New Jersey Real Estate Report

From the NYT:

Homeowners Have Had It Good. Too Good, Says the Tax Bill.

For decades, the tax code has been filled with rewards for homeownership. Tax breaks encourage people to get into first homes and to trade up as they get older, building a national mind-set that you’re never quite middle class until you’ve qualified for a mortgage.

It amounts to a vast social engineering project that assumes society is better off with owners instead of renters. But the tax bill making its way toward final passage is upending that premise.

The bill will increase many homeowners’ monthly housing costs by scaling back deductions that allow them to reduce mortgage interest and property taxes. And by roughly doubling the standard deduction, it reduces the incentive to buy homes by making far fewer homeowners eligible for preferential tax treatment.

Today, a little under half of American homes are worth enough to justify itemizing mortgage interest and property taxes. Under the tax legislation, that figure would fall to close to 14 percent, according to an analysis of the plan by the online real estate marketplace Zillow.

The Republican plan, in short, is tinkering with subsidies so entrenched in the social fabric that they have become entitlements in all but name.

“It suggests a limit in the federal government’s willingness to subsidize ownership,” said Edward Glaeser, an economist at Harvard. “It’s also a reflection of just how expensive housing has become, and how it feels problematic to be using the tax code to support people buying houses that are this expensive or, even worse, to be encouraging housing prices to rise further.”

Both parties have long championed homeownership as a way to help people build wealth and keep neighborhoods more stable. But economists like Mr. Glaeser have been critical of the resulting subsidies.

In their view, the government has made homeownership and its financing artificially cheap through the tax code and mortgage backers like Fannie Mae. As a result, people are encouraged to take on more debt than they might otherwise — to buy bigger homes and second homes, and to plow the equity they accrue into renovations and personal spending.

This distorts the economy in a number of ways. For starters, it’s unfair: Since the benefits of these deductions get bigger with larger and more expensive homes, the bulk of the benefits accrue to wealthier homeowners in pricier markets. This alters the landscape by encouraging more single-family homes and suburban sprawl. That, in turn, prompts the government to spend more on roads and infrastructure and makes housing a bigger portion of the economy than it would be in the absence of federal help.
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All this has made homeowner subsidies, in particular the mortgage interest deduction, one of the rare tax breaks with critics across the political spectrum. Matthew Desmond, a Princeton sociologist who studies how eviction wreaks havoc on the lives on the poor, has documented how the deduction became the “engine of American inequality” because it favors higher-income homeowners.

Edward J. Pinto, co-director of the conservative American Enterprise Institute’s Center for Housing Markets and Finance, has described the interest deduction and other homeowner subsidies as a wasteful giveaway that inflates home prices and encourages people to borrow excessively.

“My basic view is if you subsidize something you’ll get more of it, and as a country we’ve been subsidizing debt,” he said.

From the NY Times:

Fed Predicts Modest Economic Growth From Tax Cut

The Federal Reserve, buoyed by a steadily strengthening economy, raised interest rates on Wednesday for a fifth time since the financial crisis and predicted that a proposed tax cut moving through Congress would modestly increase economic growth for the next few years without stoking inflation.

As a result, the Fed said it did not expect the legislation, which President Trump has called “rocket fuel” for the economy, to accelerate the Fed’s plans to raise interest rates in 2018 and indicated it remains on track for three rate increases next year.

The Fed’s highly anticipated economic assessment, delivered after a two-day meeting of its policymaking committee, amounted to a lukewarm endorsement of the Trump administration’s top economic priority. Mr. Trump has suggested that the $1.5 trillion tax cut could nearly double economic growth to as much as 6 percent, a level far greater than most economists think likely.

“My colleagues and I are in line with the general expectation among most economists,” said Janet L. Yellen, the Fed’s chairwoman. She said they expected the bill to provide “a modest lift.”

Ms. Yellen spoke at a news conference after the Fed announced a widely expected decision to increase its benchmark interest rate by a quarter of a percentage point, to a range of 1.25 percent to 1.5 percent. The increase continues the Fed’s gradual march toward higher rates, which were cut to near-zero during the financial crisis. Wednesday’s increase is the third time this year that the Fed has raised rates, reflecting its confidence that the economy is in good health.

The Fed and Congress are moving in opposite directions. The Fed, in raising rates, is reducing the support it has provided to the economy since the financial crisis. Congressional Republicans, meanwhile, are preparing a $1.5 trillion tax cut for businesses and individuals with the aim of stimulating economic growth.

Some Fed officials, including Ms. Yellen, cautioned earlier this year that tax cuts could push the pace of growth to an unsustainable level, resulting in higher inflation, and that the Fed might respond by raising interest rates more quickly, to restrain growth and keep a lid on inflation.

After seeing the details of the tax plan, however, Fed officials have concluded that there is no need to raise rates more quickly. A quarterly update of the Fed’s economic forecast showed that officials still expect to raise rates three times next year — unchanged from the last economic forecast.

“We continue to think that a gradual path of rate increases remains appropriate even with almost all participants factoring in their assessment of the tax policy,” Ms. Yellen said on Wednesday.

In part, the Fed has concluded the tax plan doesn’t pack a large punch. Fed officials predicted that the economy would grow at a 2.5 percent pace next year; the previous forecast was 2.1 percent.

President Trump has predicted that the tax plan could deliver 4 percent growth or more.

Apprised of those comments by a reporter, Ms. Yellen responded: “I wouldn’t want to rule anything out. It is challenging, however, to achieve growth of the levels that you mentioned.”