My search for a new apartment sucks more because of the mortgage interest deduction

by pdxblake

This post is going to piss off some of the people who own a house, but here goes (leave the hate mail in the comments, please).  I am searching for a new apartment and I have noticed that the market has become significantly tighter than it was the last time time before last when I was searching for a place to live, which it so happens was before the financial crisis.

The statement I am going to make that will piss off most home owners is that I feel twice screwed by the mortgage interest deduction.  The first is obvious: I don’t own a home so I don’t get the mortgage interest deduction (not to mention the ability to itemize deductions).

The second is a little more complicated, but gives me a chance to run through some economics.  The mortgage interest tax deduction is a subsidy for leveraged home ownership (it only applies if you pay interest every year on a mortgage).

This is a simple supply & demand curve.  What the mortgage interest deduction does in its most simple effect is increase demand (from the blue to the turquoise line, D’) because if you buy a $200,000 house, and pay $10,000 in interest every year (and you are in the $35% tax bracket), you save $3,500 every year in taxes, every year until you pay it off (30 years from now).

The value of $1 is higher today than getting $1 in 30 years, but it still has value in the future (the calculation for how much less that dollar is worth to you is based on the ‘discount rate’; a 10% discount rate implies that getting $1 in a year will make you just as happy as if you got $0.91 today).  So if you add up all those 30 years of savings on your taxes (discounted to the value today, the present value), it works out (with the assumptions above) to about $36,000.

Because you are going to get something (a tax cut) worth about $36,000, you are going to be able to buy more house than if you didn’t get that tax deduction.

Across the entire economy, that will push up demand for single-family homes over apartments (although apartment owners get to deduct interest as well) because more people will buy a house (in part, to get the mortgage interest deduction), and there will be more houses than apartments built in the economy.

Now, take that world, add a bunch of foreclosures and make it really hard for anyone to get a loan to build a new house or buy an existing house.  What happens?  There are going to be a lot of people who delay buying houses (because credit is tight) and a lot of people who used to own a house who are now back in an apartment (after a foreclosure or short sale), and there is an inadequate supply of apartments for the new demand.

And welcome to my world.  I am not going to be too much of a ass about it, but the people who used to own homes and used to get a tax deduction that is not available for renters make up a portion of these people now driving my rents up and making it really hard to find a reasonably priced apartment.  Thanks guys, and thank you, mortgage interest tax deduction.