COVER STORY
LAWRENCE YUN
property taxes or finance multimillion-dollar homes, in a state like Connecticut, New York, or New Jersey, where property taxes are high and home prices are high as well, this change will affect about 10 to 20 percent of homeowners,” Yun said. He noted that California, in particular, will likely experience magnified effects from tax reform because home values are so elevated. Statewide, median California home values were more than half a million dollars in 2017.
FACING THE INVENTORY ISSUE HEAD-ON
“That will make the states surrounding California very interesting to watch this year,” Yun said. “California is very expensive, but the states surrounding it are much more affordable and their job growth is terrific.” He specifically mentioned Arizona, Nevada, Oregon, Washington, “and even Idaho and Utah” as states “where the housing market could continue to do very well or even accelerate in terms of more home sales at higher prices.”
As long as the demand for inventory continues in this housing cycle, housing inventory is going to continue to be an issue. According to NAR numbers, home prices hit new highs and inventory levels hit new lows in many U.S. markets during the first quarter of 2018. As a result, existing home sales volume continued to fall as affordability levels dropped.
EVERYHOUSING CYCLE ISUNIQUE.
THISHOUSINGCYCLE IS CHARACTERIZED BYASOLID FOUNDATIONWITH HISTORICALLY LOWFORECLOSURE
WHAT REAL ESTATE INVESTORS NEED TO KNOW ABOUT THE 2017 TAX REFORM BILL
O n December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into the law. TCJA was already being referred to simply as “the tax reform bill,” and advocates for the legislation pointed out that it would cut income tax rates, double standard deductions, and incentivize corpora- tions to pay employees more thanks to permanent corporate tax cuts. Critics of the bill expressed concern that the legislation eliminated most itemized de- ductions, limited the mortgage interest deduction (MID), and eliminated future borrowers using home equity lines of credit (HELOCs) from deducting that interest from their taxable income. The bill also requires taxpayers to choose between deducting local property taxes (up to $10,000) and taking income- or sales-tax deductions. National Association of Realtors (NAR) chief economist Lawrence Yun has been cautious in his predictions about the effects of the tax reform bill on the housing market. “Certainly, tax reform shaved some of the historical real estate benefits off the tax code,” he commented, but added, “There were some positive outcomes related to small businesses (of which many real estate
investors are a part).” Yun recommended withholding judgment on the bill until it has had more time to settle into U.S. tax practices and analysts like himself have had more time to identify how it will affect homeownership, which he believes is the crux of the matter. “Homeownership and real estate ownership bring stability on a personal level and on an economic level,” he said. “Real estate investors, maybe even more than homeowners, are active participants in their communities because they own their own homes and they offer options to others who may choose not to own their own homes (and rent) or who seek homeownership through unconventional means because they may not be able to purchase a home using traditional meth- ods like 30-year mortgages. “What I will try to monitor [in terms of the effects of tax reform] in 2018 is whether there is buckling or wobbliness in the upper end markets in high-tax states like Illinois, Connecticut, and New York. In some states, they will feel the pinch, and it remains to be seen if and how that will affect their real estate markets,” he said. Yun also noted that the NAR lobbied against changing both the 1031 ex-
change system (see sidebar on p. 24) and reducing the mortgage interest deduction (MID), both of which are considered to be standard, highly attractive advantages of homeownership that many feared were “on the chopping block” as part of the tax reform bill. “The 1031 exchange was preserved, in my opinion, because we [the NAR] were able to indicate just how important it is for [real estate] commu- nity stability,” he said. “Unfortunately, the traditional home-buying incentive of MID and property tax deductions have been diminished with the tax reform bill, so we will have to see if that leads to more renting households, to households renting longer before buying, or to a diminished interest in or ability to purchase property over the long term,” he added. “All of this will have an implication for real estate investors and the real estate industry.” The National Association of REAL- TORS® is America's largest trade associ- ation, representing 1.3 million members, including NAR's institutes, societies, and councils, involved in all aspects of the residential and commercial real estate industries. Learn more about the NAR’s political advocacy at www.nar.realtor/ political-advocacy.
RATESAND HEALTHIER HOMEOWNERS.”
he suspects will experience more fallout from the legislation than others: the high- end real estate markets in high-tax states. “Part of the tax reform included limiting mortgage interest deductions to $750,000 or less, meaning that if someone has a $2 million home with most of that value financed, there will be far less deduction available to them than there was before. Also, the property tax deduction has been limited to $10,000,” he noted. Note.: Homeowners who already own a property with MID higher than the new bill permits are grandfathered into the new law, but when they sell the new owner will be held to the lower MID limits. “Although relatively affordable states, such as those in the southern region of the U.S., have fairly few homeowners even at the upper end of the market who pay $10,000 in
consumers across the country, asking simple questions like, ‘Is it a good time to buy?’ and ‘Do you think home prices have further room to grow?’” Yun observed. Consumer sentiment and confidence in their local markets and the national market play a huge role in home-buying patterns just as overall consumer confidence and sentiment directly affect the national retail sector. Yun looks to these “marginal” factors to gain clarity about national trends to great effect and, as a result, is a frequent speaker at real estate conferences throughout the United States, has testified before Congress, and regularly appears as a guest on CSPAN and as a Forbes columnist. When it comes to the effects of 2017’s tax reform bill, Yun has adopted a careful wait-and-see attitude. However, he was willing to pinpoint one market sector
information about foot traffic in an area, how often a lockbox is opened on a property, or straightforward, large-scale consumer confidence surveys all enable us to assess the strength of demand for housing in an area and align that sentiment with those two primary indicators.” Consumer confidence plays a huge role in NAR evaluations of the national housing market. Yun’s analyses on this topic often stand out from other economists’ because he is willing to make specific projections on a national scale. The NAR’s dedication to tracking consumer sentiment plays a big role in his ability to make these predictions accurately and with informed, specific reasoning that he regularly spells out, in detail, across a variety of media. “We are constantly taking surveys of
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