Trump's tax reform is contributing to the housing-market slowdown, New York Fed finds

  • President Donald Trump's tax cuts passed in 2017 appear to be partly behind the slowing housing market.
  • The new law increased after-tax home-ownership costs and reduced incentives to own homes, through measures such as a cap on the amount of mortgage debt on which interest is deductible.
  • While the tax overhaul came at the same time as higher borrowing costs, the New York Fed said the recent slowdown was more severe than previous episodes when mortgage rates rose by a similar amount.

The housing market has continued to cool this year, remaining a soft spot in an otherwise solid economy. And President Donald Trump's tax cuts passed in 2017 appear to be partly to blame, according to a new study from the New York Federal Reserve Bank.

"Changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018," economists Richard Peach and Casey McQuillan said in the report out Monday, though they added the results weren't conclusive.

The Tax Cuts and Jobs Act was long expected to increase after-tax home ownership costs by capping the amount of mortgage debt on which interest is deductible, doubling Americans' standard deduction and lowering marginal tax rates. Those changes reduced the apparent price tag of the plan, but drew widespread criticism from Democrats and some industry groups.  

RELATED: Take a look at the salary needed to buy a home in 25 U.S. states: 

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Salary needed to buy a home in 25 biggest US cities
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Salary needed to buy a home in 25 biggest US cities

25. St. Louis, Missouri

Income needed for 20% down: $37,027

Income needed for 10% down: $41,655

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24. Atlanta, Georgia

Income needed for 20% down: $45,592

Income needed for 10% down: $51,291

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23. San Antonio, Texas

Income needed for 20% down: $47,158

Income needed for 10% down: $53,053

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22. Tampa, Florida

Income needed for 20% down: $48,013

Income needed for 10% down: $54,014

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21. Houston, Texas

Income needed for 20% down: $48,9678

Income needed for 10% down: $54,975

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20. Philadelphia, Pennsylvania

Income needed for 20% down: $48,948

Income needed for 10% down: $55,067

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19. Charlotte, North Carolina

Income needed for 20% down: $49,844

Income needed for 10% down: $56,074

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18. Dallas-Ft. Worth, Texas

Income needed for 20% down: $53,322

Income needed for 10% down: $59,988

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17. Chicago, Illinois

Income needed for 20% down: $53,973

Income needed for 10% down: $60,720

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16. Orlando, Florida

Income needed for 20% down: $54,116

Income needed for 10% down: $60,880

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15. Phoenix, Arizona

Income needed for 20% down: $55,479

Income needed for 10% down: $62,414

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14. Minneapolis-St. Paul, Minnesota

Income needed for 20% down: $55,845

Income needed for 10% down: $62,826

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13. Baltimore, Maryland

Income needed for 20% down: $61,216

Income needed for 10% down: $68,868

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12. Miami, Florida

Income needed for 20% down: $72,222

Income needed for 10% down: $81,250

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11. Riverside, California

Income needed for 20% down: $73,748

Income needed for 10% down: $82,967

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10. Portland, Oregon

Income needed for 20% down: $81,235

Income needed for 10% down: $91,389

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9. Sacramento, California

Income needed for 20% down: $84,683

Income needed for 10% down: $75,274

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8. Washington, DC

Income needed for 20% down: $86,667

Income needed for 10% down: $97,500

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7. New York-Newark-Jersey City, New York

Income needed for 20% down: $87,114

Income needed for 10% down: $98,004

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6. Denver, Colorado

Income needed for 20% down: $91,570

Income needed for 10% down: $103,016

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5. Boston, Massachusetts

Income needed for 20% down: $99,972

Income needed for 10% down: $112,468

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4. Seattle, Washington

Income needed for 20% down: $102,291

Income needed for 10% down: $115,078

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3. Los Angeles, California

Income needed for 20% down: $127,945

Income needed for 10% down: $143,938

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2. San Diego, California

Income needed for 20% down: $132,238

Income needed for 10% down: $148,768

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1. San Francisco, California

Income needed for 20% down: $201,205

Income needed for 10% down: $226,356

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"Before the tax law, the incentive to purchase and even trade up was in the itemization of taxes," said Jonathan Miller, the chief executive of Miller Samuel, a real-estate appraisal firm. "The 'reform' aspect of the tax cut replaces the direct messaging long enjoyed by housing."

The tax overhaul came at the same time as higher borrowing costs, with the average contract interest rate on 30-year fixed rate mortgages climbing about 70 basis points between the end of 2017 and the third quarter of 2018. But the most recent slowdown was more severe than in two previous episodes when mortgage rates rose by a similar amount.

The New York Fed found the largest sales declines tended to be in the highest price ranges and areas with higher income and property taxes at the state and local level, where homebuyers would have been most affected by the tax changes.

For homes where the amount borrowed exceeds $750,000, for example, the economists said capital costs appear to have increased to 5% from 1%.

"Different provisions of the TCJA combine to increase the marginal user cost of capital for homeowners, especially for higher-priced homes and homes in high-tax jurisdictions," Peach and McQuillan said.

While lower borrowing costs have drawn some Americans from the sidelines in recent months, gauges of the housing market have continued to come in below expectations. In March, mortgage rates hit a 14-month low.

"This plan was introduced at the same time mortgage rates were rising so the cause of the slow down was less clear," Miller said. "But today rates are now lower than they were a year ago so the slowdown wasn’t really about rising mortgage rates."

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