The Tax reform bill will result in a net gain in economic growth in 2018, despite all the wrangling commentary you’ve heard over the last 30 days. Tax reform will certainly have a positive effect on corporate profitability. And higher expected profits will drive stock market valuations.
Barring any episodic change in the world’s economy, the stock market advance is likely to continue into 2018. An expanding economy supported by rising wages, low interest rates, low inflation and improving corporate profits all provide a favorable environment for stocks.
And higher stock prices add to household wealth, especially for households with annual incomes above $100,000, because 90 percent are invested in the stock market. The expansion in wealth adds favorably to the demand for homes, as well as cars, and retail goods and services.
Admittedly, two areas of tax reform could be modestly negative for housing: the scaling back of the mortgage- interest and property-tax deductions. The property tax deduction may be the bigger issue in coastal markets because home prices (and therefore the property taxes on housing) are so much higher in these markets.
However, real estate is more highly dependent on local factors. Creation of higher paying jobs, for example, is a larger positive on housing demand than the negative effect from the reduction of the property tax deduction. And though homes are much less affordable in California, there remains strong demand for higher paying positions, particularly in the technology sectors.
The state continues to attract population from other states and from abroad, especially to fill all the new jobs created. New entrants into the state need housing. Furthermore, what happens when all those millennials living with their parents are ready to move out? This will result in a surge of condo and apartment demand.
Much of the new tax reform bill will likely produce a net positive for economic growth and for housing demand in the nation. And to reiterate, sales in the higher priced housing states will be challenged because of the deductibility limits on mortgage interest and property taxes.
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