Capitol Report: It’s not just lobbyists who say tax reform will slash home prices
In May, alarmed by the discussion of tax reform percolating in Washington, the National Association of Realtors released a study it had commissioned to study the effect of those proposals on the housing market.
The findings, from auditor PricewaterhouseCoopers, were grim. Taxes would go up, particularly for the middle class, the report found, and by making it more expensive to own a home, housing prices would fall more than 10%.
Read: Realtors say middle class will face higher taxes, lower house prices under Trump plan
As reform has gained momentum, the Realtors have doubled down on their assertions. But as actual legislation starts to take shape, it’s not just one of the most powerful lobby groups in Washington claiming suggested tax changes could deal another blow to the tepid housing recovery – but private economists, as well.
“Certainly it’s going to hurt housing,” said Joseph Lavorgna, chief economist for the Americas at Natixis.
“Housing is well below its previous peak in terms of people working in construction, the number of homes produced and sold,” Lavorgna said. “Arguably that’s a reason the recovery has been as weak as has. All of a sudden now you’re going to hurt the industry even more?”
An analysis NAR shared with reporters earlier in November, as the House of Representatives deliberated its Tax Cuts and Jobs Act, found that “many homeowners will have tax increases or less tax cuts than renters,” largely because it would make it less advantageous for taxpayers to itemize.
Read: House passes tax overhaul as spotlight turns to Senate
Calling the legislation “an overall assault on housing,” the Realtors huffed, “as if the above is not enough, we also have limits to Exclusion of Gain on Sale of Principal Residence, repeal of deduction of student loan interest (makes it harder for millennials to purchase first home, repeal of moving expenses.”
But they found an ally in Mark Zandi, chief economist for Moody’s Analytics, who released an analysis the same week. “House prices suffer under both the House and Senate plans,” Zandi wrote. “The tax law changes significantly reduce the value of the mortgage interest deduction, or MID, and property tax deductions, which are capitalized in current house prices.”
Zandi estimates the hit to home prices across the country could be as much as 5%, a figure Lavorgna said he could agree with — if not “high single digits.”
Both men note that the impact could be much higher in higher-priced areas like the Northeast and California. While much has been made of the idea that those are the areas that voted for Hillary Clinton over President Donald Trump, Lavorgna has a more practical take on the wisdom of whacking the economies of populous states: “You have a lot of GDP in places like New York, California, and Illinois,” he said. “I wouldn’t be marking my consumption and construction numbers up if the bill as structured is passed.”
The White House Council of Economic Advisors released an analysis that found that home prices would decline 2% immediately and 4% over the long run with a complete elimination of the mortgage interest deduction, which is more extreme than the proposals currently being considered by Congress.
But the CEA also suggested that lower prices would help the market and boost ownership by “encouraging home buying.” Home prices have been on a tear over the past few years as inventory remains lean and demand strong.
Read: Existing-home sales rebound in October even as inventory crunch worsens
Mark Zandi’s calculation of a 5% house price decline is separate from another consequence noted in his analysis. “Also, the higher mortgage rates that result from the higher deficits and debt under the plans weaken housing demand,” he wrote.
Mortgage rates surged after the presidential election last year in anticipation of a scenario like the one unfolding right now. Investors sold bonds knowing that lower tax revenues and bigger deficits will make more government borrowing necessary – and if the Treasury issues more debt, the value of bonds already outstanding will decline, pushing rates higher.
Lavorgna noted the curious calm that’s crept over rates markets even as tax talk has heated up. It’s possible the bond market isn’t buying the idea that a reform package will pass, he said.
Read: Republican tax plans will make it less beneficial to own a home, analysis finds
Not everyone believes tax reform will squelch housing. Ed Pinto, the housing expert at the right-leaning American Enterprise Institute, published an op-ed in mid-November noting that the mortgage interest deduction is expensive for taxpayers — an estimated $ 140 billion in 2017, he said — while providing little support to homeownership.
“This does not include the many hundreds of billions in subsidies over the same period provided to or by Fannie Mae, Freddie Mac, the Federal Housing Administration, Ginnie Mae and others, and the $ 6.7 trillion in taxpayer mortgage debt guaranteed by these same agencies,” Pinto wrote.
Still others believe that the mortgage interest deduction is “inefficient,” at best, at encouraging homeownership, and that capping it at $ 500,000 is appropriate.
And among many analysts there is a strong sense of regret for lost opportunity. Lavorgna, who described himself as “supply-side friendly,” put it this way:
“I am all for tax reform. It doesn’t have to be as bipartisan as in 1986 but you can’t just write it along party lines. You need some input from the other side. The way the bill is structured now isn’t. It’s not a particularly good bill, and it’s not going to do much for growth.”