The GOP Tax Bill’s Impact on the Real Estate Market

tax legislation and the real estate market
by Team Stessa, posted in Newsletter

The Stessa Weekly Newsletter is hand-curated every week to bring you insightful accounts of new features, investing tips, business insights and market trends from the real estate ecosystem. In addition to our regular Rental Market news, this week covers the widespread implications of the Republican tax bill. With the tax bill heading to Trump’s desk, we have rounded up a variety of analysis and perspectives on how it will impact commercial real estate, residential rentals, and the housing market.

Tax Reform Roundup

Diana Olick reports on CNBC that the Republic tax bill will likely benefit investors in single-family rental homes. None of the current tax deductions and write offs for expenses would change under the Republican tax proposal. The tax plan could, in fact, drive increased demand for single-family rentals because it will reduce the tax benefits of homeownership.

Keiko Morris reports in The Wall Street Journal that the final Republican tax bill has given commercial real estate owners reasons to cheer. As most real estate companies are structured as partnerships, limited-liability companies and other so-called pass-through companies, they will benefit from tax deductions that the bill proposes for these businesses.

Conor Dougherty of The New York Times reports that the proposed bill will increase many homeowners’ monthly housing costs by scaling back mortgage interest and property tax deductions. By roughly doubling the standard deduction, it reduces the incentive to buy homes by making far fewer homeowners eligible for preferential tax treatment.

Alexander Casey reports on Zillow that under current law, roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction. Under a reconciled House and Senate tax reform plan, that proportion of homes drops to 14.4 percent.

Patrick Clark of Washington Post reports that the overhauled Republican tax legislation will lower rates for property owners, spur new investment and increase demand for rental housing in a clear indication that the commercial real estate industry stands to gain.

Citing a Cushman & Wakefield study, the report says that the tax plan will likely favor residential landlords. Retail landlords will benefit from reduction in taxes on companies that rent space. Corporate tenants are key beneficiaries of the tax plan.

Jeff Andrews reports on Curbed that the final version of Republican tax reform bill will reduce affordable housing construction and weaken or negate many tax deductions related to owning a house including the state and local tax (SALT) deduction and the mortgage interest deduction (MID). The bill caps SALT deductions at $10,000 and lowers MID from $1 million to $750,000 worth of mortgage loans. Both SALT deductions and the MID affect mostly coastal blue states with high taxes and expensive housing markets.

Rent Growth Slowdown

Growing vacancy rate and stagnation in rent increase are slowing down the growth of rental households in the U.S., concludes a 2017 study conducted by Harvard’s Joint Center for Housing Studies.

Citing this study, David Z. Morris reports in Fortune that census data shows a decline in the growth rate of renter households in 2016. Some early 2017 data shows an actual decline in renters and a rise in vacancy rates.

Citing the same Harvard study, Henry Grabar of Slate reports that for the first time since 2004, the number and share of Americans who rent their homes have appeared to decline. The foreclosure crisis post the 2007-08 housing market crash fueled the rental markets. The rental industry remained strong even when a lack of new construction during and after the recession helped improve the housing market, but the impact of 10 million new tenant households in the last 10 years has put tremendous pressure on the stock of rental apartments, particularly in big cities.

A lot of high earners who were pushed into rental markets in the aftermath of housing crisis now seem ready to buy homes and it will likely cause a drop in the number of renters that has already reached a plateau.