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Will the New Tax Bill Affect the Chicago Market?

Late in 2017, the president signed into law the Tax Cuts and Jobs Act. The law’s most prominent features are reductions in tax rates for businesses and individuals, as well as limits on personal deductions, state and local tax deductions, property tax deductions and mortgage interest rate deductions. But what does this new tax bill mean for Chicago’s real estate market? It’s going to take time for the real impact of the tax bill to become evident. But experts are predicting a series of shifts and changes for both buyers and sellers. Here’s a look at 4 ways in which the new tax bill will affect the real estate market nationwide, as well as what to expect here in Chicago.

1. Expect Home Prices to Drop

The experts who track home prices and how changes in taxes and the economy affect them almost uniformly predict home prices to fall in 2018. In fact, Moody’s Analytics suggests that home prices nationwide will drop about 4 percent. Also, these falling home prices will be more pronounced in high-cost housing areas — like Chicago. Curbed has created an interactive table that shows how housing prices might change in some of the largest cities in America. This table predicts the following changes in home prices: • Cook County: -6.6% • Kane County: -6.6% • DuPage County: -7.4% • Will County: -7.5% • McHenry County: -8.4% • Lake County: -9.9% These predictions, of course, show that the Chicago area will see home prices drop at a far greater percentage than the national average. And there’s a reason for that: Changes to state and local tax (SALT) deductions and changes to mortgage interest deductions.

2. ‘Real’ Prices Remain About the Same

While prices are expected to drop in Chicago and throughout the area, the “real” price of buying and owning a home will remain relatively consistent. That’s because the cap on mortgage interest deductions has dropped from $1 million to $750,000 (as measured by the amount of mortgage debt), and there’s now a cap on state and local taxes — where previously there wasn’t one. What do these changes mean for homebuyers and owners? It means there will be less in mortgage interest to deduct for many homeowners, and it means that homeowners may also pay more in property taxes. A rising cost of homeownership is likely to reduce market demand. And it's only natural to see a downward shift in home prices in response to that reduced demand.

3. The Potential for Dropping Inventory

In many markets, prospective homebuyers were already looking at low inventory. It’s possible, given additional changes in this new tax bill, that inventory will remain low — or drop even further. Changes to the mortgage interest deduction only apply to homes purchased after Dec. 15, 2017. So, if you’re a homeowner affected by the drop in the mortgage interest deduction cap from $1 million to $750,000, you may think twice before selling — especially if you’re looking to buy a house of similar or greater value. In addition, it's possible that we see interest rates rise after an extended stretch of record lows. After the Great Recession, interest rates steadily dropped out of necessity to keep a struggling economy moving forward. Now that the economy is recovering, and now that the government will be taking on more debt because of a drop in revenue, it's virtually assured we'll see interest rates rise. This, of course, will make homeowners unlikely to leave existing mortgages with nice, low rates. And, finally, inventory may drop because of the uncertainty behind the tax bill. Yes, it’s likely that fewer homeowners sell because of changes to the mortgage interest deduction. And, yes, it’s likely that fewer homeowners sell because of rising interest rates. But no one will know for sure until we live for months and possibly years under the new tax law. That uncertainty is likely to make all homeowners reluctant to sell and move from their current (and more certain) situations.

4. In Chicago: Inventory Gets Even Worse

The Chicago Tribune recently wrote about how the tax bill will affect the real estate market. That story included a note from one area broker suggesting that, indeed, owners of high-value homes may be more flexible in the sales price given how buyers’ tax obligations are going up. But the takeaway from that story is that the impact of the tax bill is still “evolving,” and that much can change in the coming months as other aspects of the economy change, too. What we do know so far is this: January 2018 saw the worst year-over-year decline in Chicago home sales in the past 18 months. While that is more likely due to an ongoing lack of inventory in the market, the tax bill may only exacerbate that lack of inventory.

Make Your Best Real Estate Decision

Are you struggling with a decision to buy or sell in Chicago? Here’s some good news: You don’t have to go it alone. The KlopasStratton Team knows the Chicago market inside and out, and we provide expert guidance as you try to make your best real estate decision. We offer more than 20 years experience, as well as a track record of success that includes more than $73 million in sales in 2017 alone. Let us help you make the most of your home purchase or sale. Contact us today about buying or selling homes in the Chicago area.


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Will the New Tax Bill Affect the Chicago Market?