The tax overhaul is expected to create winners and losers among housing markets across the U.S., dealing a blow to high-cost coastal regions but potentially fueling demand in places in the middle of the country.
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The law caps the amount of property and state income taxes filers can deduct, a provision that hits places like New Jersey, New York, Connecticut and California especially hard. It also limits the size of a loan on which homeowners can deduct mortgage interest to $750,000, down from $1 million, which could put a dent in pricey markets.
On the other hand, realtors and economic-development officials in less-expensive states believe they can benefit if the tax-law changes encourage people to reconsider their home address.
"At some point this draws attention to the cost gap in high-cost areas and growing areas with growing resources like Raleigh, Austin and Charlotte," said Scott Hoyt, a realtor in North Carolina. "That's going to be a boon."
At peak impact in the summer of 2019, home prices in Essex and Union counties in New Jersey and Westchester County in New York could all be about 10.5% lower than they would have been without the tax bill, according to Moody's Analytics. For roughly 80% of counties in the country, the effect of the bill on home prices is likely to be negative, the firm estimates.
But some markets could see a slight boost to their economies and to home prices thanks to the bill, including parts of North Carolina, Alabama, Nebraska, Indiana and Tennessee.
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"They don't get nailed by the elimination of the [state and local tax] deduction, but they do benefit in the change from the standard deduction and some of the manufacturers benefit from the lower marginal rates for businesses," said Mark Zandi, chief economist at Moody's Analytics.
Still, Mr. Zandi cautioned, the changes are modest. Even areas that are likely to see an additional increase in home prices are looking at a boost in the 1% range. Overall, the national impact is likely to be negative. "What this is going to do is it's going to throw a wet blanket on [the housing market]. It's still going to move forward, but more slowly," he said.
People are already migrating from high-cost states to lower-cost areas as home prices and rents in large urban centers skyrocket and it becomes easier for people to work remotely. The tax law is likely to accelerate that trend, economists said. Idaho, Nevada and Utah saw the largest percentage growth in population in the country from July 2016 to July 2017, according to U.S. Census data released this month. New York, New Jersey and California, meanwhile, ranked below the top 20 for percentage growth in population.
Economists said the tax impact is likely to be felt more by businesses deciding to expand operations in lower-cost states, viewing local taxes as an even greater hindrance.
"There's a neon billboard now [and] the critical mass to induce companies to leave, to induce employees to leave. 2018 is going to see a lot of pressure on this," said Edward McCaffery, a professor of law and economics at the University of Southern California.
The average New York household that itemizes its tax return pays roughly $17,500 in state income and property taxes -- well above the $10,000 limit, according to an analysis by Robert Dietz, chief economist at the National Association of Home Builders. A typical California household that itemizes pays close to $14,000 in taxes. Even in slightly less pricey states, such as Illinois, Maryland, Oregon and Vermont, the average taxpayer who itemizes exceeds the new cap.
For some homeowners, the differences can be stark. A top income earner in New York who owns a home in the top-third price tier of the metro area pays more than $23,000 in property and state income tax a year, according to an analysis by Zillow. Meanwhile, an affluent homeowner with an expensive home in Raleigh would pay just over $10,000.
A homeowner in similar circumstances in Chicago would pay about $12,000 in property and state income tax, while one in the same circumstances in Nashville would pay about one-quarter that much.
Scott Mosley, a Redfin real-estate agent in Nashville, said he has one client moving from Chicago who fast-tracked his closing to just three weeks, out of fear he will take a hit on his tax bill next year because of the cap on state and local tax deductions. Tennessee has no state income tax, although it does level a tax on investment income.
To be sure, the tax law is merely likely to nudge those already considering moving to a cheaper state. Most homeowners are likely to make other sacrifices before they uproot their lives over a modestly larger tax bill.
Steve Bellone, county executive of Suffolk County on New York's Long Island, said he worries the law will hurt the area economically in the form of lower home values and less consumer spending. Long Island has already struggled to retain younger residents.
"The cost of living is high and that's something we're always grappling with to try to keep people in the region and keep young people in the region. This is really a devastating blow to all those efforts," he said.
Felicia Fleitman, a 34-year-old who owns a consulting business, Savvy Hires, that helps companies create internships and apprentice programs, said she and her husband pay about $10,000 on property taxes and another $5,000 on state income taxes for their 1,100-square-foot home on Long Island.
The couple has two children and Ms. Fleitman is pregnant with a third. She said they would make sacrifices such as taking fewer career risks or buying fewer toys for their children, in order to stay in their home close to family and friends.
"At the end of the day, we're just going to have to figure it out and come up with the money, which means that other things might have to give a bit, which stinks," she said.
Write to Laura Kusisto at email@example.com
(END) Dow Jones Newswires
December 24, 2017 07:14 ET (12:14 GMT)