US Housing Subsidies: The Home Mortgage Interest Deduction + Some Scraps for the Poor

When you think of subsidized housing, you probably picture a scene from the PJs or The Wire. Don't. Funding for low-income housing accounts for only a small portion of government housing subsidies in the US.

The US Department of Housing and Urban Development (HUD) hasn't funded the construction of a new public housing unit since 1994. However, that hasn’t entirely halted Housing Authorities’ groundbreakings and ribbon cuttings: Between 1993 and 2010, HUD competitively awarded $6.7 billion in HOPE VI funds to demolish or redevelop the most distressed public housing projects across the country, creating housing developments with a mix of public housing and market rate units. While the initiative certainly improved the physical quality of the projects it reached, it also reduced the nation's public housing stock by 39,400 net units. Public housing refers to a specific type of low-income housing – properties developed, owned, and operated by a HUD-funded Housing Authority – and it is a dying breed. Instead, HUD now supports housing for low income families primarily through two mechanisms: (1) vouchers awarded to low-income households to supplement what they can afford to pay towards rent or a mortgage payment, and (2) privately-owned housing, the construction of which is partially or completely financed with public funds (grants or low/no-interest loans), that is reserved for low-income tenants or purchasers at a rate deemed affordable. When combined with local programs and regulations, the full list of subsidies (a term that I am using loosely to mean any intervention that makes a housing unit available at a price below the market rate) that specifically target low- or moderate-income households here in the District of Columbia looks something like this:

Supply-Side Subsidies - public money (or land) spent, granted or loaned (at a favorable rate) to develop or rehabilitate housing units that, in return, will only be rented or sold to low- or moderate-income households at a price they can afford:

• Community Development Block Grant (CDBG)
• HOME Investment Partnerships Program Grants (HOME)
• Public Housing
• Project Based Vouchers
• HUD grants for special needs populations (Homeless Assistance Program grants, Section 811, Section 202, HOPWA)
• Low Income Housing Tax Credit (LIHTC)
• Housing Production Trust Fund (HPTF)
• Land Disposition Agreements - discounted sale of public land in exchange for community benefits, often including affordable housing (example)

Demand-Side Subsidies - tax dollars allocated, granted or loaned (at a favorable rate) to individuals and families to supplement their ability to pay for housing costs, including rent and mortgage payments, down-payments, and property taxes:

•  Housing Choice Vouchers
• Local Rent Supplement Program (LRSP)
• Home Purchase Assistance Program (HPAP)
• City First Homes
• Low Income Home Ownership Tax Abatement

Zoning Regulations - rules or one-time determinations that require the construction of affordable housing units (rental or for sale) as part of a larger development, in exchange for government relaxation of applicable zoning restrictions.

• Inclusionary Zoning (IZ)
• Planned Unit Development (PUD) approval

Government deserves a cookie for the sheer number of low-income housing policies and programs it has implemented, but when you look at all housing subsidies dished out (not just those that target the poor), the above list only represent a drop in the bucket.

The Home Mortgage Interest Deduction

By far, the biggest government subsidy the government offers to help individuals and families pay for housing is the Home Mortgage Interest Deduction (MID), which was claimed on about 26% of all DC individual tax returns. The Mortgage Interest Deduction allows homeowners to reduce their Adjusted Gross Income (what you pay taxes on) by the amount they paid towards interest on their first $1 million of home mortgage debt. Oh and BTW? You can also deduct the interest on your vacation home (just in case the debt on your primary residence doesn't get you to the million dollar cap). It’s easy to get caught up in semantics on this issue: Unlike a voucher, which is a direct government expenditure and therefore a more tangible subsidy, the MID is instead foregone government revenue, which is more politically palatable than a direct outlay, but serves the same purpose. Consider two scenarios: (A) getting $10 taken out of your paycheck before you ever see it; and (B) receiving full pay but then having to give $10 right back. If there is a difference between the two, then it is only psychological.

The cost of Home Mortgage Interest Deduction to the federal government amounts to a cool $100 billion dollars annually. Compare that to the annual budget of the biggest low income housing programs:

Data Sources: IRS, author's calculations, Danter, HUD

One natural reaction to these statistics is to suppose that, as an entitlement program available to all homeowners (about 2/3 of the country), the Mortgage Interest Deduction is likely a shallower subsidy disbursed to a much broader pool of recipients than something like Housing Choice Vouchers, which target a specific income range. That’s true to an extent, but it turns out that the biggest individual beneficiaries of the MID actually receive a greater (and more reliable) subsidy than recipients of housing vouchers.

Comparison of Vouchers and the Mortgage Interest Deduction Subsidy in DC

Based on approximate figures provided by the DC Housing Authority (DCHA), the average housing voucher in 2009 was worth $967 monthly. Most (at least 75%) vouchers are reserved for households earning no more than 30% of the Area Median Income, which today translates to a maximum of $32,250 (75 hours per week at minimum wage) for a family of four. Using the industry-standard assumption that households can afford to pay 30% of their income on housing, a family at the upper limit of this spectrum can afford to pay $806 per month for housing. Since most of the families eligible for vouchers earn less than the upper limit, it sounds about right that it would take $967 per month per household to get them into decent housing (Fair Market Rent for a 2BR home in DC is $1,506). This is a steep subsidy, and the overall federal low income housing budget is not astronomical only because, unlike food stamps or Medicaid, housing vouchers and public housing are not entitlement programs, meaning that even if you qualify, you may not receive the benefit. DCHA spends $130 million per year to provide vouchers to 11,200 households, but there are an additional 25,000 to 37,635 on the waiting list. 

In comparison, the average subsidy to a DC resident who claims the Mortgage Interest Deduction is $331. But unlike a voucher which increases with need, the MID subsidy rises in proportion to the cost of your home and your marginal tax rate. Take a look at who claims the deduction, and how much it costs the government, on average, for each income range:

Data Source: http://www.irs.gov/taxstats/article/0,,id=171535,00.html

Lower income households are less likely to claim the Mortgage Interest Deduction because (A) they are less likely to own their home, and (B) the sum of their itemized deductions (including mortgage interest payments) is less likely to exceed the standard deduction. The percentage of tax returns claiming the MID for each income range reflects this, with only 9% of households earning under $50k taking the deduction and 80% of households earning over $200k deducting their interest payments.

While the subsidy does increase with income, remember that there is a cap to the amount of interest that can be deducted (only that which is paid on mortgage debt up to $1 million). Here’s a hypothetical scenario to illustrate how one might achieve the maximum benefit from the MID: You take out a $1 million loan from the bank at 5% interest to buy a big-a$$ house. Over the first 5 years you would pay  $240,461 in interest on that loan (an average of  $48,092 per year). If you make earn enough money to buy a million dollar house (not extremely uncommon in DC), then your marginal tax rate is probably 35%. Because you can deduct your interest payments from your income, you reduce your tax burden by 0.35 x ~$48k: about $1,402 per month, or 1.5 times what the average voucher holder receives. What’s even more kush about this subsidy is that there is no waiting list, and the benefit never expires!

While affordable housing advocates and local politicians nobly debate over whether local tax money should be used to finance the construction of low-income units or for vouchers, the federal government continues its backwards system of giving homeowners (renters, of course, get nathan) a guaranteed subsidy that is disproportionately doled out to the rich. There are a number of ways we could reform the Mortgage Interest Deduction, for example by lowering the cap or by eliminating it completing, but no matter what, an understanding of the subsidy must inform our perception of welfare programs in this country and should be central to any discussion about housing policy.