The Effects of the Tax Cuts and Jobs Act on the Housing Market: The Good, The Bad, The Ugly
It should come as no surprise that changes in the tax code would have an impact on various sectors throughout the United States. Where changes in the tax code have a direct impact on the liquid assets of most Americans, it is equally unsurprising that changes in the tax code would have a marked impact on the housing market; this is what has happened, and many analysts believe the most recent tax reform is responsible for a slower-than-usual season.
On January 1, 2018, the Tax Cuts and Jobs Act (“TCJA”) went into effect, which allowed homeowners to deduct a maximum of $750,000.00 in interest connected to a mortgage; prior to January 1, 2018 that number was a cool million. The TCJA also limited the amount of deductions an individual can take for purposes of state and local taxes to $10,000.00. As such, the TCJA has the potential, if not offset by prudent financial maneuvering, to reduce the liquid assets of Americans.
Using a sample of 30 counties where a large percentage of the homes took the “mortgage interest deduction”, which serves as a proxy for the impact of the TCJA (it was $1 Million, and is now $250k less), home sales fell approximately 6% since the enactment of the TCJA. Similarly, in 30 counties where a large percentage of the homes did not take the “mortgage interest deduction”, home sales grew by .3%. The take away from this is that in areas where homeowners relied on the “mortgage interest deduction” for their finances, home sales suffered; likely as a result of less liquid assets. Conversely, where homeowners do not generally rely on those tax breaks, the housing market remained relatively stable.
It would be absurd to conclude that the TCJA is the only reason for a slower-than-usual housing market, there are a myriad of other factors at work; we have discussed many of those factors elsewhere on our blog.
Now for the good news. It appears the TCJA has actually had a net positive impact on the sale of homes that cost $1 million or more, the sale of those homes grew by 7.2% in areas that relied on the “mortgage interest deduction.” However, in 2017 the market grew 17.9%; the data is unclear whether 2017 was an outlier, or whether the TCJA had a negative impact on million-dollar homes.
At the Chernov Team we understand that knowledge is power, and perhaps no knowledge brings more power than the overall state of the economy and the purchasing power of would-be- home buyers. At the Chernov Team we understand that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.