Tax law might not spell instant relief for homebuyers

Despite cheers from industry groups, it could take time for the effects of the new tax law to reach the housing market.

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Shop smarter for mortgage rates 1. A rise — or fall — in mortgage rates 2. A counteract to the housing shortage 3. Savings for some homeowners More on Trump’s tax law

“The [law] is going to have very little immediate impact on the housing market because the changes aren’t going to hit people’s wallets for a year or two,” says Stephen Kates, CFP, financial analyst for Bankrate. “Mortgage rates and prices are the biggest issues right now, and I don’t think it will impact those directly.”

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The changes come as stubbornly elevated mortgage rates and continued appreciation keep homebuyers out of the market. Existing-home sales stayed muted in May, the National Association of Realtors reported, and the average 30-year mortgage rate has remained above 6.5 percent since October, according to Bankrate data.

Meanwhile, Bankrate recently found buyers need an annual household income of nearly $117,000 to afford a typical home today, up almost 50 percent from five years ago.

Yet, by making many of the provisions from the 2017 tax law permanent, the bill eases some economic uncertainty, says Phil Crescenzo Jr., vice president, Southeast Division at National One Mortgage Corporation.

Kates agrees: “Indirectly, the added certainty for businesses might help with the labor market, and an increase in the speed and level of hiring could do more for homebuyers than anything else.”

Here are three other ways the bill could play out for homebuyers and homeowners in the long term:

1. A rise — or fall — in mortgage rates

While homebuyers might not feel the impact of the bill now, it could bear out in mortgage costs in the future. The nonpartisan Committee for a Responsible Federal Budget previously estimated the bill would increase interest rates on many forms of credit, including mortgages, by 0.34 percentage points in the next 10 years. In that time, it could push up the average new mortgage payment by more than $1,450 per year.

If the bill spurs economic growth, however, it might lower deficit spending, which could ultimately drive down Treasury yields and mortgage rates, says Ed Pinto, senior fellow and co-director for the nonpartisan American Enterprise Institute’s Housing Center.

“I would rate this a 50-50 chance,” Pinto says.

Learn more: Who sets mortgage rates?

2. A counteract to the housing shortage

Some provisions could help grow housing inventory, says Dr. Danielle Zanzalari, assistant professor of Economics at Seton Hall University. The bill cements the Low-Income Housing Tax Credit, or LIHTC, a federal tax credit for developers who create affordable rental housing for lower-income households. It also expands deductions and incentives for developers of single-family and multifamily properties.

“This will create a better business climate that allows builders to increase the nation’s housing supply, which is crucial to help ease America’s housing affordability crisis,” said Buddy Hughes, chairman for the National Association of Home Builders, in a statement following the bill’s Senate passage.

In addition, the bill expands opportunity zones — “a positive move for business owners and real estate investors,” Crescenzo says. Opportunity zones were enacted in 2017 to help incentivize investment in distressed areas.

“For residents in these neighborhoods, [opportunity zones] could bring new housing, amenities and jobs,” says Pete Carroll, executive vice president of Public Policy and Industry Relations at Cotality, a property data firm, adding that it “also risks accelerating gentrification and pricing out longtime renters and homeowners unless layered with housing affordability incentives like LIHTC or with affordability requirements like inclusionary zoning.”

“While these federal incentives aid housing development, meaningful progress depends on local zoning reform and cutting through red tape,” Dr. Zanzalari says.

3. Savings for some homeowners

At the individual level, the new tax law hikes the cap on the SALT deduction from $10,000 to $40,000, effective from 2025 through 2029. (In 2030, the cap drops back down to $10,000.) This tax break allows homeowners to deduct property taxes and state income taxes, so it best serves homeowners in high-cost areas who itemize — but, the higher ceiling makes it so more homeowners will benefit. Before the 2017 tax law, there was no limit on how much taxpayers could deduct under the SALT deduction.

The change from a $10,000 tax deduction to a $40,000 one adds up to about $10,500 in additional tax savings per year for homeowners in the 35 percent tax bracket, according to an analysis by realtor.com.

In addition, the bill resurrects the tax deduction for mortgage insurance premiums, which expired in 2022. When it was in effect, the average deduction amount was $1,454, according to U.S. Mortgage Insurers, an industry group.

On the other hand, the bill also permanently limits the mortgage interest rate deduction to the first $750,000 of debt.

“While this provision simplifies the tax code and preserves federal revenue, it reduces potential tax relief for middle-income buyers in high-cost regions,” Carroll says.