HOW NEW TAX REFORM WILL IMPACT CALIFORNIA HOUSING MARKET
What does the Congress approved $1.5 trillion tax bill mean for California homebuyers? Partners Trust’s Chief Economist and Vice President of Business Intelligence, Selma Hepp, addressed the larger implications of the “so-called” Tax Cuts and Jobs Act on California’s housing market. Her latest Economic Straight Talk suggests that the new tax bill could affect most of California’s coastal housing markets. Overall sentiment is that there won’t be a decline in home sales but the rate of growth will slow. According to Moody’s Analytic chief economist Mark Zandi predicts. “If housing prices would rise by 5 percent next year, with the tax cut, they will rise 1 percent.”
The following summary illustrates the most pressing takeaways concerning housing-related tax changes, standard deductions and corporate deductions.
Average SALT Deduction Per District Filter
Source: CNN & Government Finance Officers Association; 2015 IRS data; Tax Policy Center analysis
Housing
To begin, deductions of state and local taxes (SALT) which also includes property taxes, would be capped at $10,000. The mortgage-interest deduction would be capped at $750,000—which is slightly better than the House’s proposed $500,000 but down from the current $1 million—and would be allowed on first and second homes. This $250,000 difference means about $10,000 less in mortgage-interest deductions in the first year of amortization. In total, a new buyer would lose about $25,000 in deductions in the first year of purchasing a home priced around $1.2 million. Note that the new Mortgage cap does not affect homes purchased before Dec. 15, 2017; those homebuyers will still be able to deduct interest on up to $1 million worth of mortgage debt on their primary residence. The SALT deduction cap begins immediately. The impact is disproportionately more harmful to new homebuyers than existing owners. For the first time in many years, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”
In total, a new buyer would lose about $25,000 in deductions in the first year of purchasing a home priced around $1.2 million.
2018 Outlook
Home prices still projected to increase through 2020, yet at a slower pace. 2017 experienced a very strong market with 42% of Homes Selling over Asking (Up from 38% in 2016). And appreciation Averaged 8% Year-to-Date. According to Realtor.com senior economist Joseph Kirchner, the mortgage interest rate deduction (MID) limitation will affect only 1.3% of homeowners nationally, but those will be concentrated in large, high-cost metros. As for the high-end real estate market , experts believe that there might be a slight dampening of energy and exuberance instead of the huge hit some have predicted.
LA market has a diversified wealth of buyers which will continue to fuel the market. Growing sectors including professional and technical services, health care, hospitals and specialty trade. Also, local publicly traded companies, such as Bank of America, Boeing, Disney, Amgen and Northrop Grumman have generated a lot of wealth in 2017 and will continue to do so into 2020.
More articles on tax reform and housing impact include:
https://www.curbed.com/2017/12/29/16808148/tax-bill-housing-market-calculate-change
https://www.cbsnews.com/news/gop-tax-bill-wont-help-housing-prices/
Selma Hepp’s full analysis, click here.
Resources: Partners Trust Blog, Selma Hepp’s full analysis, Curbed