This article is a collaboration between Fortune and ProPublica, a nonprofit newsroom that investigates abuses of power.
In recent weeks, President Donald Trump has been talking about plans for, as he put it, a “very substantial tax cut for middle income folks who work so hard.” But before Congress embarks on a new tax measure, people should consider one of the largely unexamined effects of the last tax bill, which Trump promised would help the middle class: Would you believe it has inflicted a trillion dollars of damage on homeowners—many of them middle class—throughout the country?
That massive number is the reduction in home values caused by the 2017 tax law that capped federal deductions for state and local real estate and income taxes at $10,000 a year and also eliminated some mortgage interest deductions. The impact varies widely across different areas. Counties with high home prices and high real estate taxes and where homeowners have big mortgages are suffering the biggest hit, as you’d expect, given the larger value of the lost tax deductions. But as we’ll see, homeowners all over the country are feeling the effects.
I’m basing my analysis on numbers from two well-respected people: Mark Zandi, the chief economist of Moody’s Analytics; and Hugh Lamle, the retired president of M.D. Sass, a Wall Street investment management company.
Zandi’s numbers are broad—macro-math, as it were. Lamle (pronounced LAM-lee) is a master of micro-math. It was Lamle who first got me thinking about home value losses by sending me an economic model that he created to show the damage inflicted on high-end, high-bracket taxpayers in high-tax areas who paid seven digits or more for their homes.
Lamle starts with the premise that homebuyers have typically figured out how much house they can afford by calculating how much they can spend on a down payment and monthly mortgage payment, adjusting the latter by the amount they’d save via the tax deduction for mortgage interest and real estate taxes. His model figures out how much prices would have to drop for the same monthly payment to cover a given house now that this notional buyer can’t take advantage of the real estate tax deduction and might not be able to take full advantage of the mortgage interest deduction.
After I showed Lamle’s model to my ProPublica research partner, Doris Burke, she steered me to Zandi’s research, which I realized could be used to calculate national value-loss numbers.
Ready? Here we go. The broad picture first, then the specific. This gets a little complicated, so please bear with me.
Zandi says that because of the 2017 tax law, U.S. house prices overall are about 4% lower than they’d otherwise be. The next question is how many dollars of lost home value that 4% translates into. That isn’t so hard to figure out if you get your hands on the right numbers.
Let me show you.
The Federal Reserve Board says that as of March 31, U.S. home values totaled about $26.1 trillion. Apply Zandi’s 4% number to that, and you …read more