There is a new federal tax law being implemented – The Tax Cuts and Jobs Act (TCJA). Many lauded this bill because it is said to help most Americans by increasing their take-home pay and lowering both income and corporate taxes. How will this new law affect the mortgage industry?
Tax Cuts and Jobs Act (TCJA) Mortgage Deduction Cap
The new law lowers the mortgage interest deduction from US$1 Million to just US$750,000. This helps homeowners lower their taxable income. Lowering the cap was a compromise between the Senate bill and the House version. Senators want the cap to stay at 1 Million while the House wants it to be cut in half.
Aside from this, the new tax code hikes the standard deduction for all taxpayers from $12,000 for single filers and $24,000 for joint filers. What does this mean? Well, generally it may be better for some not to itemize the mortgage interest deductions since it would be lower than their standard deduction. According to Svenja Gudell, the chief economist at Zillow, the new bill will make itemization sensible only to 14.4% of US homes from the current 44%.
Some experts have warned of a housing recession because of the Tax Cuts and Jobs Act (TCJA) since it discourages existing homeowners from moving. This means that existing homeowners are not buying houses and also not supplying the market with new listings.
Does Tax Benefits Encourage Home Buying?
“While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales. It might impact prices negatively over time with the largest impact on markets with higher prices and incomes,” said Danielle Hale, the chief economist at Realtor.com.
Since the new mortgage interest deduction cap applies to new purchases, existing homeowners may find it more fitting not to move. It is also worth noting that according to various studies only a very small fraction of the public decides to buy a home based on tax benefits. Homebuyers mainly base their decision when negotiations are beneficial to them.
“Don’t forget that parties in the transaction are already willing to concede about 5% to real estate brokers,” Tom Porcelli and Jacob Oubina, economists at RBC Capital Markets, said in a note.
SALT in the Tax Cuts and Jobs Act (TCJA)
State and local tax deduction (SALT) also have significant changes. Such changes will hit wealthier homeowners in blue states. Tax Cuts and Jobs Act (TCJA) caps SALT at $10,000 of property, individual income, and sales taxes. In the end, Americans could be paying more in taxes especially high-income households. In the end, instead of the well-promised tax cuts, some rich Americans in blue states would be paying more.
Future of the mortgage industry in the Tax Cuts and Jobs Act (TCJA)
Experts and analysts expect changes in the mortgage and housing industry but it might not be enough to lead to a recession. The gains of real estate in recent years is greater than the possible threat it faces now from the TCJA. Increased consumer spending might, in the end, boost home buying. Also, the law is just in its infancy so we can’t really say that it will be bad for the mortgage industry.