Doctor’s: Rate & Economic Update for Physician Loan > Talking Taxes


Keeping you updated on the market!
For the week of

December 11, 2017


Talking Taxes

The idea of tax reform will likely morph into the reality of tax reform before the end of the year.

President Trump’s tax-reform agenda, passed by the House, was recently passed by the Senate, though by a narrow margin. Fifty-one senators gave the Senate bill a thumbs up, 49 gave it a thumbs down. The two bills now need to be reconciled.

Most everything that affects housing and mortgage lending remains in both bills: Capping the tax deduction for mortgage interest remains at $500,000. Raising the standard deduction to $12,000 from $6,350 for individuals and $24,000 from $12,700 for couples remains. Both bills aim to cap the SALT deduction at $10,000.

Because everything in Washington is political, tax reform is political.

Tax reform 2017 is a Republican effort, so, naturally, the Democrats oppose it. Many Democrats have ripped a page from the Republican playbook to support their opposition. They have taken the side of deficit hawks, concerned that tax receipts will drop and debt will rise to fund the deficit.

We suspect the Democrats concerns reside more with tax changes that impart more immediate ramifications — namely the lowering of SALT (state and local tax) deductions.

Blue states tend to favor higher state and local taxes. Blue states also tend to house the country’s wealthiest people. California, New York, and Connecticut are peppered with millionaires and billionaires. Reducing SALT at the federal level lowers the tax appeal of these states for the wealthy.

We think a more salient point is being missed, though. Anyone opposing capping SALT could make a stronger point on inequity. Whether you favor higher or lower taxes, money will be taxed that the taxpayer doesn’t have.

Eliminating and reducing the SALT deduction also reduces the appeal of the mortgage-interest tax deduction. Capping the mortgage-tax deduction concurrently lowers the appeal of higher-priced homes.

Turnaround being fair play, the Republicans have torn a page from the Democrats’ playbook: The tax deductions — SALT and mortgage-interest — are subsidies, and they’re subsidies directed inordinately at the rich.

The economic reality differs somewhat from the narrative.

SALT and mortgage-interest tax deductions benefit those who use them, to be sure. They benefit housing and mortgage lending. But no one is subsidized. Money isn’t taken from one person and given to another.

Our preference would be to maintain the current mortgage-interest tax deductibility. Raising the standard deduction lowers the relative value of the benefit on smaller mortgages. It concurrently raises the relative value of the benefit on larger mortgages. We’d also like to see full deductibility maintained on SALT.


Yes, maintaining the status quo would benefit housing and mortgage lending more than less. That said, encouraging more housing and lending activity isn’t a case of robbing Peter to pay Paul.

Regardless of what passes into law, we’ll survive. After all, the economic reasons for our existence far outnumber the tax reasons.




Date and Time
Consensus Analysis

Mortgage Applications

Wed., Dec. 13,

7:00 am, ET


Moderately Important. Purchase applications maintain a rising trend. The trend bodes well for November and December home sales.

Consumer Price Index

Wed., Dec. 13,

8:30 am, ET

All Goods: 0.1% (Increase)

Core: 0.2% (Increase)

Moderately Important. Consumer-price inflation remains contained, but lack of inflation will not dissuade the Federal Reserve from raising interest rates.

Federal Reserve FOMC Meeting

Wed., Dec. 13,

2:00 pm, ET

Federal Funds Rate: 1.25%-to-1.5%

Important. The Fed is expected to raise the range on the fed funds rate by 25 basis points. The increase is already priced into the market.


The Upcoming Nonevents

Federal Reserve officials will meet again next week. They’ll likely do the expected: They’ll raise the federal funds rate a quarter percentage point. This prospect is built into market prices.

Long-term interest rates continue to defy conventional wisdom. The Fed will again raise the fed funds rate — an overnight lending rate. The impact should be minimal on the long-end of the yield curve.

Mortgage rates have actually drifted lower ahead of the Fed’s expected actions. Quotes on prime 30-year loans continue to hold near 4%, on average, across the country. We expect them to hold near 4% after next week.

We’ve noted a few times over the past couple months that long-term rates need not follow short-term rates. They didn’t follow in 1860s England; they didn’t follow in early 2000s America. The same could hold true this go-around.

Could interest long-term rates rise when the tax reform bill passes into law?

They could, but we’d hesitate to bet they would. As with the Fed and the fed funds rate, expectations are built into the market. Tax reform is expected to pass with only minor tweaks at this point. Passage is likely accounted for.
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