Changes in U.S. tax policy could make the dream of homeownership more affordable for many Americans, according to a new study by researchers. Johns Hopkins Carey School of Business. Using a new dynamic life cycle model to analyze housing demand and various tax policies, researchers predict that replacing tax deductions on mortgage interest with a refundable mortgage interest credit would increase homeownership rates by 5.9%. Additionally, these gains in homeownership will be concentrated among low- and moderate-income households and younger homebuyers.

Study, “Tax Preferences and Housing Affordability: Studies Using the Life Cycle Model,” can be viewed on SSRN.

“Modeling the housing market is very difficult because the supply and demand dynamics are much more complex than for other commodities,” he said. Michael KeaneProfessor at Carey Business School and leading expert on lifecycle modelling. “We have developed a model that takes into account all the complex dynamic factors that influence people’s home buying and selling decisions, giving us a more complete picture than previous models.”

Keane says the mortgage interest deduction makes home ownership more affordable for low- and middle-income people, while the tax break encourages rich people to buy larger homes. He and his co-author, University of New South Wales researcher Xiangling Liu, used the dynamic life cycle model to analyze the impact of converting the mortgage interest tax deduction into a tax credit.

For their analysis, the researchers simulated providing a fixed 24% loan to the homebuyer’s mortgage interest that did not depend on the borrower’s marginal tax rate. In this model, wealthy households in the 37% bracket will enjoy the same tax benefits as low-income households.

“What we have found with this policy is that you will eliminate the unintended and regressive consequences of encouraging wealthy households to buy larger homes, while still encouraging low- and middle-income earners to buy homes,” Keane said.

Researchers also examined what would happen if mortgage interest deductions were replaced with tax credits for all taxpayers.

“Our model is that everyone in the economy will actually be better off, but home ownership will fall a little bit,” Keane explained. It states that eliminating the mortgage interest deduction would offset the cost of a 5% cut in income tax marginal rates for all taxpayers. While all taxpayers will benefit, Keane says homeownership rates will fall because some low-income buyers will no longer be able to afford a home.