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Tax reform has mixed effects on long-term housing outlooks

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Inside the Beltway
Thursday, March 1, 2018

Long-term expectations for the U.S. housing industry have dropped since the Republican tax reform bill was signed into law this past December, according to Zillow Inc.’s 2018 Q1 Home Price Expectations Survey.

Although the more than 100 housing analysts and economists tapped for the survey, conducted by independent research and consulting firm Pulsenomics LLC, generally agreed that the new tax model would have short-term benefits to the housing market, 41 percent of them said the policy change lowered their expectations for home price growth over the next five years.

Thirty-one percent of survey respondents indicated that they had a more optimistic market outlook as a result of the tax reform, and the remaining 28 percent said the change in tax policy did not affect their view.

The tax plan limited itemized deductions, such as the mortgage interest deduction, while expanding the standard deduction, according to a Zillow press release. Most taxpayers take the standard deduction and likely will see take-home incomes increase, which can be attributed to the new tax policy, providing a boost to spending, savings and investment this year.

Zillow Senior Economist Aaron Terrazas said the increased pessimism could stem from fear that cutting taxes as the American economy is running at full capacity will ramp up the risk of an economic downturn in the next five years, which could cause the Federal Reserve to respond by boosting interest rates faster than currently anticipated.

“By expanding the standard deduction, tax reform will put more money into the typical American’s pocket in 2018, which will boost spending and could help renters save faster for a down payment,” Terrazas said in the release. “But the longer-term outlook is less rosy. There is some concern that tax cuts at this point in the business cycle may be throwing fuel on an already ranging fire and could lead the economy to overheat. Most economists we surveyed see a stronger outlook for the housing market over the next year or two but a more pessimistic outlook on the longer horizon.”

Market conditions could lead to a “frenetic” spring buying season, according to Pulsenomics founder Terry Loebs.

“The persistent short supply of entry-level homes for sale has highlighted just how bifurcated the U.S. housing market has become,” Loebs said. “[Analysts] project that the value of homes in the bottom third of the market will appreciate at 6 percent this year — double the rate expected for the highest-priced tertile. Limited inventory of low-priced homes, coupled with expectations for rising interest rates, likely foreshadow a frenetic, anxiety-filled spring buying season for qualified first-time homebuyers.”

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