The Tax Cuts and Jobs Act went into effect on January 1, 2018, and made significant changes to the nation’s tax code, reducing tax rates, increasing the standard deduction and limiting deductions for property taxes.
The challenge with drawing direct conclusions as to how the new rate has impacted the real estate market is that we only have a year to draw upon. More importantly, the real estate market was already on a prolonged favorable track.
Tax cuts create disposable income; the more a buyer has, the more he or she can spend, so this has likely fueled already robust demand. The tax bill also reduces some of the tax benefits of owner occupancy; because the bill caps the deduction of property taxes at $10,000 and raises the standard deduction, more people will get a better deal by simply taking the standard deduction. This means that fewer homeowners will get the benefit of deducting their property taxes and interest payments through itemized deductions.
In fact, 50 to 70 percent of taxpayers who used to itemize their deductions may cease to do so.
Thus, the after-tax benefits of homeowning are fewer, raising the relative cost of owning versus renting.
In theory, the tax changes may affect high-cost markets the most. CoreLogic conducted a study to analyze the impacts of the new law on high cost areas. They first identified areas with the highest average mortgage loan and property tax payments to find the 500 ZIP codes with the highest housing costs. They then analyzed the market in these areas over the six months prior to the legislation and six months after it, then did the same for the previous four years to create a yardstick. They then repeated this process for all other ZIP codes and compared the two groups. The patterns remain consistent, with no large drop in home prices, as some analysts have feared. The overall conclusion by CoreLogic: “So far, we don’t see any effect of the legislation in terms of prices, home sales and inventory on the housing market.”
It would be logical to conclude that as interest rates rise, inflation creeps and appreciation cools, a similar study conducted later this year might reveal something different. For now, however, a reasonable conclusion is that the high cost markets such as California, New York, Connecticut, New Jersey, Hawaii, Massachusetts, Maryland and Alaska will see some price softening or at least extended marketing times. For relocating employees, proper pricing and aggressive marketing plans remain critical.
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