WASHINGTON — The recently enacted tax reform bill is likely to reshape sections of the housing industry, including encouraging more consumers to rent instead of buy and tamp down the rapid rise in home prices.

At the same time, the doubling of the standard deduction to $24,000 for couples and $12,000 for singles may make it easier for potential homebuyers to save for a down payment, encouraging more into the market.

"The big change for all itemizers is that the standard deduction nearly doubles,” said Robert Dietz, chief economist at the National Association of Home Builders. “We are going to have this interesting experiment in the housing market where there will be competition between the income effect and the substitution effect.”

Sales of new homes, 2016-2017

The so-called income effect comes into play for households that receive a tax cut due to the doubling of the standard deduction, making it easier to save. The substitution effect, meanwhile, is that there are fewer tax itemizers to take advantage of the mortgage interest deduction.

That may deter prospective homebuyers.

Ultimately, Dietz said, it “could cause a few people to remain renters longer.”

Currently, 34 million householders claim the mortgage interest deduction. But that is expected to fall to around 14 million.

Demand vs. supply

Many in the housing market remain optimistic that lifestyle factors such as the desire to settle down and have kids will encourage millennial consumers into the home-buying market.

"If we are correct, then the demand side in the housing market will remain healthy and continue to grow in part because we have these really favorable demographics," Dietz said.

Still, even if they want to purchase a home, the supply is likely to remain tight — and expected interest rate hikes may put homeownership out of reach for some.

"Higher interest rates will reduce affordability for buyers even if they have a down payment," said Laurie Goodman, co-director of the Housing Policy Center at the Urban Institute in Washington.

If interest rates rise dramatically higher in 2018, “it will likely affect turnover, because homeowners will want to hang on to their 3.5% mortgages," she added.

Additionally, the tax bill eliminates the mortgage interest deduction on new home equity loans and lines of credit. Existing homeowners can still do cash-out refinancings to tap the equity in their homes and deduct the interest payments on balances up to $750,000. (Before passage of the tax bill, the cutoff was $1 million.)

"Despite the lack of interest deductibility on home equity loans, I actually expect an increase in home equity lending in a higher rate environment," Goodman said. "It will allow homeowners to add an extra bedroom or customize their homes."

"We may see a decline in mobility and a greater reliance on home equity lending despite of the loss of the tax deduction on home equity loans," she added.

Edward Pinto, co-director of the Center for Housing Markets and Finance at the American Enterprise Institute, says that the tax bill is likely to slow the rise in home prices but not cause actual price declines.

Prices have been rising for five and a half years, and the inventory of existing homes for sales hit a record low of 3.4 months' supply in November, according to the National Association of Realtors. A six-month supply of homes for sale is considered healthy.

Pinto expects the inventory could drop to a 2.9 months’ supply in January.

"That is a historic decline. We haven't seen anything like that in the NAR index,” he said.

High-priced areas

The impact of the tax bill will be greater in areas in high-tax, high-priced homes. The law limits the ability to deduct state and local property taxes at the same time that it lowers the cutoff for the mortgage interest deduction.

The Realtors expect the tax reform bill will prompt some homeowners in the high-tax, high-cost states to sell their homes because they won’t have the tax deduction any more.

"The rest of the country will see price growth in 2018," Lawrence Yun, the Realtor group's chief economist. But there will be "very minimal" price growth nationwide. "And in some places, like California and New Jersey, we will actually see price declines.”

Yun also expects builders to recognize it will be difficult to sell very expensive homes given the smaller limit on the mortgage interest deduction. So builders will start building more moderately priced homes.

In California, however, it appears the new tax bill creates more incentives for owners to stay in their homes.

"It will probably just make the supply situation worse," said Rick Sharga, chief marketing officer at Ten-X, an Irvine, Calif.-based online auction house for commercial and residential real estate.

In 1978, California passed Proposition 13, which restricts annual increases of the assessed value of real property to an inflation factor, not to exceed 2% per year. It also prohibited reassessment of a new base value except in cases of a change in ownership or completion of new construction.

If homeowners are grandfathered into a mortgage interest deduction on million-dollar homes at the federal level and grandfathered on state property taxes thanks to Proposition 13, "you are looking at some pretty significant disincentives for putting your house on the market," Sharga said. "Why in the world would anyone move?"

Meanwhile, the sell-off by baby boomers hasn't started yet. A lot of homeowners simply don’t have enough equity in their current property to move up to a bigger house.

Economists at the Mortgage Bankers Association estimate the single-family housing starts will total 914,000 in 2018, up from 842,000 in 2017. And sales of new homes will increase modestly, to 640,000 from 621,000.

"I don't anticipate 2018 will be a boom year for home purchases," Sharga said. "I think it will be marginally better assuming the tax changes don't mess things up too much."

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