Republican lawmakers unveiled the tax reform bill this morning and it doesn’t augur well for housing.
(** After the bill was passed, I wrote an updated version of this post. Please refer to that by clicking here – https://www.mortgageblog.com/5-ways-the-tax-cuts-and-jobs-act-will-impact-housing-and-mortgages/)
The National Association of Realtors came out swinging against the bill, suggesting a huge fight awaits over how real estate is treated.
“Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination this legislation appears to do just that,” said William E. Brown, president of the National Association of Realtors. “We will have additional details upon a more thorough reading of the bill.”
Just after the release, Homebuilders exchange-traded fund, ticker XHB, and an S&P index that tracks builders plunged in early trading. If the losses hold, it would be the worst day for both in more than a year.
Impact on Mortgage Interest Tax Deduction
According to the memo written by the House Ways and Means Committee, the new tax plan would cap the mortgage interest deduction for “newly purchased homes” at $500,000. This is a sharp drop from the current cap of $1 million for couples filing jointly.
Note that this is for homes purchased with contract date after 11/2/2017. So, the current home mortgage deduction for existing home loans will stay at $1 million.
Also, so far homeowners were able to deduct interest on up to $100,000 in home equity debt, like a HELOC or home equity loan. No more.
While it’s not clear yet, the cap of interest deduction for up to $500,000 loan amount can impact new refinance loans as well.
Impact on Property Tax Deduction
Per the tax plan, property tax deductions will be capped at $10,000. This will impact homeowners who are in a high property tax rate state like TX or live in high-cost areas like San Francisco Bay Area.
On a side note which shouldn’t impact housing – Deductions for moving expenses would no longer be allowed.
What Does It Mean For Home Buyers
If you already have an accepted purchase contract signed before November 2, 2017, you will be eligible for the old tax bracket (i.e. interest deduction up to $1M loan amount). If not, you will be subject to the new cap of $500k (assuming the bill passes in its current form).
What Does It Mean For Home Prices
While prima-facie most of it sounds like bad news for housing, let’s not jump to any conclusion.
First of all, while tax saving is an important reason for home purchase, in surveys home buyers overwhelmingly vote for “emotional benefits of home purchase” as the #1 reason.
Second, the surge in home prices in the recent years have been mainly because of 2 reasons – strong employment and the demand-supply gap of available homes for sale.
It’s expected that the lower corporate tax rate as proposed in the plan will help the economy grow at least at the current rate if not higher.
The drop in the cap for mortgage deduction could mean that more potential sellers will hold on to the current home to avoid buying a new one so that they are protected by the current cap and not get governed by the lower cap. That could mean even lower inventory which will keep the demand-supply gap at the current level if not worse for the buyers.
These 2 factors might offset the negative impact from lower mortgage interest and property tax deductions.
Note that the median home price in the country is $202,700. So, a majority of homeowners and potential home buyers will not get impacted by these rules anyway.
Take a Deep Breath; It’s Not a Bill Yet
Finally, as of now, this is just a plan, an outline, not a bill. If the bill goes the healthcare way, expect hiccups. There can be several changes before it gets passed, that is if it gets passed.