We believe that the Tax Cuts and Jobs Act (TCJA) will likely impact housing as follows:
- More entry-level home buying in most areas of the country
- Higher rents, since tenants now have more disposable income
- Acceleration in Southern migration
We ran the math for a typical two-person married renter and owner household in all of the major metropolitan areas in the country1 and learned that in 2018 the TCJA resulted in:
- Renters paying $2,716 less in taxes, ranging from $1,918 less in Miami to $5,214 less in San Jose
- Homeowners paying $1,508 less in taxes, with San Jose and San Francisco homeowners actually paying more in taxes and Nashville homeowners paying $2,335 less in taxes
With the vast majority of America receiving a boost in disposable income, we conclude that landlords will be able to charge more in rent, aspiring home buyers will be more likely to save a down payment and afford a more expensive mortgage, and certain markets (especially in the South) will benefit far more than others. Below are some key findings from our analysis.
- Renters saved an average of $2,716 on their 2018 federal tax bill across the top housing markets.2 Renters do not have deductible mortgage interest or property taxes, which would help qualify them for itemizing. Thus, the increased standard deduction and lower tax rates created additional income for renters.
- Homeowners saved an average of $1,508 on their 2018 federal tax bill.3 The increased standard deduction of $24,000 exceeded the total state and local tax (SALT) deduction and mortgage interest deduction (MID) for these households.4 Most homeowners don’t benefit from itemizing currently; however, this has been the case for the last decade per our chart below.
- Recent San Francisco Bay Area homeowners are clear losers of the TCJA. Bay Area workers with six-figure salaries and seven-figure home values were hit with a double whammy of capped SALT and MID. San Francisco homeowners who purchased in 2018 paid $1,409 more in federal taxes in 2018 as a direct result of the SALT and MID deduction caps, per our analysis. Long-term owners are less impacted because of limitations on property value reassessments for taxes.
To be clear, just because most people received a boost in disposable income doesn’t mean that they will use that money to rent a nicer place or purchase a home. We do believe two things will happen:
- More entry-level home buying in most markets. Renters who have been saving to purchase have gotten some help with their endeavor, and we will see more of them purchase homes in 2019 and beyond. Entry-level homes will continue to outperform. Low unemployment, sound economic and demographic fundamentals, and stretched affordability support strong entry-level housing demand. Many of our home builder clients have already pivoted to offering more attainable price points to meet pent-up demand. Homeowners buying at these prices points haven’t benefited from housing tax policy in years.
- More migration in the South, including current coastal and Northern homeowners. More homeowners in expensive areas who were considering renting or moving to more affordable areas are more likely to do so now. Low-tax states should continue to see in-migration and strong housing demand, while outmigration accelerates in CA, NY, NJ, and IL. The TCJA did not create these trends but has amplified them.
We do not agree with reports such as this one that blame the Q4 2018 slowdown in housing on the tax act. Rising rates, a stock market correction, and seasonality drove the slowdown.
Given that our clients serve many different buyer profiles with varying income levels, we created a printable table to show the different tax savings by income levels across the top markets, assuming a home priced at 4x income. Contact our consulting team for the impact on your market and project.
1 We isolate the impact of the TCJA on select cohorts of renters and homeowners by holding income, home prices, property taxes, and state income tax rates constant from 2017 through 2018. We control for the increased standard deduction, mortgage interest, and SALT deduction cap changes in 2018. Federal Insurance Contribution Act (FICA) tax is excluded.
2 We use married two-person renter households as a proxy for new entry-level home buying demand. This segment made up 11% of total renter-occupied housing units and 4% of all occupied housing units in 2017. In our model, we assume these households earn the median household income for the metro as reported by JBREC at the end of 2017. All renters take the standard deduction in our calculations. (Sources: John Burns Real Estate Consulting, LLC; 2017 American Community Survey)
3 Two-person married owner households made up 31% of total owner-occupied housing units and 20% of all occupied housing units in 2017. In our model, we assume these households earn the median household income for the metro as reported by JBREC at the end of 2017. (Source: John Burns Real Estate Consulting, LLC; 2017 American Community Survey)
4 We calculated state income taxes using 2017 tax brackets for each relevant state and holding these constant through 2018. Local taxes matter for select markets like Philadelphia, and we incorporated these taxes. Property tax rate data is collected by JBREC and used in our internal metrics for payment at the metro level. Mortgage interest assumes 4% 30-year fixed conventional rate with a 5% down payment on the median home price as reported by JBREC at the end of 2017. We held these constant for calculations in 2018 to isolate the impact of the federal tax reform. (Sources: John Burns Real Estate Consulting, LLC; 2017 American Community Survey, Tax Foundation)