Would Ending the Mortgage Interest Deduction Reduce the Racial Wealth Gap?

Matthew Desmond has a piece at the New York Times about homeownership and inequality. In it, he rightfully takes on the Mortgage Interest Deduction, a tax expenditure that unfairly benefits those who own homes and the rich especially.

Desmond ties the Mortgage Interest Deduction, and homeownership policy more generally, into the racial wealth gap. This naturally raises the question: would ending the mortgage interest deduction actually reduce the racial wealth gap?

In his piece, Desmond endorses the plausible theory that the value of the Mortgage Interest Deduction gets capitalized into home values. This means that home values are higher than they would otherwise be, which drives up the wealth of those who own homes.

It’s impossible to say how much, but a widely cited 1996 study estimated that eliminating the MID and property-tax deductions would result in a 13 to 17 percent reduction in housing prices nationwide, though that estimate varies widely by region and more recent analyses have found smaller effects. The MID allows home buyers to collect more after-tax savings if they take on more mortgage debt, which incentivizes them to pay more for properties than they could have otherwise. By inflating home values, the MID benefits Americans who already own homes — and makes joining their ranks harder.

On first glance, it is easy to see why someone would think that trimming home values by as much as 17 percent would reduce the racial wealth gap. In the 2013 Survey of Consumer Finances, the mean primary residence asset value for whites was more than three times the mean primary residence asset value for blacks.

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This means that trimming home values by, say, 10 percent would reduce mean white wealth by just over $20,000 while only reducing mean black wealth by a little over $6,500. So, in absolute dollar terms, the racial wealth gap would definitely shrink.

But the racial wealth gap is not usually represented as the dollar difference between white and black wealth. Rather, it is represented as the ratio of black wealth to white wealth. And for that racial wealth gap, it is the following graph that actually tells us whether trimming home asset values by eliminating the Mortgage Interest Deduction would help.

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The value of primary residences makes up 69 percent of black wealth but only 30 percent of white wealth. This means that trimming all home values by, say, 10 percent would erase 6.9 percent of black wealth but only 3 percent of white wealth. The result of this would be a decrease in the ratio of black wealth to white wealth. That is, the result would be a larger racial wealth gap, so defined.

None of this is to say that we should think twice about eliminating the Mortgage Interest Deduction. We shouldn’t. It is just that its effect on the racial wealth gap is more muddled than often suggested. Tweaks like that are not likely to deliver the kind of racial equality we seek. For that, we will ultimately need an intentional agenda of leveling out the wealth distribution in society.

The Racial Wealth Gap and Homeownership Nonsense

Matthew Desmond has a piece in the New York Times about homeownership and racial inequality. The piece is mostly good, but one part of it irked me:

While most white families own a home, a majority of black and Latino families do not. Differences in homeownership rates remain the prime driver of the nation’s racial wealth gap. In 2011, the median white household had a net worth of $111,146, compared with $7,113 for the median black household and $8,348 for the median Hispanic household. If black and Hispanic families owned homes at rates similar to whites, the racial wealth gap would be reduced by almost a third.

This statistic is pretty misleading. It is sourced from a Demos report put out in 2015, which explains how it is derived:

We tested the effects of equalizing homeownership rates among white, Black, and Latino families on the racial wealth gap. Our model looks at wealth accumulation by race and ethnicity if the existing home owning population among Black and Latino households matched the 73 percent rate of white families. In other words, what if Black and Latino homeowners made up 73 percent of each of their respective population subgroups, without changing typical home values for whites or households of color? The model did not control for other characteristics that might distinguish homeowners from non-homeowners.

As a background, 73 percent of whites in this sample own their own home while just 45 percent of blacks and 47 percent of Latinos do. All the authors do is take the 45 percent of black families that own their home in the sample and inflate their size so that they make up 73 percent of black families. Similarly, they take the 47 percent of Latinos who own their home and inflate their size in the sample so that they make up 73 percent of Latino families. Then they find the median black and Latino net worth with this reweighted sample.

The problem, as I have bolded, is that this kind of calculation does not do anything to determine whether it is the homeownership that is responsible for the difference. The suggestion of the report, which is picked up by Desmond, is that homeownership causes wealth when in reality it is more likely that wealth causes homeownership. That is, the reason that reweighting black homeowners and Latino homeowners to be 73 percent of their particular subgroups causes the wealth gap to close by nearly one-third is simply that wealthier people are more likely to buy homes.

This might seem like a nitpick of a point, but it is not. If you do not understand what is going on here, you might reach the conclusion that the way to fix the racial wealth gap is to put in place nudges that increase the homeownership rates of black and Latino families. And that is really not the right conclusion.

To see why this is the wrong conclusion, all one needs to do is scroll down a bit further in the Demos report:

[W]e find that the wealth returns to homeownership for Black households amount to $71,715—just 75 percent of the returns that accrue to white households. This difference of $24,533 means that for every $1 in wealth that a Black family builds as a result of homeownership, white families accrue $1.34. Meanwhile, the wealth returns to homeownership for Latino households amount to $62,647—just 65 percent of the returns that accrue to white households. This difference of $33,601 means that for every $1 in wealth that accrues to Latino families as a result of homeownership, white families accrue $1.54.

Homes are unique among wealth assets in that the race of the owner affects the rate of return. Likely due to the dynamics of residential segregation, housing assets owned by black and Latino families do not appreciate at the same rate as housing assets owned by white families.

However, for almost every other wealth asset you can think of (particularly financial assets), the rate of return will not generally vary based on who owns it. For instance, each share of Walmart stock pays the same dividends and goes up and down in value in the exact same way, regardless of whether it is owned by a white person, a black person, or a Latino person.

If your goal is to reduce the racial wealth gap, it probably makes more sense to encourage ownership of assets that have rates of returns that are not sensitive to the race of the owner. Yet, oddly, those that promote homeownership as the solution suggest we should put our effort into encouraging ownership of the only asset in which rates of returns are racialized in a way that penalizes black and Latino people.

Homeownership might be important for certain notions of the American Dream, but for the specific purposes of closing the racial wealth gap, it is one of the worst asset classes to focus your energies on.

Asian Poverty Varies a Lot by Group

Andrew Sullivan has a post where he argues that the economic success of Asians in the United States suggests that the lack of success of other groups cannot be chalked up to racism. One response to this kind of argument is that, as a historical matter, anti-Asian racism did hold Asians back and Asians only began to succeed when that racism receded for a number of badly-motivated reasons (see Ellen Wu). In addition to that point, I think it is useful to note that Asian economic success also varies a lot by group.

Analysis on Asian subgroups is often hard to come by because they are such a small share of the overall population that it is difficult to get good sample sizes. However, if you use the 5-year American Community Survey (ACS) files, you can get enough responses to focus in on Asian subgroups. This is what I have done for this post, using the 2011-2015 ACS data.

Here are the poverty rates for the various racial groups in this data set.

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During this period, Asians had lower poverty than the population in general, but higher poverty than non-Hispanic whites. Nonetheless, it is the case that when you analyze Asians all together, their poverty situation is much different from every other non-white group.

But here are the poverty rates of various Asian subgroups from the same data set.

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Some Asian groups are doing well but others are doing very poorly. Cambodians and Hmong people for instance have poverty rates that are similar to those of Blacks, Natives, and Latinos.

Statements like the one Sullivan made do not just wave over the complicated history of the matter. They also mislead people about the current situation of Asians in America. When you group them all together, the subgroups that are doing well make up a big enough share of the overall Asian population that you get some relatively good overall statistics. But the reality is that “Asians” refers to many different groups that have very divergent economic situations.