How tax reform changed the mortgage market's outlook
Tax reform leaves mortgage-related deductions far too low to help the average homeowner this tax season, in contrast to last year, when they slightly exceeded the standard deduction.
Mortgage interest and property tax deductions were $9,012 lower than the standard deduction for an average couple in 2018, a recent study by John Burns Real Estate Consulting finds. In 2017, mortgage-related deductions exceeded the standard deduction by $345. The analysis uses a 1.5% property tax rate to calculate the annual interest and property tax paid. It also assumes the borrowers put 5% down on a median-priced home, and had an average mortgage rate.
On the surface, this suggests tax reform has taken away a homeownership incentive from the average U.S. couple; but a look further back at the period before tax reform went into effect shows the average borrower hasn't benefited much or at all from these mortgage-related deductions for several years.
While the average U.S. couple's mortgage-related deductions exceeded the standard deduction for the 2017 tax year, they were $650 to $2,999 lower than the standard deduction each year between 2009 and 2016 due to a combination of tax policy, historically low rates and weaker housing market conditions.
"The takeaway here is that as standard deductions have risen and mortgage rates have fallen, there is less of an incentive to itemize, and the tax benefits of homeownership for the average person has fallen," said Kate Seabaugh, manager of research for John Burns Real Estate Consulting.
Under current tax rules and market conditions, interest rates would have to average 8.4% or higher before mortgage-related deductions would exceed the standard deduction of $24,000 for the average U.S. couple with a home loan, Seabaugh said.
So long as rates remain lower, the most immediate effect of lowering the limit for the mortgage interest deduction to $750,000 from $1 million, and putting a $10,000 limit on property tax deductions, could be a reduction in the tax-incentive to buy higher-cost homes.
"It could impact the wealthier, higher-priced areas, or areas where there are not necessarily super high-priced homes, but the tax rate is higher," said Todd Teta, chief product and technology officer at Attom Data Solutions.
The impact of the tighter tax-deduction limits on mortgage demand appears to be marginal so far, said Raymond Eshaghian, president of GreenBox Loans in Los Angeles.
"Folks are not necessarily worried about the tax deductions. They still want a loan so they can be a homeowner, to buy investment properties, and so on, and so forth. They're not all saying, 'Let's not buy the property because we need the tax deduction,'" Eshagian said.