As homeownership shows recovery, Trump tax plan may disrupt trend

The Census Homeownership and Vacancy Survey (HVS) released Thursday shows that the U.S. homeownership rate increased over the year to an unadjusted rate of 63.6%, up slightly from 63.5% last year, but the change is not significant. While we can’t be sure whether the rate increased, decreased, or stayed the same, there is surprising news coming out of this quarter’s report. For the first time in nearly 11 years, the number of owner occupied households grew faster than renter households. The number of new owner households grew by over 850,000 in the first quarter of 2016, which is over double that of renter formation at just 365,000. Strong renter household formation is one of the resons why the homeownership rate has continued to drop since the onset of the housing crisis, so any sign this trend is reversing is something to take note of. We look forward to future releases of these data to determine whether this is a statistical blip or a trend.

 

How will the Trump Administration’s proposed tax reform affect the homeownership rate? On net, we expect the doubling of the standard tax deduction will actually put upward pressure on the homeownership rate. However, raising the deduction will help some households to buy while incentivizing others to rent. This is for two reasons. First, raising the standard deduction puts more money into the pockets of American households, which should help renters save for that elusive down payment, thus helping them become homeowners. This would put upward pressure on the homeownership rate. Second, raising the deduction will mean that some renters at the margins would not be able to write off enough mortgage interest from a home purchase to itemize their tax return, which lessens the financial benefits of making the transition to homeownership. This would put downward pressure on the homeownership rate. Given that young households, the majority of whom are renters, firmly feel that homeownership is part of their American Dream, and that the financial benefits of homeownership are large in most metros, we anticipate net effect of raising the standard deduction will help increase the homeownership in the long-run.