Tax Proposal Could Cut MBS Issuance by $30 Billion, Analysts Say

  • Bill is a modest negative for housing, JPMorgan says
  • Proposed changes would make renting cheaper in many markets

The Make-or-Break Week Ahead for Tax Reform

U.S. agency mortgage bond supply could shrink by $30 billion under the proposed House Republican tax bill, which cuts into consumers’ deductions of interest for housing loans and could raise the cost of home buying, according to JPMorgan Chase & Co. analysts.

The bill released last week caps the mortgage interest deduction at $500,000 and eliminates the deduction for second homes. It almost doubles the standard deduction while eliminating most of the state and local tax deduction, aside from $10,000 for property taxes. That should be “a slight negative” for home prices, analysts led by Matthew Jozoff wrote in a note Friday.

Under the proposed changes, the median household would find it cheaper to buy a home rather than rent in 42 percent of metropolitan areas, compared with about 52 percent now, according to the analysts. An increase in renters could lead to a “potentially significant” decline in new home sales and bond issuance.

While a $30 billion decline in issuance is possible, a $15 billion decrease may be more likely, the analysts said. That’s because families often choose to buy homes to avoid moving or to build equity, not just to save money relative to renting. Households could also take out smaller home loans to reduce the effects of the loss of the mortgage interest deduction, and the larger standard deduction may give them more purchasing power.

Even though investor interest is high, it’s too early to position for expected tax changes because it’s not certain that the bill will pass in its current form, the analysts said. They recommend being “modestly underweight mortgages.”

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE