The Battle Lines Are Drawn
A weekend topic starting with CBS New York. “How will local homeowners be impacted by federal tax reform? As CBS2’s Carolyn Gusoff reported, the Tri-State Area may already be feeling the impact in its real estate market. New homes are being built in affluent Roslyn, but who will buy them if high property taxes are no longer deductible and mortgage deductions vanish, too? ‘A lot of incentives to buy a home it looks like will be taken away,’ realtor Maria Babaey told Gusoff. She said it appears the rush is on to close deals before tax reform deal is done. ‘A lot more transactions, a lot more activity – offers that are being accepted,’ she said.”
“Realtors say the plan, as is, would hit luxury homes in high taxed suburbs the hardest. For example, one $2.5 million home has a $40,000 property tax bill, which would not be deductible. It’s not just luxury homes. Average property taxes in Nassau County are close to $20,000. ‘It will be a dramatic change. People will feel it literately double,’ Laureen Harris, president of the Association for a Better Long Island, said. She predicts a geographic housing recession – the inability to sell, a reluctance to buy, and lost equity. ‘Your house is going to be worth less. It’s going to result in an immediate housing crisis,’ said Harris. ‘It is decimating. It is very, very serious and it’s going to be overnight.’”
The San Francisco Chronicle in California. “In Alameda County, where the median home value is about $783,800, about 99 percent of people who bought today would take the deductions. However, that drops to 78 percent under the House bill and 55 percent under the Senate’s. Although most people in the Bay Area would still benefit from the deductions, limiting them ‘might impact your decision to buy a more expensive or less expensive home. The size of the mortgage interest deduction can be significant for a lot of households,’ said Skylar Olsen, senior economist from Zillow. If you limit the deduction ‘your willingness to outbid at the high end drops.’”
“That could put downward pressure on high-end home prices. But ‘it would not take away one of the major drivers’ of Bay Area real estate, ‘which is is constrained inventory in the face of incredibly strong demand,’ Olsen added.”
“Richard Green, a real estate professor at the University of Southern California, calculated that if Congress got rid of the mortgage interest deduction entirely, it might reduce the U.S. homeownership rate, currently around 64 percent, by about a half a percentage point, but prices could fall by 10 to 11 percent. ‘You have high-income people outbidding lower-income people for the same house because they get a bigger tax break,’ he said. If you remove the deduction, they would still buy a home, but pay less for it. If you cut the maximum deduction in half, ‘you might knock (prices) down 5 percent. Given that they are rising 3 or 4 percent (a year) it wouldn’t be noticeable,’ he said. It could even be good if it makes housing ‘a tad bit more affordable.’”
The Mercury News in California. “The decision to not lower the cap on deductible mortgage interest might not thrill large swaths of the country, but in the Bay Area, where the median price of a new home now stands at $752,000, the move will be most welcome. Note that this change would only apply to new mortgages, so Bay Area residents who are already homeowners have nothing to worry about; under the House plan, though, house-seekers would pay more to the tax man for a half-million-plus loan. The real-estate lobby has been fighting hard to stop it from happening.”
“The California Building Industry Association released a statement asking that the $1-million cap not be messed with, saying ‘in states such as California where the median price of a home is $533,000, it is essential for homeowners to be able to deduct the full amount of the mortgage interest deduction. We are concerned that the limits to the deduction in the Act will create a depressive effect particularly in California which could lead to a nation-wide housing recession.’”
The Desert Sun in California. “Ron Parks, a real estate agent with HOM Sotheby’s International Realty, said removing the mortgage interest deduction piles on to a bigger source of anxiety for his clients: Whether they will be able to list their new house on Airbnb without a hitch in light of local cities’ new restrictions on short term rentals. ‘If we put a noose on the pipeline of people wanting to buy second homes,’ Parks said, ‘it’s going to hurt the housing market.’”
“In Indian Wells, vacation homes account for 42 percent of the market. In Rancho Mirage, Palm Desert, La Quinta and Palm Springs, the analysis found that vacation homes are between a quarter and a third of total housing stock.”
“Jim Franklin, a real estate agent with Berkshire Hathaway Home Services, said the proposed legislation would impact people that split their time between the coast and the desert. He also thinks removing the deduction could dissuade retirees from buying a home in Greater Palm Springs. ‘It’s not a vacation home. It’s a retirement home,’ Franklin said. ‘They rent it out, pay the mortgage, because they would be crazy to wait ten years to buy it, because the price would go up.’”
“Some buyers don’t get a mortgage at all. ‘We find that the majority of our clients in the over $500,000 range actually purchase their homes with cash,’ said Jesse Huskey, a real estate agent with The Gurney Group. ‘We might see a leveling off of prices for a short while, but that’s a good thing if you ask me,’ he said. ‘The sky isn’t falling and neither is the housing market.’”
“With that said, markets along the California coast will find the lower cap harder to swallow than less expensive markets inland. In the San Jose metropolitan area, where the median home price tops $1 million, 75 percent of new mortgages this year to date were north of $500,000, the Wall Street Journal reported. In Los Angeles, 44 percent of new loans fell into that category.”
“And while economists at the nonpartisan Tax Policy Center in Washington, DC say the mortgage interest deduction does little if anything to raise home ownership rates and creates an incentive to build more expensive homes, trade groups for real estate agents and home builders argue that the cap will dampen home ownership. Across California, a third of homes have a mortgage over $500,000, according to an analysis by the National Association of Home Builders.”
“‘For us in California, we need to hang onto everything we can possibly hang onto in order for people to qualify and buy a house,’ said Gretchen Gutierrez, CEO of Desert Valleys Builders Association.”
From American Banker. “The battle lines are drawn between those seeking to protect the mortgage interest deduction (MID) and a legislative effort to greatly reduce the use of the MID. Hopefully, this is a battle that taxpayers will win over the housing lobby — the loudest supporter of keeping the deduction intact.”
“The housing lobby’s effectiveness is measured by its success at garnering subsidies. But the proposed House bill, the Tax Cuts and Jobs Act, would be a shot across the industry’s bow. The stage is now set for a crucial debate between two competing visions: the House plan — which would disincentivize the MID by raising the standard deduction and capping loans qualifying for the MID at $500,000 — and Senate tax reform legislation that effectively would leave the deduction intact.”
“From the perspective of taxpayer cost and federal budgeting, it’s no contest which plan is better. Since 1994, the cost of the MID, the separate real estate tax deduction (also downsized in the House plan), and other single-family tax subsidies has totaled over $2.5 trillion and in fiscal year 2017 were estimated to cost $141 billion. This does not include the many hundreds of billions in subsidies over the same period provided to or by Fannie Mae, Freddie Mac, the Federal Housing Administration, Ginnie Mae and others, and the $6.7 trillion in taxpayer mortgage debt guaranteed by these same agencies.”
“What did the U.S. taxpayer get for this massive level of rent-seeking? First, the U.S. homeownership rate today is 63.9% — statistically no different than the average rate of 64.3% since 1964 (excluding the bubble years). Second, these policies directly caused the 2008 financial crisis — a catastrophe for the U.S. and world economies.”
“It is worth noting the ‘man bites dog’ nature of NAR’s admission that the MID drives home prices up higher than they otherwise would be. While this certainly explains the NAR’s past and current support for the MID, it is a damning admission for a group that purports to promote homeownership and ‘affordable housing.’”
“In terms of the merits, federal subsidies for homeownership like the MID get capitalized into higher prices, encourage the taking out of more debt, promote the buying of larger, more expensive homes, and price homes out of reach of lower-income buyers. Recent research at the Federal Reserve confirmed these points and found ‘when house prices are allowed to adjust in response to the elimination of mortgage interest deductions, the homeownership rate actually increases.’”
“According to NAR, existing home sales have been in a seller’s market for 61 straight months and there are no signs of this abating anytime soon. A seller’s market is commonplace even at the higher price end of the home market. This includes San Francisco, where homes selling for more than $4.6 million have less than 2.5 months inventory along with similar conditions for the highest price points for metro areas such as Seattle and Los Angeles. Areas like Boston, Denver, New York City and Washington D.C. have a seller’s market except for price points in excess of $1.5 million to $2 million.”
“Jerry Howard, chief executive of the homebuilder association, told The Wall Street Journal that the House legislation is ‘a bad bill for housing.’ In reality, it’s a good bill for American taxpayers and homebuyers.”
