Abstract
We investigate the heterogeneous impact of the US federal mortgage interest deduction (MID) on households’ location and tenure decisions. We develop a spatial general-equilibrium model at the county level featuring an endogenous itemization of housing subsidies. We find that repealing the MID decreases homeownership rates more strongly in central areas because owner-occupiers migrate to the countryside. Welfare increases because positive externalities arising from less congested housing markets and undistorted tenure decisions outweigh productivity losses. A MID repeal is preferred to an increase of standard tax deductions as implemented in 2018 by the Tax Cuts and Jobs Act.
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