The PHLX Housing index <.HGX> reversed course and was last down 0.3 percent after the announcement of a plan that would cap state and local property tax deductions at $10,000 and maintain deductions for mortgage interest for existing loans and newly purchased homes up to $500,000.
"It disadvantages housing, making owning a home less attractive. That's a concern," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
The housing index, which includes homebuilders, building materials and mortgage stocks, up 0.7 percent after market open, fell as much as 1.6 percent after the news.
Shares in MDC Holdings (>> M.D.C. Holdings, Inc.) were last down 8.6 percent with trading volume 1.5 times the 10-day moving average. The tax plan deepened the stocks existing losses after it issued its quarterly report before the market opened.
Toll Brothers (>> Toll Brothers Inc) shares were down 4.6 percent at $44.49 with trading volume 2.7 times its 10-day moving average.
Hovnanian Enterprises (>> Hovnanian Enterprises, Inc.) stock was down 0.8 percent at $2.42.
The National Association of Realtors (NAR) issued a statement criticizing the bill.
"Eliminating or nullifying the tax incentives for homeownership puts home values and middle class homeowners at risk, and from a cursory examination this legislation appears to do just that," NAR President William E. Brown said.
LendingTree Inc (>> Lendingtree Inc), an online lender with offerings including home loans, saw its shares fall 0.8 percent.
The tax plan news also hit shares of U.S. retailers, with home improvement companies Home Depot (>> Home Depot (The)) and Lowe's Cos (>> Lowe's Companies) among the biggest drags on the S&P retail index <.SPXRT>.
Home Depot was last down 1.5 pct, while Lowe's was down 3.5 pct. The retail index fell 0.4 pct.
(Reporting by Sinead Carew; additional reporting by Caroline Valetkevitch in New York and Ginger Gibson in Washington D.C.; Editing by Susan Thomas and Andrew Hay)