This paper examines the impact of the combined U.S. state and federal mortgage interest
deduction (MID) on homeownership attainment, using data from 1984 to 2007 and exploiting
variation in the subsidy across states, over time and due to inter-state moves. We test whether
capitalization of the MID into house prices offsets the positive effect on homeownership. We
find that the MID only boosts homeownership attainment of higher income households in less
tightly regulated housing markets. In more restrictive places – typically larger coastal cities – an
adverse effect exists. The MID is an ineffective policy to promote homeownership and improve
social welfare.