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Based on an analysis of the 7.6% national drop in home sales activity between Q4 2017 and Q3 2018, the Federal Reserve Bank of New York suggests that the recent changes to the tax code that took effect in early 2018 contributed to slowing home sales, along with higher mortgage rates and other concurrent factors.

During the period reviewed, the top marginal income-tax rate dropped from 39.6% to 37%, reducing the potential savings from itemizing one’s deductions by 2.6 percentage points. Moreover, property tax deductions are now capped at $10,000, meaning that at the margin these state and local taxes are no longer deductible. The mortgage interest deduction was also cut in half, which in effect increases the mortgage rate a homeowner is paying, the researchers argued.

The Fed’s research builds on a analysis, which compared home sales activity in counties where a high concentration of households claimed the mortgage-interest deduction with those where that was not the case. Home sales had dropped 5.4% YOY in October 2018 in “high impact” counties, they found, driven by a drop in sales for homes under $750,000. In counties where few households had claimed the deduction, home sales rose 5.7% over the same period.

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