International Property

US home price increases in expensive markets to slow as tax bill reshapes economy, analysts say

The Republican tax plan trims mortgage interest deduction and property tax deduction, which combined cut tens of thousands of dollars off homeowners’ taxable income

PUBLISHED : Monday, 01 January, 2018, 7:03pm
UPDATED : Tuesday, 02 January, 2018, 6:00pm

The steady increase in housing prices in many of the nation’s priciest markets is expected to slow in coming years, analysts say, as the Republican tax law begins to reshape a major part of the US economy.

For generations, the tax code has subsidised home ownership, particularly for people in the upper-middle-class and beyond. The Republican tax legislation, however, pushed in the opposite direction, scaling back subsidies once thought untouchable.

To pay for other tax cuts benefiting individuals and corporations, the Republican tax plan trims the mortgage interest deduction and property tax deduction, which combined allow some homeowners to take tens of thousands of dollars off their taxable income.

The law allows interest to be deducted on mortgages only worth up to US$750,000, instead of the previously existing US$1 million limit (people who got loans before December 15 are grandfathered into the US$1 million limit). It also put a US$10,000 cap on the amount of state and local taxes, including property taxes, that can be deducted from the federal return.

Economists and housing experts broadly agree the changes will slow price increases in expensive housing markets – though nobody expects housing values to decline given the overall strength of the economy and the fact that there are relatively few houses for sale in top markets.

Still, experts are debating who wins and loses from the changes, and the reality may turn as much on perception as on the fundamental economics.

Bonnie Casper, a real estate agent with Long & Foster in Bethesda, Maryland, said the new rules would put a lot of prospective homebuyers in wait-and-see mode, which could prompt a slowdown in the market.

“If they’re not going to have a tax benefit, maybe they’ll go rent and not buy,” Casper said. The tax overhaul “could hinder first-time buyers in particular, and then have a cascading effect”.

Edward Pinto, a housing expert at the American Enterprise Institute, said lower housing prices would prove attractive to first-time homebuyers who might have felt exasperated by the rapid increase in home values in recent years.

If they’re not going to have a tax benefit, maybe they’ll go rent and not buy
Bonnie Csper, Long and Foster

“Existing homeowners have benefited from that on the backs of first-time homebuyers,” Pinto said.

Housing prices have been increasing by about 6 per cent a year over the past five years nationally, according the Standard & Poor’s Case-Shiller index. Economists now expect these areas to see some slowdown in coming years as the Republican tax, particularly in pricier regions like the Northeast Corridor, parts of the West Coast and Florida, and a number of Midwest cities.

Mark Zandi, chief economist at Moody’s Analytics, a research firm, estimates that in the New York metropolitan region, some counties could see prices 10 per cent below where they would have been without the tax bill by summer of 2019. The median US county will see a decline of 0.8 per cent.

“House prices suffer under the tax plan,” Zandi wrote in a recent analysis. “The impact on house prices is much greater for higher-priced homes, especially in parts of the country where incomes are higher and there are thus a disproportionate number of itemises, and where homeowners have big mortgages and property tax bills.”

According to Moody’s analysis of the Washington area, home prices in the District of Columbia could deflate by 2 per cent, 2.5 per cent in Montgomery County, Maryland, and 2.3 per cent in Arlington County, Virginia. Loudoun County, Virginia, is most affected in the region with a projected 2.6 per cent decline in prices relative to where they would have been.

By way of example, if the price of a US$500,000 home in the District of Columbia would have risen to US$525,000 by the summer of 2019, under the new law it will only go up to US$515,000, assuming a 3 per cent rather than 5 per cent increase.

“The biggest impact is probably the psychological impact on buyers,” said Lindsay Reishman, a senior vice-president with the real estate firm Compass. “We might see fewer transactions, a little less activity for a while.”

The biggest impact is probably the psychological impact on buyers
Lindsay Reishman, Compass

ATTOM Data Solutions, a real estate data and analytics firm, found that the District of Columbia, Maryland and Virginia are among the 15 jurisdictions with the highest percentage of mortgages above US$750,000 this year.

The new law’s effect on property taxes will impact more than 90,000 homeowners in the Washington region, according to ATTOM. Alexandria and Arlington have the greatest percentage of homeowners with property taxes north of US$10,000, 12 per cent and 10 per cent respectively.

In general, economists say, the tax breaks have tended to boost the price of homes in the past because they effectively make it cheaper to afford a bigger mortgage and a bigger house, which homeowners then factor into their sales prices.

To Pinto and some housing experts, Congress’s decision to take a few steps back from subsidising home ownership is welcome news after years of government advocacy of home ownership. Some blame that housing enthusiasm for being one of the forces, among many others, that led to the housing collapse and Great Recession in 2007-2008.

This decade, housing companies have been far more cautious about building homes, leading to price increases, and the Census home ownership rate has fallen from a peak of 69.2 per cent at the end of 2004 to 63.9 per cent as of September 30.