GOP tax bill 'bad news' for housing industry, expert warns

Industries FOXBusiness

(Reuters)

While Republicans work to pass a finalized version of their tax reform bill through Congress this week, a multitude of provisions included in the legislation could put a damper on the housing market, in terms of prices, inventory and even purchasing incentives.

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The massive increase in the standard deduction, for example, to $24,000 for married couples and $12,000 for single individuals, is expected to reduce the number of people itemizing. That translates into less people benefiting from the mortgage interest deduction.

According to Dan North, chief economist at Euler Hermes North America, limiting the usefulness of the mortgage interest deduction reduces the financial incentive to purchase a home, which is “bad news” for the housing industry. Without this deduction, home values could also fall, potentially leading to trouble for the broader economy, North said.

The move to cap mortgage interest at $750,000, as opposed to the current rate of $1 million will disproportionately hurt high cost, coastal markets, he added. In places like San Francisco and New York City, the majority of mortgages are above that rate, so changing the cap will likely deter individuals from selling their home at a time when supplies of existing and new homes are already tight.

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Still, many in the industry view the new bill as an improvement from prior versions put out by the House and the Senate, which included provisions such as completely eliminating state and local tax deductions and capping the mortgage interest deduction at $500,000.

“We remain concerned that the overall structure of this bill poses problems for homeowners and the broader housing market, but the conference committee has made some important improvements to the House and Senate legislation that ultimately will benefit some homeowners and communities,” National Association of Realtors (NAR) president Elizabeth Mendenhall said in a statement. NAR was specifically encouraged by the decision to preserve deductions for second homes and to allow taxpayers to exclude up to $500,000 (for a married couple, $250,000 for single individuals) in capital gains when they sell their primary home.

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North said the changes in the bill will undoubtedly impact the housing market, but the overall trend could be an improvement, economically speaking.

“This will affect housing activity, there’s no two ways about it,” he said. “[But these changes will also] probably [help] pare away at the problem of wealth inequality.”

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