Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: We present a dynamic life-cycle model of demand for owner-occupied housing, investment property and liquid assets. Households face transaction costs, downpayment requirements, liquidity constraints, and tax preferences for owner-occupied housing. The model replicates key facts about home ownership, liquid assets, debt and consumption. Our model predicts eliminating the mortgage interest deduction (MID) and using the proceeds to cut income tax rates would increase ex ante welfare of all agents. We also predict that replacing MID with a refundable flat-rate mortgage interest credit would increase the ownership rate significantly while also improving welfare. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them.