Trump's Tax Plan Could Slow Home Value Growth In the Next 3 Years

Trump’s Tax Plan Could Slow Home Value Growth In the Next 3 Years

Housing Market
(Image: iStock/Terminator3D)

In recent months, several blue-chip U.S. corporations have pledged to give workers hefty bonuses or pay raises because of the new Republican tax-reform plan. But don’t count housing experts among those glorifying the $1.5 trillion tax overhaul package President Trump signed into law in December 2017.

In fact, new changes to U.S. tax laws prompted 41% of survey respondents to lower their long-term expectations for the nation’s housing market. The findings are from the latest Zillow Home Price Expectations Survey. Over 100 housing experts and economists were questioned on their expectations for home price growth, and if tax reform influenced the predictions.

Home values in the U.S. totaled $31.8 trillion in 2017, up 6% from $29.9 trillion in 2016, Zillow reports.

But housing experts project appreciation to slow to below 3% by 2021, according to the Zillow survey. A possible reason for the decline is fear that cutting taxes when the American economy is already running at full capacity increases the risk of a downturn in the next five or so years. The drop could push the Federal Reserve to increase interest rates faster than had been expected, says Zillow Senior Economist Aaron Terrazas.

Slower appreciation, of course, would be bad news for people who rely on homeownership to help build wealth, including millions of African Americans. One of the biggest benefits of home appreciation is it allows homeowners to sell for a higher price and boost their net worth.

Efforts to get a comment from the Trump administration were unsuccessful.

Forty-one of those surveyed reported their overall housing outlook is now more pessimistic after being asked how the new tax law impacted their five-year forecast for home values in the U.S. Some 31% had a more optimistic view, while 28% said that tax reform did not change their outlook.

The Tax Cuts and Jobs Act, enacted in December 2017, limited many itemized deductions such as the mortgage interest deduction while expanding the standard deduction. Most taxpayers take the standard deduction and will see take-home incomes increase as a result of tax reform, providing a boost to spending, savings, and investment this year.

“By expanding the standard deduction, tax reform will put more money into the typical American’s pocket in 2018, which will boost spending and could help renters save faster for a down payment,”  Terrazas says. “But the longer-term outlook is less rosy. There is some concern that tax cuts at this point in the business cycle may be throwing fuel on an already ranging fire and could lead the economy to overheat. Most economists we surveyed see a stronger outlook for the housing market over the next year or two but a more pessimistic outlook on the longer horizon.”

In the near future, experts raised their predictions from previous surveys for home values as limited inventory and high demand keep prices moving higher.

Homes today are less valuable than they would be if the last recession had not happened. If the housing bubble and bust had not occurred, and home values had instead appreciated at a steady pace, the median home value would be about $214,500, 4% higher than its current value of $206,300.