With the recent passage of president Trump’s tax bill, what impact does this have on real estate and mortgage rates. Look at the chart above, why did interest rates rise when the tax bill was passed? Who are the winners and losers? What does this bill mean for the general economy and what states will be winners/losers? What should you do now?
What was in the big beautiful tax bill?
The megabill makes profound changes to taxes and spending that will ripple through the economy.
Tax cuts:
There were a number of tax cuts that will benefit businesses and individuals:
- Pass through business deductions: The 2017 law that allowed pass-through business to deduct up to 20% of their qualified business income from their taxable income is permanently extended beginning in the tax year 2026.
- Deduct 10k of auto loans: Up to $10,000 a year in loan interest for US-made cars becomes tax deductible through 2028, a boon to auto dealers looking to close sales.
- Tipped workers: Taxpayers 65 and older get a larger standard deduction, while tips and overtime pay are exempted from income taxes.
- Salt Deductions up to 40k: this helps property owners in high tax states that were previously capped at 10k
Above are just some of the bigger highlights from the bill
Spending cuts:
- Medicare/food stamps: The measure creates new work requirements for Medicaid recipients, unless they are elderly, disabled or have children under 14 years old. Medicaid beneficiaries who gained eligibility through the Affordable Care Act will have to pay a share of costs through charges like co-pays. Food assistance for low-income Americans is cut by expanding existing work requirements for federal food stamps to cover beneficiaries up to 65 years old. Beginning in 2028, states also are required to pay a portion of food benefit costs, which are now fully paid by the federal government.
- Renewable energy/electric vehicles: phases out subsidies over the next 6 months or so for energy upgrades and electric vehicle purchases
Will tax bill drive higher growth
This is the million dollar question; will the tax cuts help the economy to drive growth higher. You could ask 10 economists and depending on their political affiliations get radically different answers. The answer is likely somewhere in the middle. Looking at the cuts above, I don’t see a huge change in the economy from the tax cuts as high earners are already the leading driver of the economy. I’m doubtful the cuts will make a monumental difference in growth but they will definitely help drive moderate growth. With that said, the cuts could also prevent a deeper recession depending on what happens in the economy.
Huge budget pressures on cities/states
Many states had greatly expanded Medicare coverage which will lead to huge budget deficits in many cities/states. For example, Colorado is facing a 1.2 billion dollar budget hole that will be substantially worse with the cuts in federal aid. This will lead to layoffs in many states/cities along with higher income taxes and property taxes. Legislatures will be scrambling to fill their budget holes with increased tax revenue somehow
No doubt higher mortgage rates here to stay
Regardless of what number you want to believe, the tax bill will increase deficits as tax cuts far outweigh spending cuts and increased growth is doubtful to have a huge impact on the deficit.
Tax provisions approved by the Senate Finance Committee would extend and expand major components of the 2017 Tax Cuts and Jobs Act, which we estimate will increase primary deficits by $4,321 billion ($4.3 trillion) over 10 years. Other Committees increase primary deficits by another $287 billion. These changes would be partly offset by spending cuts of $1,397 billion, for a total conventional cost of $3,211 billion.
The bill would increase debt by 7.7 percent in 10 years, and decrease GDP by 0.3 percent in 10 years. The average wage falls by 0.4 percent in 10 years. Primary deficits increase by more (to $3,631 billion) in the budget window when accounting for these economic dynamics, due to microeconomic responses and compositional effects described in the brief. After 30 years, GDP falls by 4.6 percent and wages fall by 3.4 percent, due to capital shallowing relative to current law.
Long and short, higher deficits will mean more bond sales at lower prices which will lead to mortgage rates staying the same or higher.
What should you do now after the tax bill passed?
For real estate, the bill keeps the market in a holding pattern for now until we get better direction on how much growth in the economy it could provide. With rates remaining high, or possibly heading higher there will not be much relief on affordability. For now, unless you have to do something I would sit tight as there could be opportunities in the future.
Big Beautiful Bill has long term impacts on real estate
The big beautiful bill cuts taxes with also cuts to entitlement programs. Unfortunately there is a mismatch between the two which will lead to increased deficit spending. The increased deficits will ultimately lead to mortgage rates staying about where they are for the foreseeable future. There is also the risk of rates heading higher. Although the tax cuts should help the economy, real estate looks to remain stuck for a while until there is better clarity on where the economy heads from here with the tax bill and impending tariffs.
Additional Reading/Resources:
https://www.fairviewlending.com/why-are-mortgage-rates-rising-again/
https://www.fairviewlending.com/why-are-mortgage-rates-rising-when-they-should-be-falling/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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