The tight rental housing market and rising rents that have hit many American cities in recent years could be made worse by the tax overhaul recently passed by Congress and signed by President Trump.

That's because the new federal tax code eliminates some of the incentives for homeownership, making renting more attractive for many middle class Americans, according to a recent report by the Urban Institute.

A family of three that owns a home and earns between $150,000 and $300,000 will likely spend more money on taxes in 2018 than it did in 2017, according to the report released in January. And those families could absorb between 25 to 32 percent increases in rent before owning a home makes more sense financially.

Under the new tax law, the mortgage interest deduction cap was reduced from $1 million to $750,000. The state and local tax deduction was capped at $10,000. Those changes mean that only 14.4 percent of homes are valuable enough to incentivize their owners to itemize instead of taking the standard deduction.

In December, the National Association of Realtors said the new laws could spur home values to drop -- although it remains to be seen whether that's true. But it's much harder to gauge the tax law's impact on the rental market.

“The mortgage interest deduction and the property tax deduction doesn’t push people to buy homes, but it pushes people to buy more home,” says Will Fisher, senior policy analyst at the Center on Budget and Policy Priorities. “Based on that, you wouldn’t think the incentive would be that big in pushing people into the rental market.”

Rental markets have been strong since the end of the recession. Vacancy rates are at historic lows, and the current share of American households that rent -- 37 percent -- stands at a 50-year high, according to the Joint Center for Housing Studies of Harvard University.

At the same time, rentals are in short supply. Multifamily construction ticked up in 2016, according to the report, but the gains were concentrated at the high-end luxury segment of the rental market. Rents have continued to increase faster than wages, according to the Urban Institute.

“The overall cost of housing, whether it’s homeownership or rental, is mainly impacted by supply rather than people generally switching from homeownership to rental,” says Mark Willis, senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy.

But if more Americans do choose to rent because of the tax law changes, that could drive down supply and drive up demand -- and rents along with it. 

At a time when most rental construction is luxury condos, the new tax law also strips away a major incentive to build more affordable units. Low-Income Housing Tax Credits will become less effective under the new tax law.

The credits help subsidize the construction cost of low-income housing by reducing the developer’s tax burden. But with corporate tax rates dropping to 21 percent from 35 percent, the credits will be less attractive to developers, says Fisher.

Analysts expect the new tax law will reduce the number of newly constructed affordable home units by 235,000 across the country.