“It exacerbates the cost problem further,” Miller said.

The mortgage-deduction limits may also worsen one of the housing market’s most vexing issues right now: a severe shortage of inventory in many areas. Homeowners with high-balance mortgages will be reluctant to sell and lose the deduction that would be grandfathered in for current owners, said Zandi of Moody’s.

California, Connecticut

Silicon Valley, one of the most expensive U.S. housing markets, would face a “triple whammy” from the proposed legislation, said Ken DeLeon of DeLeon Realty in Palo Alto.

“The average price is right around $3.4 million in this area,” DeLeon said. “These aren’t really rich people, they’re just people trying to buy a somewhat nice home for their family. Even condos are at least a million.”

Halving the mortgage interest deduction, capping the state and local tax deduction, and the capital gains changes will likely make Silicon Valley’s housing market even more short on inventory and more expensive, DeLeon said. And even as Congress debates the legislation, the uncertainty will turn many potential buyers into renters.

“It feels very political,” DeLeon said. “It’s like they’re saying, ‘Let’s just please our base and strike back at those who voted against us.’ Which is short-sighted because Silicon Valley is the best thing America has going for it. This is going to prompt companies to go offshore or look at tax-haven states.”

In Greenwich, Connecticut, where the median single-family house sold for $1.8 million in the third quarter, the tax bill could damage both the “fragile” recovery in the luxury market and sales of starter homes, said Robin Kencel, an agent with the Stevens Kencel Group at Douglas Elliman Real Estate. Buyers in the tony town have been moving toward smaller homes while lavish estates on several acres have languished on the market, data from Miller Samuel and Douglas Elliman show.

“At the $1 million level, which is first-time buyers in a market like ours, every dollar matters,” Kencel said. “One of the nice things we’ve been seeing is more millennials starting to come out to Greenwich from Manhattan and take the home-buying plunge. This is the buyer pool, I think, that would be particularly sensitive to any changes like this."

For the ultra-rich, caps to property taxes are a bigger blow than the limited mortgage-interest deduction, said Stephen Shapiro, chairman of brokerage Westside Estate Agency in Beverly Hills, California. The firm’s average sale this year was about $9.5 million.