Marcus Millichap Research Services, a longstanding, well respected research services firm that specializes in commercial real estate investment, financing, research and advisory services, offers us information and insights into how both the housing and rental markets are and may be impacted by the new tax law changes.

According to Marcus Millichap, changes in the tax code have removed homeownership incentives for many prospective buyers and sellers. Here’s the short list…

  1. Raising the standard deduction rate to $12,000 for single filers and $24,000 for joint filers,
  2. Capping the SALT taxes (state & local property, income, sales and real estate taxes) at $10,000,
  3. Reducing the mortgage deduction to $750,000 and
  4. Eliminating home equity interest deductions for existing and new accounts.

 

The firm’s thesis…homeownership is not as attractive as it “used to be.” Fewer homeowners will realize any benefits from itemizing their deductions. And, very importantly, the threshold home price that offers the ability to lower married couples’ tax liability has increased from $200,000 to $400,000.

Pay attention to the fact that $400,000 is well above the December 2017 median price of $285,100, for an existing single-family home. Even the December 2017 median price for a newly constructed single-family home, $331,400, is less than the new $400,000 threshold home price that offers married couples the ability to lower their tax liability. (And also pay attention to the price spread between existing and newly built single-family homes.)

Of course, stronger economic growth, as anticipated by the Republicans, could counter some of these challenges and dis-incentives. Tax savings may flow through to individual taxpayers by an increase in take-home pay. But who knows whether or not those taxpayers will use whatever “extra” money they receive in take-home pay to increase their consumption spending or to save in order to purchase a home.

Continued concerns about affordability, low savings rates and predicted interest rate increases are favorable to rental markets. Factor into this mix the fact of the new home construction backlog as well. (This backlog now stands at 32.6% of all new home sales.) The longer new homebuyers have to wait for their new houses to be built, the longer they extend their stays in apartments.

Just one more data point from Marcus Millichap…first time buyers represented 32% of the market in December 2017. This percentage is higher than it was in 2010 however, this first time buyer presence in the housing market still remains well below its 41% long-term average in the marketplace.