If passed into law, The Tax Cuts and Jobs Act could cause markets to cool, housing values to dip—and, some real estate experts say, help millennials buy their first homes.
“Everybody across the country is going to see a big decrease in the value of their homes,” says Evan Liddiard, senior policy representative for federal taxation at the National Association of Realtors.
That's bad news for a lot of homeowners, which is why both the National Association of Realtors and the National Association of Home Builders have voiced opposition to the Tax Cuts and Jobs Act. But it could also set up a conflict between millennial aspiring homebuyers, particularly those in expensive coastal cities, and the owners in their parents' generation.
The reasoning: While the two versions of the plan being considered by Congress differ in substantial ways, both call for the elimination of itemized deductions that are tied to housing costs. The version passed by the House of Representatives in mid-November places a $500,000 cap on the mortgage interest deduction, although it allows for the deduction of up to $10,000 in property tax. The Senate’s version, which is expected to face a vote next week, maintains the mortgage interest deduction but eliminates the ability to deduct property tax.
In practice, both versions of the plan will make itemizing home-related expenses less effective than taking the standard deduction—eliminating what has effectively been a discount that the tax code gives to homeowners, and making home ownership less of a bargain relative to renting.
Homeowners May Suffer
Either change could have a chilling effect on the housing market. A cap on the mortgage interest deduction, Liddiard argues, would make it harder to find a buyer willing to borrow more than $500,000 to buy a house.
“It’s going to make it harder for [owners] to sell that home," says Liddiard, who predicts a 10% drop in home sale prices. "The price is going to go down and they probably won’t be able to afford a new home."
Trulia chief economist Ralph McLaughlin predicts a less drastic, but still negative, impact. “My take is, broadly speaking, it’s not going to cause house prices to collapse like other organizations have said,” he says.
If either tax change goes through, a Trulia study McLaughlin authored predicts cooling in expensive coastal markets where home values exceed $555,000 or property taxes top $10,000—with the greatest impact felt in pricey cities across California, as well as tax-heavy states on the East Coast. “There is potential to see cooling,” he says.
Better for Millennial Buyers?
But what is bad news for sellers could be encouraging for millennials itching to enter the housing market.
Data from the Pew Research Center found that 15% of millennials age 25 to 35 lived at home in 2016—five percentage points higher than was true for their Generation X counterparts in 2000. An Apartment List survey this year of U.S. renters found that 80% of millennial respondents wanted to buy a home and 72% of that group said affordability is the primary obstacle.
“If you’re not a homeowner now and the prices drop by 10%, then we have to admit it makes it much easier,” says Liddiard, of the National Association of Realtors.
And millennials saving for a down payment may get another boost from the tax plan. The proposed increase to the standard deduction, which will double under both versions of the tax plan, could put more money in some taxpayers' accounts.
Yet the Trulia's McLaughlin cautions that the doubled standard deduction won't help all first-time homebuyers.
Because the Tax Cuts and Jobs Act eliminates the personal exemption taxpayers can currently claim for themselves and members of their family, the benefits from either version get murkier for a couple that already has a child. And at two children, McLaughlin says, a family might be worse off when it comes to saving for a home.
"It really does hurt middle and low income families the most," McLaughlin says. "It would probably marginally help a moderate to low-income couple trying to save up for a down payment."