Metropolitan Area Home Prices and the Mortgage Interest Deduction: Estimates and Simulations from Policy Change

We simulate changes to metropolitan area home prices from reforming the Mortgage Interest Deduction (MID). Price simulations are based on an extended user cost model that incorporates two dimensions of behavioral change in home buyers: sensitivity of borrowing and the propensity to use tax deductions. We simulate prices with both inelastic and elastic supply. Our results show a wide range of price effects across metropolitan areas and prospective policies. Considering behavioral change and no supply elasticity, eliminating the MID results in average home price declines as steep as 13.5 percent in Washington, D.C., and as small as 3.5 percent in Miami-Fort Lauderdale, Florida. Converting the MID to a 15 percent refundable credit reduces prices by as much as 1.4 percent in San Jose, California, San Francisco, California, and Washington, D.C., and increases average prices in other metropolitan areas by as much as 12.1 percent (Miami-Fort Lauderdale). Accounting for market elasticities produces price estimates that are on average thirty-six percent as large as standard estimates.