Let’s take a look at the collective thinking of real estate experts on the GOP tax bill signed into law on December 22, 2017.
Evan Liddiard, director of tax policy at the National Association of REALTORS (NAR) said, “For more than 100 years, the IRS has incentivized homeownership through mortgage interest and property tax deductions. This will change in major ways because of this bill.”
At the top of those changes is the cap of mortgage interest deduction from $1M to a threshold of $750,000. The Wall Street Journal sees limiting this cap as “killing the sacred cow of tax policy” in this country.
Yet, limiting the mortgage interest deduction is almost blinded by the combination of
– doubling the standard deduction for single payers to $12,000 and for joint payers to $24,000
– capping the SALT (State and Local and Property Taxes) at $10,000
– terminating deductions for equity loans.
The upshot? Potential homeowners, according to Liddiard, “will be less likely to afford to buy (houses) and less likely to want to buy (them) because they won’t have the help, the subsidy, the assistance from the tax code. This,” Liddiard emphasized, “will lead us toward being a nation of home renters rather than a nation of home owners.”
Moody’s anticipates that sales prices will drop by -4% by Q2 2019 due to the lack of tax code incentives for home ownership. It also believes that housing prices in high income, high tax states will drop by -10% in this same time period. (We’re already seeing prices drops in high taxed states and we’re already seeing buyers wanting to “wait and see” if those prices drop more the longer they wait.)
Rodney Ramcharan, former executive at the Federal Reserve and now associate professor of finance and business economy at USC’s Marshall School of Business, said, “The use of the home equity loan took a relatively illiquid asset (a house) and made it very liquid. Doing away with this deduction will have a big impact on the usefulness of a house as an asset.”
Essentially, why should people concentrate much of their wealth into housing, now rendered a completely illiquid asset that may or may not increase over time?
Real estate agents, brokers and developers, people who are essentially transaction professionals, may be helped by new “pass through” privileges specified in the new tax bill. As long as they organize their businesses as such entities, real estate professionals may now shift 20% of their personal income to such pass-through entities and pay a lower business rate on that portion of their income.
The problem for real estate professionals may, however be that they will have to trade their pass-through lower tax rate for weaker market demand, fewer transactions, even slower inventory growth and higher interest rates, all potential and now happening effects of the tax bill.
If the American Dream was built, in part, around homeownership, this Republican tax bill makes owning a home less attractive.
According to Nela Richardson, chief economist at Redfin, “We don’t believe this tax bill was about housing policy. (We believe) it’s about finding ways to lower corporate and other taxes…” and finding ways to pay for those lower taxes by putting that differential “…on the backs of current and prospective homeowners.”