David Frederick


This article will work to answer the question: What effect has the mortgage interest deduction had on the American mortgage market? The main examination proceeds in two ways. First, this article recounts the interrelated histories of the American mortgage market and the deduction of interest from taxable income throughout the twentieth century, giving special attention to the Tax Reform Act of 1986 and the events that led to the codification of the current mortgage interest deduction. Second, this article analyzes several sets of time series data and numerous pieces of qualitative evidence on mortgage consumption in and around the 1980s to determine if, and to what extent, the changes to the mortgage interest deduction has had an economic impact on the American mortgage market. Though it is impossible to prove single causation when analyzing a market as complex as the residential mortgage market in the United States, the analysis shows that the purposeful refinement and entrenchment of the interest deduction in the Tax Reform Act of 1986 correlated with an appreciable shift in the mortgage market in favor of consuming more mortgages and maintaining higher mortgage debt levels.

This article concludes with observations about the relationship between the mortgage interest deduction and the American mortgage market. The conclusion of this article will discuss possible reasons why the mortgage interest deduction may increase mortgage debt consumption, yet may not increase homeownership rates. Furthermore, the conclusion will also touch upon the timely question of whether the mortgage interest deduction caused the American mortgage bubble, which collapsed with disastrous effects in 2008.

Included in

Tax Law Commons