Where you fall on the continuum really depends a lot on if you want to buy a house right now or whether you want to sell. It also hinges on the monstrous tax reform that’s shaping up to impact property values.
Let’s start with something that we all fundamentally understand. Inventory remains stubbornly low and as we close out the last month of 2017, there are still buyers who desperately want to purchase a home. Prices have continued to push higher. Multiple offers still continue to frustrate the Buyer whose offer isn’t chosen even though the situation delights sellers.
Let me illustrate with a recent story. A young couple with a baby has moved here from the Bay Area and wants to purchase their very first home together. They’re in the absolute sweet spot that many, many buyers are in – they want a remodeled home in the low $400’s in Rocklin or Roseville. They’ve put in offers and have been outbid more than once – the one prior to the last one had a winning offer of $25k over the asking price. Now with this recent one, the winning offer won because the offer had a larger down payment that could be used to offset an appraisal that comes in too low. But they aren’t the only ones looking! I’ve got buyers who want to buy in the $600K range, and others downsizing to $450k. There’s many buyers out there who are frustrated as well…on the verge of giving up!
Homeowners are telling me that they’re sitting and holding. They aren’t moving. OR they’re waiting until next year. If you’re one of the latter, consider selling now. There are buyers out there!!!
Trickle Down Economics
So let’s talk about something that looms large – The Tax Reform Package. I have some very real concerns over home values with the new plan and here’s my reasoning. While the average price of homes is under $500k here in the Sacramento region today, the fact is that with a normal 6% annual price appreciation that $500k price is going to be the new average priced home soon here. The average is currently in the $400k’s. That means that in the tax reform bill’s current form, the homeowner will not be able to deduct mortgage interest above $500k. Sometimes, that’s the incentive for someone to buy a home, all other things being equal. I get it. The mortgage interest deduction is still going to be there and capped at $500k. So the question is: will some folks decide to buy less house because their incentive to deduct all of their mortgage interest went down?
Then there’s the cap on the property tax deduction of $10k. In California, ten thousand in property taxes are levied on a home worth $1M because Prop 13 limits it to 1% (plus some incremental local taxes). In Sacramento, that doesn’t impact very many home buyers you might argue and you’d be right. It’s going to have a larger effect in Southern California and the Bay Area so why should we care here in Sacramento?
If tax reform passes in its current state, the lower cap on the mortgage interest deduction and new lower limits on property tax deductions will likely have consequential effects on the higher priced areas of California, but many of our buyers are coming from those higher priced areas and this is why we’re not immune to impacts. Demand for homes may slip due a greatly reduced tax benefit to owning. Lack of demand would help to solve the supply issue, but it may take prices down with it.
In just one obvious scenario: The migrating SF Bay Area resident who cashes out with less money, will have less to spend here. Today, over-the-top pricing in San Francisco makes the seller flush with cash and that has certainly been driving some of the higher pricing here because the more cash that a buyer had, the more they were willing to use it to outbid others here (see above story).
Another scenario is that with higher standard deductions, the attractiveness of homeownership may diminish if it’s a push to afford a mortgage versus renting. Some potential first-time homebuyers and downsizers, may opt out of buying. Again, this vacuum will equate to a pull-back in demand and that could soften prices.
Of course, no one has a crystal ball. We don’t know if the Tax Reform will pass and there are other factors outside of taxes that impact home prices. They say that the decrease in corporate taxes should bolster growth and that could bring in more residents who want to own a slice of our great lifestyle here! Maybe it will create the opposite effect – higher prices?! I welcome your comments and opinions even if you disagree.
The good news is that the long-term attractiveness of owning a property will still favor homeownership because there is no other vehicle to buying an appreciating asset over time with leverage (aka a mortgage).