How Has the 2017 Tax Overhaul Impacted Home Prices?

December 2, 2019

The 2017 Tax Cuts and Jobs Act, which capped federal deductions for state and local taxes at $10,000 a year and modified the mortgage interest deduction, has had a sweeping impact on real estate. How much so varies geographically, with owners in low-tax states feeling less financial pressure from the loss of deductions than those in counties with high taxes and home prices. Additionally, the increased standard deduction has lowered the number of households that can claim a tax incentive for owning or buying a home from about one in three to less than one in ten, according to the National Association of REALTORS®.

A new study aims to enumerate the impact of the tax law on real estate, and the analysis—conducted by Mark Zandi, chief economist at Moody’s Analytics, and Hugh Lamle, former president of Wall Street investment management firm M.D. Sass— paints a picture of an underperforming housing market. U.S. home prices are about 4% lower than they’d otherwise be if it weren’t for the 2017 law, Zandi says in the study. That equates to about $1.04 trillion in home value losses. Further, total home equity nationally is 6.6% lower than where it would have been without the law, according to analyses of the study by ProPublica and Fortune. Zandi is quick to clarify that home prices have not fallen by an average of 4% but that, on average, home prices are about 4% lower than they’d be otherwise.

NAR Chief Economist Lawrence Yun says the shortcomings in housing due to the tax law haven’t burdened the majority of homeowners. “There is certainly less of an incentive to be a homeowner in high-cost states. It’s no surprise, therefore, that home prices at the upper end in Connecticut, New York, New Jersey, and Illinois are impacted negatively. Still, given that home prices nationwide have been appreciating quite solidly—due to housing shortage and not because of the new tax law—the 4% home price impact of a ‘what-if’ analysis is not visible for most consumers.”

The five counties that have seen the biggest impact from the loss of tax write-offs, according to Zandi and Lamle's analysis, are:

  1. Essex County, N.J.: estimated home value loss of 11.3%
  2. Westchester County, N.Y.: 11.1% estimated loss
  3. Union County, N.J.: 11% estimated loss
  4. New York County, N.Y.: 10.4% estimated loss
  5. Lake County, Ill.: 9.9% estimated loss

The economists also say mortgage rates—already hovering near historic lows—should be even lower than they are. Zandi asserts that higher federal budget deficits caused by the tax bill are resulting in higher interest rates. Zandi estimates that 10-year Treasury notes, a benchmark for mortgage rates, is 0.2% higher than what it otherwise would have been under the old tax code, and that has prompted mortgage rates to be 0.2% higher. Still, mortgage rates have been at some of the lowest averages in decades over the past year.

Other housing experts argue that the tax overhaul has done little to change the overall housing market. Some even argue that real estate taxes should never have been tax-deductible in the first place because such action inflated home prices and tended to favor higher-income brackets.

Trump’s Trillion-Dollar Hit to Homeowners,” ProPublica/Fortune (Oct. 10, 2019)