by Calculated Risk on 3/02/2018 01:58:00 PM

A few brief excerpts on taxes from a note by Merrill Lynch economist Michelle Meyer: Housing: the top five questions (Overall Merrill is positive on housing).

How does the tax legislation impact the housing market?
On the one hand, tax reform is supportive of the housing market as it increases disposable income for households. The average household will see tax-home pay increase by $1,610 this year according to the Joint Committee of Taxation, which helps affordability and increases confidence.

On the other hand, it reduces the incentive for homeownership by doubling the standard deduction, reducing the cap for the mortgage interest deduction (MID) to 750k and limiting property tax deductions along with state and local income taxes to $10k. This results in fewer households who will itemize deductions, thereby making homeownership less attractive from a tax perspective. The biggest challenge is for markets where there is a double whammy of high home prices and property/income taxes....

In our view, the winners from tax reform are conventional buyers who are below the MID cap and likely to see a net windfall of cash from lower taxes. However, the high priced markets on the coast could struggle. The consequence: we expect to see strong new home sales growth, particularly for lower priced properties, but slower growth in high priced existing home sales.

CR Note: There are several headwinds for housing this year including: higher mortgage rates, impact of tax legislation, higher labor costs, higher material costs (Lumber prices are up sharply), and overall affordability. I think housing will be OK this year, but I'm watching for any slowing.