The Tax Cuts and Jobs Act was supposed to boost corporate profits, and it did. It was expected to give at least a temporary lift to consumer spending, and it did.
Housing, on the other hand, has defied expectations. Because the 2017 law reduced tax breaks for homeowners, forecasters thought it would cause house prices to fall, especially in high-priced neighborhoods.
Sixteen months after the law took effect, any adverse effect on housing is hard to detect. Home values, as measured by the national Case-Shiller Index, rose 4.6 percent for the 12 months that ended in January.
Prices climbed a bit faster in 2016 and 2017, but it’s hard to argue that tax changes caused the slowdown. Mortgage rates, which rose by a percentage point last year before coming back down in recent months, almost certainly did more to dampen buyers’ enthusiasm.
When the tax bill was being debated, economists and real estate lobbyists pointed to three changes that would hurt housing. The mortgage interest deduction was limited to loans of $750,000, down from a previous cap of $1 million; the deduction for state and local taxes was capped at $10,000; and a higher standard deduction meant that many homeowners would no longer itemize.
Frank Nothaft, chief economist for CoreLogic, studied the issue last fall and couldn’t find any tax law effects on house prices, even in high-cost cities.
More recently, he sees some downward pressure in expensive places such as San Francisco and Los Angeles, but he thinks that has more to do with mortgage rates and overall affordability than with taxes.
Jeff Tucker, an economist at Zillow, notes that the tax law also raised most people’s after-tax income, which lets them afford a bigger mortgage. “The tax bill’s broad impact on the housing market would be ambiguous,” he says. “Housing is a large fraction of household budgets, and this increased their overall budget by several thousand dollars.”
Lawrence Yun, chief economist at the National Association of Realtors, thinks the limit on state and local tax deductions, SALT for short, is affecting high-tax states like New York, New Jersey and Illinois.
“We are finding right now that house prices are softer in those places where the SALT limit is starting to bite,” Yun said.
In modest-priced markets like St. Louis, the economists say, the tax law changes have had no noticeable effect on housing.
For a typical buyer here, the $24,000 standard deduction is now more attractive than the itemized deductions that go with owning a house. The lack of a tax break doesn’t make people indifferent between buying and renting.
“The decision is mostly motivated by considerations about the type of house you can have as a buyer, space for a growing family and a yard and good schools,” Tucker said. “Those are things that don’t change with a tweak in the tax code.”
Eventually, the 2017 tax changes could still have a dampening effect on house prices. “Now that everyone has submitted their first 1040 under the new law, for many people it was an eye-opener,” Nothaft says. “I think many people didn’t understand specifically how it affected them.”
In the near future, though, any negative tax law effect probably will remain hard to detect. The large millennial generation is entering its prime home-buying years, and mortgage rates have fallen below 4 percent. Those two facts should keep demand strong, tax break or no tax break.