As a country, we have woven home ownership into the fabric of the American Dream for centuries. In addition to the pride of owning a home (especially for first-generation home buyers), we've grown accustomed to the benefit of counting on a reduction in income taxes based on the mortgage interest we paid within the tax year.
Experts believe 2018 could spell change for many who count on this reduction at tax time. With the recent passage of tax reform in the form of the Tax Cuts and Jobs Act, it begs the question of whether or not it will result in a reduction in home ownership.
Moving On Up?
We are familiar with economic booms here in Texas. Our fair state's proclivity for producing oil and cattle remains stitched into American lore. The most recent boom in the form of a hot housing market. Combined with an out-of-state influx of companies and residents, the boom keeps rushing through the state like a West Texas wind.
As a result, many home prices have skyrocketed. A family home valued between $300,000-$400,000 10 years ago may fetch a price of $500,000-$1,000,000 in today's market. That's where the rubber meets the road for many taxpayers used to deducting interest on their mortgage when itemizing. They may find themselves falling into the category of owning a home near the cap of the deduction limit.
Homeowners who purchase after December 15th, 2017 will see their ability to deduct mortgage interest drop by $250,000 (from $1,000,000 to $750,000). A large percentage of homebuyers regularly choosing the standard deduction versus itemizing and deducting their mortgage interest, probably won't feel the effect of this recent change on their own taxes. But, it doesn't mean immunity from its effect.
Those used to itemizing mortgage interest may experience less incentive if the tax benefit does not prove favorable. For those considering purchasing in the range of $750,000+, they may choose to stay where they are versus moving up in price on a new home if they can't deduct at the previous level of $1,000,000. We could see a trickle-down effect in the rest of the market. People choosing to stay in their existing home decreases current inventory. Less inventory can slow the housing market. Those choosing the standard tax deduction may find purchasing the home they want more difficult.
Add to this the market of renters who won't view home ownership as a major incentive come tax time and we could see a slowdown of what is an amazing time of expansion in Texas.
This is Texas
However, we are on an epic level of expansion that seems to rival similar large-scale expansions in New York, California, and Florida. One advantage our state continues to hold . . . land. Coupled with a favorable tax climate for businesses, Texas may continue to welcome new companies, their employees, and out-of-state transplants looking to follow the job trail.
If home builders continue to provide inventory, we may see this boom evolve into something completely unprecedented. Also, taking into account the continuation of the American Dream of home ownership, the decision not to itemize and take the mortgage interest deduction in favor of taking the standard deduction may not matter to buyers.
What effect the passage of this tax reform will have on the national housing market remains to be seen. Will it have the same effect on the Texas housing market? It may, or, it may not.
Our Lone Star State may shine a little brighter on the national stage.
At Insurance For Texans, we know how the cost of home ownership can fluctuate due to a variety of factors, including property tax and homeowner insurance in escrow.
We're here to help!
