2017 tax reform and housing – let’s take a deep breath

Posted on December 5, 2017

Death and taxes. The only sure things in life but nobody likes either one. The year-long efforts in Congress to reform the federal tax code appear headed for final passage later this month if the House and Senate reconcile their competing bills. The National Association of Realtors (NAR) believes it will happen and is not happy about some of the bills’ provisions (click here if you want to support NAR’s protest). NAR says if passed, these provisions could depress home values by dampening demand.

Let’s take a deep breath for a minute though and – without talking politics – assume that some or all of the provisions that concern NAR make it into the final bill. Will it mean that home prices drop precipitously in 2018 or into 2019 (reforms could go into effect either year depending on which version of the bill passes)? We aren’t convinced, but let’s look at some of the most talked-about provisions related to real estate:

  • Deductibility of property taxes to be limited to first $10,000 paid (worst case House version). Currently, there is no limit. Even NAR acknowledges the House proposal would affect just 1.3% of the population in Georgia.
  • Elimination of the mortgage interest deduction for second homes. This would affect just 2.3% of population according to NAR. Also, the vast majority of second homes are purchased with cash and Atlanta is not really a second home market.
  • Elimination of mortgage interest deduction for mortgages of more than $500,000 (worst case Senate version). Currently the deduction limit is mortgages of $1 million or more. NAR says this would affect 7.9% of the population.
  • Elimination of deductibility of interest on home equity loans. Home equity loans were a darling of the housing bubble but not so much anymore. This has the potential to hurt businesses that rely on home renovations much more so than real estate.
  • Change to the exclusion of profits on the sale of a primary residence. Currently, a homeowner must live in a home for two of the last five years to deduct profits from the sale of that home. Under the proposals, homeowners will have to live in their home five of the last eight to receive the exclusion. This does sound bad and along with the mortgage interest deduction change is a top lobbying cry for NAR, but demographics could help here. Millennials and Baby Boomers make up the vast majority of the housing market. Millennials are buying their first homes while many Boomers have been in their homes for much longer than five years. Also, the average time in one home is now eight years. Finally, under the current proposals, anyone who has bought a home before the end of 2017 would be exempt.
  • Deductibility of moving expenses repealed. OK, you got us on this one. This would be bad but…(keep reading)…
  • It must be noted that all of the above changes would/could be offset by proposed reductions in income tax rates under both bills (here’s where we suggest you talk to an accountant though). For instance, the Tax Policy Center at the Urban Center and the Brookings Institution claims that 93% of all taxpayers would pay less tax ($1,200 on average) based on the Senate version of the bill. So, for instance, even though you pay more than $10,000 in property taxes and can no longer deduct the amount you pay in excess of $10,000, you very likely will still receive an overall tax break anyway.

For argument’s sake, let’s suggest tax reform has a net neutral effect on the housing market. As one top-selling Atlanta residential real estate agent of 15 years recently said, “no client of mine has ever based their decision to buy or sell a home based on changes to the tax code.”

Enough about taxes. NAR does have encouraging predictions for 2018 including some trends we have already started to see in Atlanta:

  • The major news from NAR is that they predict housing inventory will rise for the first time since 2015 in September of next year. This, along with slowing home price appreciation, will pave the way for a 2.5% increase in home sales from the all-time record year that will be 2017. New home sales are predicted to rise 7%.
  • Southern real estate markets will beat the national average in home sales growth.
  • The homeownership rate will stabilize at 64%. Historically, 65% is the sweet spot.
  • Millennials will continue to gain market share, from 40% of mortgages to 43% in 2018. The largest contingent of Millennials will turn 30 in 2020, so their share of the market should continue to increase along with overall demand.

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Beacham & Company, REALTORS is Atlanta’s top-selling luxury real estate office. The firm was founded in 2006 by Glennis Beacham, one of Atlanta’s most celebrated real estate agents. The company sells nearly $1 billion in real estate annually among its 100 agents who are the most productive in the state by dollar volume sold.

*Photo courtesy of Orlando Regional Realtors Association.