Will tax reform end the American dream of owning a home?

If a U.S. tax reform measure targeting the popular mortgage interest deduction is adopted, values of homes could drop 10 percent on average nationally, Lawrence Yun told 20,000 real estate agents gathered for the National Association of Realtors conference last week.

Home owners would be leery of trading up to bigger, more expensive homes, because the cap would fall to $500,000 from the current $1 million, while renters would lose a tax benefit that could be a key incentive in the decision to buy, said Yun, chief economist of the real estate brokers group.

“This will greatly disincentivize buying homes,” he said. “There will steadily be fewer home buyers over time.”

The NAR is launching an offensive against the tax bill introduced last week by Republicans in the House of Representatives and anything similar that arises in the Senate. Finalizing a measure remains a long way off.

But real estate agents are worried. The potential change comes when many Americans still are reluctant to buy homes after the trauma of the 2008 housing crash, said Kenneth Rosen, chairman of Rosen Consulting Group. Home ownership remains near a 50-year low, with potential homebuyers still suffering from “post-foreclosure stress disorder,” he says.

Currently 63.9 percent households are homeowners, compared with the 69 percent pre-financial crisis.

Since a final tax change is a moving target that could disturb future housing prices, it may be prudent to put home buying on hold while awaiting clarity from Capitol Hill.

“If changes in your tax liability would make buying a house unfeasible, it probably would be worth sitting on the fence,” said Ralph McLaughlin, economist for Trulia, an online real estate service that is a unit of Zillow Group Inc.

BIGGER STANDARD DEDUCTION

To understand the potential impact, do not look directly at the mortgage interest deduction. Under the House plan, most middle class homeowners still will be allowed to take that popular deduction because the tax plan does not wipe it out for except for the portion of a mortgage over $500,000.

Still, the tax plan essentially renders the deduction worthless to the middle class, and that is what Yun expects to injure the housing market.

The reason for the mortgage deduction’s loss of power: a key part of the GOP tax plan almost doubles the standard deduction for taxpayers. Couples could claim a standard deduction of $24,400 rather than the current $12,700; singles could claim $12,200 rather than $6,350.

Instead of buying a house or scouring checking accounts for possible other deductions, a middle class taxpayer simply could claim a standard deduction that would protect a much larger chunk of income from taxes than current law provides.

With the higher standard deduction, the math turns the decision to buy or rent upside down from current conditions, said Trulia’s McLaughlin.

After a sharp rise in rents, buying has recently been a better deal in 100 of the nation’s largest markets. But the tax changes could make renting more economical, and real estate agents could find it more difficult to turn renters into buyers. Often the agents use tax deductions as a selling point when dealing with younger would-be buyers.

Eventually, however, there is potential for change and an improvement in housing market as young adults amass the down payments they have struggled to accumulate, McLaughlin noted.

In the association’s recent survey, about 25 percent of potential first-time homebuyers said amassing a down payment was a problem.

Renters who get an extra $11,700 each year from the higher standard deduction could sock away those tax savings, if they do not have to use it for student loans or decide on other purchases.

And homes could become more affordable if sluggish buying drives prices down. According to the National Association of Realtors, home prices rose 48 percent during the last six years, while incomes climbed just 15 percent. The nation’s median home price is $235,000.

For expensive homes, the standard deduction will be inadequate to make up for the mortgage deduction, and large families will face even more difficulty since the tax plan also takes away the $4,050 dependent exemptions for each person, according to McLaughlin.

“Realtors use the tax deduction to educate first-time home-buyers, and if they lose it, that could be detrimental for home buying,” said Elizabeth Mendenhall, chief executive of Re/Max Boone Realty in Columbia, Missouri and president-elect of the National Association of Realtors.

(The opinions expressed here are those of the author, a columnist for Reuters)

~Gail MarksJarvis, Reuters

Key indicators for Western Washington housing still rising, but brokers detect slowdown and uncertainty

Early seasonal snow and questions swirling around the tax plan unveiled last week by House Republicans could make the usual seasonal slowdown more pronounced, say industry leaders from Northwest Multiple Listing Service. For October, however, key indicators trended upwards.

Pending sales rose nearly 8 percent from a year ago, closed sales were up 5.2 percent, and prices jumped about 8.2 percent, with 14 counties reporting double-digit gains. Even the number of new listings improved on the year-ago total.

Northwest MLS figures for the 23 counties it serves show members added 8,466 new listings to inventory during October, outgaining the year-ago total of 7,575 by 11.8 percent. Buyers outnumbered new listings, with 10,586 of them having their offers accepted. That number of pending sales was up nearly 8 percent from the same month a year ago.

“The challenge for buyers actually isn’t lack of choice, it is the rapid pace of sales,” suggested Ken Anderson, president/owner of Coldwell Banker Evergreen Olympic Realty.

“The market in Thurston County has never been better for sellers, and they’re getting the message,” Anderson remarked. His analysis revealed a 10-year high for sellers coming to market during October. “These savvy sellers are not waiting until spring to sell. They are taking advantage of today’s great market and making their move now,” he reported.

Buyers may find themselves in a quandary as the year winds down as they contemplate limited supply, possible upticks in interest rates and tax reform. Last week’s announcement of a provision in a GOP tax proposal to cap the mortgage interest deduction is concerning to buyers, brokers and builders.

“Imagine if the proposed plan to cap the mortgage interest deduction at $500,000 is approved in a market that is starved for homes and where the median price [for a single family home in King County] is now $630,000,” said O B Jacobi, president of Windermere Real Estate. “Homeowners may be less likely to sell because they would be giving up their grandfathered tax credit on their current home. That’s fewer homes for sale in a market where we really need them,” he stated, adding, “There could also be a flood of new buyers trying to purchase before the plan is passed, adding to the already hyper-competitive market conditions.”

Northwest MLS data show 66 percent of single family homes sold so far this year (Jan. – Oct.) in King County had selling prices of $500,000 or higher.

Within King County prices are considerably higher. In Seattle, year-over-year prices jumped 17.6 percent, from $625,000 to $735,000. On the Eastside, the median price for a single family home rose 10 percent from a year ago, increasing from $768,000 to $845,000. Nevertheless, high prices did not seem to deter many house-hunters.

J. Lennox Scott, chairman and CEO of John L. Scott Real Estate, noted October was the “best ever for sales activity in the Puget Sound region. With a large buyer pool for each new listing, we saw a higher percentage of new listings sell within the first 30 days of coming on the market,” Scott reported, while also noting the seasonal change in housing market dynamics. “As we enter the winter market, the number of new listings being added will be in short supply from now through February,” he explained.

Inventory remains low in many counties in the Northwest MLS system. Overall, there is only 1.5 months of supply of single family homes and condos combined. In King County, it’s less than one month. Industry analysts say four to six months typically indicates a balanced (or “normal”) market.

Most brokers agree inventory will not grow over the next few months. “Sellers who bring their homes on the market over the next three months will have a lot of interest because of the pent-up demand of buyers who are going to have fewer houses to consider,” suggested Wilson.

“Homebuyers in our area are at a real disadvantage right now,” commented Wilson, a member of the Northwest MLS board of directors. “They have to be pre-underwritten with their lenders, put forward a conventional or better offer, put down substantial earnest money, and hope that multiple offers do not escalate the price out of their affordability zone.” He fears “more and more buyers will be sidelined.”

~Northwest Multiple Listing Service

Republican Tax Plan Would Hit Seattle, Eastside Buyers Dealing with Pricey Market

Aspiring homeowners in the Seattle region, dealing with the hottest housing
market in the country, would be hit especially hard by the new GOP tax plan
unveiled Thursday.
The proposal would cap the federal mortgage-interest deduction at $500,000
for new-home purchases, down from the limit of $1 million. Basically, new
homeowners would only be able to deduct the interest on the first $500,000
of their mortgage.

This won’t impact most Americans because they don’t own homes that expensive. But it’s a big deal locally, where the median single-family houseselling today is worth $725,000 in Seattle and $855,000 on the Eastside.

Even with a regular down payment, lots of buyers here take out a mortgage
that’s over half-a-million dollars, and they would lose out on some of their
itemized tax benefits if the Republican tax plan passes.

The change wouldn’t apply to current mortgages — only new sales going
forward. And it wouldn’t impact anyone who takes the standard deduction,
which would nearly double under the tax plan, because the mortgage-interest
break is only used by people who itemize their deductions.

But the potential impact — combined with proposed limits on two other tax breaks, for home flippers and mansion owners — looks large. So far this year, 30 percent of all sold homes and refinances in King County used mortgages above $500,000. Looking at single-family houses, 36 percent of
new mortgages this year were above half-a-million dollars. Those rates are
likely to rise in future years as home prices here go up faster than anywhere
in the country.

More than 11,000 King County homebuyers so far this year took out a
mortgage over $500,000, including 4,500 in Seattle, 1,090 in Bellevue, 760
in Kirkland, 660 in Redmond and 560 in Issaquah, according to Attom. Most
of those are single-family houses, but also about 1,200 condos in Seattle,
mostly downtown.

Homes with mortgages over $500,000 made up half of new sales this year in
Sammamish, 35 percent in Bellevue, Redmond and Issaquah, and 29 percent
in Seattle. On the other end, less than 5 percent of new mortgages this year
topped half a million dollars in Tukwila, SeaTac, Kent and Des Moines.
The savings from the tax break can add up. Across the Seattle metro area, the
typical homeowner who used the deduction claimed $11,540 last year.
There are two other possible impacts from the tax plan that would serve to
make housing more unaffordable, said Windermere chief economist Matthew
Gardner.

First, homeowners could be less likely to sell, preferring instead to benefit
from their grandfathered tax credit on their current home. That would starve
a market of homes for sale at a time when inventory is at record lows.
Second, interested buyers might rush to purchase to be eligible for the tax
credit before the plan could pass, increasing demand during what is typically
a slow time of year. “The longer-term effects could be substantial,” he said.

He noted that homebuilders and other special-interest groups have or are
likely to come out against the plan, and called the proposal a “first stab at a
remarkably complex issue.”

The changes would impact people the most in the early years after they buy,
since mortgage payments initially are mostly interest, which is what the tax
break is used for.

Two other elements of the tax overhaul could cost local homeowners as well.
The proposal would also limit capital-gains-tax breaks on home sales.
Currently, homeowners can generally exclude from gross income up to
$500,000 profit on a home sale if they’ve used the house as a principal
residence for two out of the previous five years. The GOP proposal would
change that so the exemption would be applied only if people lived in the
home as their primary residence for five out of the prior eight years. And
they’d be able to use the exemption only once every five years, targeting
speculators and home flippers.

What’s more, the plan would cap property-tax deductions at $10,000. Most
locals wouldn’t be affected. The average homeowner in King County pays
about $5,600 in property taxes; even on expensive Mercer Island, the typical
tax bill is $8,800. But some owners of large homes have bills that top
$10,000; in Medina, the typical homeowner pays $15,200 a year in property
taxes, and on Hunts Point, where the typical home value tops $3 million,
homeowners pay $22,300 in property taxes.

~Mike Rosenberg, Seattle Times