The housing market has continued to cool this year, remaining a soft spot in an otherwise solid economy. And President Donald Trump’s tax cuts passed in 2017 appear to be partly to blame, according to a new study from the New York Federal Reserve Bank.
“Changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018,” economists Richard Peach and Casey McQuillan said in the report out Monday, though they added the results weren’t conclusive.
The Tax Cuts and Jobs Act was long expected to increase after-tax home ownership costs by capping the amount of mortgage debt on which interest is deductible, doubling Americans’ standard deduction and lowering marginal tax rates. Those changes reduced the apparent price tag of the plan, but drew widespread criticism from Democrats and some industry groups.
“Before the tax law, the incentive to purchase and even trade up was in the itemization of taxes,” said Jonathan Miller, the chief executive of Miller Samuel, a real-estate appraisal firm. “The ‘reform’ aspect of the tax cut replaces the direct messaging long enjoyed by housing.”
The tax overhaul came at the same time as higher borrowing costs, with the average contract interest rate on 30-year fixed rate mortgages climbing about 70 basis points between the end of 2017 and the third quarter of 2018. But the most recent slowdown was more severe than in two previous episodes when mortgage rates rose by a similar amount.
The New York Fed found the largest sales declines tended to be in the highest price ranges and areas with higher income and property taxes at the state and local level, where homebuyers would have been most affected by the tax changes.
For homes where the amount borrowed exceeds $750,000, for example, the economists said capital costs appear to have increased to 5% from 1%.
“Different provisions of the TCJA combine to increase the marginal user cost of capital for homeowners, especially for higher-priced homes and homes in high-tax jurisdictions,” Peach and McQuillan said.
While lower borrowing costs have drawn some Americans from the sidelines in recent months, gauges of the housing market have continuedto come in below expectations. In March, mortgage rates hit a 14-month low.
“This plan was introduced at the same time mortgage rates were rising so the cause of the slow down was less clear,” Miller said. “But today rates are now lower than they were a year ago so the slowdown wasn’t really about rising mortgage rates.”