The nation’s largest real estate trade group, the National Association of Realtors (NAR) went before a U.S. House of Representatives subcommittee on Wednesday to lament the negative effect of tax reform on homeownership.
NAR, which has more than 1.3 million members nationwide, has not hidden its dissatisfaction with the Trump administration’s tax reform law, the Tax Cuts and Jobs Act, which cut several homeowner deductions. The law, passed by Congress at the end of 2017, capped mortgage interest deductions (MID) for primary and secondary residences at $750,000 (down from $1 million), while capping state and local tax deductions (SALT) at $10,000 (there was no cap previously).
On Wednesday, NAR director Kevin Brown, former president of the California Association of Realtors, testified on NAR’s behalf before the Select Revenue Measures Subcommittee of the House Ways and Means Committee at a hearing called “How Middle Class Families Are Faring In Today’s Economy.”
Brown noted, in generations past, federal tax policies had helped make homeownership possible for tens of millions of Americans.
But Brown went on to say the new tax reform law passed in 2017 had “undermined significantly” the incentive to move from renting to owning a home, particularly in high-cost states where home prices and taxes exceed the caps in the law.
“While federal tax policies designed to reduce the cost of purchasing and owning a home by making that home more affordable are still present in the current law, they have been significantly reduced and are a fraction of what they were just one year before. Such policies can still be considered benefits for those who are fortunate enough to still be able to enjoy them,” Brown said.
“However, for the large number of current and would-be middle-class homeowners who are no longer able to claim these benefits, the changes in the Tax Cuts and Jobs Act amounts to a significant barrier to homeownership.”
Brown talked up the benefits of homeownership to communities, household wealth and the economy and said the federal government had historically supported these benefits, but that the new law “punched a huge hole in the amount of federal tax dollars being steered toward incentivizing homeownership.”
Brown noted the barriers to homeownership seem to be growing. Home prices continue to outstrip wage growth, making homes more and more unaffordable, and student debt has grown to $1.4 trillion, which is 10 percent of all outstanding debt in the country, he said. More than 8 in 10 (83 percent) of non-homeowners say student loan debt is a factor in delaying them from buying a home because it made it impossible for them to save for a down payment, he added.
NAR’s housing shortage tracker, which is an index that compares how many building permits are issued relative to the number of new jobs, has found that a single-family permit is issued for every three new jobs across the country when historically the average has been one such permit for every two new jobs. The shortage is much higher in certain metro areas, particularly those in California.
Given these factors, the tax law has made it even more challenging for middle-class families to afford a home, according to Brown.
While the MID cap does not affect most homebuyers — the average price of a single-family home was $256,400 in December — there are some areas where home prices are much higher. Home prices in populated metros in California and New York state, for instance, routinely exceed the $750,000 cap.
“[I]n areas where the home prices were much higher, the lower limit had an immediate and negative effect for those who borrowed more than $750,000 to purchase their home,” Brown said.
“For example, for someone in the new 24 percent tax bracket, the first-year reduction in the tax benefit from the MID was about $2,300, assuming a mortgage of at least $1 million financed with a 3.9 percent 30-year loan.”
The same is true for the SALT deduction. While most homeowners are not affected by the cap, those in a handful of states are and because the cap is not indexed to inflation, more and more will be affected over time, according to Brown.
“Despite the situation that most of the nation is not immediately affected by the new and direct changes of the TCJA on MID and the property tax deduction, the fact remains that millions of homeowners in the higher housing-cost areas of the nation will be negatively impacted by the changes,” he said. “And many of these will be members of the middle-class living in homes that are far from large and lavish.”
Brown also bemoaned the indirect effect that the new law’s doubling of the standard deduction to $24,000 for a couple would have on encouraging the purchase of homes.
That part of the law means that fewer homeowners will itemize deductions, making it so couples have “the same tax liability whether they rent or own their home because the MID and SALT deductions have no effect because the standard deduction was higher than their itemized deductions,” he said.
In 2017, about 32 percent of tax filers itemized their deductions, but only about 13 percent of tax filers are expected to itemize for 2018, according to Brown.
“This means, of course, that seven of eight taxpayers will claim the standard deduction and will find no incentive effect of the MID and property tax deduction,” he said.
“While some few of these who are not homeowners will find that purchasing a home would increase their itemized deductions to a level higher than the standard deduction and thus enter the range where the MID and property tax could lower their tax liability vis-à-vis renting, the numbers who do so will be very low as compared to those who could enjoy these incentives before the tax reform law changes went into effect.”
NAR expects the number of tax filers claiming the MID to fall by 20 million people, or 60 percent, and anticipates the amount of the deduction will decline by almost $40 billion, or 62 percent.
Meanwhile, the trade group predicts the number of SALT deduction claimants will fall by almost 27 million (a 62 percent drop) and the amount of the deduction will decrease by nearly $50 billion, down 71 percent.
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