The conventional wisdom (i.e. what my dad and his buddies would tell me) is that, so long as you have decent credit and plan to stay in the area for a few years, it is crazy not to buy a house (rather than rent) because you can deduct the interest on your mortgage. Especially in the first few years, when you are paying tens of thousands in interest payments, that tax advantage equals hundreds or even thousands of dollars in extra take home pay per month.
Yet this seems too easy. Wouldn’t economics tell us that it can’t be true that “only a fool would rent”? In particular, if buying is so much “obviously” superior to renting, then market prices should change to reflect this. So more and more people buy property for the tax advantage and then rent it out. Nobody wants to rent (following the conventional wisdom). This happens until rental rates (compared to mortgage payments) for comparable pieces of property fall until people are indifferent between renting or buying. In essence, the landlord is giving the tax deduction to his tenants in the form of lower rents. (One thing I’m assuming is that landlords can claim this as a deduction, even if they don’t live in the building. Is that true?)
Is this a sound argument? Granted, my Chicago-esque analysis is leaving out all sorts of real world considerations (imperfect knowledge, credit constraints, no such thing as true indifference, etc.). But as a first pass, do people generally agree with me? E.g. wouldn’t it be silly if someone said, “Oh the government just started subsidizing farmers, so only a fool would go into a different profession”?
