Has tax reform had an impact on home prices?
The Tax Cuts and Jobs Act of 2017 enacted this past December was the largest change to the U. S. tax code in more
than three decades. Tax reform has touched every person and industry. Let’s examine how it affects housing
decisions made by families.
Overall, tax reform has lowered personal
income taxes, not necessarily for each
taxpayer but in the aggregate. An increase in after-tax income, at the margin,
generally increases the amount of shelter
consumed and the likelihood of being a
homeowner. Economists refer to this as
the “income effect.” Thus, the increase in
after-tax income should be a net plus for
housing demand and homeownership,
holding all else constant.
All else is not constant, however. Tax
reform also lowered the maximum loan
size for interest deductibility on new
first-mortgage debt to $750,000, eliminated deductibility for some second
liens and capped the annual deduction
for state and local income and property
taxes at $10,000.
Further, the hike in the standard deduction will substantially reduce the number
of tax filers who itemize, and lower marginal tax rates reduce the value of deductions for those who do itemize.
By raising the after-tax cost of homeownership, tax reform is expected, at the margin, to lower the amount of shelter
consumed by owner-occupants and tilt tennant choice toward renting rather than owning. Economists refer to this
as the “price effect” because the relative cost of owning versus renting has changed.
Whether the “income” or the “price” effect is stronger will determine whether demand for shelter — and
homeownership rates — will rise, fall or remain largely unchanged. Further, the impact may vary geographically,
depending on local housing costs.
To see if there has been any material effect on prices, we used CoreLogic home-sales data through this past May
and examined high housing-cost areas separately from lower-cost areas. High-cost areas were determined using
CoreLogic’s single-family public-record data for 2017 for the median annual property tax payment and for the
median origination loan size by ZIP code. A 4 percent mortgage interest rate was used with the median loan
amount to estimate the annual mortgage interest payment.
The median property tax and mortgage-interest payments were summed. The 500 ZIP codes with the highest
sum were designated “high housing-cost areas” and all other ZIPs as “non-high-cost areas.” Geographically,
roughly 200 of the high housing-cost ZIPs were located along or near the California coast, another 200 in the
greater New York metropolitan area and the Northeast, and the remaining 100 were scattered in various places
across the remaining U.S.
Two-week moving averages of weekly median home-sales prices were used for analysis, with the time series rescaled
by setting the first two weeks of June equal to 100. But what would serve as a benchmark to determine whether sales
prices had been affected by the tax legislation? We chose to compare the recent sales-price data with the average of
the prior four years for the same weeks of each year in high housing-cost ZIPs. (See chart on this page.)
We did a similar comparison in the rest of the country — in other words, outside of high-cost areas. If there was an
immediate negative effect of the tax-reform legislation, either during the congressional debate this past autumn
or around the time of passage, then our sales-price index should fall and remain below the average of the four
prior years. The decline in the unemployment rate, a robust stock market, and low housing-inventory levels could
mask any effects the tax-reform legislation had on home prices, however.
Nevertheless, according to our analysis, we have yet to see any material difference in home-price trends between
high housing-cost and lower-cost areas nearly six months after passage of tax reform, nor any meaningful change
in price trends compared with earlier years. n
Frank E. Nothaft
Frank E. Nothaft is chief economist
for CoreLogic, America’s largest
provider of advanced property and
ownership information, analytics
and data-enabled services. He leads
the economics team responsible for
analysis, commentary and forecasting trends in global real estate,
insurance and mortgage markets.
Before joining CoreLogic, Nothaft
served as chief economist for
Freddie Mac. Prior to Freddie Mac,
he was an economist with the Board
of Governors of the Federal Reserve
System and served as assistant to
Fed Governor Henry C. Wallich. Visit
CoreLogic at www.corelogic.com.
Two-week moving average of MLS sales prices in 500 high housing-cost ZIP codes;
scaled with first t wo weeks of June = 100. Source: CoreLogic
June 2017-May 2018 Average Four Prior Years
Home-Price Trend for High-Cost Areas in the U.S.