The Impact of House Tax Plan on California Counties’ Home Prices
A study conducted by the
Although the House Bill grandfathers mortgage interest deductions up to
In addition to these recommended changes, the House bill calls for other revisions, including changes in tax rates and standard deductions, the elimination of the personal exemption, the elimination of the alternative minimum tax (AMT) and an end to the deductibility of state and local taxes.
This study is based on the assumption that homebuyers evaluate the beneficial tax consequences of purchasing a home and are willing to pay more for a home to reap the resulting tax benefits.
Table 1 below presents the following data relating to the impact of the House bill on a median- priced home in
* The median-priced home is currently
* To qualify for a 30-year mortgage with the required down payment, the minimum median family income level is
* Based on the existing federal tax code with existing home-related deductions in place, the study's findings suggest that a family with the required income of
* Under the proposed House bill tax regulations and its caps on home-related deductions, the present value of the tax savings from buying the
* Buying a home under the House bill tax regulations will, therefore, result in a loss of home-owner tax savings of
* If the tax savings from buying a home declines as a result of the proposed revisions in deductibility, so too will the amount a family will be willing to pay for that In the case of a median-priced home of
The accompanying Table 2 uses the methodology described above on a county- by-county basis. The counties are ranked in order of lowest to highest median home price. The projected housing price depreciation that would result from the loss in home-related deductions in the House Bill ranges from zero for counties like
It might be argued that grandfathering current home-related tax deductions for existing homeowners in the proposed tax plan will limit the potential losses (gains) in home values. That is not the case. Home prices are largely set by new transactions that will reflect the changes under the proposed tax plan, since new homebuyers will be subject to the new caps on mortgage and property tax deductions.
Since selling a home means a loss in potential home-related tax deductions, resale activity will likely decline, reducing the supply of homes for sale. But demand will also decline, since potential homebuyers will have an incentive to stay in their current homes in order to continue benefitting from the housing deduction of the grandfathered provision. New homebuyers will therefore be forced to more narrowly rely on newly built housing to a greater extent. Although these trends are national in scope, the dynamic changes outlined here will be far greater in areas where incomes and housing prices are higher.
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