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Economist: Tax plan erodes middle-class wealth

With Congress moving closer to passing a major tax overhaul, the housing lobby continues to push back against Republican proposals that minimize longstanding homeowner incentives, such as the mortgage interest deduction and itemized deductions for state and local taxes. As the debate shifts to the floor of the Senate this week, National Association of Realtors Chief Economist Lawrence Yun discusses the potential impact of the Republican plan.

Generally, what is your position on the GOP tax plan?

lawrenceyunJust focusing strictly on housing, it is not a good thing for the nation’s homeowners and/or homebuyers.  

Could you talk a little about some of your concerns?

Well, it takes away the incentive to purchase a home. If there is a lesser mortgage interest deduction or property tax deduction — now I understand that they are not diminishing it greatly— but by raising the standard deduction, fewer Americans will itemize the mortgage interest deduction or property tax deduction; and, therefore, there is less incentive to buy homes. Therefore, the home values … will adjust over time. There is some state-by-state variation in our estimation. Homeowners will see some reduction in their housing equity. This is something that people have worked on over the years trying to build. That now gets cut.

The other thing is that to get the capital-gains exemption [that applies to homeowners following a home sale], which is another element of the tax reform, now a person has to stay in their property for five years rather than two years [to qualify for the exemption].

Life is uncertain. Sometimes people move because of a terrific new job, or changes in family circumstances, or a military family on call — this will put a large burden on people who need to move quickly and also people who do not need to move, but are just considering some improvement in their lives — say, a better home or a better school district. Now they will delay that decision. This is counter to the American way of advancement and mobility. The tax reform is, in essence, saying, stay put. Don’t move. If you move, we will tax you.

Regionally, where are the places that this hurts?

The places where they utilize the tax benefit in a greater amount [are in areas like the] high-cost state of California. The mortgage amount is much larger. [It also will hurt more in] New York state and New Jersey, where they have high property taxes. On the state-by-state variation, it will be the states more higher priced, and also areas where there is a higher property tax in that state. 

What is the practical impact of this on home sales, on the market?

Given that this is a major change, in a sense, an unprecedented change, it is really hard to predict, other than the directional impact. People will hold back buying a property more now than before. We anticipate that home sales will probably decline compared to the current market momentum that is in place. There will be some decline in home sales, and I don’t know for how long. Is it going to be over a two-year time frame, three years?  Because of the reduction in home purchases, that will lead to prices adjusting downward.

Again, I don’t know how long it will adjust. Real estate prices, unlike stocks and bonds, do not instantly change. It is a slow moving change. But, directionally, home sales will get hurt, home values will get cut. Overall, it will be bad for homeowners, particularly. Maybe some renters are looking for the prospect of lower prices. That is coming at the destruction of housing wealth in America. So, it is not a win-win situation. It is a win for some renters, who may see lower prices, but it is coming at a large wealth destruction for a vast middle class in America, who own property.

Is it the totality of the proposal, or could Congress make adjustments that could minimize the impact?  

It is the totality of it, but again, it is uncertain and unprecedented. We’ll see how it plays out. If the tax reform does provide greater GDP growth and income growth, maybe it mitigates some of the downside. It is also possible that when housing goes down, it can drag the economy down with it. Then we have a double negative, which is to say, the housing market suffers and also the economy. Rather than getting a GDP boost, the economy actually slows down as vast property owners in America lose confidence about the economy.    


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