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May 15, 2019

How Tax Reform Has Impacted the Housing Market

Mortgage Orb -- Patrick Barnard

When the Tax Cuts and Jobs Act was enacted in 2017, it reduced tax breaks for homeowners.

Mainly, it lowered the cap on the mortgage interest deduction to $750,000, down from $1 million, and the deduction for state and local property taxes was capped at $10,000.

At the time, housing experts and economists said the changes would mostly affect the luxury market.

Nearly a year and a half later, it turns out they were right: While the law has had almost no impact on the housing market on the macro level, certain high-end local markets such as Eastchester N.Y. and the Hamptons have seen high-end home prices plummet, partly as a result of the changes, a recent analysis from First American shows. 

“Our analysis found that the 2017 tax law only impacted house prices at the highest price points of high-cost towns,” says Odeta Kushi, deputy chief economist at First American, in the report. “It’s important to note that the 2018 housing market benefitted from a strong economy, record-low unemployment rates, and a tax cut that created more disposable income for consumers. However, the tax bill did raise the relative cost of owning versus renting in some high-cost markets.”

Kushi says moving forward, “the highest price points of some of the highest priced housing markets may suffer as real estate is re-priced to reflect the change in the cost of owning.”

Still, “the housing market remains healthy and it is difficult to find signs that the tax changes have impacted housing,” she adds.

“Nationally, house prices have continued to rise,” Kushi says. “Median house prices have increased nearly five percent since the law was implemented, according to DataTree by First American data. The limited deductibility of state and local taxes has not impacted the housing market nationally because the cap remains high enough, so most homeowners can still deduct all of their state and local taxes.

Kushi notes that the impact is hard to detect even when looking at the states that contain the highest priced local markets, including California, New York and Connecticut.

“In fact, median sales prices for existing homes in these states were higher in 2018 after the tax law took effect than they were before the tax law took effect in 2017,” she says.

“However, zooming in on micro-markets, specifically high-priced markets where the high property prices result in property taxes that exceed the new cap on state and local tax deductions may find some impact,” she adds.

Kushi says it’s “difficult to discern” whether the other strong macro-economic trends such as low unemployment, rising wages and rising home prices “may have masked the effects of the tax change on housing.”

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