Tax Reform: Do Loan Application Data Show a Change in Demand?

Loan-Purchase Applications Remain Similar to Prior Years

By Archana Pradhan Housing Policy, Real Estate

The tax reform bill enacted in December 2017 cut marginal tax rates, dropped the mortgage loan limit for interest deduction to $750,000 from $1 million for a new first-mortgage, eliminated deductibility for some second liens, and capped the annual tax deduction for property, state and local income taxes at $10,000. These changes will likely affect the demand for owner-occupied housing and the type and size of new construction, especially in areas with high property and income taxes, and high mortgage interest expenses.

Top 500 High-Cost Zip Codes

In order to examine an early effect of tax reform in housing decisions, CoreLogic identified high-cost areas to conduct an event study. In general, taxes are highest in northeast areas and loan amounts are largest in California. The sum of median mortgage interest expenses for new originations and median property tax levies in 2017 were used to rank the ZIP codes.[1] The top 500 ZIP codes with the highest sum were designated as high-cost areas (see Figure 1).[2] The rest of the country’s ZIPs were designated as non-high-cost areas. Predictably most of the high-cost areas are heavily concentrated in the northeast and west coast.

Top 10 counties with Highest Number of High-Cost Zip Codes

States with the highest number of high-cost ZIPs are in California (221), New York (53), New Jersey (53), and Massachusetts (36). The high-cost ZIPs in California—heavily weighted by median price—are mostly concentrated in Los Angeles, Santa Clara and San Francisco counties. The high-cost ZIPs in New York—weighted by both high-cost and high-tax—are mostly concentrated in Westchester, New York, and Nassau counties. Table 1 shows the top 10 counties comprising the highest number of high-cost ZIPs.

Trends in Purchase Application Demand

High-cost areas purchase demand remains similar to prior years

In the short run, taxes affect the economy primarily through their impact on demand by changes in disposable income and tax subsidies or penalties. To observe if there have been any effects on housing demand, we used CoreLogic Loan Application data through March 2018 in high-cost areas and compared the recent trend with the average of the prior four years (Figure 3a). We then did a similar comparison in the non-high-cost areas (Figure 3b). We didn’t observe any meaningful change in purchase loan application trends compared to earlier years in both high-cost and non-high-cost areas. Perhaps, it is too early to detect the impact. The mixed challenges (such as shortage of housing supply, affordability) and opportunities (decline in the unemployment rate, robust stock market) in the current housing market make it even harder to disentangle the impact of tax reform.

Lower-Cost Areas Purchase Demand Remains Similar to Prior Years

We will continue to monitor the performance of the housing market in light of the tax reform using high-frequency and current data.

[1] Since Zip codes provide a finer level of geographic precisions than do counties, we used ZIPs to designate the high-cost areas for this study. 

[2] For methodology, please see Frank Nothaft’s blog

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