I wouldn’t be enthusiastic about tax breaks for homeownership and mortgage debt even if they increased the rate of homeownership. An article in the new National Affairs, summarized in today’s Wall Street Journal, demonstrates once again that the tax breaks actually do not do much to expand homeownership. They do, however, expand homes: They induce people who would have bought homes anyway, and particularly high-income people, to buy larger homes.
The additional square footage purchased because of housing’s tax-preferred status varies among metropolitan areas, just as the cost savings from these policies do. At the high end of the spectrum, estimates suggest that homes are substantially larger due to housing tax expenditures — as much as 1,400 square feet larger in the Washington, D.C., metropolitan area. In other areas, like Philadelphia, Los Angeles, and New York City, the effect of housing tax expenditures on the size of homes is smaller but still quite significant, encouraging people to buy homes that are at least 800 square feet larger. Even at the bottom of the distribution, tax benefits still have a real effect, increasing home sizes by more than 250 square feet in all metropolitan areas. And it is worth noting that these estimates include only purchases of owner-occupied single-family homes, so they do not account for purchases of larger condominiums and necessarily exclude all rental properties.