Tax changes don’t seem to have changed the calculus on home ownership very much
The spring home-buying season is in full swing, but the landscape has changed a lot from last year. Congress has curtailed tax incentives to purchase a home, mortgage rates are up and homes are more expensive. Yet, for many folks, buying a home is still better than renting.
The new tax law doubles the standard deduction to $24,000 for couples and caps deductions for state and local taxes at $10,000. Those greatly limit the tax incentive to purchase a home instead of renting. Zillow estimates homeowners who will take deductions and list mortgage interest and property taxes will fall from 44% to 14%.
Economists estimate this will reduce purchase offers enough to lower median housing prices by about 4% in more expensive cities, but that has yet to become apparent in the data.
Tax law changes were in focus by December and we have resale pricing data available through February. In the top 20 metro areas year-over-year price increases were about the same or greater than a year ago.
Most home buyers have more disposable income to pay mortgages. In their take-home pay, a higher standard deduction compensates them for not taking interest and property tax deductions, and lower rates overall actually boost most taxpayers’ buying power.
In hot markets, foreign buyers, who for a variety of reasons pay cash and are simply parking wealth in the United States, have played a big role in elevating prices. U.S. personal income tax laws have few consequences for that behavior.
The FreddieMac average for a 30-year fixed-rate mortgage is currently about 4.6% — up from about 4% a year ago. For a $300,000 mortgage, that adds about $150 to monthly payments but landlords are paying more to finance apartment buildings too and that gets factored into rents.
How long a purchaser plans to stay in a home remains a key factor, because closing costs, realtors’ fees, and the like significantly raise the initial cost of owning a home — even if you can roll these costs into the mortgage balance to stretch those out.
Employing a calculator on the Trulia website, we examined the buying vs. renting tradeoff with a 30-year mortgage, a 4.6% interest rate and 20% down payment. The formula also factors in higher utility costs associated with home ownership, and expected inflation and rent increases.
If the home is occupied for at least 4 or 5 years, owning beats renting even without a mortgage interest deduction.
Families could instead invest their down payments in stocks, which at first glance appear to be the better bet. From 2000 to 2017, equities as measured by the S&P 500 SPX, -0.80% were up an average of 5.3% annually, whereas homes appreciated 3.9%.
In recent years, appreciation as measured by the S&P Core-Logic Case-Shiller Indexes for top 20 markets and overall nationally indicate an accelerating pace of home appreciation — rising steadily from 4.4% in 2014 to about 6.5% in 2017.
Tougher zoning in and around cities where major employers are located, rising material costs and a slow pace of productivity growth in home building combine to make additions to the single-family housing stock slow. With millennials finally pushing into the house market, continued appreciation beating the historical trend and competitive with stocks can be expected.
Also, homeowners will have their full equity working for them, as opposed to just their down payments.
Homeowners enjoy more flexibility — they can modify and add to their homes to fit the circumstances of their families and personal preferences — and stability — they don’t have to fret about a landlord selling to a new owner who might want to repurpose the building.
Owning a home in a good neighborhood — not necessarily a rich area but one that is stable and has good employers within commuting distance — has proven one of the most reliable ways for ordinary folks to save and invest.