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Date: October 2, 2017
Category: Real Estate

Tax Reform, the Mortgage Interest Deduction, and Multifamily Investing

mortgage tax reform multifamily

Over the last ten years, the proportion of renter households has grown from around 31 percent to over 36 percent; the highest it’s been since 1965.1 This has been great news for investors with exposure to multifamily real estate as a growing number of renters means more demand and potentially higher rents.

But as Congress starts to tackle tax reform, one of the things that may be on the chopping block is the mortgage interest deduction (MID), which allows households to claim their mortgage interest payments and other mortgage expenses against their taxable income.2 Some investors are curious how changes to the MID may impact multifamily real estate.

mortgage tax reform multifamily renter households

The MID and homeownership

Historically, the MID has been seen as a tax break that boosts homeownership. The argument is that by allowing homeowners to lower their tax bills, the MID makes homeownership more affordable and accessible. Under this logic, eliminating the MID could lower the homeownership rate and increase rental demand.

But not so fast. It turns out there’s a flaw in this logic: despite what many people believe, the evidence shows that the MID actually has no meaningful impact on the homeownership rate.3,4,5 Multiple studies have found that the MID does not increase homeownership. Therefore, eliminating the MID (which other countries have done) will not reduce the homeownership rate. In fact, the MID’s only impact seems to be raising high-end house prices by encouraging wealthy people to buy more-expensive houses.

Other studies have shown that the down payment is the major barrier to homeownership among renters who would prefer to buy.6 Young people and members of the U.S. workforce with lower incomes struggle to save enough for the 20 percent deposit that many mortgage lenders require. The MID has no impact on people’s ability to afford a down payment, which may help explain why it doesn’t move the needle on homeownership one way or the other.

The MID and the multifamily market

So, what does this mean for multifamily investing? The good news is that whether Congress decides to keep or eliminate the MID, it probably won’t have any impact on rental demand in the country. The trend to rent is driven by multiple factors that aren’t affected by the MID.

For Millennials, renting offers a flexible lifestyle. Young people change jobs often and they typically don’t want to be tied down to a particular place while they are building their careers. Millennials also often rent for financial reasons—they have lower salaries and are carrying student debt that makes buying a house unaffordable.

For working families, renting also makes financial sense. Saving for a down payment is tough for people in the workforce, and they don’t want to deal with the added hassle and expense of home repairs. Renting is a convenient and affordable option.

Americans rent for many reasons, and policies like the MID don’t directly affect their decision to rent. Whatever happens with tax reform, as the American dream changes, the number of renters in America is likely to continue to grow.

The Bottom Line:

Any changes to the MID are unlikely to have a meaningful impact on the homeownership rate or the multifamily market.

1 Pew Research Foundation. More U.S. Households are Renting Than at Any Point in 50 Years. 7/19/17.

2 CNBC. Popular Mortgage Deduction Could Get a Haircut in Tax Reform. 8/22/17.

3 National Bureau of Economic Research. The Benefits of the Home Mortgage Interest Deduction. 10/02.

4 National Bureau of Economic Research. Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark. 7/17.

5 Organization for Economic Co-operation and Development. Housing Markets and Structural Policies in OECD Countries. 1/25/11.

6 CityLab. The Down Payment is Too Damned High. 4/18/17.

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