According to Fitch Ratings, the 2017 Tax Cuts and Jobs Act (the Act), which limits state and local tax (SALT) deductions and reduces the amount of housing debt eligible for interest deduction, may have exacerbated slowing home price growth in certain areas. Fitch's rating analysis for residential mortgage backed securities takes into account these declines in both its base case and stress scenarios.
Rising mortgage rates at YE 2018 and a larger inventory of high-priced homes are contributing factors to slowing home price growth; however, these two factors alone cannot fully explain the slowing price growth and price declines observed in the areas where SALT deduction amounts and usage was highest prior to the tax code change.
SALT deductions cap property, income, vehicle and sales tax itemized deductions to a maximum of $10,000, and lowers the housing debt amount eligible for mortgage interest deduction, meaning that high-income taxpayers are most affected by the change in the SALT deduction.
In tax year 2017, more than 60% of taxpayers who earned more than $100,000 claimed a SALT deduction compared with about 10% of those who earned below $50,000. The average SALT deduction amount was also significantly higher for high-income tax payers than low-income tax payers.
"Since early 2018, states with higher property taxes have seen acute home price appreciation slowdown and even price declines in several metropolitan areas," sayd Fitch. "Congressional district level data shows that districts where the real estate SALT deduction was more often pursued and the deduction amount averaged higher in the tax year of 2017, prior to the change in SALT deductibility, have seen more noticeable slowing in home price growth over the past year."
Fitch notes that the rising mortgage rates toward YE 2018 and the larger inventory of high-priced homes are significant factors in slowing home price growth. The available supply of higher-priced homes rose due to both an increase in construction of luxury homes and slower sales. Lower interest rates this year may provide for a bump in sales but it is not clear if this will offset some of the recent declines in home prices.