What Does the New Tax Reform Mean to the Mortgage Market?

What's behind this tax reform?   

The new GOP tax reform has everyone making predictions on how it’ll affect the mortgage and housing market in the months to come. After president Trump signed the bill on December 22, many economists believe that home prices will lower and that the new reform will have different levels of impact on every city. But what does it change with it? How can it affect your mortgage and what should you prepare for? We’re discussing all about it in today’s article.

The new tax reform has three key changes for mortgage payers. For the longest time, you might have heard that one of the most encouraging parts of homeownership was the potential to apply for mortgage interest deduction from your taxes. The former cap established a limit of up to $1.000.000 that could be deductible if the loan was used to improve your house or buy a second property. However, with the new bill, the cap has lowered to $750.000; the property tax deduction will drop to $10,000, and the standard deduction for all taxpayers will increase to $12,000 for single filers and $24,000 for joint filers.

This was purposely done to increase the standard deductions, as it might no longer be a good idea for households to itemize the mortgage interest deduction. This means it doesn’t matter if a potential home buyer spends extra money on a house, a car or a vacation because all that spending is treated the same under standard deductions. The practice of spending more on a home in hopes of recouping some of the spends during tax season will probably decrease.

It will particularly be felt deeply in urban areas with high-priced properties because people won’t be able to deduct the full, combined total of state income taxes and property taxes since the houses surpass the $750,00 cap. Cities in New York and California might be especially affected. However, if you live in an area with lower prices, the new bill probably won’t affect you.

As we said in previous articles, supply has been on the low side during the past few years in the United States. A lack of supply and high demand lead to overheated home prices, which joined with the new tax reform, might refrain people from buying houses, especially millennials. However,  because of what we explained before, some economists and housing experts agree that this new bill will help slow price increases, more specifically in expensive housing markets.

This might benefit first-time homebuyers who might have felt frustrated and exasperated by the rapid increase in home values. The new reform could also help protect low-income house tax credit, and small builders could start constructing more affordable houses, which is something that’s been lacking in the housing market, especially during this period of high demand.

It’s hard to know for sure what the true impacts of this new legislation will have on the housing market. Although home sales might get a little stale during the next few weeks, most experts believe that today’s economy is strong enough to go back to normal soon enough. It’ll definitely be an opportunity for builders to create new types of incentives for homebuyers that tackle their real necessities on today’s market. To learn more about what the new reform might mean to your mortgage and taxes, contact Intercorp Mortgage Solutions, and let us assist you!

How will it affect homebuyers?