Who are the winners and losers in the homeownership market after the 2017 tax reform? A trio of studies find that the answer is: “It depends.”

Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

Research on behalf of Redfin has found that the Tax Cuts and Jobs Act of 2017 has not had a profound impact on housing, with less than half of all would-be buyers either adjusting their sights lower or moving to places where local state and property taxes are lower.

And now, a new study from John Burns Real Estate Consulting, an advisory firm in the new construction space, has found that aspiring buyers will be more likely to save more for a downpayment and afford a more expensive mortgage as a result of the changes in tax law.

But a third report, this one from economists at the Federal Reserve Bank of New York, suggests that the new rules are impacting the housing sector negatively by causing sales to slow.

The authors Richard Peach and Casey McQuillan cautioned that their findings are “not conclusive.” Still, they postulated that the changes in Uncle Sam’s tax code that were enacted in December of 2017 “have contributed to the slowing of housing market activity that occurred over the course of 2018.”

Specifically, the authors at Liberty Street Economics, a blog that takes its name from the New York Fed’s headquarters address in Manhattan’s financial district, cited three key tax law changes for the slowdown: the higher cost of capital (i.e., higher mortgage rates, caused by lower marginal tax rates), the $10,000 cap on the deductibility of states and local taxes, and the lower limit on the amount of mortgage debt on which interest payments can be written off.

Peach and McQuillan said that the after-tax cost of a home loan was 3.1 percent prior to the tax law changes. Throw in expected appreciation and the final cost was roughly zero, they said.

But in last year’s third quarter, when the top marginal tax rate had dipped from 39.6 percent to 37 percent, the tax savings resulting from itemizing deductions declined by 2.6 percent. At the same time, since property taxes are no longer deductible “at the margin,” the effective national median property tax rate had risen from 1.2 percent to 1.7 percent.

“Using these assumptions, our analysis estimates that the user cost of capital to owners increases from 0.1 percent to 2.1 percent, and that a major part of this is due to a 1 percentage point decline in our measure of expected house price appreciation,” they wrote.

The economists admitted that their analysis is based on “circumstantial evidence.” But the Redfin-commissioned study of 2,000 people who said they plan to purchase a house within the next 12 months found that only 14 percent lowered the price range in which they were house hunting and just 13 percent were heading to greener pastures where the tax bite wasn’t as great as where they live now.

Tax reform a mixed bag for homebuyers

At the same time, though, Redfin found a large drop off in the number of folks who thought they were better off because of the tax changes. For example, the percentage of those looking for a higher-priced house because of the new rules fell by more than half, from 17 percent a year ago to 8 percent this spring. And just 11 percent said they actually bought a house because of the benefits of the new law versus 19 percent in the spring of 2018.

“Last year, more homebuyers were worried that tax reform would hurt their budgets, but it turns out tax reform wasn’t all bad or all good,” Redfin Chief Economist Daryl Fairweather said in a press statement.

“Some homebuyers, especially in low-tax states, are now paying less in taxes overall, which has left them with more cash for a more expensive home. For others, not being able to deduct as much of their property taxes or mortgage interest from their taxable income was the other shoe that needed to drop to make them pick up and move to a more affordable area.”

Though many complain that the tax code changes tend to benefit the wealthiest, Redfin found that the biggest losers were high-income buyers, with 61 percent of those earning $150,000 or more impacted in their searches — including 16 percent who are looking at houses in lower price ranges.

Said Fairweather: “In the long run, we will see demand for luxury homes in high-tax states suffer the most because those homes have been hit the hardest by this tax reform, and there’s actually early evidence of that already happening.”

Meanwhile, the latest report from the Irvine, California-based Burns consulting firm says that both renters and owners now have more adjustable disposable income because the former pay $2,716 less in taxes on average and the latter pay $1,508 less.

Tax reform likely to boost first-time buying

Consequently, landlords are able to charge higher rents, forcing the hands of tenants who have the means to buy, senior research analyst Taylor Nichols and senior manager Kate Seabaugh said. At the same time, those aspiring to own will be better able to save a down payment and afford a more expensive mortgage.

“To be clear, just because most people received a boost in disposable income doesn’t mean that they will use that money to rent a nicer place or purchase a home,” Taylor and Seabaugh warned. But they believe that the entry-level sector will outperform all others.

“Renters who have been saving to purchase have gotten some help with their endeavor, and we will see more of them purchase homes in 2019 and beyond,” they wrote. “Homeowners buying at these prices points haven’t benefitted from housing tax policy in years.”

They also suggested that more people in expensive parts of the country “who were considering renting or moving to more affordable areas are more likely to do so now.”

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Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

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