Fed Analysis Suggests Tax Reform Is Hurting Housing Market

NEW YORK–A new analysis suggests President Trump’s tax reform plan is likely having a negative effect on the housing market.

NY Fed

The analysis, published by researchers at the Federal Reserve Bank of New York, suggests that in addition to the uptick in mortgage interest rates, the Tax Cuts and Jobs Act of 2017  contributed to the recent decline in new housing sales, according to Richard Peach and Casey McQuillan, who co-authored the study.

The data show sales of new single-family homes declined by 7.6% from the fourth quarter of 2017 through the end of the third quarter of 2018. The authors said while mortgage interest rates rose by roughly 70 basis points during the period, the drop in home sales was larger than in the two previous episodes, in 2013 and 2016 respectively, when rates rose by a comparable amount, which suggests additional pressure of prospective home buyers.

What’s Deterring Would-Be Buyers

According to the Fed Bank of New York study, several factors may have deterred renters from becoming buyers, including the $10,000 cap on the deductibility of state and local taxes, which effectively increased what buyers have to pay. In addition, the lower marginal tax rates for many taxpayers also reduced the tax savings from housing-related deductions.

“Although new buyers still benefit from deducting mortgage interest, the overall incentives to buy is somewhat curtailed,” Peach and McQuillan said. “Arguably the slowing is especially acute for higher-priced homes and homes in high-tax jurisdictions.”

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