A House Republican tax proposal that infuriated housing groups and sent homebuilder stocks sliding on Thursday would only have a modest impact on the market for new homes and could end up being a net positive for the industry, according to analysts at Keefe, Bruyette & Woods.
That's because most new homes are priced between $200,000 and $400,000, with the median new-home sale price at $320,000. So while the tax plan cuts the limit on loan amounts eligible for the mortgage interest deduction in half, to $500,000, most new construction would still be eligible for the benefit, the analysts wrote Thursday, citing Census Bureau data.
"While a lower cap on the mortgage interest deduction may limit deductions on higher-end homes, most homebuilders offer more affordable product below $500,000. Other factors that could impact buy versus rent decisions include a doubling of the standard deduction, which will likely decrease the number of individuals who itemize deductions," said KBW analyst Jade Rahmani.
"The doubling of the standard deduction is likely to meaningfully decrease the percentage of borrowers who itemize," according to a second KBW report Thursday by Bose George, Eric Hagen and Thomas McJoynt Griffith. "This would in turn impact the rent versus buy calculation," as the MID incentive to buy a home is rendered moot for consumers who would benefit more by taking the standard deduction.
"However, we think over time, the tax deduction is not a big driver of the home purchase decision and home buyers will be no worse off with the doubling of the standard deduction," the analysts added.
When evaluating both the new and existing home markets on the whole, "the impact on the reduced mortgage deduction is likely to be modest. The median home price is roughly $250,000, so in most markets, the majority of borrowers would not be impacted," the mortgage analysts said.
One caveat, though, is in high-cost housing markets such as California, which has a median home price of $550,000, the lower cap would "increase the cost of homeownership for borrowers with mortgages that are larger than that size."
Meanwhile, the plan's reduction of the corporate tax rate to 20%, from 35%, "should be a meaningful positive for the mortgage sector, where most of the companies are full taxpayers," the George team said.
The mortgage industry has historically opposed a rollback of the mortgage interest deduction. Mortgage Bankers Association President David Stevens said last year that the group would be open to changes to the MID, so long as it was part of a comprehensive tax reform proposal that preserves home affordability. But in a statement Thursday, Stevens said the proposal falls short of that goal.
"We believe that the proposed changes to the mortgage interest deduction, deductibility of state and local real estate taxes and the exemption for capital gains treatment when families sell their principal residence would have a negative impact on the housing market and potentially the national economy as a whole," Stevens said.