Abstract: Paper No. 179

The Demand for Home Mortgage Debt and the Income Tax

James R. Follain and Robert M. Dunsky

April 1996 

The goal of this paper is to learn more about the demand for the amount of mortgage debt owed by United States home owners. Mortgage debt is defined to be the amount of outstanding household debt secured by the owner's principal residence; mortgages for second homes and other real estate are not considered, but second mortgages and home equity loans are. The analysis focuses on the behavior of individual households and examines variations in the demand for mortgage debt with respect to a variety of characteristics such as household income, age, education, and other characteristics of the household. Of particular interest is the responsiveness of the demand for mortgage debt to the tax rate at which interest on mortgage and consumer debt can be deducted. The 1983 and 1989 Surveys of Consumer Finance are used to estimate the demand for mortgage debt. The analysis offers strong support for the hypothesis that the demand for mortgage debt is highly responsiveness to a change in the rate at which mortgage interest can be deducted. As such, the elimination of the mortgage interest deduction can be expected to lead some households to shift away from the financing of owner-occupied housing with mortgage debt and toward the use of their own assets (equity finance).

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