How Will Rising Interest Rates Affect the New Jersey Real Estate Market?

New Jersey real estate

Over the past ten years, real estate prices have fallen in New Jersey. That trend is slowly changing. In most areas of New Jersey, the home values have not reached the 2005-era peaks. While it is feared that current federal tax reforms will have a negative impact on home values in New Jersey, there are many scholars, such as Monmouth’s Professor Peter Reinhart, who claim that the positive impacts will outweigh the negative outcomes.

The current Congressional tax reform will have a major impact on the housing market in New Jersey. For instance, state and local taxes (SALT) will involve a new $10,000 tax cap on deductions. This is much less of a price for taxpayers, because, in 2015, New Jersey citizens paid $17,850. The deduction cap on interest on new home mortgages decreased from $1,000,000 to $750,000 of principal. This also involved elimination of interest deduction for home equity mortgages. Homeowners who have existing mortgages can still deduct interest.

There are several negative impacts on the New Jersey housing market that are due to rising interest rates. Existing homeowners with a mortgage over $750,000 and lower than $1,000,000 will probably not decide to relocate if a larger mortgage would be required by moving to a new home. This would mean that the low inventory of availability of homes for sale would stay low. Thus, there would be a diminished ability for those in the market to buy a home to receive tax benefits of property tax and interest deductions. This would result in more of the buying market to rent, versus purchase a home, and existing homeowners who would typically upgrade to a larger home would not be able to afford to do so. With a decreased number of home buyers starting out in the market, in conjunction with a decreased number of homes for sale, less overall transactions will likely occur.

New Jersey lawmakers can implement certain policies that would help offset any potentially negative effects of the recently imposed tax laws. The New Jersey governor and legislature could possibly eliminate the $10,000 cap on local property tax deduction, which would offer a reprieve to those who pay more than that on their property taxes. There is a controversial approach which involves viewing the overall New Jersey tax structure as a whole, and relates to shifting away from income and property taxes and implementing business or sales taxes that are not already deductible to ‘individual homeowners.’ Some other available alternatives to decrease the burden on homeowners include municipal consolidation, cost cutting, and cost sharing. This would increase property tax revenues in the United States.

There are some positive outcomes from the tax reforms related to housing and the rising interest rates. One example of a positive outcome involves the increase in demand for the rental market. Another example involves the upgrades and improvements landlords will do to already existing apartment communities, given the increase in demand for available rental properties. Furthermore, a lower tax rate for pass-through entities and corporations would potentially lead to greater profits which could be reinvested in housing.  Companies which purchased detached, single-family homes to utilize as rental properties after the recession might experience an increase in demand as there is a decrease in the benefits of home ownership.

 

 

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