How Trump’s Tax Cuts and Job Act Could Affect the Market

Trump’s Tax Acts and Job Cuts was introduced on November 2, 2017 and in that 1,000+ page bill, there was a section that could affect the housing market. President Trump has decreased the amount that homeowners are allowed to write off in interest payments. Prior to this, homeowners were allowed to write off up to $1 million in interest payments, which proved to be a great perk for homeowners and a huge incentive for people who were looking to purchase a home. With less of an advantage associated with being a homeowner, the motivation to buy a home is predicted to fall by the wayside and slow down even more so.

 

Millennials Can’t Afford To Buy A Home

It is no secret that millennials aren’t buying homes. They simply can’t afford it and more millennials are reported to rent with little intention to buy or continue living at home so that they can work towards saving for a down payment. Even though it seems small now, this can actually grow to be a bigger problem. Millennials are now expected to sustain the housing market, but it isn’t happening. Millennials are now at the age when their own parents bought their first home and had children, but these types of plans are getting delayed. Millennials are choosing to postpone this part of life because it is too expensive and with the mountain of student debt they have accumulated, buying a home is not high on their list of priorities. The probability of existing homeowners buying several additional properties is on the lower side. They are not going to purchase a second home unless they’re a real estate professional who buys investment properties for profit, or if they have the financial means to do so. We cannot depend on the professionals to continue buying homes and keep our market afloat.

What Trump’s Tax Cuts and Job Act Means For Millennials

If millennials are already slowing down the rate at which houses are being bought, then this new adjustment in tax benefits is going to make things move along even more slowly than it already was.  Additionally, more and more millennials are reported to be skipping the “starter home” and seem to be going straight to buying the multi-million dollar “forever home” because they are waiting longer to save up for the larger down payment. With millennials already putting off the purchase of their first home due to it not being as affordable and Trump’s new Tax Cuts and Job Act, you can definitely expect an even bigger decline in the rate of home purchases. President Trump decreased the amount that homeowners are able to write off in interest payments. Homeowners were previously able to write off up to $1 million in interest payments, but that has now decreased to $500 thousand. If millennials were purchasing starter homes for lower prices, then this change wouldn’t have an impending effect on the market. However, because millennials are choosing to live with their parents in order to save up for the larger down payment, the motivation to continue with their plans will weaken. The ability to write off interest payments is no longer the perk that it used to be.

 

What Is Going To Happen If Millennials Continue Not Buying Homes?

If millennials continue to not purchase homes, then home values will slowly go down. This is because of the supply/demand concept. If the demand for homes are high, then the prices of homes will be high. If the demand for homes lessen, then the price of homes will also start to shrink. The value of homes is determined by the dollar amount homes in your neighborhood are selling for, and home values can fluctuate. While this can be great for people who want to buy a home but felt it was too expensive, this could be bad news for people who are currently homeowners. As mentioned before, home values can go up and down and this also includes the ones that have already been purchased. Just because your home was appraised for a certain amount when you purchased it, it doesn’t necessarily mean that it will stay that way. The appraiser gives you the home value based on when you purchased the home, not if it will continue holding that value. Even if you have made home renovations in hopes of increasing the value of your home, the value of your home will go down if the prices of homes in your area go down. If the home value goes down enough that your mortgage is more than what your home is now worth, that means you are underwater or upside down on your mortgage.

What Can I Do To Avoid Being Underwater On My Mortgage?

Unfortunately, there isn’t much you can do. You’ve already signed your mortgage and you’re committed to paying off your loan whether your home increases or decreases in value. There are however some refinance options that could be helpful. If you don’t already have one, you can refinance into a 30-year fixed mortgage so that you’ll have the same payment for the entire term for a low amount. You can also take advantage of your current home value and tap into your home’s equity for cash.

 

How To Use A Cash Out Refinance To Your Advantage

A Cash Out Refinance is when you refinance your loan for more than what you owe and you take the difference in cash. This is possible by tapping into your home’s equity, which is the portion of the home you actually own. Your equity can also fluctuate depending on your home’s value. If home values are steadily rising, then that mean you’re building up equity by doing nothing. Although you haven’t officially paid off that dollar amount in your loan, you now have that equity because if you were to sell your home, that’s how much you would receive after paying off the rest of your mortgage. If home values plummet and your mortgage is more than what your home is worth, you now have no equity regardless of all the payments you’ve been making over the years. This is because if you were to sell the house for its new low value, you wouldn’t be able to pay off the entire loan. You would still owe money after the fact. With Trump’s new Tax Cuts and Jobs Act and the steady decline of millennials not buying homes, we can expect rates to fall. The best case scenario would be to take out a cash out refinance loan while your home value is still high and get your equity in cash before it disappears into thin air. Yes, you will eventually have to pay this amount back, but you will at least have tapped into your equity while you still had it. If you don’t, you will have zero equity and you could be underwater on your mortgage. There are some limits to a cash out refinance. You cannot take out 100% of your equity in cash, but you can take out 80%. Although it’s not the full amount, it is a way better option to have 80% of your equity readily available for you to use than nothing at all.

 

Overall Thoughts

Tapping into your equity has proven to be useful if you had a big expense, but given the current situation, cashing in on your equity might be the best thing for this situation. You are already committed to paying off the principal, whether you have a 30 or 15-year fixed or an Adjustable Rate Mortgage. If the value of your home has gone up since you purchased it, cashing in on that additional equity might be the best way to actually use it to your advantage while it still exists.