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Residential Department: DataDecoded: August 2018

 

DataDecoded

Has tax reform had an impact on home prices?

r_2018-08_Datadecoded_chartThe Tax Cuts and Jobs Act of 2017 enacted this past December was the largest change to the U.S. tax code in more than three decades. Tax reform has touched every person and industry. Let’s examine how it affects housing decisions made by families.

Overall, tax reform has lowered personal income taxes, not necessarily for each taxpayer but in the aggregate. An increase in after-tax income, at the margin, generally increases the amount of shelter consumed and the likelihood of being a homeowner. Economists refer to this as the “income effect.” Thus, the increase in after-tax income should be a net plus for housing demand and homeownership, holding all else constant.

All else is not constant, however. Tax reform also lowered the maximum loan size for interest deductibility on new first-mortgage debt to $750,000, eliminated deductibility for some second liens and capped the annual deduction for state and local income and property taxes at $10,000.

Further, the hike in the standard deduction will substantially reduce the number of tax filers who itemize, and lower marginal tax rates reduce the value of deductions for those who do itemize. By raising the after-tax cost of homeownership, tax reform is expected, at the margin, to lower the amount of shelter consumed by owner-occupants and tilt tennant choice toward renting rather than owning. Economists refer to this as the “price effect” because the relative cost of owning versus renting has changed.

Whether the “income” or the “price” effect is stronger will determine whether demand for shelter — and homeownership rates — will rise, fall or remain largely unchanged. Further, the impact may vary geographically, depending on local housing costs.

To see if there has been any material effect on prices, we used CoreLogic home-sales data through this past May and examined high housing-cost areas separately from lower-cost areas. High-cost areas were determined using CoreLogic’s single-family public-record data for 2017 for the median annual property tax payment and for the median origination loan size by ZIP code. A 4 percent mortgage interest rate was used with the median loan amount to estimate the annual mortgage interest payment. 

The median property tax and mortgage-interest payments were summed. The 500 ZIP codes with the highest sum were designated “high housing-cost areas” and all other ZIP codes as “non-high-cost areas.” Geographically, roughly 200 of the high housing-cost ZIP codes were located along or near the California coast, another 200 in the greater New York metropolitan area and the Northeast, and the remaining 100 were scattered in various places across the remaining U.S.

Two-week moving averages of weekly median home-sales prices were used for analysis, with the time series rescaled by setting the first two weeks of June equal to 100. But what would serve as a benchmark to determine whether sales prices had been affected by the tax legislation? We chose to compare the recent sales-price data with the average of the prior four years for the same weeks of each year in high housing-cost ZIPs. (See chart on this page.)

We did a similar comparison in the rest of the country — in other words, outside of high-cost areas. If there was an immediate negative effect of the tax-reform legislation, either during the congressional debate this past autumn or around the time of passage, then our sales-price index should fall and remain below the average of the four prior years. The decline in the unemployment rate, a robust stock market, and low housing-inventory levels could mask any effects the tax-reform legislation had on home prices, however. 

Nevertheless, according to our analysis, we have yet to see any material difference in home-price trends between high housing-cost and lower-cost areas nearly six months after passage of tax reform, nor any meaningful change in price trends compared with earlier years.


 

Frank E. Nothaft is chief economist for CoreLogic, America’s largest provider of advanced property and ownership information, analytics and data-enabled services. He leads the economics team responsible for analysis, commentary and forecasting trends in global real estate, insurance and mortgage markets. Before joining CoreLogic, Nothaft served as chief economist for Freddie Mac. Prior to Freddie Mac, he was an economist with the Board of Governors of the Federal Reserve System and served as assistant to Fed Governor Henry C. Wallich. Visit CoreLogic at www.corelogic.com.

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