Opendoor Tax season research affect on real estate
In our research we were able to find quantitative data regarding current and upcoming trends in the real estate market. The sources we have referred to are split in opinion due to conflicting qualitative analyses from economists and housing market experts. Therefore, the quantitative data we present must be treated as a possibility, or threshold, rather than a certainty.
The consensus is that the recent tax law will slow the price increase in the housing market nationwide. More expensive housing markets, such as those along the coasts, are expected to be hit the hardest by this price lag. There are many potential effects of this such as raised mortgage rates, low demand for housing in high-end areas, and an increased tax burden for current homeowners.
Below I will elaborate on this slow-down and its possible consequences.
Effect in 2018
The following are salient points from the recently-passed tax law:
• The standard deduction is doubled for single and joint taxpayers; the figures are $12,000 and $24,000, respectively.
• The mortgage interest deduction has a debt limitation of $750,000 (previously $1 million).
• State and local property taxes (SALT) are capped at $10,000.
Due to the standard deduction doubling, the value of mortgage interest and property tax deductions will decrease, which de-incentivizes home ownership as the tax burden for renting begins to resemble the one for home-owning for over 90% of taxpayers. Moreover, potential buyers in high-taxed housing markets would be less inclined to buy because of the capped property tax deduction, and homeowners in these areas will feel a heavier tax burden. In Dallas, for example, an estimated 10% of homeowners will see reduced tax benefits from home ownership. It is also speculated that the relative health of the economy paired with the recent tax cuts will prompt the Federal Reserve to increase interest rates, and thus raise mortgage rates this year. Taking all of these factors into account results in demand for homes in higher-taxed locations suffering and a subsequent decrease in home prices.
There has also been fear of another housing market crash. Yet, experts in the high-end real estate market agree that the imposed tax burdens and decrease in home prices will lead to a "less energetic" market, rather than a collapse.
Despite this, there are optimistic takes on the current tax reform for 2018. Real estate broker Richard Haynes believes that mortgage rates may rise by only 0.25%, or at worst by 0.50%. He maintains, though, that the Federal Reserve would "buy up mortgages to lower rates and get them under control." Furthermore, the tax cuts introduced will leave wealthier Americans with more disposable income. Also, the tax reform bill allows mortgages on second homes to be included toward a household’s mortgage deduction. Some theorize that this will lead to an increase in the purchase of vacation homes in the United States in 2018. The CEO of Lake Homes Realty, Glenn Phillips, puts it in the following words, "Interest rates and interest deductions are not as important as many of these purchases are cash transactions." In South Florida, the CEO of OneWorld Properties, Peggy Fucci, hopes that the 21% corporate tax cut will bring jobs to her region, and therefore increase housing demand.
Homeowners in higher-taxed areas should expect to feel the full tax burden from this reform in 2019. By next year, the median U.S. county should expect to see home prices decrease by 0.8%. In fact, in New York metropolitan area the decrease in price is expected to be as high as 10% by the summer of 2019. Mark Zandi from Moody's Analytics states, "The impact on house prices is much greater for higher-priced homes, especially in parts of the country where incomes are higher and there are thus a disproportionate number of itemizes, and where homeowners have big mortgages and property tax bills." In addition, the 30-year mortgage rate could rise as high as 4.65% by next year.
Overall, the imposed reforms are expected to cause home buyers to avoid high-tax states such as California, New York, and Massachusetts. Additionally, the general decrease in home prices could motivate first-time buyers to begin their investment into a home. Therefore, cities and regions with lower tax burdens would be prime real estate for both first-time buyers and homeowners looking to re-situate themselves.
As one can see, there are several probable consequences from 2017's introduced tax bill. While higher-end cities are expected to take a disproportionate hit in home prices, moderately-taxed ones can look forward to the prospect of an influx of homeowners. Overall, though, a decrease in home prices has the potential to create a lack of demand in popular cities. Despite these factors, there are optimists who see the reform as a chance to sell second homes to affluent Americans, or to increase housing demand from the corporate tax cut.