How to fix the housing affordability crisis

Homeownership may be the American dream. But, for many, it remains an expensive, unattainable fantasy.

New research led by the Johns Hopkins Carey Business School suggests one possible way to help ease the housing affordability crisis: changing U.S. tax policy. Replacing the existing mortgage interest deduction with a flat, refundable tax credit could make homeownership attainable for more Americans, according to a model developed by Johns Hopkins economist Michael Keane.

Lopsided Incentive

Existing U.S. tax policy includes an incentive for homeowners called the mortgage interest deduction. This means Americans who own real estate can write off some of the interest they pay on their home loan each year. The deduction lowers their taxable income which, in turn, reduces the amount they owe or boosts their tax refund come April.

By offering the mortgage interest deduction, the U.S. federal government hopes to encourage Americans to buy and own homes. But economists argue the deduction disproportionately benefits wealthy individuals.

"The higher the tax bracket you're in, the bigger the deduction will be," says Keane, a professor in the Johns Hopkins Carey Business School. "The mortgage interest deduction is more and more valuable as your income goes up and as the size of your mortgage goes up."

Low- and middle-income tax­payers, who are typically in lower tax brackets, usually have smaller homes and mortgages. For these Americans, the deduction is "much less valuable," Keane adds.

The mortgage interest deduction is also only available to the roughly 10% of taxpayers who itemize instead of taking the standard deduction. Renters get no benefit, and all Americans face higher overall income tax rates to help the government make up the revenue it loses by offering the deduction, Keane says.

A Flat Credit Solution

Keane and Xiangling Liu, a researcher at the University of New South Wales in Australia, recommend swapping the mortgage interest deduction with a flat, refundable credit equal to 24.6% of a homeowner's annual mortgage interest.

"You're going to get 24.6% of your mortgage interest back as a tax credit—like a direct payment from the government—regardless of your tax rate," Keane says. "The idea is, you're making it fair. No matter how rich or poor you are, you're going to get the same payment as a percentage. And, in fact, even if you don't owe any taxes at all, if you have a mortgage, you still get that 24.6% back."

The researchers landed on 24.6% because, according to their model, getting rid of the mortgage interest deduction would raise revenue just enough to pay for the 24.6% flat tax credit.

Their simulations suggest this change would increase U.S. home­ownership by 5.9%—a "pretty big bump" relative to historical numbers, Keane says.

According to the model, the biggest upticks would be among young people and low- to middle-income households. Homeownership rates among wealthy Americans, meanwhile, would remain flat, though members of this group would shift to buying slightly smaller houses, Keane says.

"According to our simulations, 90% of people would be better off with this—and the 10% who are worse off are the 10% highest-income people," he adds. "What we argue is they've already heavily benefited from the current situation, so we shouldn't feel too sorry for them."

Real-World Implications

Many tax policies are expiring at the end of 2025, and Congress will need to decide how best to move forward. Keane believes his proposed tax reform could find support on both sides of the aisle.

"Progressives like the idea because it's more fair," he says. "But conservatives also like the idea because they believe the tax code shouldn't favor certain activities over others. It's a policy that could potentially happen, if and when they talk about reforming the tax code again."