A report released this week by Zillow, a real estate and rental marketplace, estimates that homeowners and renters will pump $13.2 billion in tax savings directly into the American housing market this year by using a portion of their tax cut to rent or buy a bigger house.
Not only that, they will spend nearly twice as much on home renovations, Zillow said.
The sweeping tax overhaul, enacted in December, reduced most Americans’ federal tax liabilities and increased their after-tax incomes in 2018, mainly by lowering marginal tax rates and increasing the standard deduction.
Zillow said many taxpayers would spend some of their gains on housing — even though the tax act limited itemized deductions historically aimed at homeowners, including the mortgage interest deduction and deductions for state and local property taxes.
At the same time, the report acknowledged that spending money on a new or larger home or home repairs and renovations would take a back seat to paying off debt and saving or investing the tax gains, the two most common uses of the extra cash among both homeowners and renters.
Zillow said it assumed that the average taxpayer received a tax cut of $1,610 this year, as estimated by the Tax Policy Center; and 136.9 million taxpayers, based on initial filing estimates for tax year 2017 from the Internal Revenue Service.
Zillow’s data indicate that homeowners on average will spend 15 cents on every dollar of their tax cut on home renovations, and renters will spend about 11 cents on the dollar on buying or renting a larger home.
The report noted that the U.S. housing market has been booming, with home value appreciation exceeding 6% per year for 22 consecutive months. In March, the median home value nationwide topped out at $213,100, an 8% year-over-year increase, owing to a combination of strong demand and tight supply.
In the most supply-constrained markets, some homeowners are renovating rather than selling as their needs outgrow their current homes, according to Zillow.
“Despite new limits to two longstanding tax benefits for homeowners, the typical American taxpayer saw their tax burden fall in 2018 as a result of tax reform,” Zillow senior economist Aaron Terrazas said in a statement. Terrazas said some of the tax savings would wind up in the American housing market even though they were not explicitly targeted there.