Did the 2017 tax overhaul depress the housing market in 2018? In a new research report, economists Richard Peach and Casey McQuillan at the Federal Reserve Bank of New York say there’s a good chance it did.
The housing market slowed significantly from the fourth quarter of 2017 to the third quarter of 2018, according to Peach and McQuillan, with sales of new single-family homes falling by 7.6% and sales of existing single-family homes dropping by 4.6%. Interest rates rose by more than half a percentage point during the period, producing predictable headwinds for the market. But the size of the slowdown was larger than expected relative to the interest rate increase, leading the researchers to look at the tax overhaul as a possible source.
Peach and McQuillan found that key changes in the tax code — the reduction of income tax rates, the $10,000 cap on the deductibility of state and local taxes and the reduction in the mortgage interest write-off — combined make it more expensive — and less financially appealing — to own a home, especially in coastal areas with high housing prices and property taxes. The increase in costs of home ownership went beyond what was expected from higher interest rates, creating a drag felt throughout the housing market during the period.
The bottom line: “While certainly not conclusive,” Peach and McQuillan write, the evidence “is consistent with the view that changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018.” The researchers said that an upcoming Fed paper will present empirical evidence that supports their conclusions.