The Tax Cuts and Jobs Act enacted in December is the largest change to tax code made in decades, but its effect on home prices is still playing out. Tax reform has lowered personal income taxes in aggregate, CoreLogic’s Frank Nothaft notes, which generally translates to an increased likelihood of being a homeowner.
Other tax reform measures such as capping the mortgage interest deduction at $750,000 and state and local income and property taxes at $10,000 complicate this formula, however, known as the “income effect.” Nothaft writes:
By raising the after-tax cost of homeownership, tax reform is expected, at the margin, to lower the amount of shelter consumed by owner-occupants and tilt tenure choice toward renting rather than owning. Economists refer to this as the ‘price effect’ because the relative cost of owning versus renting has changed. Whether the ‘income’ or the ’price’ effect is stronger will determine whether demand for shelter and homeownership rates rise, fall, or are largely left unchanged.
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