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Will Tax Reform Affect California’s Housing Market in 2018 or Beyond?

Tax reform has been in the news a lot lately. And the sweeping tax reform package that was passed in December has California homeowners and home buyers asking a lot of questions.

Common questions include: How will the new tax bill affect California real estate markets in 2018 and beyond? How might it affect home prices? Will these changes have any impact on the housing market?

What Does the Tax Cuts and Jobs Act Do?

Before we can even speculate on how these tax changes might impact California’s housing market, we have to talk about what they actually do. There are a lot of provisions within the Tax Cuts and Jobs Act (TCJA), much of which isn’t relevant to this discussion. So let’s zero in on the changes that relate to mortgage loans and homeownership, specifically.

Aspects of the new tax bill that could affect homeowners and home buyers:

  • Mortgage loan interest can generally be deducted up to a limit of $750,000, in 2018 and beyond. Prior to the tax reform, the deduction cap was set at $1 million. This change applies to new loans originated after the start date for the new law. California homeowners who took their loans out “before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward,” according to H&R Block.
  • State and local income and sales taxes, including real estate property taxes, can be deducted up to a limit of $10,000 (or $5,000 for those with married-filing-separate status). Prior to the tax reform, such deductions were virtually unlimited. There wasn’t a hard limit before, but there is now.
  • The interest paid on most home equity loans in California will no longer be deductible, starting in 2018.

Will It Affect Home Prices, Housing Market in California?

It’s important to note that no one can predict future housing market conditions, or home prices, with complete accuracy. The most effective analysis is the kind that’s done in hindsight. So it could take economists several years to fully assess the impact these tax changes have on the housing market (if any).

One of the concerns people have is that the reduced limit for mortgage interest deductions could weaken demand for homes in California and nationwide. But such fears might be unwarranted. In fact, once you do the math, you begin to realize that only a small percentage of homeowners nationwide will be affected by that reduction. conducted an analysis and found that, “the new cut is expected to affect only about 1.3% of new mortgages.” It will mostly affect homeowners, and future home buyers, at the upper end of the price range — i.e., those with larger mortgage balances.

Of course, a lot of homeowners in California have larger mortgage balances. This is especially true in high-priced housing markets like those in the Bay Area. In these areas, quite a few people could be affected by the reduction of the mortgage interest deduction.

But remember, there’s a grandfather clause built into that aspect of the tax reform package. So California homeowners who had existing mortgage loans prior to the change shouldn’t be affected.

Going forward, many tax policy experts are predicting that fewer homeowners will actually utilize the mortgage interest deduction. That’s because the bill roughly doubled the standard deduction. So taxpayers have less of an incentive to itemize (which is necessary to take all available deductions).

Positive Forecast for CA Home Prices

So, will any of these tax policy changes have a negative affect on home prices in California? It’s hard to say. But most forecasts being issued for the California real estate market suggest that prices will continue to rise throughout 2018, and possibly beyond.

The research team at Zillow, for example, recently predicted that the median home value for the state would rise by 4.1% over the next 12 months. This forecast was issued in February 2018, after the new law took affect.

Disclaimer: This article includes forecasts and opinions gathered from third parties not associated with our company. We have presented them here as a service to our blog readers.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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