The Tax Cuts and Jobs Act Disincentivized Homeownership, With Crippling Repercussions: Study

Affordability Forum Highlights Need for New Policy

The Tax Cuts and Jobs Act disincentivized homeownership, the housing industry says, bearing broad consequences in the economy, for household wealth, and more.

At a forum hosted by the National Association of REALTORS® on Thursday, experts and legislators met on policy, addressing affordability, credit, gaps in the homeownership rate and supply, and the far-reaching implications of the legislation.

In tandem, NAR released reports on accessory dwelling units, tenure and zoning, and, most notably, a research white paper, prepared by Rosen Consulting Group (RCG), to advocate for incentivizing ownership.

Among its provisions, the TCJA cut down the mortgage interest deduction, imposed a limit on state and local tax deductions—which include property taxes—and doubled the standard deduction, deterring filers from itemizing, the RCG research shows.

To combat the fallout, NAR and RCG propose a credit, which would entail:

• A benefit to first-time homebuyers
• Basing eligibility on local parameters, such as earnings and home prices, with adjustable ceilings and/or income phase-outs
• Basing eligibility on home-sale timing, when the benefit to the economy is larger than in later years, with phase-outs over time
• The ability to choose the credit or to itemize, based on circumstances, year to year

“It is critical to structure any new federal tax policy that incentivizes homeownership as a tax credit rather than a deduction, so that the benefit can be taken without the need for itemizing deductions,” the RCG research states. “This would better support the large and rapidly growing groups of households who have struggled to gain access to homeownership during the last decade and have now been largely excluded from the annual federal tax incentives for owning versus renting.”

By basing eligibility on indicators in the local market, the credit “equalizes” homeownership, according to the research, and assists homebuyers in most need of support. Likewise, if eligibility hinges on sale timing, the credit encourages homeowners to trade up, after their current eligibility phases out—adding crucial inventory to the market. Per the research, consumer spending tends to track up in earlier homeownership years.

Most vitally, with a credit, affordability can expand, especially to the group hardest hit in the recession: the $50,000-$200,000-earning households, which include minorities and millennials.

Among $50,000-$150,000 households, specifically, African Americans comprise 5.5 million individuals, Hispanics, 7 million, and millennials, 20 million, according to the research. As of the fourth quarter of 2019, both the African American and Hispanic homeownership rates trailed whites, 44 percent and 48.1 percent versus 73.7 percent, respectively. Despite the millennial rate rising to 37.6 percent, it continues to lag, as well, lower than the pre-recession record, 42 percent.

‘Institutional Challenges Still Must Be Faced and Defeated’
During the forum, NAR President Vince Malta discussed the importance of unity when it comes to ensuring the future of homeownership, especially for minority populations.

“We have to work together with a broad coalition of multicultural real estate groups, lenders and builders to broaden housing opportunities for the underserved communities,” Malta said. “We believe that widely spread property ownership helps makes society fairer, more prosperous and more equitable. Everyone deserves access to affordable housing.”

Among the challenges, access to financing has posed roadblocks, forum panelists shared.

“There are many people who are mortgage-ready but are not buying. Why? Because they can’t afford it. Because of low inventory. But also because they don’t have access to credit,” said Sara Rodriguez, CEO of Titan Title and 2019 president-elect of the National Association of Hispanic Real Estate Professionals.

Discrimination, too, has inarguably played a role, explained Bryan Greene, director of Fair Housing Policy at NAR.

“You might expect there to be a lower homeownership rate among minority Americans, as a history of discrimination in this country has left many with lower incomes…and less generational wealth to pass on for down payments,” Greene said. “We’ve seen homeownership rates among racial groups steadily rise, but I think many of us would have expected rates to have risen more.”

“Being educated on down payment assistance and credit will help increase black homeownership,” noted Donnell Williams, president of the National Association of Real Estate Brokers. “The average African American purchasing a home is 48 years old—we are moving that down with programs and by providing education.”

As Greene pointed out, just last year, African American homeownership leveled to its pre-1968 rate, when the Fair Housing Act first passed.

“The fact that homeownership rates for African Americans have regressed in spite of the presence of fair housing laws makes clear that various institutional challenges still must be faced and defeated,” Malta said, adding that “by strengthening post-purchase counseling; funding programs to prevent foreclosure for low- and moderate-income and vulnerable families of color; and building tools that help create early-warning displacement triggers, we can ensure first-time homebuyers have the knowledge and resources to remain homeowners for the rest of their lives.”

At the beginning of the year, NAR announced changes in its approach to defending fair housing, with a new plan that calls for examining licensing regulations and training, among other programs.

“As this country becomes more diverse, we need to make sure, as real estate professionals—whether Hispanic, Asian, white or whoever—that you serve people the correct way no matter your background, and that you provide full access to the opportunities we are fighting for,” said Jim Park, chairman emeritus of the Asian Real Estate Association of America.

‘Overturning a Century of U.S. Tax and Housing Policy’
As an economic engine, homeownership matters, the RCG research shows.

Beyond individual savings and wealth—a compelling incentive on its own—homeownership contributes to GDP as a portion of spending (e.g., paying utilities). Examining GDP in the third quarter of 2019, housing-related spending sunk to 14.6 percent, down from the historical 16.9 percent per year. Construction (including home renovations) historically nets 5.1 percent of GDP per year, but as of the third quarter of 2019, contributed only 3.1 percent. Since 2010, GDP growth has stalled under 3 percent.

In a compound effect, homeownership also boosts the labor market, because businesses can collateralize their home, fueling hiring and spending. According to the research, small businesses employ 47 percent of the private workforce, and, in separate studies, both Harvard and MIT connected dots between entrepreneurship, homeownership and the housing market. Affordability is linked to local job market strength, as well, additional findings from NAR show.

With the current economic expansion, the longest on record, homeownership can continue driving momentum, or cushion a downturn, NAR and RCG say. In fact, if activity in the housing market stabilized—namely, construction and home sales—RCG estimates 0.25 percent-0.5 percent gains in GDP per year, over the next four years, and $220 billion-$400 billion into the economy overall. According to additional estimates from NAR, one existing-home sale translates to $85,000 in “economic impact.”

Then there are the intangibles, like the American Dream homeownership symbolizes, and benefits to the community, such as improved neighborhoods and schools, and, for children especially, safety and stability. According to NAR, homeownership preserves these, and more.

However, as a result of the TCJA, the amount of deductions dropped significantly in 2018, markedly within the $50,000-$200,000 segment, the research shows. Moreover, because the MID and SALT deductions are not adjusted for inflation—in contrast to the standard deduction—they have less long-term viability, because the bar to itemize keeps moving out of reach.

“In effect, the TCJA practically terminated the annual tax benefits for owning a home for all but the highest-income households, overturning a century of U.S. tax and housing policy,” the research states.

Importantly, NAR and RCG acknowledge that while the TCJA effectively erased incentives, it could help in unexplored ways, such as allowing for down payment savings—a challenge for homebuyers today.

From a macro perspective, however, the benefits of homeownership spread wide, and as such, it is critical for the federal government to support, NAR and RCG say.

“No longer providing a tax incentive for buying a home versus renting is a fundamental policy shift for tens of millions of households,” the research states. “A larger number of households in the middle-class, minority and millennial group…continue to face the greatest headwinds to increased homeownership. In order to ensure U.S. tax policies
support access to the American Dream of owning a home…it is imperative that homeownership can and should be incentivized in the federal tax system.”

In December, Congress approved federal funds for two key provisions: the ability to deduct mortgage insurance premiums, and the ability to exclude debt that was forgiven (i.e., in a short sale). Both had been pending reauthorization. The House of Representatives also passed H.R. 5377, which proposes eliminating the $10,000 limit on SALT deductions for two years, beginning with 2020 returns. The bill is currently awaiting a Senate vote.

Along with assessing the disparities in homeownership and the impact of the TCJA, the forum hit on short supply, with consensus that the affordability crisis is pervasive, and that the biggest challenges have regulatory roots—in fact, one panelist shared that it contributes to 24 percent of the cost of erecting a single-family home. In another session, panelists touched on the Affordable Housing Credit Improvement Act, an expansion of the Low Income Housing Tax Credit, and the Neighborhood Homes Investment Act, which centers on declining existing homes and rehabilitation.

In addition to leadership at NAR, the forum included perspectives from Muriel Bowser, District of Columbia mayor; Stefanie DeLuca, the James Coleman professor of Sociology and Social Policy at John Hopkins University; and Brian Montgomery, deputy secretary of the U.S. Department of Housing and Urban Development.

Ahead of the forum, NAR urged HUD to consider a litany of policy suggestions, centered on credit, GSE reform, “Yes in My Backyard”—which addresses land-use restrictions—and more.

For more information, please visit www.nar.realtor.

Liz Dominguez contributed to this report.

Suzanne De Vita is RISMedia’s senior online editor. Email her your real estate news ideas at sdevita@rismedia.com.