The Tax Plan – Real Effect on Real Estate

The new tax laws are expected to have wide ranging impact. In the midst of criticism on both real and imagined effects, non-political financial sources point to real estate as an area where certain areas will take a hit.

The new law sets new limits on the mortgage deduction. Specifically, the law lowers the mortgage deduction limit from $1 million to $750,000. This means that if you own a house worth a million dollars, you cannot deduct payments on $250,000 of the mortage, the difference between $1 million and $750,000. This, of course, means that every house over $750,000 is more expensive to own, and any sale of such a house must be at a lower price for the same affordability.

According to the National Association of Realtors (NAR), the effects in some of the most extreme areas could be between 10% and 21%. New Jersey and parts of Chicago might be the hardest hit, with substantial effects in California, New York and parts of New England.

The changes as estimated by Moody’s are in the map below

However, the effect may not be as pronounced as the basic calcutations indicate. Some of the areas, notably in the southern California where housing shortages are rampant, the effect may be less pronouced, or may be temporary, as property holders delay sales until the market adjusts. A short term, localized “inflation” could save sellers at the expense of buyers.

The opposite effect will likely occure in growing and boom areas like Austin, North Carolinas research Triangle, and much of the non-coastal West.

Two features of the new tax law will make those areas more attractive. The decreased mortage deduction will likely push people away from the high priced areas to booming areas where luxury is more affordable. Plus new limits in the deductions for state and local taxes to $10,000 per years means that high tax areas, which often coincide with high housing price areas, will lose people to lower tax areas, which often coincide with booming and growing areas. The increase in demand in these areas will actually cause a rise in housing prices.

This is a moving target, I believe no one has a perfect model that incorporates all of the supply-demand, cause-effect and other psychological factors. These are real changes with real financial consequences, but don’t be surprised if the adjustments are quietly factored into the pricing and real estate market greets this with a yawn.

About bullmarket

3 comments

  1. is the $500000 profit still tax free one time ?

  2. The examples furnished are all East Coast and suburban Chicago counties. The article mentions “substantial effects” on California prices, but nothing is listed. What is expected to happen re Santa Clara and San Francisco Counties?

  3. The map should provide some information there, clearly some loss of value in the more affluent areas. But we are predicting that since the California market is so tight, the effects will not be as bad, and will be back to normal in a year to 18 months.

Leave a Reply

Your email address will not be published. Required fields are marked *

*