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The 2017 Tax Cuts and Jobs Act, alongside higher mortgage interest rates, ultimately negatively affected the housing market over the course of 2018, contributing to a decline in new house sales, co-authors of the study, Richard Peach and Casey McQuillan, wrote in the April blog post.
“Specifically, this slowdown stems from a higher user cost of capital caused by lower marginal tax rates, the $10,000 cap on the deductibility of state and local taxes, and the lower limit for the amount of mortgage debt on which interest payments are deductible,” they argued.
From the fourth-quarter of 2017 through the third-quarter of 2018, the 30-year fixed mortgage interest rate rose to 4.6 percent from 3.9 percent. In that same time period, sales of new single-family homes declined by 7.6 percent, while sales of existing single-family homes fell by 4.6 percent.
But in 2018, unlike other periods of a strong economy, the housing market was also bogged down by new provisions in the tax law, like the $10,000 cap on the deductibility of state and local taxes (SALT) which essentially increased what buyers have to pay in real estate taxes.
A lower marginal tax rate also had a impact on the housing market, largely because it reduced tax savings from housing-related deductions. In addition, the ceiling on mortgage interest deductions was dropped to $750,0009 from $1 million.