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Exploring the Impact of the Tax Act on Home Values

Now that nine months have passed since the Tax Cuts and Jobs Act of 2017 became a reality, a new study reveals that the legislation is having an impact on home value growth in some markets. Real estate site Zillow has analyzed home value growth across the nation, particularly as it relates to recent changes in the tax law. The results show that the effect so far is slight and limited to certain geographic areas.

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How the New Tax Act Affects Homeowners

Although the aim of the tax reform legislation was to provide a net tax cut to a majority of Americans, some aren't seeing the anticipated benefit. This is particularly the case in higher-tax states and with taxpayers who had previously achieved a long list of "breaks" due to their status as homeowners. Some of the changes to the tax code that are housing-specific include:

  • Capping state and local tax (SALT) deduction at $10,000 (this was previously unlimited)
  • Lowering the threshold from $1 million to $750,000 for full mortgage interest deductions
  • Increasing standard deductions for most filers, meaning fewer people are likely to use the SALT or mortgage interest deductions

The Impact of the Tax Act on Home Values

According to Zillow, there has been a dip in home value growth attributable to the tax law changes in areas with higher percentages of homeowners that used the SALT deduction compared to areas with less historical usage.

In 2015, about 22 percent of U.S. tax filers opted for the SALT deduction. In those same areas in July 2018, home value growth was 0.3 percentage points slower than the pace just prior to the passage of the new tax law. In U.S. zip codes with the most intensive use of SALT, with 44 percent usage, appreciation in home values had dropped by 0.6 percentage points.

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Home Value Changes Across State Lines

There are some specific markets that are more impacted than others, particularly in metro areas that straddle state lines where one state has a more favorable real estate tax environment than the other. Two examples are the Portland and Boston areas, which straddle the Oregon and Washington lines and the Massachusetts and New Hampshire lines respectively.

In the Portland market, 38.6 percent of tax filers on the Oregon side took the SALT deduction versus 12.7 percent on the Washington side. On the Oregon side, home value growth slowed by 0.5 percent in less than a year while growth accelerated by 0.1 percentage point on the Washington side.

In the Boston market, 41.2 percent of tax filers on the Massachusetts side took the SALT deduction versus 18.4 percent on the New Hampshire side. In less than one year, home value growth slowed 1.3 percentage points on the Massachusetts side while it accelerated 0.5 percentage points on the New Hampshire side.

What Does Slowing Home Appreciation Mean for a Loan Portfolio?

As home value growth slows in certain areas of the country, this could have a further impact on the housing market in the coming year. One factor continuing to add strength to this current market is the lack of supply of affordable homes. This has created a pocket of unfulfilled demand, even in the face of rising interest rates.

These issues will continue to produce challenges for both lenders and borrowers in the coming year. Banks can mitigate risk and optimize loan portfolio results by partnering with an asset management company that can provide access to note buyers across different asset classes.