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Will the New Tax Bill Affect Washington Housing and Home Prices?

How will the new tax bill enacted in January affect the housing market across Washington State? Will the new law have some kind of impact on home prices? These are common questions among Washington residents, particularly those who own a home or plan to buy one in the near future. So let’s shed some light on this topic.

What Does This Bill Actually Do?

Let’s start by looking at what this new legislation actually does, specifically through the lens of housing and homeownership. Here are some of the key provisions in the recently passed Tax Cuts and Jobs Act (TCJA):

  • State and local income taxes (SALT) or state and local sales tax, plus real property taxes, can still be deducted but only up to a combined total limit of $10,000 (or $5,000 for those with married-filing-separate status). These types of deductions were practically unlimited before. But now they are capped.
  • The interest paid on home equity loans is no longer deductible, starting in 2018.
  • Interest on a new mortgage loan can generally be deducted up to a limit of $750,000. (This limit was reduced under the new tax bill. The cap used to be $1 million.) This change applies to mortgage loans taken out after December 14, 2017.
  • According to H&R Block, homeowners in Washington and nationwide whose mortgage loans were “taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward.”

Will the New Tax Law Affect the Housing Market?

First, a disclaimer. No one can predict future housing conditions with complete accuracy, because there are many unknown variables that can happen along the way. It could take years for economists to assess and measure the impact (if any) the new tax laws have on the housing market and the broader economy.

That being said, there are a lot of opinions and forecasts floating around. So, how will the tax reform package affect home prices and the overall housing market in Washington? Here are some insights:

Jonathan Miller from the Miller Samuel appraisal firm is one of those who thinks the tax law changes could have a negative impact on the housing market. He recently told Curbed.com:

“It’s very hard to come up with how this [tax bill] is helpful to housing. It’s either neutral or negative; there’s no positive, at least that we’re aware of at the moment. All this does is make everything more expensive, at least in high-cost housing markets.”

But when you run the numbers, there’s only a small percentage of homeowners with mortgage loans who will be affected by the reduced mortgage interest deduction.

For one thing, there’s a grandfather clause built into it. So homeowners in Washington State who had existing home loans prior to the change won’t be affected. They’ll keep their previous deduction limit, in most cases.

Also, according to an analysis done by realtor.com, “the new [deduction] cut is expected to affect only about 1.3% of new mortgages.” It will mostly affect affluent homeowners with larger mortgage balances, people who theoretically could afford the cut.

Going forward, there might be fewer homeowners who actually take the revised mortgage interest deduction. That’s because the Tax Cuts and Jobs Act roughly doubled the standard deduction. So taxpayers have less of an incentive to itemize (which is necessary if you want to take advantage of all available deductions).

Ken Johnson, a real estate economist at Florida Atlantic University, is another expert who thinks the impact will be minimal.

“On a scale of 1 to 10 on if interest deductibility is going to have a big impact on housing, it’s a 2” Johnson said. “It’s not clear that it will hurt housing. But it is clear that it’s not going to help.”

So it’s not entirely clear what kind of impact these changes will have toward home prices and housing conditions in Washington, or elsewhere in the country.

Home Prices in Washington Continue to Rise

As far as Washington home prices go, it’s hard to imagine they’ll stop rising anytime soon. Though they might slow down a bit.

Real estate markets across the state — and particularly within the Seattle metro area — are currently short on supply. There’s plenty of demand for housing, but not enough inventory to meet that demand. And this is pushing prices north.

If home value appreciation slows down over the coming months (as it is expected to do), it will probably have more to do with affordability issues than tax reform. Property values in Washington have risen sharply over the last couple of years. And they now appear to be slowing as the housing market gradually “normalizes.”

According to a February 2018 report from Zillow, the median home value for Washington State rose by around 10% over the last 12 months. They expect the median to rise between 4% and 5% over the next year or so (stretching into early 2019).

Related: Home price forecasts for Washington

Disclaimer: This article includes views and insights from various third parties not associated with our company. We have gathered them here to give you a broader sense of these tax changes and how they might affect you.

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