Will new tax law affect home values as industry fears?

Written By: Joel Palmer, Op-Ed Writer

Housing is a critical staple of the economy. Home values, home sales and home construction are strong indicators of economic growth or stagnation. Home ownership often represents stability, community, and household wealth.

For decades, tax laws and economic policies have been designed and enacted to encourage home ownership and maintain a strong housing market, especially when other areas of the economy are on the decline.

Yet some in the mortgage and housing industry wonder if Congress and the Trump administration contradicted this philosophy with the recently passed Tax Cuts and Job Act. 

In late December, Congress passed and President Trump signed the new tax law. Throughout the drafting and debate of the bill, many in the industry warned that many of its provisions would negatively impact the housing market. 

Mortgage lenders were encouraged that some of the more objectionable provisions did not find its way into the final legislation. 

David H. Stevens, president and CEO of the Mortgage Bankers Association, said some good news from the bill included:

•    Preservation of current law that allows homeowners to exclude up to $500,000 of the gain on the sale of a home. 

•    Inclusion of the Low-Income Housing Tax Credit and the tax-exempt status for private activity bonds. 

•    Preservation of business interest deductibility for real estate, as well as Section 1031 like-kind exchanges for real property. 

•    Maintaining the option of deducting up to $10,000 in property taxes.

Still, the final bill does remove some tax incentives to certain homeowners, especially in high-value markets. That, in turn, leads some to believe the demand for home buying will lessen, which will stifle home values.

The National Association of Realtors is projecting slower growth in home prices of 1 to 3 percent in 2018. NAR believes the current environment of low housing inventory will offset some of the negative affects of the tax law.

“However, some local markets, particularly in high cost, higher tax areas, will likely see price declines as a result of the legislation’s new restrictions on mortgage interest and state and local taxes,” says the NAR.

Mark Zandi, chief economist at Moody's Analytics, told Business Insider that by the summer of 2019, “national house prices will be approximately 4 percent lower than they would have been if there were no tax legislation.”

The biggest direct impact on housing are the changes in mortgage interest deductions. The new law:

•    Reduces the limit on deductible mortgage debt from $1 million to $750,000 for new loans taken out after December 14, 2017.

•    Repeals the deduction for interest paid on home equity debt unless the proceeds are used to substantially improve the residence.

•    Retains the interest deduction on second homes, though subject to the new $750,000 cap as with primary mortgages.

A previous version of the bill would have capped mortgage interest at $500,000 and eliminated the deduction for second homes.

Another major change in the new tax law is the raising of of the standard deduction, which for 2018 will be $12,000 for individuals and $24,000 for joint filers, double the current standard deduction. The standard deduction will subsequently be indexed for inflation. 

In 2015, about 21 percent of tax filers claimed the mortgage interest deduction. “Congressional estimates indicate that only 5 to 8 percent of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90 percent of taxpayers,” said NAR.

On the other hand,  if the new law does what its proponents say it will by reducing the tax bills of most Americans, it could have the opposite impact. After all, if people have more money to spend due to a reduction in taxes, they can potentially afford higher mortgages, which means higher priced homes, which could result in increasing home values.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.