Interest deductions took root in the late 19th century. The first federal income tax was established in 1894 and all forms of interest were deductible. However, homeownership was not what motivated Congress to enact such a policy. An interest deduction was viewed primarily as a business situation.
Most people at that time in history paid cash for their homes (as is the case today in countries with less sophisticated financial systems), and mortgages were generally only taken out by farmers or investors. Not until the 1950s did the home mortgage gain anything close to its current significance. Since then, the home mortgage has become the going concern of the housing industry, and the tax deductions and exclusions are considered entitlements for those homebuyers who must borrow and for those who sell.
The true tax benefits of interest rate deductions were lost long ago — arbitraged away — by increased pricing and interest rates which pass them on to the seller (increased price) and the lender (increased interest and charges).
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