The Tax Cuts and Jobs Act went into effect on January 1, 2018, and made significant changes to the nation’s tax code, such as reducing tax rates, increasing the standard deduction and limiting deductions for property taxes. At EPIQ 2018, CoreLogic Chief Economist Dr. Frank Nothaft examined how the changes could benefit or hinder the housing economy.
Nothaft first noted that tax cuts create more disposable income, which should have a positive effect on the housing market. Shelter is a normal good, meaning that as income rises, people want a higher quality and quantity of housing. With the tax cuts increasing income, there should be a corresponding increase in demand on housing. This is called the Income Effect.
But not all of the changes that occurred as a result of the tax cut were favorable to the market. The tax bill also reduces some of the tax benefits of owner occupancy. Because the bill caps the deduction of property taxes at $10,000 and raises the standard deduction, more people will get a better deal by simply taking the standard deduction. This means that fewer homeowners will get the benefit of deducting their property taxes and interest payments through itemized deductions. In fact, 50 to 70 percent of taxpayers who used to itemize their deductions may cease to do so. Thus, the after-tax benefits of homeowning are less than they used to be, raising the relative cost of owning versus renting. This is called the Price Effect.
With the Income Effect pushing the public toward home purchase and the Price Effect pushing people away from home purchase, what impact have we actually seen in the housing market?
The tax changes may affect high-cost markets the most, so CoreLogic first identified areas with the highest average mortgage loan and property tax payments to find the 500 ZIP codes with the highest housing costs. CoreLogic looked at the market in these areas over the six months prior to the legislation and six months after it, then did the same for the previous four years to create a yardstick. Then we repeated the entire process for all the other ZIP codes and compared the two groups.
By analyzing all of this data, Nothaft saw that the patterns remain fairly consistent, with no large drop in home prices, as some analysts have feared. Nothaft followed up with similar studies on other areas of the market to come to the same overall conclusion: “So far, we don’t see any effect of the legislation in terms of prices, home sales and inventory on the housing market.”
Whether this trend continues, or whether any effects currently masked by a strong macroeconomy come forth, only time will tell.
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