“[T]he federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”

The recent changes to the American tax code signal a shift toward homeownership:

It may be a few years before experts can accurately assess how the new tax reform law will affect each city’s individual housing market, but one thing is clear: For the first time in a century, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”…

“It’s very hard to come up with how this is helpful to housing,” said Jonathan Miller, President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm “It’s either neutral or negative; there’s no positive, at least that we’re aware of at the moment. All this does is make everything more expensive, at least in high-cost housing markets.”

As a result of the bill, Moody’s Analytics estimates that housing prices will drop about 4 percent nationwide relative to projections in which the law doesn’t exist, and those drops are more pronounced in high-cost housing markets.

A lower sale price is good news, though, right? Not necessarily. Average home prices will drop because of the lowered cap on the MID (from $1 million to $750,000), and a new cap on SALT deductions. These two tax deductions were baked into the price of homes-for-sale, so without them, prices will seem lower. But homeowners and buyers could end up with less mortgage interest to deduct, and a potentially astronomical property tax bill. Previously, there was no cap at all on property tax deductions.

Several things to keep in mind:

  1. The context – the specific address of the residence – matters a lot for this bill. And, local communities and states can respond uniquely to how the changes affect local homeowners.
  2. A lot of urbanists have criticized the subsidies from the federal government for single-family homes and suburbanization. Might these tax code changes help encourage more density in certain locales (and these high-price/high-tax locations are also ones where affordable housing is sorely needed)? Of course, since context matters here, some of those who prefer more sprawl could move to cheaper states where the disappearing SALT deductions matter less. But, isn’t this good for limiting Americans deducting mortgage interest?
  3. Could this help some communities move away from such reliance on property taxes? As one example, some have argued for decades that school funding needs to be more equitable and this is directly tied to property values and taxes: wealthier communities can draw in more tax revenue. (I would argue this is a red herring to as there are bigger issues at work.) Could these federal tax changes encourage more revenue sharing within counties, regions, and states?

Perhaps the best thing to keep in mind is the first sentence of the article quoted above: it could take years to see how this all plays out.

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