Thursday, January 25, 2018

A First Look at the Tax Cut and Jobs Act, the Economy, and Real Estate

UPDATE May 2018

In May 2018 David Barker and Steve Malpezzi presented abridged and revised versions of our preliminary analysis of the Tax Cut and Jobs Act to the professional side of the Homer Hoyt Fellows.

Malpezzi presented contextual data on government taxation, spending, deficits, debt, etc., and on possible macroeconomic effects of the TC&JA.  Download Malpezzi's presentation here.

Barker presented detailed discussion of the TC&JA's potential effects on real estate markets, including several case studies.  Download Barker's presentation here.

Those presentations were developed from a larger effort that involved several other colleagues that began in January.  That effort, and the larger library of draft presentation slides, are presented below.

The slides above are cleaner and more concise; however they are still preliminary and not meant as tax or investment advice.

The slides below are less polished (!) and more extensive; they may be of interest to instructors who are searching for selected slides for class use.  Or for those who are gluttons for PowerPoint punishment.

Original January post and files follow here:

In January 2018, we held a meeting of the Homer Hoyt Academic Fellows in West Palm Beach, Florida.  Much more about the Hoyt Group another day, soon.  For now suffice it to say that the meeting gathers about 50 real estate researchers, mainly but not entirely economists, for several days of papers and presentations.

One of the sessions was devoted to a semi-structured group discussion of the Tax Cut and Jobs Act 2017, including but not limited to provisions affecting real estate.

To help frame the discussion, we prepared some draft materials, and pointed colleagues to a few other sources. This blog post provides links to files containing that information, so that meeting participants – and now, other readers of this blog – can readily access these materials.

Taxes are complicated things, as I re-discovered recently when my tax software choked on my own return for the year I split between Wisconsin and Massachusetts. I finished my returns “by hand” and submit them by paper mail. Wish me luck!

Which reminds me that it's a good place to place a disclaimer.  These notes are working drafts, written by economists who are not tax advisors.  As you will see, there are several areas where the TC&JA is not very clear, and these materials should not be used as substitutes for professional advice.

The draft materials will be revised.  Comments and corrections are extremely welcome, especially at this early stage.  The current version is dated April 30, 2018.

For the moment this post points you to two links.

The first link downloads a PDF summary of tax provisions, comparing the gist of major provisions before and after the Tax Cut and Jobs Act. Again we reiterate that these are brief summaries and not a substitute for professional tax advice.

The second link downloads a PowerPoint presentation that includes slides we used in the discussion, including the summary table of major provisions noted above, but also a number of other slides, about 100 in total. Quite a few of the slides are culled from my class notes on public finance, others were contributed by Homer Hoyt participants including David BarkerRichard Green and Morris Davis. Since I pulled together the final deck, with a lot of my own slides, David Richard and Morris should not be held responsible for any of my outrageous personal opinions remaining.

They are grouped within the deck roughly as follows:

  1. Taxes – some basics.
  2. Spending – some basics.
  3. Deficits and debt – some basics.
  4. What about state and local taxes?
  5. Review of the Tax Cut and Jobs Act 2017; comparison to prior code.
  6. TC&JA and real estate – focus on pass-through entities.
  7. TC&JA: who gets the cuts?
  8. TC&JA:  will it increase investment?
  9. TC&JA:  will it increase GDP, wages and incomes?
  10. Some readings.

Be aware that most of the slides also have notes attached, some of them fairly extensive. A preliminary bibliography is included as a long note to a slide near the end. Look for the "Tax Library in Hell" slide.  The bibliography is on the next slide.

Monday, January 8, 2018

Housing Supply and Demand: Some Basics

Teach a parrot the terms "supply and demand" and you've got an economist.  (Thomas Carlyle)

(Interesting digression: Carlyle is also usually cited as the first to apply the term “the dismal science” to economists.  This was in the context of a debate between the pro-slavery Carlyle and anti-slavery economists (notably John Stuart Mill) regarding the reintroduction of slavery to the West Indies.  See Persky (1990)).

Functions Give Rise to Curves

Supply and demand, the fundamental behavior of producers and consumers, are each multivariate concepts.  Demand for housing depends on income, housing prices, demographics (population, household formation, the age distribution), mortgage rates and availability, and certain taxes, among other fundamentals.  Some of these are relatively easy to measure, or at least they are conceptually straightforward; but there are other demand fundamentals that are a little “squishy,” at least to most economists – psychology, tastes, and expectations come to mind.  

Both the levels of variables and rates of change in those variables can be considered.  Furthermore, demand is forward-looking and will depend not just on today’s values of the variables, but on expectations about their future values.

On the producer side, supply is affected by housing prices, the prices of inputs, the technology of building and development, infrastructure availability, physical geography and topography, interest rates (especially short term, to builders), other taxes, and the regulatory environment, among other things.  Expectations and psychology, levels and changes, and psychology and so-called “animal spirits” matter hear, as well.

The familiar supply and demand curves pick a single variable (most often the price of housing) to analyze, while at least temporarily holding other things (income, prices of inputs, etc.) constant.  Exhibit 1 illustrates, presenting market-level supply and demand curves.

Even though the curves usually look similar when drawn, conceptually it’s important to distinguish between the demand function (and curves) for individual consumers, and the sum of these over all consumers in a market.  In this section we focus on market supply and demand.  Later we’ll examine supply and demand for individual producers and consumers, as well as for market aggregates.

Suppose, for simplicity, that all housing units are the same, so that we can measure quantity by simply counting houses; then rent per house is the same as the flow price per unit of housing services, and the value or asset price per house would also be a true price measure.  Holding for the moment the other variables that affect supply and demand fixed, we highlight the effect of prices on both supply and demand.  Demand slopes down – the higher the price, the less we demand.  Supply, using similar reasoning, slopes upwards.  If supply was fixed, the supply curve would be vertical.  If supply was horizontal, that would indicate that the market would supply any quantity demanded, at a constant market price.  As drawn, the supply curve is fairly flat – meant to convey fairly, but not perfectly, elastic supply.

Now let’s change one of the other variables, which we initially held fixed.  Suppose income in our city increases substantially; this would shift the demand curve out, i.e. the market would demand more housing, at any given price.  The intersection of supply and the new demand shows that some new houses would be built (Q1 – Q0 houses) and housing prices would increase from P0 to P1.  Notice that in a market with elastic supply, a lot of housing gets built – Q1 – Q0 is “large,” and P1 – P0 is “small.”

Contrast this with Exhibit 2, a heavily regulated market with fairly inelastic supply.  In this case, the same initial demand shock results in a “large” increase in prices, and a “small” quantity response.  We will return to this theme when examining some housing policies, in later posts.


Elasticity is economic jargon for "responsiveness."  It's the proportionate change in output given a proportionate change in price.  
Mathematically, we can represent the price elasticity of demand:

There are many elasticities, e.g. supply vs. demand elasticities; with respect to price, income, population…