Despite detracting from some former homeowner tax benefits, the Tax Cuts and Jobs Act will spur billions in spending in the housing industry, according to estimates from Zillow . Americans are primed to channel $13.2 billion in tax savings toward the purchase or rental of a larger home and another $24.7 billion toward home renovations this year.
While the new tax law imposes stricter limits on the mortgage interest deduction and deductions for state and local property taxes, it raises the standard deduction for most Americans, and according to the semi-annual Zillow Housing Aspirations Report , “many are likely to spend at least some of these gains, however small, on housing.”
Americans have earmarked the largest portions of their tax savings for “savings and investment” and “paying off debt,” according to Zillow’s survey of more than 10,000 consumers in the 20 largest U.S. markets. Both owners and renters are likely to hold about 29 percent of their savings as “savings and investment.” For owners, another 21 percent will go to paying off debt; renters will put 27 percent toward paying off debt.
Homeowners collectively will spend about 4 percent of tax savings on buying or renting a larger home and about 15 percent on home renovations. Renters will spend 11 percent of their tax savings on buying or renting a larger home and 2 percent on home renovations.
A small percentage of respondents said they intend to spend all of their tax savings on buying or renting a larger home—about 2.6 percent of renters and 0.5 percent of owners. About 8.1 percent of renters and 1.4 percent of owners said they intend to spend at least half on a larger home.
Higher-income households will spend a smaller portion of their tax cuts on housing than lower-income households, according to Zillow’s survey. Households in the top quintile of earnings will spend about 3.6 cents of each dollar in savings, while households in the bottom quintile of earners will spend 12.2 cents of each dollar on housing.
Of the 20 large markets surveyed, those where households are likely to spend the largest portion of their tax cut on housing were St. Louis, Missouri (16.8 cents per dollar); Miami, Florida (16.5 cents); and Atlanta, Georgia (15.5 cents). Markets where households will spend the smallest portion of their tax cut on housing were Seattle, Washington (7.7 cents); Phoenix, Arizona (8.1 cents); and Chicago, Illinois (8.7 cents).
For its survey, Zillow asked respondents how they would spend a tax cut of $1,610, which is the estimated average tax cut per household calculated by the Tax Policy Center.
“Because the highest earners received disproportionately larger tax cuts, the effects on the housing market are more muted than they might have been had tax cuts been uniformly distributed,” Zillow explained.
Zillow estimated an additional $174 million will be spent on buying or renting a larger home in 2018, but if the tax cuts were distributed uniformly, Zillow calculates an additional $4.5 billion would be spent due to the discrepancy in the portion of anticipated spending between high-income and low-income households.