01 Dec Effect of the New Tax Bill on the Tri-State Area Real Estate Market
The new tax bill is going to have a dramatic effect on real estate values in the Tri-State area. Below I set forth what I think the major results of this bill will be once it is enacted.
Renting v. Owning
Due to the loss of these tax deductions, the cost of owning real estate is going to increase. When this happens, some of the allure of home ownership will be diminished. If it costs more to own a home, thenrenting will become a more attractive option. This will be especially true for those (i) who don’t have the money for a downpayment and (ii) who don’t like to be tied down and enjoy the freedom of getting up and moving to a new place any time. Rent amounts will increase due to the higher demand for rental units. This will be good for landlords and bad for tenants. So, though initially the rental market will improve, once rents go up enough buying a home will again become a better option. Though, in the mortgage business, we will no longer hear those magic words “my accountant told me to buy a house because I needed a write off!”
Short Term Home Value Declines
If the tax bill passes before the end of the year, I believe that in the first half of 2018, there will be a reduction in the prices of homes, coops and condos. This will be the result of both (i) the actual monetary costs from the decreased tax deductions making owning a home more expensive as well as (ii) a supply problem that will be caused by a glut of homes coming onto the market.
People who have been holding on to their homes waiting for prices to recover to pre-2008 levels (other than in NYC where they have exceeded those prices) as well as retirees and near-retirees (snowbirds and otherwise) who no longer need to own a home in NY or NJ, will be listing their houses for sale in early 2018. This will initially cause a mini real estate boom while new homebuyers who haven’t had anything to buy absorb the lack of inventory for homes.
But, by the 3rd or 4th quarters, this increased inventory will exacerbate the buyer’s market that we are starting to see. As such, I expect that by the 4th quarter of 2018, prices in the “core” middle class market (i.e. $400k-$750k), will decrease by 10-15% from today’s values. I think that in the “upper middle class market” of $750k to $1.25M, the decrease may be larger, possibly as much as 20-25%, by some point in early 2019. Buyers of these homes are often aspirational buyers or those moving up into their 2nd or 3rd property. They will be affected by the reductions in their tax deductions as well as the decrease in the price of their current home when they try to sell. The only bright spot is that I don’t expect that these tax laws will have much, if any, effect on the upper end of the market.
Mortgage Interest Rates
Mortgage rates, which were expected to rise this year and in 2018, will likely not go up much in the next year or two. And, depending on the severity of the real estate price drop it is possible that they could actually decrease. This would create a refinance opportunity for some. These low mortgage rates could help mitigate the decrease in the real estate prices. With lower rates and lower real estate prices, more young people will be able to buy homes. So, this may actually help create another strong housing market in a few years. Bank requirements have been easing recently. They are requiring lower down payments and permitting higher debt-to-income ratios. These factors taken together will enable more potential homeowners to enter the real estate market.
Longer Term Effects for Tri-State Area Homes
The longer term effect of this tax bill, will be an accelerating flight out of high tax states like New York, New Jersey and Connecticut to low tax states (yes, we mean you Florida and Arizona)! For people whose children are grown (or who don’t have children), there is going to be less and less of a reason to live in our area. We have horrendous and every worsening traffic living near Manhattan and terrible weather. Who needs this? Certainly the folks who are retired or nearing retirement don’t. Nor do the young people who want to work remotely and desire a more active quality of life. And, now that Hamilton is or will be playing in Los Angeles, Arizona, Denver and other places, the allure of New York for its Broadway shows is diminishing! With tax rates of 6.50% that will no longer be tax deductible on our 1040s, there is going to be pressure on NY and NJ to reduce their state income tax rates.
This will put these states in a “damned if they do and damned if they don’t” situation. New York, New Jersey and Connecticut are in desperate need of infrastructure work, especially NJ with respect to bridges and tunnels. As a result, they will be hard pressed to lower taxes. Yet, if they don’t, this will increase the flight of the young, mobile and the older, but still mobile. This population flight will further erode the tax base making the problem even worse. But, if they decide to lower taxes to keep individuals and companies here, they will do so at the expense of important social programs and the maintenance of important government services. If Connecticut is in such bad shape that it had to recently close rest area bathrooms on Route 84 and other roads to save a measly $2M annually in salaries, think about what they will need to do if that number climbs into the hundreds of millions!
So, overall, I see this tax bill as doing significant short term and long term damage to the Tri-state area. This damage will come in the form of decreased home values and a far worse quality of life as the states grapple with doing more with less. As my youngest child is only 12, I will be here suffering with the rest of you for at least another 10 years. So, while I am, please lessen my misery and help me make up for the lost deductions by contacting me for your mortgage needs and real estate legal work!
This article was written by Dan Shlufman, Classic Mortgage, Maywood, NJ (firstname.lastname@example.org)