Freddie Mac on the Economy

Grappling with Uncertainty

Outlook | January 30, 2017

The U.S. economy is now in its eighth year of expansion and the housing market is coming off its best year in a decade. Prospects remain good for future growth. However, uncertainty weighs on our Outlook for 2017 and 2018. We must grapple with uncertainty about fiscal policy, foreign investments in U.S. real estate, and the size of the mortgage market.

Uncertainty about fiscal policy

After the U.S. presidential election, expectations about economic policy have shifted, particularly expectations about fiscal policy. We still do not know all the parameters of fiscal policy changes, but we assume an expansionary policy will boost both growth and inflation over the next two years and corporate tax reform will increase long-run potential economic growth by about two-tenths of a percentage point.
President Trump’s tax proposals include increasing standard deductions and flattening marginal personal income tax rates. Increasing the standard deduction will reduce the number of households who find it advantageous to itemize deductions. This will reduce the homeownership incentives that comes from the mortgage interest deduction. Changing marginal tax rates shifts the attractiveness for homeownership among those who itemize. The Tax Policy Center estimates the increase in the standard deduction will reduce the number of filers who itemize by 60 percent from 45 million to 27 million.
As an illustrative example, the average monthly cost of owning a $250,000 house financed by a 4.25 percent 30-year fixed-rate mortgage increases by approximately $200/month for a borrower who no longer itemizes deductions.¹ Reducing marginal tax rates will also increase the cost of homeownership, but by a smaller amount ($75/month or less, varying by tax bracket).
The extent to which tax policy changes will impact housing is hard to determine. Reducing taxes may boost income and general economic efficiency. But as we illustrated above, shifting tax policy may increase the cost of homeownership. The net impact on housing markets is uncertain.

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