What are you getting for your money?

A quick point (or three): when you buy a house, you buy the location, you buy the bricks, you buy the new windows. You buy the garage, the driveway, the shade in the backyard on the hot summer afternoons. You buy the proximity to highway (or train), the local deli, movie theater, or shopping mall. You buy many things that contribute to the value of the house. They all contribute to the PRICE of the house.

What some people forget is that YOU'RE ALSO BUYING THE TAX ADVANTAGES. You're paying for the privilege of getting money back each year. IT DON'T COME CHEAP. It makes no difference if the seller doesn't realize this, or if the seller is some little old lady who has to sell because she's moving to a nursing home - if the seller hires a realtor. It's in the best interest of that agent to advertise these benefits and inform prospective buyers of these advantages.

And buyers aren't stupid either. They know they can afford "more house" because of the year-end benefits. It enters their calculations. It's not a secret. My point: house prices are higher because of these tax advantages. To sell a house without considering this is silly - and effectively doesn't happen. To buy a house without considering this is silly - and effectively doesn't happen.

Anything worth buying is worth paying for. You can't get something for nothing. There's no free lunch. Houses are not magic. [insert catch-phrase here].

Bottom line: Tax deductions on mortgage interest don't benefit the people they "intend" to help.

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It's also a regressive

It's also a regressive policy.
Most folks take the standard deduction and don't itemize.
To take the mortgage interest deduction, you give up your standard deduction (which opens up whatever else you might be able to deduct too.)
With a little bit of handwaving, we can say it's a wash at home values under $100K. The benefit goes to those with McMansions or who live in trendy markets like DC, Boston, California. It encourages people to get more house than they really need, but does little to held the typical renter get into a starter home. If the purpose is to buy off the upper middle class, well that makes sense. But let's not hide behind any sense of it being a rational or socially useful policy.
The $1,000,000 house, today, would be worth somewhat less if the deduction ended tomorrow. I'll call that y, where y = $1,000,000 - x. I don't have a handy number for x. Currently the homebuyer is paying interest on x, but can deduct the interest on both y and x. I wonder what these numbers work out to - how much of the "saving" from the deduction gets eaten by interest costs on the increased value of the house?
Currently the housing bubble is built on zero-equity all-interest loans.
What would happen to the banks if congress seemed to be seriously considering doing away with the deduction tomorrow?
This could be a lucrative racket for congresscritters - introduce a bill to get rid of the deduction, watch the lobbyists throw a lot of money at it, secretly split the take to kill the bill. Multiply by 1000 issues, and you get a sense of the dynamics of the public choice economy.