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Examining Tax Cuts Act’s Impact on Housing

taxThursday, June 21, marks six months since the Tax Cuts and Jobs Act became law. To mark this event, a hearing entitled Empowering a Pro-Growth Economy by Cutting Taxes and Regulatory Red Tape by the Financial Services Committee [1] on Wednesday, looked back at how this act has impacted the economy over the last six months.

In his opening statement during the hearing, Sen. Jeb Hensarling, Chairman of the Financial Services Committee said that the passage of this legislation was “incredible good news that has made a great difference in the lives of our constituents.”

“Not only do we have tax relief, but we have a new regulatory agenda under this Administration to right-size regulation, and to help market participants actually comply, and to ensure that the burden of this regulatory infrastructure is minimized so that we can have economic growth – and indeed we do,” Hensarling said.

The tax reform bill enacted by Congress in December did four main things that impact housing. According to a recent report [2] by CoreLogic, the legislation “cut marginal tax rates, dropped mortgage loan limit for interest deduction to $750,000 from $1 million for a new first mortgage, eliminated deductibility for some second liens, and capped the annual tax deduction for property, state, and local income taxes at $10,000.”

Another study, by Moody’s, indicated [3] that the Tax Cuts and Jobs Act of 2017 decreased the tax incentive of homeownership by 1.61 percent from 1.67 percent to 0.06 percent for a family earning $150,000 annually in a high-tax state. It also found that though the legislation greatly reduces the tax benefits of homeownership, the impact on residential mortgage credit performance in the near-term will be neutral.

The legislation, according to a pair of economists [4] is also likely to drive migration in the medium to long-term. In a recent Wall Street Journal op-ed, they said that changes instituted by the tax reform bill would ultimately drive millions of people out of blue states such as California and New York and into low-tax red states.

Despite detracting these homeownership benefits, a recent study [5] by Zillow found that the legislation would spur billions in spending in the housing industry. According to the study, Americans are primed to channel $13.2 billion in tax savings toward the purchase or rental of a larger home and another $24.7 billion toward home renovations this year.

Americans have earmarked the largest portions of their tax savings for “savings and investment” and “paying off debt,” according to Zillow’s survey of more than 10,000 consumers in the 20 largest U.S. markets. Both owners and renters are likely to hold about 29 percent of their savings as “savings and investment.” For owners, another 21 percent will go to paying off debt; renters will put 27 percent toward paying off debt.

And this was an aspect pointed out by Hensarling too. “Just in the last couple of weeks, I heard from Brad in Wills Point, ‘the bank my wife works for has given two raises and increased benefits since the passage of the Act.’ I heard from Jim in Royce City in the Fifth District, ‘we take home three to four hundred dollars more per paycheck.’ It is making a difference, but there is so much more to be done,” he said.