It may be a few years before experts can accurately assess how the new tax reform law will affect each city’s individual housing market, but one thing is clear: For the first time in a century, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”
The specific mechanisms by which it’s doing this—lowering the cap on the mortgage-interest deduction (MID), capping state and local tax (SALT) deductions at $10,000, doubling the standard deduction—all interact with each other, sometimes canceling one of the others out, and will have different impacts depending on the housing market.
Here’s a good rule of thumb, though: If you live in a city (or for our purposes below, a county) with high housing costs, your market will likely get more expensive. If you live in a city with moderate to low housing costs, you may not notice any difference at all. Is there upside for homeowners in any market? It’s hard to find any.
Sales prices down, taxes up
“It’s very hard to come up with how this is helpful to housing,” said Jonathan Miller, President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm “It’s either neutral or negative; there’s no positive, at least that we’re aware of at the moment. All this does is make everything more expensive, at least in high-cost housing markets.”
As a result of the bill, Moody’s Analytics estimates that housing prices will drop about 4 percent nationwide relative to projections in which the law doesn’t exist, and those drops are more pronounced in high-cost housing markets.
A lower sale price is good news, though, right? Not necessarily. Average home prices will drop because of the lowered cap on the MID (from $1 million to $750,000), and a new cap on SALT deductions. These two tax deductions were baked into the price of homes-for-sale, so without them, prices will seem lower. But homeowners and buyers could end up with less mortgage interest to deduct, and a potentially astronomical property tax bill. Previously, there was no cap at all on property tax deductions.
How your specific housing market will change
To see how these factors impact you, take a look at this interactive table that includes data from Zillow, Moody’s Analytics, and ATTOM Data Solutions. Click on your city name, and then the highlighted counties in your metro area, to surface data.
Note: Data has been compiled by county, and we consulted with Curbed city editors to generate the list of counties that comprise their 14 metro areas. Allow for some margin of error, particularly in counties where home prices vary drastically from county (rural) to city (urban).
What does this table even mean?
The “home price change” is a projection from Moody’s Analytics that compares home prices under the new law with home prices had the law not passed. You can see they’re all going down. (Ergo, the bigger the price drop, the more the tax bill affects that county.) Remember, you’re losing the MID and SALT deductions outlined above. The more these deductions mean to your city, the more the projected price will drop.
The percentage of homes with property taxes over $10,000, which is the new SALT cap, is data provided by ATTOM Data Solution. The higher the percentage, the more your city will be impacted by the cap on SALT deductions. The percentage of homes valued higher than $750,000, which is the new MID cap, is also from ATTOM Data Solutions, and that data is from homes sold in 2017. The higher the percentage, the more the MID cap impacts your city.
The number of homes worth itemizing for is from a Zillow study. The higher the percentage, the less likely it is that the doubling of the standard deduction affects you. In lower-cost housing markets, the standard deduction doubling—to $12,000 for individuals, $18,000 for heads of household, and $24,000 for couples—will negate the caps on the MID and SALT deductions. (Homeowners in lower-cost markets may skip itemizing their taxes because sale prices and property taxes aren’t high enough for deduction changes to affect much.)
What effect will this have on my house, specifically?
As you can see in the table, the SALT deduction has a greater impact on a given market’s drop in home prices—that’s because there’s a cap on how much MID can affect a single homeowner. SALT didn’t have any cap at all before the new law, so what this ends up costing you is proportional to your city’s property tax rate—a potential nightmare for homeowners in places like New York City.
Some other things to consider: The new MID cap does not affect homes purchased before Dec. 15, 2017; those homebuyers will still be able to deduct interest on up to $1 million worth of mortgage debt on their primary residence. The SALT deduction cap begins immediately.
For those with mortgage interest deductions on home equity loans, you’re out of luck. The new law says you can’t deduct any of this interest at all, and that change takes effect immediately.
If you’re looking to buy a home right now, it may be more difficult if inventory drops as homeowners become more reluctant to sell. (Some won’t want the risk of a new mortgage; others may wait to see how the market shakes out after the new law takes effect.)
Conversely, if you’re looking to sell, it might be wise to see where the market equalizes before jumping into a new mortgage. Additionally, interest rates will likely go up as the government takes on more debt (though Jonathan Miller believes it will be modest at best).
If you’re a renter, it’s hard to say if the law impacts you at all. Some believe it will put downward pressure on rent, since tax incentives for developers are still in place; you might also see more development and a higher supply—though it would take years to bear out.
How do individual tax cuts factor in?
If you live in a city where owning a home means your tax bill is going up, some of that could be offset by a drop in individual tax rates and thresholds. These cuts are across all income levels, but will impact individual brackets differently—and are set to expire in 2025. The table below shows how taxes for your income bracket will change:
Correction: A previous version of this story stated that the tax bill repealed mortgage-interest deductions on second homes. While that was in a previous version of the bill, it did not make it into the final bill.