With the tax overhaul now in full swing after Congress approved the sweeping changes, there are changes that ultimately could have a ripple effect through the real estate landscape.
A wide majority of new homeowners likely won’t even be affected, as the median home price is not even close to $750,0000. The median list price is $270,000 nationally, according to REALTOR.com® data.
Existing homeowners also will be grandfathered into the previous deduction limit. According to REALTOR.com® data, the new cut is expected to affect only about 1.3 percent of new mortgages.
More worrisome for clients is that fewer homeowners are likely to take the mortgage deduction. That’s because the new tax code will double the standard deduction, to $12,000 for individual filers and $24,000 for married couples filing jointly, and eliminate many of the other available deductions for taxpayers. As a result, there will be less of an incentive to itemize.
Ken Johnson, a real estate economist at Florida Atlantic University in Boca Raton, said this may not be a huge deal.
“On a scale of 1 to 10 on if interest deductibility is going to have a big impact on housing, it’s a 2. It’s not clear that it will hurt housing. But it is clear that it’s not going to help.”
Johnson said this is because most taxpayers don’t itemize their tax bills anyway, so they aren’t taking advantage of the available deductions. Only about a third itemize, and 21.5 percent claim the mortgage interest deduction.
Fewer homeowners taking the deduction may be a good thing after all
Losing the mortgage write-off isn’t necessarily a bad thing. Some housing experts have described it as wasteful and blamed it for inflating housing prices and encouraging buyers to borrow more money for bigger houses, according to the New York Times.
The mortgage interest deduction was created in 1913. It was a byproduct of Congress making interest deductible when it passed the first income tax.
So who will mourn the changes to the deduction?
Residents of cities and states where housing costs and taxes are sky-high are likely to be hardest hit by the changes to the tax code. Those hailing from Washington, DC; California; Hawaii; Massachusetts; and New York will be the most affected, according to realtor.com data. These states have the highest percentages of mortgages worth $750,000 and up.
A bigger question for agents and brokers is whether the changes will buyers from becoming homeowners.
Whether or not they can deduct the mortgage interest is not likely to dissuade too many people from buying. Homeownership is the American dream, after all. There is a belief it could be an opportunity for the middle class to build equity and wealth over time. Plus, many folks don’t like the idea of forking over their hard-earned cash on rent or not being able to modify their abodes as they wish.
But the changes could dissuade some buyers on the margins to continue renting. That’s because when these more cash-strapped folks do the math, they won’t be saving nearly as much by owning the roof over their heads.