U.S. home sales will likely take a hit next year as middle-class Americans receive fewer perks under an overhaul of U.S. taxes and face rising home prices and interest rates, industry experts said.
Sales of new single-family homes are projected to rise 5 percent in 2018 — only about half the growth estimated for 2017 and the slowest pace since 2014, according to the National Association of Home Builders (NAHB).
The Republican tax bill, approved by Congress on Wednesday, will allow home buyers to deduct interest on mortgages up to $750,000, down from the current $1 million, potentially hurting buyers in California and other costly markets.
The tax plan will also cap the deduction for state and local taxes at $10,000, effectively leaving homeowners in higher-tax states with a bigger tax bill.
"In major metropolitan areas where property values are high and taxes tend to be high as well, the middle-class family is going to get hit by that," said Joel Naroff, chief economist at Naroff Economic Advisors, a Pennsylvania-based consultancy.
The new rules should spur people to buy cheaper homes next year, a trend that has already become popular in recent years among thrifty millennials who are shunning expensive living.
Indeed, big homebuilders including Lennar Corp
D.R. Horton Inc
The business, aimed at first-time buyers, made up 37 percent of the number of homes sold by D.R. Horton in the latest quarter.
Neither Lennar nor Pulte responded to emails seeking comment.
A prolonged shift toward entry-level homes should drive much of the growth in new home sales next year, JPMorgan analyst Michael Rehaut said.
Sales of multifamily homes or apartments and condos, largely rental properties, are expected to stay relatively flat next year, NAHB's Chief Economist Robert Dietz said.
The Mortgage Bankers Association expects the median price of new homes to rise 4.5 percent next year, up from an expected 2.8 percent increase this year.
Still, some analysts expect demand for new homes will remain robust, supported by further increases in jobs and wages that are expected from the tax reform.
Appetite for new homes was strong this year but homebuilders could not properly benefit from the demand due to tight labor supply and as lumber prices
Analysts expect these challenges to persist in 2018.
Meanwhile, the U.S. Federal Reserve, which has already hiked interest rates three times this year, is expected to do so another three times in 2018 and 2019, making borrowing dearer.
"Tax changes, price increases, interest rate increases — there's nothing good on the horizon for the residential housing market," Naroff said.