Realtors in Kentucky are concerned that the two federal tax bills — one of which was approved Thursday by the U.S. House — will slow record home sales by encouraging existing homeowners to stay in their homes longer, further straining the already limited housing inventory and keeping potential new homeowners out of the market.
The currently proposed changes also could result in an up to 10 percent drop in home values, according to a study by PricewaterhouseCoopers that was commissioned by the National Association of Realtors. In Kentucky, that translates to an average decline of $10,000 to $20,000, the Kentucky Association of Realtors stated.
“We are fearful of it. We hope this can be changed,” Steve Stevens, chief executive of the Kentucky Association of Realtors, said in an interview Wednesday. “We have such a robust economy. We would love to keep riding that wave, and if this happens, we don’t think we will be able to.”
If home values decline, cities, which get most of their funding from property taxes, will have to look at raising their tax rates, or take a cut. It also could result in some home equity loans ending up outside their margins, making default more likely.
“It could be pretty serious,” said Rip Phillips, principal broker with Keller Williams in Louisville.
Sen. Mitch McConnell of Kentucky issued a statement following the 227-to-205 House vote, which for the most part, followed party lines, saying the changes in the tax bill will help Americans and the economy.
“Today with House passage of the Tax Cuts and Jobs Act, we are one big step closer to putting more money in the pockets of millions of struggling American families so they can pay their bills, save for their future and invest for their children,” he said in the statement. “The tax proposals before Congress will help restore our nation’s economic growth and give our workers, families and small businesses greater confidence that the future will hold greater prosperity, more jobs and opportunity.”
Democratic Congressman John Yarmuth on Thursday called the tax plan “a horror show and a disaster for the American people.” He voted against the tax bill, while Kentucky’s five Republican congressmen voted in favor of it.
A tightening of the housing inventory
Both the Senate and House versions of the tax bill alter the restrictions for the capital gains tax. Under the proposals, homeowners can only write off the capital gains tax if they sell their primary residences, and homeowners must live in the house for five out of eight years. The current law only requires someone to live in a house for two of the five prior years and doesn’t limit the capital gains tax to a single residence.
The change could negatively impact military families and people who move regularly for work, real estate agents said.
And “it is encouraging the public to hold onto their property longer,” Phillips said.
In Jefferson County, as with other places nationwide, there’s been chronically low housing inventory. In October, there were nearly 10 percent fewer homes on the market compared to the prior October, according to the Greater Louisville Association of Realtors.
“Do we want a nation full of homeowners, or do we want a nation full of renters? Homeownership really drives the economy,” said Hunt Cooper, director of communications, marketing and member services for the Kentucky Association of Realtors. According to the association, each home sold generates $60,000 in economic activity.
When people buy homes, they also may buy furniture, new HVAC systems, and other home goods, real estate agents told Insider.
“There’s not one time in the last 28 years, that we haven’t been selling homes, and the economy’s been good,” said Steve Cline, the incoming president of the Kentucky Association of Realtors and real estate agent in Bowling Green.
An overall decline in deductions
Although both tax bills propose almost double the standards deduction for homeowners, up to $12,000 for individuals and $24,000 for joint filers, they also eliminate the personal exemption of $4,050 per eligible individual, the deduction of state and local income or sales taxes and the deduction of moving expenses.
The House bill also gets rid of the mortgage interest deduction for second homes and caps the mortgage interest deduction at $500,000 for new mortgages, though the Senate version does not.
Cooper said he considers his family to be fairly average. He and his wife own a $240,000 home and have two children. Under the current tax code, the first $32,000 his family earns is tax free. Should the proposed changes take effect, that would drop to $24,000.
Each year, Cooper estimated, his family would be out $1,500 to $2,000. That’s money that could go toward a family vacation or sporting events for his kids, he said.
Homeowners with an income ranging from $50,000 to $200,000 would face an average tax increase of $815, according to the PricewaterhouseCoopers study.
The elimination of the deduction for home equity loans could also throw a wrench in homeowners’ plans. Home equity loans are popular tools homeowners use to pay for large purchases that may or may not relate to their house. For example, a homeowner may use it to finance home remodels or vehicle purchases, among other things.
The inability to write off the interest on a home equity loan could have homeowners thinking twice, which would impact the economy outside of the housing industry, real estate agents said. Not having that tool available could slow vehicle sales and possibly lead to job cuts, for example.
Leaders with the Kentucky Association of Realtors said they were encouraging every homeowner to look at how those changes would impact them, saying it’s too important to ignore.
“It’s tough, and it’s uncomfortable” for people to talk about, said Pamela Gregory, the association’s director of governmental affairs. “We are scared for our businesses and the clients.”
The Kentucky Association of Realtors, along with the national association, has issued a call to action to members to reach out to their representatives with their concerns.