Republican tax bill likely curtailed 2018 home sales, Fed economists say

Republican tax reform that capped mortgage and property deductions has curtailed the housing market, according to a report from economists at the Federal Reserve Bank of New York.

While a 7.6% decline in the sales of new single-family homes from 2017’s fourth quarter through the end of 2018’s third quarter could be attributed to a 70 basis point rise in mortgage rates, the drop was larger than periods of similar rate gains in 2013 and 2016, according to Richard Peach and Casey McQuillan, co-authors of the report posted on the New York Fed’s Liberty Street Economics blog. That suggests additional forces are at work, they said.

“Given the overall strength of the U.S. economy in 2018 as well as the subsequent strong pace of job creation, one might expect the housing market to be able to shrug off the increase in mortgage rates,” the report said. “However, this most recent episode is qualitatively different because of changes in the tax code.”

The Republican tax bill that was signed into law by President Donald Trump at the end of 2017 capped state and local tax deductions – known as SALT – at $10,000. That had an outsized impact on states such as New York, New Jersey, Massachusetts, Connecticut and California that have high-priced real estate coupled with hefty property taxes that support schools and local services.

The new tax law also capped mortgage interest deductions at $750,000 of indebtedness, down from $1.1 million, however, the change in treatment of property taxes could potentially have a larger impact than the mortgage deduction on housing markets in high-SALT areas.

“Changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018,” the Fed blog post stated. “Specifically, this slowdown stems from a higher user cost of capital caused by lower marginal tax rates, the $10,000 cap on the deductibility of state and local taxes, and the lower limit for the amount of mortgage debt on which interest payments are deductible.”

Those changes to the tax treatment of homeownership “have negatively impacted the housing market,” the report concluded.

Article source: https://www.housingwire.com/articles/48804-republican-tax-bill-likely-curtailed-2018-home-sales-fed-economists-say

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