the MID is typically regarded as a 

fairly regressive subsidy. 

Table 1 shows the breakdown of itemizers by income bracket. As the table shows, under current law,

the fraction of itemizing households is generally increasing in income and can reach over 90 percent for 

higher income brackets. But,the projected fraction of households that would continue to itemize under 

the House version of the tax reform bill falls for each of the income brackets.

3

 Overall, only 8 percent of 

households are projected to itemize deductions following the House version of the tax reform bill. 

 

1 The Senate bill retains a number of other current deductions like qualified medical expenses.

2 The two bills also differ on the deductibility of refinancing debt. The House bill allows for a deduction of such 

debt while the Senate bill does not.

3 As the Senate bill is a bit more generous with retaining current itemized deductions, the decrease will be less 

severe. However, the biggest deduction for state and local taxes is eliminated in both bills.
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 3

Table 1: The Simulated Percentage of Tax Units that Itemize under 

Current Law and under the House Plan

Income Bin Amount Percent Itemizers Under 

Current Law

Percent Itemizers Under 

the House Tax Plan

1 < 0 0.0% 0.0%

2 0 - $10,000 0.1% 0.1%

3 $10,000 - 20,000 3.8% 0.6%

4 $20,000 - $30,000 9.5% 1.4%

5 $30,000 - $40,000 15.6% 2.4%

6 $40,000 - $50,000 22.4% 3.5%

7 $50,000 - $75,000 36.0% 7.5%

8 $75,000 - $100,000 49.8% 11.0%

9 $100,000 - $200,000 72.7% 19.6%

10 $200,000 - $500,000 92.2% 47.2%

11 $500,000 - $1,000,000 91.6% 66.3%

12 > $1,000,000 86.5% 74.8%

Overall 26.3% 7.6%

Source: IRS Statistics of Income Public Use File, 2009 and CPS 2014. CEA Staff Calculations via Open Source 

Policy Center Tax-Calculator.

In addition to doubling the standard deduction, the House plan also alters the cap on mortgage values 

for the purpose of calculating deductible interest, lowering the cap from $1M to $500,000. The cap is 

relevant for new mortgages issued after November 2; previously issued mortgages would not be 

affected by the change. But data on recent mortgage transactions can provide an estimate of the scale 

of the effect going forward. Using data available through the Consumer Financial Protection Bureau on 

new mortgages issued in 2016, we find that 7.1 percent of home mortgages are greater than $500,000 

in loan value, implying that roughly 7 percent of future homeowners would be affected by the change 

in the MID cap under stable housing prices. Because the first $500,000 of the mortgage value would 

remain eligible for the MID, even homeowners with mortgage values above the cap would continue to 

benefit from the MID. Based on mortgages issued in 2016, we estimate that the average mortgage above 

the proposed $500,000 cap would still receive preferential tax treatment on three-fourths of its total 

value. These calculations are based on all new mortgages issued in 2016, including refinances and home

improvement loans, but results are similar for the sample limited only to home purchases.4

As noted previously, the MID is a regressive subsidy that provides more value to higher income tax units. 

Reducing the cap on the MID would also primarily affect higher income homeowners. In 2016, the 

median income for homeowners initiating new mortgages of less than $500,000 was $79,000. For 

homeowners initiating new mortgages above that threshold, the median income was $219,000. (Again, 

for homeowners taking out new mortgages above the $500,000 cap, the first $500,000 remains eligible 

 

4 Sample is restricted to all first-lien mortgages on owner occupied homes of 1-4 families, including manufactured 

housing.
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 4

for the interest deduction.) Figure 1 shows the distribution of mortgages across loan value as well as 

the median income by loan value.

Figure 1. Distribution of Mortgages and Applicant Income by Loan Amount

Note: Includes loans issued for home improvement, purchase, and refinancing.

Source: Consumer Financial Protection Bureau Home Mortgage Disclosure Act Data, CEA Calculations.

Sommer and Sullivan (2017) confirm these distributional assessments when they find that the greatest 

welfare losses from an unexpected and complete elimination of the MID accrue to landlords and highincome homeowners who live in large houses with large mortgages and face high marginal tax rates. In 

contrast, potential homeowners and current owners in modestly sized homes, with smaller mortgages 

and facing lower marginal tax rates, gain the most from the elimination of the MID due to declining 

prices. One of the more surprising results in their paper is that 55 percent of current homeowners with 

mortgages would benefit from the elimination of the MID, even though they lose a tax deduction and 

incur a capital loss due to the fall in home prices. These households gain, however, from lower prices 

that allow them to make an eventual upward move to a larger house. We discuss the Sommer and 

Sullivan (2017) findings in more detail below. 

Finally, home mortgages issued for greater than $500,000 are rare except for a select few urban areas 

in the United States. Of the 409 metropolitan statistical areas (MSAs) tracked in the data on mortgages 

issued, 93 percent of these areas had less than 10 percent of mortgages above $500,000. And 50 percent 

of areas had less than 1 percent of mortgages above $500,000. Thus, the majority of housing markets 

will have minimal exposure to any impact of a lowered MID cap.

Median Applicant Income 

(Right Axis)

$0K

$100K

$200K

$300K

$400K

0

10

20

30

40
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 5

3. Homeownership—Positive Externalities

Taking a step back from the distributional impacts of the MID, for the government to subsidize 

homeownership, as a tax credit for mortgage interest purports to do, there should be some social 

benefit to homeownership beyond the benefit to the homeowner themselves. Oddly enough,

promoting homeownership was not the original objective of the deduction. Rather, the mortgage 

interest deduction was inadvertently created following the passage of the Sixteenth Amendment in 

1913, which authorized a Federal income tax. At a time when fewer than 40 percent of non-farm homes 

were owner-occupied and, of these, only a third were secured by a mortgage, and, moreover, the line 

between small-proprietor business and personal expenses was often difficult to discern, the new 

income tax enacted by Congress allowed for the deduction of all debt interest expenses, making them 

analogous to other business expenses (U.S. Census Bureau, 1910; Ventry, 2009). 

The rationale for maintaining the deduction, though, often lies in arguments that homeowners are 

more invested in their residences, making them cleaner and safer and thereby increasing home values

for others. Homeowners are also more involved politically and have more social connection to their 

neighborhoods. (See Glaeser and Shapiro (2003) for a review of this literature.) Despite strong positive 

correlations between homeownership and these positive externalities, a causal relationship between 

homeownership and these behaviors has not been rigorously established.

5

 

4. The Impact of the MID on Homeownership Rates

Given the stated purpose of continuing Federal investment in the MID, a key empirical question is the 

relationship between the subsidization of home mortgages and homeownership rates. The academic 

literature has generally been interested in understanding the impacts of the MID compared to an 

economy with no preferential tax treatment of mortgage interest. The consensus is that the mortgage 

interest deduction fails to achieve the aim of increasing homeownership. The findings are summarized 

in Gale, Gruber, and Stephens-Davidowitz (2007), and a number of notable recent working papers since 

have solidified this conclusion. Hilber and Turner (2014), find that, in aggregate, the MID has no 

statistically significant impact on homeownership rates. Taking a closer look at smaller geographical 

markets, they find that the MID boosts homeownership attainment in elastically supplied markets,

where supply responds more readily to price increases, but only for higher-income households. In more 

restrictive places (i.e. inelastic supply), the MID serves to raise prices, and effectively reduces 

homeownership, though again only for higher income households. They find that the MID has no impact 

on homeownership rates of low-income households, regardless of elasticity of supply. 

Gruber, Jensen and Kleven (2017) make use of a natural experiment from Denmark in the 1980s to look 

at the long-run impacts of scaling back the mortgage deduction on homeownership rates, home size,

and home values. The authors find that the mortgage deduction has a moderate impact on the 

 

5

In an attempt to address the causality problem, Engelhardt et al (2010) find that low-income households that 

were randomly offered a subsidized saving account for home purchases were more likely to purchase a home but 

were no more likely to engage politically or provide more social capital.
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 6

intensive margin of housing demand, inducing homeowners to buy larger and more expensive houses 

but, at the same time, has no impact on homeownership. These findings suggest that the mortgage 

interest deduction affects the size and value of homes purchased – where there is no clear social benefit

– and is ineffective at promoting homeownership where the social benefit arguments are generally 

made.

Finally, Sommer and Sullivan (2017) develop a general equilibrium model in which both the price of 

owner-occupied housing and the price of rental housing are endogenous. They study the impact of the 

mortgage interest deduction on homeownership rates (among other factors) and find that eliminating 

the mortgage interest deduction reduces home prices enough to induce an increase in homeownership. 

This increase in homeownership comes from relatively lower-income households; in the Sommer and 

Sullivan model, eliminating the MID is a progressive reform that transfers value from high-income 

households to the remainder of the income distribution by removing a subsidy that is relatively more 

valuable to higher income homeowners and passing the benefits to individuals who otherwise would 

have been priced out of homeownership and opted to rent.

5. The Impact of the MID on House Prices

A related line of research has studied the effect of the MID on housing prices, again comparing the 

existence of the MID to an economy with no preferential tax treatment of mortgage interest. Early

studies found substantial impacts on housing prices. For example, Poterba (1984) estimates a very large 

housing price response to the elimination of the MID—on the magnitude of a 26 percent decline. 

However, this is in an environment of 10 percent inflation and is perhaps not relevant for today’s 

economic setting. Capozza et al. (1996) estimate that eliminating the MID (along with ending the 

deduction for property taxes) would decrease home prices by an estimated 13 percent. Harris (2013) 

estimates that eliminating the MID would reduce home prices by 12 percent. PricewaterhouseCoopers 

(2017), in a report for the National Association of Realtors, estimates that tax reform plans very similar 

to those currently being considered reduce home prices by 10 percent.

However, other academic literature that considers the MID within the context of the larger economy

finds significantly lower price effects from elimination of the MID. These studies more flexibly model 

housing markets by allowing housing supply to respond to reductions in the demand for housing, or by 

incorporating spillover effects in the rental housing market. Most recently, Sommer and Sullivan (2017) 

find that eliminating the MID would reduce home prices by 4.2 percent in the long run, although the 

effect is only half this size in an environment with the low interest rates observed today. In a similar 

model, Floetotto, Kirker and Strobel (2016) estimate that eliminating the MID would decrease home 

prices by only 1 percent in the long run. As housing wealth is equal to roughly 30 percent of total 

household wealth, even a 4 percent fall in price translates into about a 1.2 percent decline in total 

household net wealth (Federal Reserve Board Financial Accounts of the United States, 2017). 

Recent research also indicates that the impact of eliminating the MID would vary depending on the 

elasticity of supply of housing in different areas. In markets where supply is constrained, eliminating 

the MID is more likely to reduce prices because supply does not adjust downward in the long run. As 
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 7

described above, Hilber and Turner (2014) find that the impact of the MID on homeownership depends 

on the elasticity of the supply of housing. In areas with inelastic supply, there is no increase in 

homeownership, and eliminating the MID would likely decrease home prices in these areas more than 

in areas with elastic housing supply. Rappoport (2016) uses a structural model which allows housing 

supply elasticities to vary across areas and finds that eliminating the MID would decrease home prices 

by 6.9 percent on average, but with considerable variation across markets depending on the elasticity 

of supply. In sum, the most recent state-of-the-art academic literature suggests that the impact of 

eliminating the MID on house prices is likely to be modest, and its magnitude in different areas will 

depend on the extent to which housing supply can respond to reduced demand. Cities like San 

Francisco, California, where the housing stock is relatively inelastic, may experience greater price

responses compared to relatively unregulated cities like Dallas, Texas. 

6. International Comparisons

Figure 2. Rates of Homeownership in the United States and Canada

(Percent)

Source: U.S. Census Bureau via Federal Reserve Economic Data; Statistics Canada and National Housing Survey

The experience of other developed countries indicates homeownership subsidies are neither necessary 

nor sufficient to ensure high rates of ownership. For example, unlike the United States, Canada does 

not provide preferential treatment for mortgage debt. Nonetheless, the homeownership rate in Canada 

is very similar to that in the United States. (See Figure 2.) Although the United States had higher 

homeownership rates in the 1970s and 1980s, the rates converged by the mid-1990s and have moved 

Canada

United States

58

60

62

64

66

68

70

1976 1981 1986 1991 1996 2001 2006 2011
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 8

in almost lockstep in the period since. In the last year of available data, 2011, Canada’s rate was slightly 

above that in the United States. To be clear, this comparison does not imply that homeownership in 

Canada would not be higher with a preferential tax treatment of mortgage interest. 

That the MID is neither necessary nor sufficient to ensure homeownership is confirmed by a simple 

analysis of OECD countries more broadly. Tax relief for homeownership is relatively rare in the OECD. 

Figure 3 shows the relevant comparisons for countries that report both the value of mortgage interest 

deductions (frequently zero) and homeownership rates. Although the United States has the second 

highest level of tax relief for homeownership among reporting member countries (at 0.5 percent of 

GDP), the homeownership rate is lower than 10 out of the 13 OECD countries reporting both 

homeownership and MID value data. A more complete tabulation of homeownership rates in the OECD, 

including 37 nations, ranks the United States 28th. To be sure, there are other government policies in 

OECD countries, including the United States, to promote homeownership beyond preferential tax 

treatment of mortgage interest expenses, such as mortgage guarantees and down payment or direct 

interest subsidies. But the data still indicate that the MID is not a critical component of a developed 

country’s homeownership policy agenda. 

Figure 3. Mortgage Interest Deduction Subsidies and Homeownership Rates 

in OECD countries

(Percent)

Note: Cyprus, France, Germany, Korea, Latvia, Lithuania, Mexico and Slovenia do not apply tax relief for access to 

homeownership. No information was provided for Belgium, Turkey, Bulgaria, Greece, Korea, Israel, Italy, 

Romania, the Slovak Republic, and the United Kingdom. 

Source: OECD Questionnaire on Affordable and Social Housing (2016).

Mortgage Interest Deduction

(as percent of GDP)

Homeownership 

Rate (Left Axis)

0.0

0.5

1.0

1.5

2.0

2.5

0

20

40

60

80

100
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 9

7. Conclusion

It is important to note that the tax reform bills do not propose the elimination of the MID. By doubling 

the standard deduction and eliminating most other itemized deductions, many households will find it 

beneficial to choose the standard deduction rather than to itemize. Evidence from recent mortgage 

activity in the United States indicates that up to 7 percent of new borrowers would be affected by a 

reduction in the mortgage value cap from $1M to $500,000. Because the proposals before Congress 

fall short of a full elimination of the MID, measured impacts of eliminating the MID from academic 

literature should be considered an upper bound on potential changes to housing prices and 

homeownership. We project that equilibrium housing prices will experience a muted reduction of less 

than 4 percent, while homeownership rates may rise modestly as a result of the current tax reform 

proposals before Congress.
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 10

References

Capozza, D. R., Green, R. K., & Hendershott, P. H. (1996). Taxes, Mortgage Borrowing, and Residential 

Land Prices. Economic Effects of Fundamental Tax Reform. Edited by Henry A. Aaron and William G. Gale. 

Washington, DC: Brookings Institution Press, 171-210.

Consumer Financial Protection Bureau. (2017). The Home Mortgage Disclosure Act. Custom Datasets.

Engelhardt, G. V., Eriksen, M. D., Gale, W. G., & Mills, G. B. (2010). What are the Social Benefits of 

Homeownership? Experimental Evidence for Low-Income Households. Journal of Urban 

Economics 67(3): 249-258.

Federal Reserve Board. (2017). Financial Accounts of the United States: Flow of Funds, Balance Sheets 

and Integrated Macroeconomic Accounts. 

https://www.federalreserve.gov/releases/z1/current/z1.pdf.

Floetotto, M., Kirker, M., & Stroebel, J. (2016). Government Intervention in the Housing Market: Who 

Wins, Who Loses? Journal of Monetary Economics 80: 106-123.

Glaeser, E. L., & Shapiro, J. M. (2003). The Benefits of the Home Mortgage Interest Deduction. Tax Policy 

and the Economy 17: 37-82.

Gruber, J., Jensen, A., & Kleven, H. (2017). Do People Respond to the Mortgage Interest Deduction? 

Quasi-Experimental Evidence from Denmark. National Bureau of Economic Research, No. w23600.

Gale, W., J. Gruber, and S. Stephens-Davidowitz (2007). Encouraging Homeownership Through the Tax 

Code. Tax Notes 115(12): 1171-1189.

Harris, B. H., & Center, U. B. T. P. (2013). Tax Reform, Transaction Costs, and Metropolitan Housing in 

the United States. Washington, DC: The Urban Institute.

Hilber, C. A., & Turner, T. M. (2014). The Mortgage Interest Deduction and its Impact on Homeownership 

Decisions. Review of Economics and Statistics 96(4): 618-637.

Rappaport, D. E. (2016). Do Mortgage Subsidies Help or Hurt Borrowers? Finance and Economics 

Discussion Series 20216-81. Washington: Board of Governors of the Federal Reserve System.

Sommer, K., & Sullivan, P. (2017). Implications of U.S. Tax Policy for House Prices, Rents, and 

Homeownership. American Economic Review (forthcoming).

Poterba, J. M. (1984). Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach. The 

Quarterly Journal of Economics, 99(4), 729-752.

PricewaterhouseCoopers. (2017). Impact of Tax Reform on Owner-Occupied Housing (prepared for the 

National Association of Realtors). http://narfocus.com/billdatabase/clientfiles/172/21/2888.pdf.
CEA • Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction 11

United States Census Bureau. (1910). Decennial Census. Vol. 1, Population, General Report and Analysis.

United States Department of the Treasury (2017). https://www.treasury.gov/resource-center/taxpolicy/Documents/Tax-Expenditures-FY2019.pdf

Ventry, D. J. (2010). The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage 

Interest. Law and Contemporary Problems 73(1): 233-284.
ABOUT THE COUNCIL OF ECONOMIC ADVISERS

The Council of Economic Advisers, an agency within the Executive Office of 

the President, is charged with offering the President objective economic 

advice on the formulation of both domestic and international economic 

policy. The Council bases its recommendations and analysis on economic 

research and empirical evidence, using the best data available to support 

the President in setting our nation's economic policy.

www.whitehouse.gov/cea

November 2017