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72 I N D U S T R Y I N S I G H T / R A L P H D E F R A N C O When the Tax Cuts and Jobs Act went into effect, many in the industry began to speculate what impact this would have on home prices, sales, and business confidence. While the industry is already feeling the change, the tax code isn't the complete game changer some have claimed it is. National home prices are still expected to grow–just at a slower rate. e impact varies substantially by region and sub-market, with low-cost markets getting a minor boost and upper-middle class and high-tax markets being hit on multiple fronts. e changes, particularly the limits on deductions, make renting relatively more attractive for high-income households. So it follows that the future homeownership rate will be slightly lower relative to what it would have been under the old rules. Home-price growth is likely to continue because of strong underlying housing-market fundamentals and a strengthening world economy that is finally firing on all cylinders. Fundamental factors such as strong job growth, low interest rates, and a shortage of homes for sale outweigh the weaker incentives for homeownership in the new tax code in the vast majority of areas. While many economists think a strong economy is the wrong point in the business cycle for a tax cut, the timing works well for the housing market. Since rapid national home-price growth over the past five years (5 to 7 percent a year) has far outpaced the 2 to 3 percent annual income growth, some cooling of the housing market isn't as bad as it sounds. It might even help prevent housing markets from overheating. A CLOSER LOOK AT THE PROS AND CONS e most important impacts of the new tax law on housing include the following: PROS » Increased business confidence (which also was helped by a push for regulatory relief). Higher confidence supports continued strong hiring and increased capital spending, which has been relatively weak over the past decade. However, the incremental economic growth attributable to the tax bill will be modest. Estimates of the total increase in Gross Domestic Product over the next 10 years are typically under 1 percent. » Lower taxes for most people could stimulate demand, at least in lower-cost markets where fewer people itemize their taxes. Also helped is the tiny segment at the other extreme: e ultra-high-end luxury housing segment may benefit due to lower taxes for those who can structure their income into pass-through companies. RIPPLE EFFECT