New tax law has homeowners and potential buyers concerned.
The Tax Cuts and Job Act signed into law in December gives homebuyers more cash, but less incentive to use it, particularly on high-end homes. With time, the law is expected to slow home prices that have been on the rise nationally for years, experts including those at Moody’s Analytics and the National Association of Realtors report.
Right now the changes are weighing heavily on the minds of those who own homes or plan to buy one.
According to the latest survey from realtor.com, more than half of homeowners say they’re concerned, and two-thirds of people looking to buy a home this year say they may move more slowly, postpone or look elsewhere.
On the other hand, most sellers — about 57 percent of them — are shrugging off any effect on their plans. Another 23 percent are almost evenly split as to whether they think changes in the law will make the sale go faster or slower. Not quite 8 percent said they now will postpone their sale.
Buying, selling or staying put, the law will certainly alter how millions of Americans reconcile the costs of homeownership when they sit down to pay their taxes. And the housing market is sure to change because of that.
The biggest impact will be felt in places where homes cost more.
Why? Mortgage deductions are typically for the affluent. Every taxpayer gets a standard deduction and only when your total deductions — including interest paid on the mortgage — exceed that standard does itemizing work.
The new tax law does a couple of things here.
One, it doubles the standard deduction to $12,000 for an individual and $24,000 for couples filing jointly. That means fewer folks whose mortgage interest rises above that new bar.
Secondly, on the high end, the law reduces the once-powerful incentive to buy bigger and pricier homes and write off the interest on your taxes. Deductions that once could be claimed on mortgages up to $1 million are now limited to those of $750,000 and under. (A caveat: Those pricier mortgages that were already in hand on Dec. 14, 2017 are grandfathered in, as are any future straight refinances without additional cash out.)
The law also introduces a $10,000 cap on deductions for state and local taxes, including property tax.
Before the law went into effect, roughly 44 percent of U.S. homes were worth enough for it to make sense for the owner to itemize deductions and take advantage of the one for mortgage interest, according to Zillow. That fell to about 14 percent under the new law, by Zillow’s estimates.
Add those factors up and it’ll cost more to buy already expensive housing. While experts don’t think it will stop the upward trend — housing prices have increased about 6 percent annually for the past five years — it could slow things down.
Moody’s Analytics calculates home prices will be 4 percent lower by mid-2019 than they would’ve been without a tax bill.
“It’s not that they would decline, but the rate of growth will slow,” says Mark Zandi, chief economist at Moody’s Analytics. “If housing prices would rise by 5 percent next year, with the tax cut, they will rise 1 percent.”
The hit would be most pronounced in the country’s swankiest markets including New York, New Jersey and California, where Moody’s Analytics said prices could be off up to 10 percent. Other hot spots included the Chicago area and parts of South Florida.
The changes also may slow some home construction and sales, according to that analysis.
Edward Pinto, a housing expert at the American Enterprise Institute, tells The Washington Post that lower housing prices will appeal to first-time buyers who might have been frustrated by the rapid increase in home values in recent years.
The law’s reach goes beyond buyers and sellers and into the pockets of homeowners who have borrowed against their home’s equity or plan to in the future.
Under the new law, the interest on that debt can no longer be deducted when the money is used for anything other than improving the home.
Home equity loans and lines of credit have long been one of the least expensive ways to borrow money, but now if you use them to pay off a car or medical debt, you can’t write off the interest as once was possible.
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Article last modified on January 7, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Nation’s Hottest Housing Markets In For Cool Down? - AMP.