| 
Kenneth Harney
A new report from the New York Federal Reserve sheds a little light on a question that’s been hanging over the American real estate market: Has the massive tax overhaul adopted by Congress in late 2017 had any effect on whether consumers want to buy or sell homes?
It’s an important issue because federal tax laws can make owning a home much less costly – or far more – than it otherwise would be.
The new study does not attempt to measure impacts on home values or selling prices. Instead it focuses on sales and concludes that the tax law’s $10,000 cap on deductions of state and local taxes (SALT), its increase in the standard deduction and the $750,000 limit on the amount of mortgage debt that qualifies for interest writeoffs “have negatively impacted the housing market” by lowering sales volume.
The study found that a slowdown in home sales nationwide from late 2017 through the third quarter of 2018 could be attributed in part to the tax-law changes as well as interest-rate increases.
The Sky Hasn’t Fallen
The law’s potential effects on real estate have been controversial since before the legislation was enacted.
In the weeks leading up to the overhaul, housing and realty groups lobbying Congress warned of damage not only to sales but to property values. The National Association of Realtors predicted price declines, with the heaviest hits in high-cost coastal markets where the new SALT limit would hit owners hardest.
By all indications, there have been no widespread decreases in home values. The Case-Shiller home-price index, which tracks price movements, has documented a modest slowing in the pace of increases recently but has recorded no net declines. The National Association of Realtors’ own data indicate that although sales of existing homes slumped in the final quarter of 2018 as interest rates increased, they have rebounded since then. Sales rose nearly 12 percent in February – the largest month-over-month gain since December 2015. Median home prices in February rose by 3.6 percent from the year earlier to $249,500, the 84th straight month of year-over-year gains.
So, what does seem to be happening in real estate that can be linked to the tax changes? Economists and real estate agents offer a couple of preliminary observations.
Buyers and owners who opt for the standard deduction are unscathed by the lowering of the mortgage interest cap to $750,000 – they no longer itemize, so real estate writeoffs are not an issue. Owners who had planned to use home equity lines of credit may be inconvenienced by new rules restricting deductions, but those who use the borrowed money for home improvements are untouched.
Ripples Visible in High-Tax Markets
Where you can see ripples is in the upper brackets in high-tax areas.
A new crop of homebuyers is emerging, said Mark Fleming, chief economist for First American Financial Corp.: “Tax refugees.” These are owners who are fed up with high taxes – now no longer deductible beyond $10,000 – and are heading to more tax-friendly locales. In the process, Fleming said, they may be creating “greater demand in the high end of lower-cost real estate markets.”
Real estate agents in Florida, which has no state income tax, confirm the trend. Brian Walsh, a Redfin agent in Tampa, said he is seeing an influx of generally affluent clients who tell him they are abandoning areas with high taxes to purchase homes in Tampa and St. Petersburg. He quoted one client who said, “I am so excited to be in a state with no income tax!”
Recent refugees that Walsh has encountered come from places like New York, the Washington, D.C. area, Chicago and Denver, he said.
Others are seeing a lot of frustration over SALT.
“When you’re losing 60 percent of your [previous] tax deductions,” it hurts, said Mike Litzner, broker at Century 21 American Homes on Long Island.
But agents who serve the upper end of some markets aren’t so sure about tax refugees.
Liz Lavette Shorb, an agent with Washington Fine Properties who specializes in luxury homes in the D.C. area, said so far in 2019, the numbers tell a different story: There has been an 18 percent increase in the number of sales in $1 million-plus homes year-over-year, and a 16 percent jump in $2 million-plus homes.
“While buyers might grumble, we are seeing more of them at the settlement table,” she said.
Ken Harney’s email address is harneycolumn@gmail.com.
