Trump’s trillion-dollar hit to homeowners

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox. In recent weeks, President Donald Trump has been talking about plans for, as he put it, a “very substantial tax cut for middle income folks who work so hard.” But before Congress […]

Trump’s trillion-dollar hit to homeowners

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

In recent weeks, President Donald Trump has been talking about plans for, as he put it, a “very substantial tax cut for middle income folks who work so hard.” But before Congress embarks on a new tax measure, people should consider one of the largely unexamined effects of the last tax bill, which Trump promised would help the middle class: Would you believe it has inflicted a trillion dollars of damage on homeowners — many of them middle class — throughout the country?

That massive number is the reduction in home values caused by the 2017 tax law that capped federal deductions for state and local real estate and income taxes at $10,000 a year and also eliminated some mortgage interest deductions. The impact varies widely across different areas. Counties with high home prices and high real estate taxes and where homeowners have big mortgages are suffering the biggest hit, as you’d expect, given the larger value of the lost tax deductions. But as we’ll see, homeowners all over the country are feeling the effects.

I’m basing my analysis on numbers from two well-respected people: Mark Zandi, the chief economist of Moody’s Analytics; and Hugh Lamle, the retired president of M.D. Sass, a Wall Street investment management company.

Zandi’s numbers are broad — macro-math, as it were. Lamle (pronounced LAM-lee) is a master of micro-math. It was Lamle who first got me thinking about home value losses by sending me an economic model that he created to show the damage inflicted on high-end, high-bracket taxpayers in high-tax areas who paid seven digits or more for their homes.

Lamle starts with the premise that homebuyers have typically figured out how much house they can afford by calculating how much they can spend on a down payment and monthly mortgage payment, adjusting the latter by the amount they’d save via the tax deduction for mortgage interest and real estate taxes. His model figures out how much prices would have to drop for the same monthly payment to cover a given house now that this notional buyer can’t take advantage of the real estate tax deduction and might not be able to take full advantage of the mortgage interest deduction.

After I showed Lamle’s model to my ProPublica research partner, Doris Burke, she steered me to Zandi’s research, which I realized could be used to calculate national value-loss numbers.

Ready? Here we go. The broad picture first, then the specific. This gets a little complicated, so please bear with me.

Zandi says that because of the 2017 tax law, U.S. house prices overall are about 4% lower than they’d otherwise be. The next question is how many dollars of lost home value that 4% translates into. That isn’t so hard to figure out if you get your hands on the right numbers.

Let me show you.

The Federal Reserve Board says that as of March 31, U.S. home values totaled about $26.1 trillion. Apply Zandi’s 4% number to that, and you end up with a $1.04 trillion setback for the nation’s home owners. That’s right — a trillion, with a T.

Please note that Zandi isn’t saying that house prices have fallen by an average of 4%. That hasn’t happened. What he’s saying is that on average, house prices are about 4% lower than they’d otherwise be.

Given that the Fed statistics show that homeowners’ equity was $15.76 trillion as of March 31, Zandi’s numbers imply that homeowners’ equity is down about 6.6% from where it would otherwise be. (That’s the $1.04 trillion value loss divided by the $15.76 trillion of equity.)

This is a very big deal to families whose biggest financial asset is the equity they have in their homes. And there are untold millions of families in that situation.

While Zandi and I were having the first of several phone conversations, he sent me a county-by-county list of the estimated home-price damage done to about 3,000 counties throughout the country. I was fascinated — and appalled — to see that the biggest estimated value loss in percentage terms, 11.3%, was in Essex County, New Jersey, the New York City suburb where I live.

In case you’re interested — or just snoopy — the four other counties that make up the five biggest-losers list are: Westchester County, New York, suburban New York City, 11.1%; Union County, New Jersey, which is adjacent to Essex County, 11.0%; New York County, the New York City borough of Manhattan, 10.4%; and Lake County, Illinois, suburban Chicago, 9.9%.

You can find Zandi’s county-by-county list in our Data Store. Eyeball the list, and you’ll see that counties throughout the country have home values lower than they would otherwise be.

Here’s how it works. Zandi took what financial techies call the “present value” of the property tax and mortgage interest deductions that homeowners will lose over seven years (the average duration of a mortgage) because of changes in the tax law and subtracted it from the value of the typical house. That results in a 3% decline in national home values below what they would otherwise be.

The remaining one percentage point of value shrinkage, Zandi says, comes from the higher interest rates that he says will result from the higher federal budget deficits caused by the tax bill. He estimates that rates on 10-year Treasury notes, a key benchmark for mortgage rates, will be 0.2% higher than they would otherwise be, which in turn will make mortgage rates 0.2% higher.

Even though interest rates on 10-year Treasury notes are at or near record lows as I write this, they would be even lower if the Treasury were borrowing less than it’s currently borrowing to cover the higher federal budget deficits caused by Trump’s tax bill.

If Zandi’s interest-rate take is correct — it’s true by definition, if you believe in the law of supply and demand — even homeowners who aren’t affected by the inability to deduct all their real estate taxes and mortgage interest costs are affected by the tax bill.

How so? Because higher interest rates for buyers translate into lower prices for sellers and therefore produce lower values for owners.

You can argue, as some people do, that real estate taxes should never have been deductible because allowing that deduction is bad economic policy that inflated home prices and favored higher-income people over lower-income people.

But even if you believe that, there’s no question that eliminating the deduction for millions of homeowners inflicted serious financial damage on homeowners who had no warning that a major tax deduction that they were used to getting would be wiped out.

As a result, homebuyers who had taken the value of the real estate tax deduction into account when buying their homes had their home values and finances whacked without warning. Interest deductions on mortgage borrowings exceeding $750,000 were cut back, compared with interest deductions on up to $1 million under the old law — but that doesn’t affect anywhere near as many people as the cap on real estate tax deductions does.

(A brief aside: Among the modest winners here are first-time buyers who purchased their homes after the tax law took effect and benefited by paying less than they would have paid under the old tax rules.)

Now, to the micro-math.

Lamle’s model isn’t applicable to most people because it works only for taxpayers with a household income of at least $200,000 a year who paid at least $1 million for their homes. But the principle underlying Lamle’s model applies to everyone who owns a home or is interested in owning one. To wit: You calculate the tax-law-caused loss of value by figuring out how much a house’s price needs to fall for buyers’ or owners’ after-tax costs to be the same now as they were before the tax law changed.

“People buying large-ticket items typically focus on after-tax costs of ownership,” Lamle told me. “The amount that many buyers can afford is affected by limits on their financial resources. Therefore, as their tax costs increase substantially because of the loss of tax deductions, they have less money available to pay for homes and to take on mortgage debt.”

At the suggestion of one of my editors, I asked Lamle to use a modified version of his economic model to estimate the tax law’s impact on the value of a theoretical house in the New York City suburb of West Orange, New Jersey, purchased for $800,000 in 2017 by a theoretical family with a $250,000 annual income. Those home value and income numbers are very high by national standards — but middle class by the standards of large parts of suburban Essex County.

Real estate tax on that theoretical house would run about $28,900 a year, according to statistics from the New Jersey state treasurer’s office. That tax used to be fully deductible for federal tax purposes. Now, it’s not deductible at all if you assume that the house’s owners are taking the standard deduction on their federal returns. Or that even if they’re itemizing deductions, they’re paying at least $10,000 of state income taxes, which means they don’t get any benefit from deducting property taxes.

According to Lamle’s calculations, this inability to deduct real estate tax has reduced the home’s value by $138,720, assuming a 5% mortgage rate. At a 4% rate, the value loss is $173,400. (For the math and assumptions underlying these numbers, see his methodology below.) So if the family put up $200,000 — 25% of the purchase price — to buy the house, more than half of that investment has been wiped out.

Obviously, it’s impossible to prove that Zandi and Lamle are right about the impact they say the tax law is having (and will continue to have) on home prices, because there’s no way to gauge the accuracy of their numbers. But the logic is compelling.

The loss in home values is crucial because it turns out that lots more people have bigger financial stakes in their houses than in their stock portfolios, which have thrived as the Trump tax law turbocharged corporate earnings and stock prices.

In fact, 73.5% of households that own homes, stocks or both had bigger stakes in the home market than in the stock market, according to David Rosnick, an economist at the Center for Economic and Policy Research, who parsed Federal Reserve data at my request.

Now, let’s put things in perspective, set aside home value losses for a minute and talk about the cash that people are getting from Trump’s 2017 tax law. It isn’t all that much for most families. Households’ average federal income tax has fallen by $1,260 a year, according to the Tax Policy Center. That average is skewed by big savings realized by people with big incomes; the median family’s tax cut is only about half as much as the average cut, by the Tax Policy Center’s math.

This means that — for taxpayers of higher income and more modest income — the income tax savings are likely small beer compared with the hidden loss inflicted on many of them by lower house values.

Back to the main event. And some final — but important — numbers.

According to the Tax Policy Center, the Treasury will get $620 billion of additional revenue over a 10-year period because people can’t deduct their full state and local taxes.

That, in turn, covers most of the 10-year, $680 billion cost of the income tax break that corporations are getting. So you can make a case that my friends and neighbors and co-workers in New York and New Jersey — and many of you all over the country — are paying more federal income tax in order to help corporations pay less federal income tax.

That, my friends, is the bottom line.

We're ad free

That means that we rely on support from readers like you. Help us keep reporting on the most important New Mexico Stories by donating today.

Related

Emily’s List endorses seven candidates for Legislature

Emily’s List endorses seven candidates for Legislature

Emily’s List, a nonprofit that supports women candidates and reproductive rights, endorsed seven incumbents facing general election opponents in New Mexico legislative elections. All…
Equality New Mexico endorses 15 legislative candidates

Equality New Mexico endorses 15 legislative candidates

A New Mexico-based LGBTQ rights organization endorsed 15 candidates for state House and Senate seats for the 2024 elections.  Marshall Martinez, executive director of…
Lujan Grisham pocket vetoes two bills

Lujan Grisham pocket vetoes two bills

Gov. Michelle Lujan Grisham pocket vetoed two bills the legislature passed this legislative session: one changing the Cybersecurity Act and the other concerning law…
BLM announces final methane waste rule

BLM announces final methane waste rule

The federal Bureau of Land Management announced its final methane waste rule on Wednesday. These new regulations clamp down on the practice of venting…
What consumers, farmers should know about the flu impacting dairy cows

What consumers, farmers should know about the flu impacting dairy cows

Migrating birds appear to have caused a virus in dairy cattle that is causing reduced milk production. So far, the disease, which initially started…
Republicans seek to limit national monument designations

Republicans seek to limit national monument designations

Republican-backed legislation in the U.S. Congress would make it harder for the government to designate new national monuments. The proposed Congressional Oversight of the…
Amid new graduation requirements, what do high schoolers want to learn?

Amid new graduation requirements, what do high schoolers want to learn?

By Margaret O’Hara, The Santa Fe New Mexican The main things that bring Brayan Chavez to school every day: Seeing, talking to and engaging with…
Special ed teachers hope lawmakers OK pay raises, admin changes

Special ed teachers hope lawmakers OK pay raises, admin changes

By Margaret O’Hara, The Santa Fe New Mexican Brittany Behenna Griffith has a laundry list of adjectives to describe the ideal special education teacher:…
Lawmakers must find consensus on competing education spending plans

Lawmakers must find consensus on competing education spending plans

By Margaret O’Hara, The Santa Fe New Mexican A challenging task awaits New Mexico lawmakers in the next 30 days: Reconciling three very different…
Health workers fear it’s profits before protection as CDC revisits airborne transmission

Health workers fear it’s profits before protection as CDC revisits airborne transmission

Amy Maxmen, KFF Health News Four years after hospitals in New York City overflowed with covid-19 patients, emergency physician Sonya Stokes remains shaken by…
Lujan Grisham, Biden admin announce $10 million in federal funds for tribes, pueblos

Lujan Grisham, Biden admin announce $10 million in federal funds for tribes, pueblos

Gov. Michelle Lujan Grisham announced Friday $10 million in funding from the federal American Rescue Plan Act was awarded to six tribal nations and…
Proposal to curb executive powers moves to House Judiciary

Proposal to curb executive powers moves to House Judiciary

The House Government, Elections and Indian Affairs Committee discussed a potential constitutional amendment that seeks to limit the governor’s executive powers. The committee approved…
Senators introduce legislation to aid abortion providers

Senators introduce legislation to aid abortion providers

Sen. Martin Heinrih and other Senate colleagues introduced abortion rights legislation into the U.S. Senate on Thursday. The Abortion Care Capacity Enhancement and Support…
U.S. Supreme Court hears case to restrict access to medication abortion

U.S. Supreme Court hears case to restrict access to medication abortion

The U.S. Supreme Court heard the case about the regulations around mifepristone, one of a two-step regime for abortion medication, on Tuesday. FDA v.…
At stake in mifepristone case: Abortion, FDA’s authority, and return to 1873 obscenity law

At stake in mifepristone case: Abortion, FDA’s authority, and return to 1873 obscenity law

Lawyers from the conservative Christian group that won the case to overturn Roe v. Wade are returning to the U.S. Supreme Court on Tuesday in pursuit…
Senators introduce legislation to aid abortion providers

Senators introduce legislation to aid abortion providers

Sen. Martin Heinrih and other Senate colleagues introduced abortion rights legislation into the U.S. Senate on Thursday. The Abortion Care Capacity Enhancement and Support…
New Mexico Medicaid to cover cost of over-the-counter oral contraception

New Mexico Medicaid to cover cost of over-the-counter oral contraception

New Mexico Medicaid announced on Wednesday that it will cover the cost of Opill, the first oral contraception approved for over-the-counter use. It is…
U.S. Supreme Court hears case to restrict access to medication abortion

U.S. Supreme Court hears case to restrict access to medication abortion

The U.S. Supreme Court heard the case about the regulations around mifepristone, one of a two-step regime for abortion medication, on Tuesday. FDA v.…
San Juan County, Navajo Nation settle redistricting case

San Juan County, Navajo Nation settle redistricting case

The Navajo Nation and San Juan County reached an agreement Monday about commission districts after the tribe alleged that its members were not adequately…
MIT ranks NM elections most well-run in the U.S.

MIT ranks NM elections most well-run in the U.S.

New Mexico’s 2022 election was ranked most well-run in the country by Massachusetts Institute of Technology’s Election Data and Science Lab’s Elections Performance Index.…
Emily’s List endorses seven candidates for Legislature

Emily’s List endorses seven candidates for Legislature

Emily’s List, a nonprofit that supports women candidates and reproductive rights, endorsed seven incumbents facing general election opponents in New Mexico legislative elections. All…
Ex-GOP candidate allegedly hired people to kill witnesses in shootings of homes of Democratix politicians

Ex-GOP candidate allegedly hired people to kill witnesses in shootings of homes of Democratix politicians

Republican failed state house candidate Solomon Peña is facing more federal charges, this time on a murder-for-hire scheme.  Peña allegedly tried to hire two…
BLM announces final methane waste rule

BLM announces final methane waste rule

The federal Bureau of Land Management announced its final methane waste rule on Wednesday. These new regulations clamp down on the practice of venting…
U.S. Supreme Court hears case to restrict access to medication abortion

U.S. Supreme Court hears case to restrict access to medication abortion

The U.S. Supreme Court heard the case about the regulations around mifepristone, one of a two-step regime for abortion medication, on Tuesday. FDA v.…

GET INVOLVED

© 2023 New Mexico Political Report