The high level of activity in Washington, D.C. these days can hardly be overstated. But while Congress and the President continue to bat charges of treason back and forth in the midst of an official impeachment inquiry and a particularly convoluted campaign season, fears continue to rise that the day-to-day costs of doing business will be lost in the shuffle.
Such is the case with the potential impact of the Tax Cuts and Jobs Act of 2017 on housing, particularly in high-tax states like Connecticut.
Ryan Raveis, co-president of Shelton-headquartered William Raveis Real Estate, Mortgage & Insurance, recently took a trip to D.C. to discuss the situation with members of the U.S. Treasury Department, including Assistant Secretary of the U.S. Treasury for Tax Policy David Kautter.
“We have to make sure that the housing market stays liquid,” Raveis told the Business Journal. “Our concern is whether the government is keeping an eye on the importance of migratory patterns in and out of Connecticut and the rest of the Northeast, which typically are among the highest-tax states.”
An April report by analysts at the Federal Reserve Bank of New York examined the drop in home-sales activity between the fourth quarter of 2017 and the third quarter of 2018. With figures in the respective quarters adjusted for seasonal factors impacting the housing market at those times of year, the report found that new home sales decreased by 7.6% nationwide — with the Northeast and West regions sustaining the most substantial drops in sales activity.
During the period, the top marginal income-tax rate dropped from 39.6% to 37%, reducing the potential savings from itemizing one’s deductions by 2.6 percentage points. With property tax deductions capped at $10,000 under the new law, effectively ending the deductibility of state and local taxes, and the halving of the mortgage interest deduction, the cost of buying a home has increased between 1% and 5% for homeowners affected by the tax code changes.
The report found that the Northeast was by far the hardest hit during the period, with a 28.2% drop in new home prices. The second-most affected region, the West, recorded a 12.1% decrease.
“We have to make sure that Connecticut and the Northeast region stay competitive,” Raveis said.
One byproduct of the tax code change, he said, was that “There’s now less incentive to get a larger mortgage because you can’t deduct it. And that has a real effect. For younger generations particularly, who are typically loaded down with student debt and are living at home, home ownership of their own – which has always been seen as a way of building equity – is getting harder to come by.”
There’s also a knock-on effect on local businesses, Raveis said. “Plumbers, roofers, landscapers and the like have fewer opportunities when there’s not that reinvestment into the community. Keeping the neighborhood looking nice becomes less of a priority if you’re just renting.”
There is also the issue of the administration’s plan to to re-privatize the mortgage groups Fannie Mae and Freddie Mac, announced in September. That plan – aimed at reducing risk while preserving homebuyers’ access to 30-year, fixed-rate mortgages — would make the companies privately owned but government-sponsored, with profits no longer going to the Treasury but used to build up the lenders’ capital bases as a shield against possible future losses.
But not everyone is convinced the strategy is sound, with concerns voiced from several quarters that the new capital requirements for Fannie and Freddie could result in increased fees for guaranteeing mortgages, thus possibly raising borrowing costs for homebuyers.
U.S. Sen. Sherrod Brown, D-Ohio, of the Senate Banking Committee, called the proposal “another industry giveaway that would destabilize the economy … and limit access to mortgages for working people across the country …. (It) will make mortgages more expensive and harder to get.”
National Association of Realtors (NAR) President John Smaby, who visited Kautter with Raveis, has spoken in favor of the plan. But Raveis echoed Brown’s sentiments, saying that if the privatization goes through, Fannie and Freddie would be replaced by banks and a secondary market for mortgages, which would result in interest rates going up and crippling the state further.
Raveis – who was joined by several other NAR executives on the D.C. trip – said that Kautter and the Treasury Department “were very responsive” to the concerns they voiced, noting that the group visits Treasury staffers twice a year.
“This is about building a consensus on the ground level,” he said. “We’re really happy to have a seat at the table to represent the consumers, in Connecticut as well as in New York and Massachusetts.”