Tax Reform, Homeownership Costs, and House Prices

Abstract

The effective cost of homeownership depends on the tax code. I derive a sufficient statistic formula for the effect of tax reform on house prices, and use it together with nearly 4 million simulated tax returns to measure the potential response of house prices to the Tax Cuts and Jobs Act of 2017. The price decline from the disincentives to itemize federal deductions is five-fold the price increase from higher disposable income, so my simulation suggests that house prices can decline about 2 percent on average, and up to 7 percent, in my sample of 269 metropolitan areas.

Keywords: Public Economics, Sufficient Statistics, House Prices, Tax Cuts and Jobs Act, TCJA

JEL Classification: H24, R28