The Federal Reserve Bank in New York indicated that the -7.6% decrease in single-family home sales from Q4 2017 through the end of Q3 2018 “could be due to the 70 basis point rise in mortgage rates…” or to something else, according to Richard Pench and Casey McQuillan, co-authors of a report posted on the NY Fed’s Liberty Street Economics blog.
Why? Because the drop in home sales from Q4 2017 – Q3 2018 was larger than comparable mortgage rate gains in both 2013 and 2016. Pench and McQuillan wrote, “Given the overall strength of the US economy in 2018 as well as the subsequent pace of job creation, one might expect that the housing market would have been able to shrug off the increase in mortgage rates.”
Pench and McQuillan went on to write that the 2017 Tax Bill caused weaker sales in 2018. “This most recent episode is qualitatively different than 2013 and 2016…this recent episode is because of changes in the tax code.”
The 2017 Republican tax bill capped both state and local tax deductions (SALT) at $10,000. Those SALT deductions “…had an outsized impact on California, New Jersey, Massachusetts, Connecticut and New York…states that have high-priced real estate plus hefty property taxes…” wrote Pench and McQuillan.
Additionally, the 2017 Tax Bill also capped mortgage interest deduction at $750,000, down from $1M. Again, higher impacts of this reduced deduction were felt in states with higher real estate prices.
Pench and McQuillan believe that changes in federal tax laws have been the central contributors to the slowing of housing market activity that occurred in 2018. “Specifically,” they wrote, this slowdown stems from a higher user cost of capital caused by lower marginal tax rates…for the amount of mortgage debt on which interest payments are deductible. “
Their conclusion? Changes to the tax treatment of homeownership “has negatively impacted the housing market.”
Strong words from influential voices.
