Why the initial mortgage payment on a home is typically higher than its market rent.

A conventional mortgage’s payment is fixed, in nominal dollars, as of the date of issue. Rent, in nominal dollars, generally increases in line with wage inflation; so today’s higher-than-rent mortgage payment is buying payments down to a (probably) lower-than-rent level in future decades.Moreover, the appreciation of the underlying asset in nominal dollars(even if there is no real appreciation, which isn’t far from the truth)accrues entirely to the homeowner. Separate out this highly leveraged investment opportunity, and you may find that, in the early years of an 80% mortgage, half or less of the homeowner’s carrying cost (including maintenance, insurance, and property taxes) is attributable to the privilege of living there.

It would therefore be entirely justifiable (on a planet where analysis from first principles carried any weight in a tax court) for me and my neighbor to run our mini-REITsat a perpetual loss in cash-flow terms. We could even periodically refinance to recoup this “operating loss” and re-leverage our investments. More realistically, we could rent from, and invest in, areal estate holding company which operates on a scale that allows frequent realization of the “profits” of nominal appreciation. This is the model of tax and capital efficiency against which ownership ofone’s own home should be measured.

If this analysis is correct,then without the mortgage interest (and property tax) deduction, owning one’s own home (rather than a securitized slice of everyone else’s) would not be a rational choice in purely financial terms. Many Americans would choose it anyway, especially if they feel strongly about stability in their children’s lives; few attractive single-family homes can be leased for decades on a pre-negotiated rent schedule.Happily for them and their communities, the consensus in Washington(however flawed the reasoning on which it is based) continues to support the mortgage interest deduction—for those not so unfortunateas to be caught by the travesty of “tax fairness” that is the AMT.