The Metros That Will Feel Tax Reform the Most

January 2, 2018

The new tax law, which was signed into law at the end of 2017, will directly or indirectly affect most current and prospective homeowners. Those affected directly are mostly found in the higher-cost housing areas of the nation, and will find their mortgage interest deduction limited by a new maximum loan amount of $750,000, down from $1 million.  There is also a cap on the deductibility of state and local taxes of $10,000.  In addition, the great majority of homeowners will be indirectly affected by the tax act’s increase in the standard deduction, which will result in fewer than 10 percent of tax filers itemizing their deductions.  

Which metros’ real estate likely will be most directly affected by the new law?

To determine this, NAR researchers calculated the share of homes with mortgages that are worth more than $750,000 as well as the share of owners who pay more than $10,000 for real estate taxes. (View an interactive map to see how many homeowners will be affected in the 382 metro areas that NAR studied.)

The five most affected metro areas, according to NAR’s analysis, are:

  • San Jose-Sunnyvale-Santa Clara, Calif.
  • San Francisco-Oakland-Hayward, Calif.
  • Santa Cruz-Watsonville, Calif.
  • Santa Maria-Santa Barbara, Calif.
  • Urban Honolulu, Hawaii

In San Jose, Calif., and San Francisco, for example, home buyers in 2017 were able to deduct up to $33,260 from their taxable income with the mortgage interest deduction. Under the new law, home buyers will only be able to deduct up to $24,945. Owners in these areas will be able to deduct up to $10,000 for real estate taxes. But in San Jose, a quarter of owners paid more than $10,000 on their real estate taxes in 2016.

“Both provisions [of the new tax reform law] will also directly affect some owners in less affordable metro areas,” according to NAR’s Economists’ Outlook blog. “Furthermore, the provision of the property tax will affect owners in metro areas where property taxes are high, such as New York, N.Y.; Bridgeport, Conn.; and Trenton, N.J.”

Lawrence Yun, NAR’s chief economist, told CNBC that 30 percent of New Jersey residents pay more than $10,000 in property taxes. As such, the new law could make some N.J. home shoppers more hesitant in the new year to buy expensive homes. Yun predicts some price declines in 2018 in California, New Jersey, New York, and Connecticut from the new law—potentially by up to 5 percent.

However, for most parts of the country, 95 percent of home buyers and homeowners will not likely be impacted by the mortgage interest deduction limit of $750,000 or real estate property taxes capped at $10,000, Yun says. He predicts that nationwide, home prices are looking to be fairly neutral in 2018.

Watch more from Yun’s interview with CNBC talking about the impact of the new tax law on property values.

Source: “Metro Areas Most Affected by the New Tax Law,” National Association of REALTORS® Economists’ Outlook blog (Dec. 27, 2017) and “How the New Tax Law Could Affect Your Property Value: NAR,” CNBC (Dec. 28, 2017)