Lawrence Yun, National Association of Realtors, provides insight to the new tax code and its impact on housing.
Yun says that two changes in the new GOP law regarding the treatment of real estate taxes may cause buyers of expensive homes in states with higher taxes – primarily, New York, Connecticut, New Jersey, California – to become more cautious and this may cause price declines around five percent.
Buyers Applying for a New Mortgage
The first change affects people applying for a new mortgage. Under the new law, these buyers will be able to deduct interest on home loans only up to $750,000. That’s down from the current threshold of $1 million. Existing mortgage holders won’t see any change.
Here Comes the Deduction Cap
The second change has to do with the $10,000 deduction cap on state and local taxes, including property taxes. The IRS said people may be able to deduct their 2018 property taxes only if they were assessed and paid during 2017. Prepaying based on estimated assessments won’t be allowed.
While wealthier residents of high-tax states may be scrambling, most of the country won’t be affected, said Yun. “Ninety-five percent of homeowners and homebuyers are not impacted by mortgage interest deduction limit of $750,000 or the property tax deduction of $10,000.”
Beware Rising Mortgage Rates
But one thing that could impact everyone in the real estate market is the possibility of higher mortgage rates, Yun said. “Mortgage rates could rise because we are seeing larger deficits over the horizon” due to the tax law, he said. Bigger deficits can lead to more inflation, which could put the Federal Reserve on a more aggressive interest rate hike path.
Yun also mentioned that the fundamentals of the economy are still strong with job growth continuing to rise. Even though interest rates are expected to rise, new household formation is expected to rise as well, as young adults start their own households fueling demand. Yun pointed out that home builders have not been able to keep up with demand and are producing homes at below historic normal levels of 1.5 million new home starts a year. This year, they produced only about 1.2 million new homes.
What Does This Mean to You?
All this means that acting sooner rather than later makes sense. Making your move with relative certainty is always a safer way to manage your investment than wading through an uneasy period. Call us. We’ll help you better understand where you stand and just how much you stand to gain today.
