US Housing
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14th December 2017
US HOUSING MARKET FOCUS Buying still better than renting in the long run •
Based on the current tax environment, our forecasts for house prices and rents show that buying a median-priced home is better than renting one for any holding period of six years or longer. By making the standard deduction more valuable, the tax bill working its way through Congress will change that calculation, and on the face of it could raise the net costs of buying by up to 30%. But, given most households will see an overall tax cut, and potential buyers are likely to put that saving towards their home, we doubt it will have a significant detrimental impact on the housing market.
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Since we last looked at whether it is better to buy or rent a house in the long run, house prices have risen by 45%, but rents by only 21%. More recently concerns have been raised that the tax bill will reduce the benefit of buying a property. So does it still make sense financially to buy a home in the long run, and will the tax bill change that calculation?
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There are many costs and benefits involved in a buying a home. Our buying versus renting calculator accounts for closing costs, maintenance, insurance, property tax and foregone interest on the down payment, as well as the tax deductibility of mortgage interest and property tax. We also take account of the housing equity accrued by homeowners as they repay mortgages, as well as any gains or losses in equity as a result of movements in house prices. On the rental side, we need to factor in transactions costs and future rent hikes.
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Assuming the purchase of a $250,000 home with a down payment of 20% our calculator shows that, for households who would itemise irrespective of their tenure choice, buying is a better option than renting for any holding period over six-years – the same conclusion we reached when we last ran this exercise at the start of 2012.
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But the tax bill working its way through Congress puts new limits on the property and mortgage interest deduction, and doubles the standard deduction. That will reduce the tax benefits of owning a home. Indeed, our calculator shows that by opting to take the new, larger standard deduction, over a 10-year period buyers of a $250,000 home would see their net buying costs increase by 30%.
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On the face of it, that might suggest house prices are set for a sizeable drop. However, the key point to note is that households are choosing not to itemise. Apart from their accountants, there is nothing to stop this household from continuing to itemise to enjoy the same housing-specific costs and benefits as before. Admittedly, they can now elect how they will spend their tax savings; they are no longer tied to buying a home. But most households stretch themselves when buying a home, and to the extent that the bill will cut taxes for most households, the overall change could even be positive for the housing market.
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The impact on expensive homes could be more detrimental, with a potential limit on the mortgage interest deduction raising taxes for itemisers. However, for a $1.5 million home held for 10-years, the extra cost of $5,898 a year is unlikely to have a large impact on home values. Particularly as many wealthy households will enjoy an overall tax cut. That said, some high-end markets in high-tax states will be more vulnerable, and could see some downward pressure on values.
Matthew Pointon, Property Economist, +1 646 934 6640, matthew.pointon@capitaleconomics.com Ed Stansfield, Chief Property Economist, +44 (0)20 7808 4992, ed.stansfield@capitaleconomics.com US Housing Market Focus
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