The New York Times had an interesting piece recently entitled “How Homeownership Became the Engine of American Inequality.”
The author blames the mortgage interest deduction (MID) in part for inequality. But the MID has been used for decades to stimulate and preserve homeownership, one of platforms of the Democrat Party. Unfortunately, housing is often no longer “affordable.”
One measure of housing affordability is home prices relative to household income or wages. For example, check out YoY earnings growth for 2001-2003 period. Wage growth was declining as YoY home prices grew. As wage growth grew from 2004-2007, home price growth slowed. The housing bubble is characterized as a period of declining/low wage growth coupled with rapidly rising home prices. (orange box)
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Since 2012, home price growth has started to grow rapidly again and has been higher than earnings growth (pink box).
True, the MID does tend to support home purchases in more expensive housing areas like the west coast. And raising the standard deduction will reduce the demand for housing in lower cost areas like the US flyover states. But is the home affordability problem in the more expensive areas of the country as MID problem? Or is it a supply problem? (as in zoning results in higher home prices making housing progressively more unaffordable). And what about The Federal Reserve with its zero interest rate policies (ZIRP) which contributes to income inequality?
But let’s look at the GINI coefficient (a measure of income inequality) and homeownership rate in the US. Despite continued attempts at leveling the playing field, income inequality has just been getting worse and worse. Notice that income inequality was positively correlated with homeownership rates until 2004; after 2004, income inequality has risen as homeownership has fallen.
How has The Fed helped lower income inequality? It hasn’t.
So focusing on the mortgage interest deduction (MID) as the cause of income inequality is misplaced. Again, Democrats have pushed the homeownership (and affordable housing) platform for decade, but it is only now that it is “unfair?”
There is little doubt that removing the MID will result is a slowing or decline in home price growth. Not something that mortgage investors are looking forward to.
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