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Will tax cuts affect the housing market?

In a year when politics have dominated the headlines, it’s no surprise that tax discussions are a major talking point. President Trump’s tax initiative is in the proposal stage right now, but ideas include significant changes to the deduction structure. For most homeowners today, the mortgage interest deduction is one of the most important entries on their tax form.

One of the recurring proposals is to increase the standard individual deduction and simplify itemization. This may or may not leave the mortgage interest deduction as it is today. While tax code changes are only in the talking stage at present, industry groups have offered preliminary opinions about what could happen to the housing market if there are changes to the mortgage interest deduction.

What does the NAR say?

The National Association of Realtors (NAR) came out in clear opposition to removing the interest deduction earlier this year, arguing that it creates incentives for home ownership by making it more affordable for average citizens. The deduction is only available for homes valued up to $1.1 million. Based on data, NAR reports that roughly 32 million homeowners utilized the deduction in 2014 and owners saved $2,173 on average.

The cause-effect relationship

It’s not the mortgage interest relationship itself that affects a homeowner’s tax return. Instead, it’s the process of itemized deductions. Even if current proposals leave the mortgage interest deduction as it currently stands, the National Association of Homebuilders predicts that an increased standard deduction would lead to less usage of the interest deduction, estimating that half of taxpayers would no longer claim the deduction.

This cause-effect relationship could cost homeowners more money and stagnate the market, the association predicts. Changes in real estate value affect renters as well, both through market demand and through ownership’s investment back into properties.

The industry effects of tax changes

At present, any tax code changes are in their infancy, still being developed and fine-tuned in Washington. Some industry insiders are reluctant to change the system, but others are more open. As Ralph McLaughlin of Trulia told Forbes, tax cuts often lead to more spending money, which can positively affect the market.

As tax code takes over the news, it’s a reminder that the housing market is always connected to the national economy. As the story develops, realtors, homebuilders and taxpayers are sure to keep watch.

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