New Evidence on The Effect of The TCJA On the Housing Market

The Tax Cuts and Jobs Act of 2017 (TCJA) dramatically changed tax law. It narrowed the subsidy on mortgage interest in several ways, which should lower mortgages and home prices; it also increased most taxpayers’ after-tax incomes, which should have the opposite effect. Thus, the TCJA’s overall effect on mortgages and home prices is ambiguous. Existing estimates of how the TCJA affected the housing market use synthetic data, calibrate models to aggregate data, or extrapolate from prior data. Our research is the first empirical estimate of how the TCJA affected mortgages and house prices that uses data on mortgages, house sales, income, and demographics aggregated by Public Use Microdata Area. We use a two-stage approach: first we estimate the effect of the TCJA on mortgages, then we estimate how the demand for mortgages affects house prices. We use the TCJA tax variables as excluded instruments. We find that the reduction in subsidies had a negative, statistically significant effect on mortgages and that the general reduction in taxes had a positive, statistically significant effect on mortgages. We also found that increased mortgages had a positive, statistically significant effect on home prices. However, combining these results, we find that the overall effect of the TCJA on home prices was close to zero, although some variation exists across by location: some areas experienced a positive effect while others experienced a negative effect.