Inverted Incentives: Homes and Mortgages

A person who can pay cash (or can make a hefty down-payment) for a house prefers lower lifetime cost for a home. This means that a situation of high interest rates and low home prices might be preferable to one of low interest rates since low interest rates and low home prices rarely coincide.

The current system of incentives, specifically the mortgage interest deduction, encourages people to prefer debt regardless of home price and, in fact, drives home prices higher.