10% Correction in Bay Area market after Tax Reform?

13 Replies

Hi Folks,

I cannot understand why more people are not talking about this. 

Renter:

Imagine I am a renter in Bay Area and I wan't to buy an average $1M home here in Bay Area and want to put down a decent 25%. My loan would be $750K. At 3.75% interest rate my mortgage payment is $3500. Total Mortgage interest paid is $27K and Property Taxes are about $12K.  Now if I am married, under the new tax plan, I am already getting $24K in standard deduction and I am already paying $10K in state income taxes (max SALT deduction of $10K), I have almost 0 Tax incentive to buy a home. 


Home Owner:

Now, Imagine I am a married home owner with the same above $1M house with $750K Mortgage. I was deducting my $27K in interest + $8K personal exemptions + $12K in property taxes + $10K in State income taxes = $57 in deductions. With the new law I would just do $27K interest + $10K = $37K in deductions. That's a loss of $20K in deductions. That translates to around $6K higher tax and roughly $500 per month. So my mortgage went up from around $3500 to about $4000. If I had a HELOC, I would further lose deductions. Combined with peeps for have expiring 5 Years Arms, would come under tremendous pressure to sell with higher interest rates next year.

Wouldn't this cause a correction in home prices, if that market was rational??? What am I missing here?

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Keep in mind that it would be very doubtful that the people in the original example would be able to take all of that income and property tax deduction because most people in this situation would have already lost their deduction because they pay alternative minimum tax. Once you get into certain upper middle class tax brackets in CA, pretty much everybody pays AMT, so increasing the exemption limits on AMT is a nice boon to CA taxpayers at the same time that the limits on SALT deductions is a negative.

The Bush tax cuts of 2001 and 2003 weren’t as big a tax cut for NY, NJ, and CA taxpayers because the AMT wasn’t changed and it ensnared a lot of more these taxpayers. This wasn’t publicized as much at the time. Overall, the SALT deductions are negative to high tax states but might not be as bad as reported because so many of the taxpayers affected are already in AMT.

Aside from the AMT, the tax brackets have changed so people in that range won't be affected much.

If i remember correctly, you only get the 10000$ if you itemize, which the renter won't be doing. So you'd be going from a 24000$ deduction to 37000$, which isn't as big of an incentive but isn't that bad.

@Account Closed I don’t think that is a conspiracy theory. It’s basic electoral math to assume that removing the income tax deductibility above 10k is primarily only an all blue state phenomena (not considering that limit combined with property taxes). So in effect he is extracting additional tax revenue from voters who’s ire and dissatisfaction won’t effect him.

@Albert Xavier I can’t speak to your point; whether more people should be alarmed about a new tax plan. However I can tell you the vast majority of Americans are mathematically illiterate, so when you start talking numbers to most people you might as well be speaking Hungarian. This is why whenever you hear about the tax plan you never actually hear figures in the news, they know that would be unwatchable to most viewers. To be fair I do think most people know the difference between a million and a billion, but they are just unsure which number is actually bigger.

Originally posted by @Steve B. :

Kyle K. I don’t think that is a conspiracy theory. It’s basic electoral math to assume that removing the income tax deductibility above 10k is primarily only an all blue state phenomena (not considering that limit combined with property taxes). So in effect he is extracting additional tax revenue from voters who’s ire and dissatisfaction won’t effect him.

 I'm not sure I follow? Why would this only effect "blue" states? Even in so called states, the grand majority of single family homes are valued under $750,000. 

402-965-1853

@Anthony Gayden I should have said that it effected them more, not only.  It’s because the combined SALT deduction is 10k. So that effects high combined income and property  tax states disproportionately.  This is why Darryl Issa and other  blue state Reblublicans  voted against the tax changes. 

Originally posted by @Albert Xavier :

 Wouldn't this cause a correction in home prices, if that market was rational??? What am I missing here?

I think what you are missing is that there are a lot more reasons that folks buy a home in the Bay Area besides saving a few grand on taxes. 

Many of them believe (and sometimes they are right) that the value of the home will go up, which is worth more than any tax savings. Others believe (and might be right) that rents will continue to go up, and buying a home at today’s reasonable interest rates with a fully amortizing fixed rate loan locks in their housing costs essentially for life, if they choose to let it happen that way.

And still others are just hoping to have far lower housing costs in their retirement years once their mortgage is paid off.  And I’m sure that some enjoy the security of controlling their own destiny rather than running the risk of a 60 day notice on the whim of a landlord, or just want to customize their home to their own liking rather than live with landlord-grade Navajo white. 

So I think homeownership will remain desirable in the Bay Area which will continue to drive demand. So with continued demand there is only one thing to drive a correction—supply. Well we all know that adding supply to the housing stock in the Bay Area is one of the most difficult achievements in the real estate industry. And here in Santa Rosa we just lost 5% of our housing stock from a destructive wildfire so our supply side has actually moved in the wrong direction. 

Looking for a correction?  Maybe someday, but it’s still too soon to start holding your breath.

Albert, this feels really important, and I’m surprised there isn’t more discussion (of course a lot of it is I agree indeed Steven’s m/billion point) And my not-too-tinfoil conspiracy theory: not enough of the people who are directly benefitting from the tax cut are doing the math on indirect effects. 

And while I agree that San Francisco remains desirable, it would still seem that increasing the costs of ownership (by reducing deduction advantage) will impact the price. I would welcome more math to have a sense of how many people would be affected. Doesn’t need to impact a plurality of buyers in the market to have a price impact. 

Add that to a rise in interest rates, and it does seem economically significant. (That said, underscoring Brian’s point, migration patterns suggest folks are moving towards the sunbelt and towards water, and the Bay Area has both. Add that to a cool climate, SF has among the most desirable weather d geography in the world, so it seems a “hold” even if it’s a softer “buy.” 

But your point goes well beyond the Bay Area. 

You are missing a lot including demographics and the high employment situation in the Bay Area. The new tax laws definitely create a speed bump in home buying (for the small few who care to even consider it) but people are still going to build families, have kids, want to own homes and in the bay we have a pent up population of high income earning millennials who are doing exactly that. It's not uncommon here to find hordes of new households who are making > 3 - 400k here.

The game changer is the employment situation in the tech sector. Keep an eye on that. If that shifts down than we have a correction. That will be more than 10%, if and when it happens.

But let's be blunt, if things start to slow down in the worlds tech capital, that impact will be felt in other smaller tech hubs including Seattle and Austin and then they will have cascading impact on their surrounding areas.

Let's put it mildly that if the worlds largest capitalized companies which are mostly in the Bay Area start to hurt, we have a problem across the board. People underestimate how it will impact their own state or county even if it is far away from San Francisco.

@Matt Mason nails it with the AMT explanation. I live in the Bay Area and this is the primary gripe I hear about from colleagues.

so true people are missing if you live here in bay area and own a home you are under AMT Most of the people will end up saving money there is no need for them to panic and sell the home at the same time there is a huge demand.


Originally posted by @Matt Mason :

Keep in mind that it would be very doubtful that the people in the original example would be able to take all of that income and property tax deduction because most people in this situation would have already lost their deduction because they pay alternative minimum tax. Once you get into certain upper middle class tax brackets in CA, pretty much everybody pays AMT, so increasing the exemption limits on AMT is a nice boon to CA taxpayers at the same time that the limits on SALT deductions is a negative.

The Bush tax cuts of 2001 and 2003 weren’t as big a tax cut for NY, NJ, and CA taxpayers because the AMT wasn’t changed and it ensnared a lot of more these taxpayers. This wasn’t publicized as much at the time. Overall, the SALT deductions are negative to high tax states but might not be as bad as reported because so many of the taxpayers affected are already in AMT.

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