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Realtors wary of tax reform impact on home sales

Pending home sales rose in December for the third straight month, providing further evidence that 2017 was a positive year for housing, but the National Association of Realtors doesn’t expect the good times to keep rolling.

Recent data from NAR, the Census Bureau and the Department of Housing and Urban Development showed that 2017 was the best year for new home sales and existing home sales in a decade.

Now, new data from NAR shows that pending home sales rose in December to the highest level since March 2017, but NAR is concerned that Republican-led tax reform will dent home sales in 2018.

According to a new report from NAR, which was released Wednesday, the Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.5% to 110.1 in December from an upwardly revised 109.6 in November.

That marks the third straight month that the index has increased.

But combine continually low housing inventory and the Republican tax plan, which President Donald Trump signed into law late last year, and you have a recipe for a slowdown, according to NAR Chief Economist Lawrence Yun.

“Another month of modest increases in contract activity is evidence that the housing market has a small trace of momentum at the start of 2018. Jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now,” Yun said.

“Sadly, these positive indicators may not lead to a stronger sales pace,” Yun added. “Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices – especially at the lower end of the market.”

According to NAR, there’s an “imbalance” of supply and demand, which has led to price increases of 5% or more for each of the last six years, but Yun expects that to slow this year.

Yun said that while tight inventories are still expected to put upward pressure on prices in most areas this year, he expects overall price growth to shrink, with some states even experiencing a decline, due to the negative effect the changes to the mortgage interest deduction and state and local deductions under the new tax law.

“In the short term, the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand,” Yun said. “However, there's no doubt the nation's most expensive markets with high property taxes are going to be adversely impacted by the tax law.”

Three of the states where the tax bill’s changes to property tax deductions are expected to have a significant impact are already threatening to sue the government over the tax bill.

Last week, the governors of New York, New Jersey, and Connecticut said they plan to sue the government due to the Tax Cuts and Jobs Act’s elimination of certain state and local tax deductions.

The tax bill installs a cap of $10,000 on state and local tax deductions, but several states (including New York, New Jersey, and Connecticut) have state and local tax burdens that far exceed $10,000.

Yun said that he anticipates the changes to the SALT deduction rules to disproportionally impact certain segments of the housing market.

“Just how severe is still uncertain, but with homeownership now less incentivized in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas,” Yun said. “This could in turn lead to both a decrease in sales and home values.”

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