Monthly Archives: December 2017

Will the Republican Tax Bill Hurt California Property Values?

The new GOP tax bill is complete and there have been many changes which don’t seem to favor constituents on the coasts (namely, CA).  Many people who live here see these changes to be hostile toward how things operate here in Silicon Valley and SoCal.  One of the big differences between the “heartland” and the coastal states are the costs of living.  With price-to-rent ratios being so much higher in CA you can imagine that many people living in CA don’t have an option to buy or prefer to rent.  I wrote a post detailing some of the best places to invest in setting up Passive Income based on price-to-rent ratios.

Rental unit vacancy in CA is 3.33% whereas in the general US it’s nearing 6%.  On top of that, the cost of renting as the percentage of the median household income is near 25% and in the general US it’s around 20%.  In CA, around 47% of households rent their residence. [1]  One may ask: “If rent is so high in CA then it’s probably better to buy, right?”.  Well that depends where you live.  With prices to high to buy in CA, it’s expected that you wouldn’t be able to cover the mortgage if you rented the place out.  Much of the time, in NorCal you can expect to see price-to-rent ratios hearing the low 20s.  Given that the median price for a home in many parts of CA is nearing 1 million dollars many have relied upon the 1 million dollar MID (Mortgage Interest Deduction).  This was instated in the Tax Reform Act Of 1986 [2].  With this deduction it’s common for prospective buyers to put down 20% on a 1.2 million dollar house and then write off the interest on a 1 million dollar loan.

Real estate prices are about as high as they were before the housing bubble in 2008 so buying a house in CA for over 1 million dollars is common.

The Housing Price Index in CA over time

The new GOP Tax Bill that was finalized recently removes the incentive to buy expensive housing.  It lowers the MID to $750,000 loans and below effective in 2018 (Other who already are taking advantage of the 1 million dollar MID are grandfathered in).

The GOP’s other aim was to lower the amount of taxes you could write off for your home as well as eliminate the state and local tax write off that many Californians have taken advantage of for years.  They have decided on just allowing you to deduct only $10,000 off of your state, local and property taxes.  This is seen as being a big hit to New York, Connecticut, California and New Jersey and may cause housing prices to fall in these areas.  As many say “It’s payback time”.

Overall, it will be more expensive to borrow money and fund expensive real estate ventures in the future.

Conversely, others have seen these tax incentives as bolstering a housing bubble and subsidizing the real estate sector.  With low interest rates and big incentives to own, there has been more development of luxury properties and artificial inflation of the prices in the market.  With prices usually starting low ($780,000) and ballooning all the way to $950,000, it’s entirely possible that the subsidizing of housing this expensive is detrimental to “real” value.  We may seen a slowing of this trend in the near future given this new tax bill.

Here is what a 2/2 is going for in San Francisco's Mission District (Bitcoin Money?)

Considering all of the changes imposed on expensive markets, it’s possible the lowering of the MID ceiling and state/local tax write-offs could contribute to prices being lower in 2018.  Also, with interest rates rising in the next few years, money won’t be as cheap as it once was.  A lowering of prices would be good for first time buyers possibly since the down payment would be lower.  I’m interested to see what happens to the real estate market in 2018.

What are you thoughts on the new GOP bill in reference to the housing market?  Any plans to buy in 2018?  Leave your comments below.