Fannie Mae sees mixed tax reform response from housing market

by Francis Monfort24 Jan 2018
The recently passed tax law is expected to generate mixed responses from the housing market as well as boost economic growth, according to the January 2018 Economic and Housing Outlook released by Fannie Mae.

“The new tax laws are likely to motivate a mixed response in the housing market: Increased disposable household income should lead to greater housing demand, but changes to deductions essentially reduce the subsidy for homeownership,” Fannie Mae Chief Economist Doug Duncan said. “On balance, we expect the housing market in 2018 to encounter many of the same challenges as last year, including inventory shortages, particularly in the middle and lower-end of the market, and affordability headwinds."

Fannie Mae said real GDP is expected to grow 2.7% in 2018 on a mix of stronger consumer spending and higher labor productivity due to increased business equipment investment. However, Fannie Mae said any continued expansion would depend highly on complementary policy decisions from the Federal Reserve. The possibility of overly aggressive monetary tightening intended to preempt rising inflation could pose downside risk.

"The recently passed tax bill should provide a shot in the arm for an expansion that, while long in the tooth, likely brought the best full-year performance during 2017 in three years. The question for 2018 is less about the impacts of the tax cuts for consumers and corporations than about how the Fed manages the pace of monetary policy normalization amid a stimulative fiscal environment," Duncan said. "As we see it, the traditional view of a tradeoff between employment and inflation lacks solid empirical support in recent decades, and aggressive monetary policy to ward off a potentially overheating economy may do more harm than good. Managing a 'soft landing' will be a difficult but critical task for policymakers in 2018.”

Fannie Mae further predicts that the unemployment rate will fall further from its already-low level to its lowest in 50 years and that inflation should stay below the Fed 2% target for 2018.

Related stories:
Fannie Mae: Housing remains a drag on economy
Fannie Mae maintains 2017 growth outlook on hurricane-related impacts