Why Buying a Home Just Got a Lot More Complicated

Tax-law changes, a stronger economy, and rising interest rates are just some of the considerations

Buying a home has always been a difficult process. But this year the new tax rules, the stronger economy, and rising interest rates have made the home-buying decision even more complex.

Some market factors indicate that it’s a great time to buy a house. Mortgage interest rates remain historically low. Rental prices in many regions are going up.

But there’s a lot more to think about. The new tax law trims deductions that have benefited homeowners in high-tax areas for years. That complicates the outlook for prices in those areas. Some experts think prices could fall, but no one really knows what the impact will be.

The tax cuts and a stronger economy will also put more money in people’s pockets, although the effect of that also remains to be seen. Then there are local factors, such as the supply of available housing, the strength of the regional economy and property taxes.

To help you sort through all of this, here’s a rundown of all the different factors that could affect housing in your area:

• You could have more money for housing. The tax law is likely to increase take-home pay for many Americans, though how much is unclear. Tax brackets and rates are changing, many itemized deductions have been eliminated, and the standard deduction has nearly doubled, but many people won’t get an idea of how much more they’ll get until the changes start showing up in their paychecks. That could happen as early as February, according to the Internal Revenue Service.

According to the nonprofit Tax Policy Center, based in Washington, D.C., average after-tax income in 2018 will rise 2.2 percent for the country overall. For instance, taxpayers in the middle income quintile—with income between about $49,000 and $86,000—will see an average cut of about $900, or 1.6 percent of after-tax income. (A Consumer Reports analysis shows that how much you gain or lose from the tax change depends heavily on individual circumstances.) Higher earners will get a bigger average boost in income; those making less will see little change.

• Renting may become more costly. The national average rental vacancy rate is a low, 7 percent, notes Mark Zandi, who is chief economist at Moody’s Analytics and is based in West Chester, Pa. In an environment where people aren’t moving much, rents can rise. (A current exception is higher-end rentals, Zandi adds; a recent increase in supply is likely to slow the growth in those rents.)

The decision on whether to rent or own depends on your personal situation and local market conditions. Check out resources from the Consumer Financial Protection Bureau to help you make the decision. (Unfortunately, the rent-vs.-buy calculators we looked at—CalcXMLThe New York TimesRealtor.com, and Zillow—don’t yet take into account new tax brackets and other changes from the new tax law, so it’s difficult to accurately compare the cost of renting and homeownership.)

• Mortgage rates could rise. Locking down an interest rate now could be a smart move. The Federal Reserve is expected to raise its short-term lending rate several times this year, which would immediately affect adjustable-rate mortgages. Currently five-year ARMs have an average interest of 3.47 percent, according to HSH.com, a mortgage information publisher.

That said, observers aren’t expecting 15- and 30-year fixed mortgage rates, which are still near historic lows, to jump precipitously. Keith Gumbinger, vice president of HSH, projects that the 30-year fixed-rate mortgage, now averaging 3.99 percent, could rise to around 4.5 percent. “We’re not likely to even hit 5 percent this year,” he says. “I don’t think it’s a deal-breaker for most borrowers.”

• Qualifying for a mortgage could get easier. Would-be buyers who might otherwise have difficulty getting a home loan could get a leg up if quasi-government mortgage backers Fannie Mae and Freddie Mac begin to allow lenders to use alternative, potentially more lenient credit scores in their decision-making. Fannie and Freddie purchase and guarantee the vast majority of traditional home loans in the U.S.

The Federal Housing Finance Agency, which owns Fannie Mae and Freddie Mac, recently said it was evaluating whether lenders should be able to use alternative credit scores in determining mortgage applicants’ eligibility. FHFA has long required lenders to consider mortgage applicants’ FICO credit scores in applications.

But some lenders, particularly online mortgage companies, have argued that alternative credit scores, such as VantageScore, could open up mortgage lending to qualified millennials with short credit histories, among others.

Don’t expect a quick change, though. The FHFA is soliciting public comments though Feb. 20; it could then take months to issue a decision. In the meantime, if you’re worried about your credit history, you might be better off improving your credit score on your own.

• The tax law could lower prices in some areas—eventually. Buyers in areas with high property taxes and real estate prices, such as New York’s Long Island and suburban Washington, D.C., could have more leverage in the future, Zandi says. The new tax law reduces mortgage interest deductibility to borrowings of $750,000 or less; it also eliminates the deduction of all but $10,000 in state and local taxes, including property taxes. If demand for homes in those regions weakens as a result of those changes, so could prices.

But that shift may not happen for a while. Buyers in affected regions might see some price declines in the next 18 to 24 months, Zandi opines. Even in those areas, home values may soften only modestly or just stay flat for a couple of years. “The underpinning of the market will continue to be strong,” he says.

“Most people aren’t buying or selling because of nuances in tax policy,” agrees Aaron Terrazas, senior economist at the real estate site Zillow, based in Seattle. “They’re making decisions because they’re having children, retiring. That’s going to happen regardless of the tax situation.”

If buyers aren’t sure whether they should purchase now, they should consult a financial adviser, he adds.

Alex Casey, policy adviser for Zillow, concurs. “What it’s going to boil down to is after-tax income and paychecks,” he says.