[abb]

Because of this tax distortion, people have an incentive to buy bigger houses with more bells and whistles than they would otherwise buy.

Partially true, I would argue. Large, flashy houses have throughout history been built to impress others or as a sign of prosperity. Successful businessmen (Vanderbilt, Morgan, Rockefeller) did this before there was an interest deduction or even an income tax. No doubt many people tried to imitate that behavior - to "keep up with the Joneses." Cars are the same way. People want to show off.

I call it the SWIG factor. See What I Got.

[curiosity]

No doubt. Some people would undoubtedly continue to buy extravagant houses even without the MID. My only point is that the MID increases the frequency with which this happens, other things being equal.