New changes to U.S. tax laws led 41 percent of survey respondents to lower their long-term expectations for the U.S. housing market, according to the 2018 Q1 Zillow Home Price Expectations Survey.

The quarterly survey, sponsored by Zillow and conducted by Pulsenomics LLC, asked more than 100 housing experts and economists about their expectations for home price growth, and whether tax reform affected these predictions.

When asked how the new tax law impacted their five-year forecast for home values in the U.S., 41 percent of respondents said their overall housing outlook is now more pessimistic, while 31 percent of the panelists had a more optimistic view as a result of the tax reform. The remaining 28 percent of respondents said that tax reform did not change their outlook.

The Tax Cuts and Jobs Act, enacted in December 2017, limited many itemized deductions such as the mortgage interest deduction while expanding the standard deduction. Most taxpayers take the standard deduction, and will see take-home incomes increase as a result of tax reform, providing a boost to spending, savings and investment this year. 

One possible reason for the experts' pessimism is the fear that cutting taxes when the American economy is already running at full capacity increases the risk of a downturn in the next five years. This could push the Federal Reserve to increase interest rates faster than had been expected, according to Zillow Senior Economist Aaron Terrazas.

"By expanding the standard deduction, tax reform will put more money into the typical American's pocket in 2018, which will boost spending and could help renters save faster for a down payment," said Zillow Senior Economist Aaron Terrazas. "But the longer-term outlook is less rosy. There is some concern that tax cuts at this point in the business cycle may be throwing fuel on an already ranging fire and could lead the economy to overheat. Most economists we surveyed see a stronger outlook for the housing market over the next year or two but a more pessimistic outlook on the longer horizon."

In the near future, experts raised their predictions from previous surveys for home values as limited inventory and high demand keep prices moving higher.

Despite the rosy outlook for home prices over the next few years, homes today are less valuable than they would be if the recession had not happened. If the housing bubble and bust had not happened, and home values had instead appreciated at a steady paceⁱⁱ, the median home value would be about $214,500, 4 percent higher than its current value of $206,300.

"The persistent short supply of entry-level homes for sale has highlighted just how bifurcated the U.S. housing market has become," said Terry Loebs, founder of Pulsenomics. "The experts project that the value of homes in the bottom third of the market will appreciate at 6 percent this year—double the rate expected for the highest-priced tertile. Limited inventory of low-priced homes, coupled with expectations for rising interest rates, likely foreshadow a frenetic, anxiety-filled spring buying season for qualified first-time homebuyers."