Wont the new Trump/GOP tax plan reduce demand for housing?

56 Replies

In expensive markets like NJ, Seattle, expensive areas of CA, etc? I suspect the demand curve will shift unfavorably, at least for expensive properties. Cheap properties in the Seattle area around 350K and so may be considered a substitute good as they have far lower property taxes. I suspect that the demand for those will increase since most of what is being built are the 600-700K luxury houses with 7K property taxes per year and counting. On the 350K properties the taxes are closer to 4K, which is still within the limites of the new tax plant when you factor in SALT.

Seems like it would reduce the demand for expensive houses in Seattle while increasing the demand for starter homes. And since many trade up buyers would not want to take out a new mortgage over 750K, this would further reduce housing inventory. So demand and supply may both drop together for expensive houses and keep appreciation somewhat the same for them, while demand may increase for starter homes that they aren't building enough of...thus increasing their appreciation.

Thoughts?

@Jack B.

I am 100% in agreement with you. SALT is one of the reasons why people are willing to invest in housing. Since the new bill will make property tax deductions cut off at 10K, many expensive counties in states like NY, NJ, Maryland, Cali, Wash and Florida will make a lot homeowners unhappy. I know people in New Jersey paying nearly 15K on property tax alone. I would hate to see the look on their face when they find out they can only get 10K back.

So yes, starter homes would become more in demand and drive up appreciation. Who knows, maybe that was what congress was trying to push for all along. #CongressHousingConspiracyTheory lol

Not once have I ever had a single buyer who mentioned the tax benefits of owning a house as a reason why they were buying.  I think any impact of the new tax bill will be quite minimal.  

Originally posted by @Russell Brazil :

Not once have I ever had a single buyer who mentioned the tax benefits of owning a house as a reason why they were buying.  I think any impact of the new tax bill will be quite minimal.  

We talk about tax benefits and use the tax benefits as a "kicker," to get the logical part of the decision to buy however the main reason to buy has never been the "tax benefits," in my opinion. The buyer/ borrower may say Im so sick of paying someone elses mortgage and on the surface it sounds like they hate renting but there is always other emotional/lifestyle/psychological reasons for the purchase.

Originally posted by @Russell Brazil :

Not once have I ever had a single buyer who mentioned the tax benefits of owning a house as a reason why they were buying.  I think any impact of the new tax bill will be quite minimal.  

 Ivy league economists with PhD's have studied this stuff. It affects it, whether one realtor has not encountered anyone that outright told him it affected their purchase decision.......In high tax states, the deduction factors into peoples purchase decisions because it affects affordability, just like INTEREST rates do..... 

I know it did when I bought my home that is getting pretty close to one mil. If I had to buy again now with the new law, I would not. In fact, I'm planning on selling partly because with local taxes and property taxes, I'm above the threshold of 10K.

@Jack B.

Maybe you and I were the only savvy buyers who considered that before we bought our homes. LOL

I expect that it will reduce the price of homes, though I doubt that it will reduce the quantity demanded. It might actually increase at a lower price since more people would be able to participate.

I'm not a big fan of treating housing as a piggy bank, and I don't think owner occupied housing is a good investment. Mostly because it has to appreciate faster than wages to make it a good investment and 50 years of that has brought us to where we are today, where houses cost as 10 times annual wages instead of 3.

Originally posted by @Jack B. :
Originally posted by @Russell Brazil:

Not once have I ever had a single buyer who mentioned the tax benefits of owning a house as a reason why they were buying.  I think any impact of the new tax bill will be quite minimal.  

 Ivy league economists with PhD's have studied this stuff. It affects it, whether one realtor has not encountered anyone that outright told him it affected their purchase decision.......In high tax states, the deduction factors into peoples purchase decisions because it affects affordability, just like INTEREST rates do..... 

I know it did when I bought my home that is getting pretty close to one mil. If I had to buy again now with the new law, I would not. In fact, I'm planning on selling partly because with local taxes and property taxes, I'm above the threshold of 10K.

 The problem with relying on ivy league economists with PHD's is there is inevitably multiple ones on opposite sides of each argument.  Robert Shiller won the Nobel Prize in economics and takes the view that interest rates do not affect housing housing prices.  It is also interesting to note that while Shiller won the Nobel Prize largely with the thesis that markets are irrational and ineffecient, Eugene Fama shared the Nobel with him that year for taking the opposite view with his efficient-market theory.

I think the decision to buy is different for a lot of buyers but this will definitely come in to play when they calculate how much house they can afford

Originally posted by @Sean Walton :

I think the decision to buy is different for a lot of buyers but this will definitely come in to play when they calculate how much house they can afford

 The research that I've read over the years indicates that the MID causes people to buy bigger homes but doesn't play a large role in their decision to purchase. Thus the effect on volume and price aren't directly correlated.

will be interesting take Texas for example  Austin were prices are high.. and tax's are sky high.

although no state income tax..

I think when you get to the plus 1mil range or 2 to 3 mil homes.. a tax deduction of 10 to 20k a year is not going to keep someone who can afford those homes from buying them.

My son in law just bought a 1.9.. mil in Vegas  and he was not even aware that he could only write off 10k of prop tax's  that house has 21k a year and only 750k of mortgage.. he wants the house end of story.

no doubt will have some affect.. I know me personally I would look at it.. but for me I basically never have had a mortgage over 425k anyway.. although have had million dollar homes and mine right now is probably 1.1 with 13k in taxs a year.. but shoot whats a 3k write off really.. boils down to 1200 bucks or something.. not anything your going to sell your wife on why you should not buy this wizbang house.

but I certainly like all the new construction I am building its in PDX and it tics the box's  425 to 475k total price tax's about 5.5k.. so we should be good and brand new homes..

I think the not be able to write off state income tax is bigger issue with high wage earners than property tax's by a long shot.. I am paying mine this week.. and I did just buy a home in Vegas and am going to take NV residency what I save in state tax for all the income we make out in the cheap income tax states like florida and SC  MS  IN etc.. it will will pay the house off in Vegas in 5 years just in the money I save that I pay to ORegon..

So Steve I think Vancouver could be a big play.. I know if I was hanging around here I would probably move my company over the river.  But then again in WASH. you have excise when you sell and that is a big number on expensive houses.  15 to 20k.

I was wondering about this as well . I don't know the prices in Seattle too well but I had read median home price in Seattle is higher than L.A now . Can you actually buy a single family home in Seattle for $350,000 ?
I know it is not possible in L.A , even Compton is over $400,000 now .

I'm thinking demand will still be strong for the homes over $750,000 in L.A , don't know if people will be willing to downgrade the area they buy it or size of home to save on taxes .

Will be interesting to see what happens though .

It is something we will have to stay tuned to see. Trying to project forward, I think that it may effect clients looking for housing over $1.5 million, but at the end of the day, if you are purchasing a property at that prince range and above, generally, if you want something you want something, damn the price. And then you talk to your CPA and Attorney (like me) and see how you can then take advantage of the new Real Estate Investors Tax Loopholes, tax breaks and business pass-throughs.  Remember that tax pass-through entities is the backbone of American businesses. 

@Brian Bradley and @Joseph M.

We are all speculating at this point. Let us see in the next 2-3 years which person's forecast holds true. I hope yours does @Russell Brazil .

Besides, I heard a lot of people who said they would move to Canada if Trump gets elected but I have yet to read a news article about a mass exodus of Americans moving to Canada yet. So who knows.

That's the point @Brian Adzadi its all speculating. I Think @Russell Brazil and I and you are all saying the same thing. I think it will be minimal if anything. For any one "Ivy League" economist PhD says theirs another that will say another. So I wold not fall into the trap of what the 'expert economist' says. A great thing I learned from my trial work is that when you pull a jury, they will tell you that when each party presents an 'expert' witness, the jury sees it for one for one and they cancel each other out. Same goes for economic ivy league experts. They all get paid for an agenda one way of the other. I don't see real effect large enough to cause average Joe not to purchase. 

I think people tend to buy depending on if the Bank qualifies them for a particular monthly payment for Mortgage Affordability. Taxes, if they are considered, are an after thought. It's just too difficult for the average non-investor to calculate. In fact, it may be too difficult for the average Investor to take into account as well!

Unless the Mortgage Industry says, "HEY.... we will ding your DTI because now you are paying more in personal taxes because of the SALT deduction elimination" I personally don't see this as being an issue.

So the question will be, will Mortgage Banks include a reduction in SALT deductions? Did they take it into account in the first place?

I'm not a Mortgage Expert but @Chris Mason is. Maybe he can comment on whether or not a Mortgage Company takes into account Tax Payments at all in their underwriting?

So basically, If I am a National Mortgage Bank, will I qualify a Buyer from NY/California differently than say, Florida that has no State Tax?

I think it will have an impact, but I o it base that on my own personal experiences. I lived outside of Chicago for nearly 6 years and looked at buying a house for 4 of those 6. My champagne taste couldn’t be matched by my beer budget. Every house I liked or fit my “desire” came with a tax bill of 10-12k a year. That’s adding nearly 1k every month to my payment in nothing but property taxes...that was the deciding factor to not buy.

Once I was able to transfer out, I jumped and landed in a state where I was able to get the house I wanted plus an acre of land. Now I’m looking back to my colleagues in Chicago and many are contemplating leaving due to the hit they’re going to take. I expect there to be a rise in people leaving states with higher property taxes...guess that means it’s great to be investing in certain states ;).

Originally posted by @Llewelyn A. :

I'm not a Mortgage Expert but @Chris Mason is. Maybe he can comment on whether or not a Mortgage Company takes into account Tax Payments at all in their underwriting?

Only for VA loans, otherwise no.

I would guess 99% if Americans if you asked them how much were they getting back in taxes because of their deduction on property taxes would tell you they have no clue. If the numbers are that tight where you have to rely on the tax benefit from taxes to acquire a home or pay your bills then you will be in trouble at some point in time.

For those who have $15k in taxes, your saving possibly 1500 a year- that is really not a lot of $ compared to the value of the property.

In Washington DC I do not see this is an issue as your paying for location and people will pay the $ to be where they want to be otherwise they will be in traffic 3 hours a day and paying it in gas, tolls and loss of time.

Also many don’t realize people in their bracket typically were paying the AMT anyways which reduced your tax benefits anyways.

I agree with @Russell Brazil .  If you think that anyone in the top 25 markets is not going to purchase a home because now they can't deduct above $10K in property taxes you're mistaken @Jack B.   @Jay Hinrichs is spot on. The net result in savings generally is minimal.  Let's say I'm paying $20K in taxes for my NJ home.  I can deduct $10K, and not the other $10K.  What's my net effect of losing that $10K deduction if I was a 40% effective tax rate?  $4k net?  Divide that by 12.  Am I going to let $333.34 each month get in the way of me not owning my million dollar home?   Most likely not because at that price point it's not a deal breaker.  You're earning plenty to cover it. 

The vast majority of middle America with their 100k mortgage doesn't even reach the threshold to itemize anyway

I feel like a lot of people are panicking over this. There's multiple stories of people trying to prepay their 2018 (and even further) property tax bills in an attempt to save money. The high coverage of these stories make it seem as if most of the US population has property taxes this high and that's not accurate. 

Also, these people with knee-jerk reaction to try and prepay aren't taking into account that their property likely/possibly hasn't been assessed yet for the future year(s), so prepaying is doing nothing for them. But the local governments will happily take their interest-free loans.

I do not see most people foregoing home ownership due to this new tax plan.

Do sales of Lamborghinis go down when the price of gas goes up ? Or when a state like CA enacts a "gas tax" as they did recently . Maybe not the best analogy but a fun one .

Originally posted by @Joseph M. :

I was wondering about this as well . I don't know the prices in Seattle too well but I had read median home price in Seattle is higher than L.A now . Can you actually buy a single family home in Seattle for $350,000 ?
I know it is not possible in L.A , even Compton is over $400,000 now .

I'm thinking demand will still be strong for the homes over $750,000 in L.A , don't know if people will be willing to downgrade the area they buy it or size of home to save on taxes .

Will be interesting to see what happens though .

 I don’t think they mean Seattle proper because even 1 bedroom condos and studios are 335-450k . It would be hard to even find a wholesale deal for under 400k in Seattle area unless you go far out in the suburbs.

I closed a loan in bellflower a few months ago and the sales price was 455k so you don’t necessarily have to be in Compton to be in the 400k range.

I agree with Darren Sager. People are freaking out about this for little reason in my opinion. Could it slow the demand for housing? Possibly, but so could dozens of other things. Most people don't even understand how the tax write off works in the first place which is where you here dumb ideas like intentionally keeping a mortgage around for the tax write off. Basically, paying $4k to save $1k for example. If people really want a house they can afford, a couple hundred dollars a month in net tax expenses aren't going to slow things down that much in my opinion. Most of the people I have talked to who aren't buy and hold investors typically don't even itemize in the first place and that was without the increased standard deduction.

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