Reader Tim sent this in:
Jim/All – do you have any thoughts on unintended consequences of the tax bills (as constituted)? You think there could be an impact from eliminating interest deduction on equity withdrawals with regard to the cash buyer market? Also wondering if increasing the time homeowners need to be in their home ultimately reduces velocity, which gums up the market further.
My initial thoughts:
- If the Senate plan gets approved, then we should see some real scrambling for Hawaiian shirts as realtors get back in the game this week. The senators’ plan allows for those who have lived in their house for less than five years to close escrow in 2018, as long as their contract to sell is signed this month. But are people paying close attention? If so, we should see a Santa frenzy over the next three weeks.
- If those who were planning to sell in 2018 or 2019 end up delaying their sale to qualify for the five-out-of-eight rule, we might see fewer homes for sale – especially in 2018 (the impact will lessen in each of the next three years as people catch up). But other sellers could pick up the slack, or buyers just take what they can get. In San Diego County we have had 7% fewer listings in 2017, but about the same number of sales as last year – the lower inventory didn’t cause sales to drop.
- Home equity lines no longer deductible? No impact on buying or selling – the money extracted by your HELOC must be used for home improvements to be deductible. I’m sure everyone abides by the rule (?).
- I think the misinformation is a real threat – what are the real facts? When realtor presidents can’t get their head straight about the tax-reform details, and instead spew vague threats about values dropping 10% to 15%, it might cause buyers to pause. We’ll probably know in February or March – if sales start popping, buyers will forget and, instead, get back into the fight.
- An intended consequence is that the stock market will go ballistic, and if that happens, real estate will be fine.
What do you think?
The single largest killer of any market is uncertainty. Trump deliberately foments chaos and cuts a path through to his goals. From my personal perspective, deliberate or not the entire plan seems specifically designed to knock me down a rung and then saw that old rung off. Not poor enough to escape the impacts. Too rich to enjoy the breaks. Was it really a decade ago that I called the Great Bifurcation?
Other thought. If loss of some deductions keeps people from buying, then absent a major exodus or substantial increase in available inventory, rents should hold firm or keep going up. Property tax and interest are still expenses that offset income for landlords.
Looking at whole of SD County (MLS reported only), detached single family rental 3/2/1500 feet or more,
Year Number Median Rent
2013 2068 $3050
2014 1694 $3300
2015 1676 $3495
2016 1608 $3600
2017 1424 $3800 (YTD)
Don’t know if the drop in reported rentals reflects more use of zillow/craigslist/prop management rentals not reflected on the MLS or a true decrease in number of houses rented.
Was it really a decade ago that I called the Great Bifurcation?
Yep – and once we saw the banks stop foreclosing, we knew the fix was in.
the drop in reported rentals reflects more use of zillow/craigslist/prop management rentals…
I would say definitely fewer rental listings in the MLS due to Zillow, etc., but it doesn’t change the price velocity (+25% in five years!).
Don’t forget. If you are rich enough for it to matter you can always form a LLC with a single asset; your home. Then you rent from the LLC which dutifully takes all the deductions including depreciation.
1-Some homes have already began to take advantage of that, so look for a slight bump, especially the home owner who has been there 2/5 and was planning to flip and now there will be some who have to wait.
2-I see sales the same and inventory close but down a bit next year.
3-home equity lines deduction eliminated look for more over all refis to fill the gap.
4- the pause is what is it, its not yet into law, once the law comes in the market will resume about 30 days after and people still need a place to live and not a pay a landlord.
5-Stock market up, higher sales in the upper price levels.
The law is not gonna dent the fact we have a serious housing crisis which cannot be fixed look at the new UT article yesterday and population projects of us being over 4 million…..if you can lock at 4% for 15/30 years…winner winner chicken dinner.
> “if you can lock at 4% for 15/30 years…winner winner chicken dinner.
Absolutely. It gonna take wheelbarrows of Jacksons to buy groceries eventually. When? No idea. Slowly then all at once. Money is a demand on “stuff” like goods and services and taxes. When the robot at Amazon Grocery (FKA Whole Paycheck) looks at you funny when you pull out a roll of bills instead of using your Amazacoin Card or something trusted like BTC you will know it is happening.
“If you are rich enough for it to matter you can always form a LLC with a single asset; your home”
I’ve wondered if it would be possible to sell a property this way and the new owner gets to keep the tax basis? Does transfer of the property to the LLC trigger re-asessment?
An LLC costs only $800 per year; just being able to deduct the HOA might be worth it.
Cough cough potential cough irs audit cough cough cough.
whew! dusty today.
Ross, if properly done, a transfer to an LLC can avoid reassessment. If done incorrectly, it can trigger reassessment. Once in the LLC, technically a reassessment is triggerd at 50% transfer of ownership or control, which is always self-reported, I’m sure. I’d bet there are a lot of entity transfers out there that “forget” to report. That being said, getting caught failing to report an entity transfer 10 years later leads to the mother of all supplemental assessments. If it is in the LLC and a rental, the owners are not racking up any time for the “2 out of 5 years” (soon to be 5 out of 7) for the $500k in ‘free’ capital gain, among other pitfalls.
Thanks Jim! Just as a follow-up and tying in with your post on cash sales, do you have a sense as to whether there is a material % of cash buyers that ultimately use cash out refinances at some point after the close – and if so does the senate’s plan impact that practice? As is, parents front them the cash so they can get a house in this competitive market and then they take an equity withdrawal to pay them back? Might be grasping at straws here, but really just going down rabbit holes to try and think about potential areas this reform could surprise us…
I do know that when Blackstone was buying distressed properties those were listed as cash sales. In fact Blackstone was using a commercial line of credit. The banks did this because they removed their exposure to MBS and increased their commercial paper lending. Whitewashing.
…do you have a sense as to whether there is a material % of cash buyers that ultimately use cash out refinances at some point after the close – and if so does the senate’s plan impact that practice?
Refinancing to pull cash out of your home’s equity has always been a tax-free event, which is still shocking to most. I don’t think there is anything in this tax reform that will change it.
I don’t think anyone can say with any certainty how many cash purchases were done off an equity line from the parents. They can always tap out and wire the funds into the kids’ account, and make it look like it’s been there all along. It’s how the bad guys launder money too – who knows about some of the foreign buys?