To buy or not to buy? New tax law creates uncertainty for some California homebuyers
Orange County Register — Steve Jenner and his wife were planning to buy a home near the house they’re renting in Dana Point, where properties typically sell in the $1.2 million to $1.5 million range.
But in December, just as Congress was voting to pass a new tax law limiting real estate-related deductions, the Jenners backed out and renewed their lease instead. They may not be able to afford to buy a home under the new tax law, Jenner said.
“The deduction on your taxes won’t be there anymore,” said Jenner, 50, a sales executive for a biotech firm. “That increases my cost to own because I’m not getting that benefit.”
Throughout Southern California, potential homebuyers and their real estate agents are trying to assess how tax cuts President Donald Trump signed into law Dec. 20 will impact housing.
Some are pulling out of the market, local agents say. Others are in a holding pattern and some home shoppers said they plan to buy out of state where the tax consequences won’t be as great.
There also are forecasts showing California house price increases won’t be as big as they would have been before the tax changes.
But interviews with economists, mortgage brokers, accountants and agents show there are just as many who think this is no big deal. The brouhaha will die out, they say, once the industry adjusts to the new reality.
“Every time these new laws are passed, there’s panic. Then it ends up being nothing,” said Blake Roberts, CEO at Pier to Pier Brokers in Hermosa Beach. “Death, divorce and desire keep happening, and people still have a need to buy real estate.”
THREE KEY PROVISIONS
After weeks of dueling proposals and constant revisions, the final tax bill ended up with three key provisions affecting homebuyers: A lower cap on mortgage interest deductions, reduced state and local tax write-offs and an increased standard deduction.
Borrowers buying homes after Dec. 14, 2017, can only deduct interest paid on up to $750,000 of home mortgage debt, vs. $1 million for homes purchased earlier.
Buyers getting a mortgage of $1 million or more will pay about $3,000 to $4,000 a year more in federal taxes, depending on their individual tax rate.
But the tax hit is compounded by a new $10,000 cap on deductions for state and local taxes, including property taxes.
The third provision — the doubling of the standard deduction — will significantly reduce the number of households who take advantage of the mortgage interest and property tax deductions by itemizing on their tax returns, some economists said.
“There will be people who say, ‘We don’t have to buy. We’ll continue to rent,’ ” said Oscar Wei, senior economist for the California Association of Realtors. “It will definitely disincentivize people from buying a home.”
SMALLER PRICE GAINS
Price gains will be smaller under the new tax law, according to forecasts by both Moody’s Analytics and the National Association of Realtors.
Los Angeles County home prices, for example, will be almost 5 percent lower by the summer of 2019 than they would have been if there were no tax legislation, Moody’s determined. In Orange County and the Inland Empire, prices will be nearly 4 percent lower by mid-2019.
NAR predicted California price gains will be reduced almost 1 percent under the new tax plan.
“House prices suffer under the tax plan,” wrote Moody’s Chief Economist Mark Zandi.
Price gains will be softened even further if mortgage rates increase, as predicted. Home prices could even drop in high-cost California housing markets, said NAR Chief Economist Lawrence Yun.
“I would not be surprised to see a 5 percent price decline in some of the higher-priced areas, such as Orange County or San Francisco,” Yun said in a phone interview.
The new tax law could hit the luxury home market hardest because of lost property tax write-offs, said luxury home broker Phil Immel of Dana Point.
Buyers paying $5 million or more will lose at least $50,000 a year in property tax write-offs under the new law.
And those in the rarified market of $20 million-plus home sales will lose at least $200,000 or more in property tax write-offs annually.
“I’ve got some sellers with $25 million listings who are kind of nervous it’s going to soften their price,” Immel said. “It’s going to affect the uber-luxury market, … even though these people have hundreds of millions of dollars — or a billion — and typically own two or three of these homes. It’s going to make them hesitate.”
GAINS OFFSET LOSSES
But several economists and real estate professionals don’t think the tax law will have much of an impact.
Caps on deductions will dampen prices, said Chapman University economist Jim Doti, the university’s former president. But demand continues to outpace supply, pushing home prices higher, he said.
“The positives are outweighing the negatives,” Doti said.
Richard Green, director of USC’s Lusk Center for Real Estate, predicted the tax overhaul will backfire, possibly triggering a recession by 2019. But its impact on homeownership will be “minor at most,” he said.
“As much as I hate this tax bill, I don’t think those things will matter that much to homeowning,” Green said. “If you can afford a mortgage (greater than $750,000), you get a pretty big tax cut. … I don’t think it’s the tax code that determines whether you’re a homeowner if you’re at that level of income.”
For many, buying a home is more about emotions than dollars and cents, some agents said.
“People are going to keep buying homes,” said Jamie Duran, president of Coldwell Banker in Orange, Riverside and San Diego counties. “It’s still the best place to accumulate wealth.”
Irvine accountant Marcelo Sroka estimated the reduced mortgage interest deduction cap amounts to about $300 a month in increased federal taxes.
“Someone buying a $1 million house, are they going to do it or not do it because of a $300 cost?” Sroka asked. “I doubt it. I think they’re going to do it regardless.”
LESS DISPOSABLE INCOME
But Dana Point resident Steve Jenner said an extra $300 a month could be a deal breaker for him.
The Jenner family has rented its Niguel Shores home for three years. He and his wife have been exploring buying a home off and on for the past 1½ years.
Then, “all the tax stuff started popping up,” he said.
He told his agent and his mortgage broker, “We’re holding off.”
In addition to losing mortgage interest and property tax deductions, Jenner worries mortgage rates will rise, pushing monthly costs even higher. That will leave his family with less disposable income and less cash for his sons’ school activities and booster clubs. And, he fears, it could trigger price drops.
“We’re going to wait and see what happens,” he said.
The tax law could be significant for a lot of families in areas like South Orange County, where house prices typically start at $800,000, with many selling for $1 million or more, Jenner said.
“You start adding $400 to $500 a month (to housing costs), you’re going to have people pushing back a little bit,” he said. “It’s very expensive to live here.”
Remember, educate yourself, think like a seller, and you’ll buy at the best price possible for your new home. For more information, visit www.RealEstateGuru.com