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Will the New Tax changes + other stuff = slower home appreciation?

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  • Drop it into MD
    replied
    With the cap on SALT and the higher SD I am not going to Itemize this year.  So maybe I should get a bigger house to save on taxes :P

     

    Leave a comment:


  • Zaphod
    replied





    I have this somewhat dytsopian view of cities, that they’re likely to get bigger and more expensive. 
    Click to expand…


    They don’t have to be. Japan is great example of mega cities with extremely reasonable rents and cost of living. Why? They allow anyone anywhere to build up and when prices rise to a certain points, less valuable properties are razed and converted to high rises. No NIMBY. It isn’t allowed.

    SF, NYC, DC, LA could allow for more high rises and put downward pressure on costs. Come to Philly where housing is still reasonably cheap ?

    Tangent – Amazon putting their second HQ in DC and NYC only adds to the problem. I was rooting for some other location besides an already successful mega-metropolis.
    Click to expand...


    That Japan is affordable is all demographics. Yes there are lots of building constraints and we have a paucity of starter homes, this I think will be fixed soon. Tokyo was once worth more than all us RE.

    Leave a comment:


  • ITEngineer
    replied


    I have this somewhat dytsopian view of cities, that they’re likely to get bigger and more expensive.
    Click to expand...


    They don't have to be. Japan is great example of mega cities with extremely reasonable rents and cost of living. Why? They allow anyone anywhere to build up and when prices rise to a certain points, less valuable properties are razed and converted to high rises. No NIMBY. It isn't allowed.

    SF, NYC, DC, LA could allow for more high rises and put downward pressure on costs. Come to Philly where housing is still reasonably cheap

    Tangent - Amazon putting their second HQ in DC and NYC only adds to the problem. I was rooting for some other location besides an already successful mega-metropolis.

    Leave a comment:


  • Dont_know_mind
    replied





    I am a bit worried I will pay CGT on my primary residence when I sell it. 
    Click to expand…


    I was just pointing out that if I made $500k profit on AAPL or FB or AMZN, people would think it’s crazy to not pay capital gains taxes on the profit (If I sold them).

    I’ve never understood why housing gets an exemption. Between that and falling interest rates, it contributes to a lot of the upward rise in housing prices (since Americans in general buy houses based on monthly payment, not what they are worth)

    As for your situation, if you bought a $1M house and it appreciated to $2M, you would only pay Capital Gains taxes on $500k. At 20%, that’s only $100k in taxes (on a $2M sale). And that’s assume you made no upgrades/repairs/etc (which would all raise your cost basis) and lower the amount of tax that you paid.
    Click to expand...


    I agree. People pay monthly repayments not the principle amount. It took me a while to realize this. Many things flow from this that I had been fighting not to realize before like: why interest rates have such a disproportional effect, why markets can become unaffordable and beyond.

    Also agree with CGT, it should all be equal, but it's not.

    I have this somewhat dytsopian view of cities, that they're likely to get bigger and more expensive. They will tend towards peoples uncle points for affordability. Unless there's war, I can't see why houses won't keep becoming more unaffordable. It wouldn't surprise me to see the affordability becoming much more of an issue in the future, when the average city household price to income ratio is 8 or beyond.

    The US still has incredibly affordable housing. It wouldn't surprise me if it catches up to international peers at some stage in the future (but this could take decades). Everyone needs a house so it gets to their uncle point. That's my theory. I actually don't think there was a bubble in housing in 2008, just some overenthusiastic speculation.

     

    Leave a comment:


  • White.Beard.Doc
    replied







    What is happening to the housing market in our area is very interesting.  We live in a VHCOL area.  The job growth has been very strong.  But the new tax law has already had a profound effect on the housing market.

    In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families.  These homes go into multiple bids.  The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%.  But the property taxes are only 20-30k for these smaller 3 bedroom homes.

    In contrast, the expensive homes are just sitting on the market with no buyers.  This is directly related to the change in the tax law.  The property taxes were previously onerous, but they were deductible on both state and federal income taxes.  Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%.  So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner.  That is how people were justifying 60k in property taxes, “Half is paid by the deduction.”  Now that has all changed.

    The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating.  This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating.  There is a very interesting and unique dynamic going on.  I am not sure where it will end.
    Click to expand…


    The only challenge/question to this I’d have is AMT. I hear people complain a lot about losing SALT deductions, but a large majority of people I know buying more expensive houses (in my area, $750k to $2M, so admittedly probably a little lower threshold than where you are) are in the sweet spot for what used to be AMT – meaning, they never got the property tax deduction in the first place.

    Would you say that’s not the case in your area? That these people were not getting hit with AMT under the old tax rules and in fact got to deduct their property taxes?
    Click to expand...


    The higher end of the market in this village is 1.5M to 3M.  So by the time many folks get into the very high income brackets to afford those homes, the regular income tax would be high enough to avoid AMT.

    Leave a comment:


  • ko
    replied




    What is happening to the housing market in our area is very interesting.  We live in a VHCOL area.  The job growth has been very strong.  But the new tax law has already had a profound effect on the housing market.

    In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families.  These homes go into multiple bids.  The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%.  But the property taxes are only 20-30k for these smaller 3 bedroom homes.

    In contrast, the expensive homes are just sitting on the market with no buyers.  This is directly related to the change in the tax law.  The property taxes were previously onerous, but they were deductible on both state and federal income taxes.  Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%.  So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner.  That is how people were justifying 60k in property taxes, “Half is paid by the deduction.”  Now that has all changed.

    The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating.  This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating.  There is a very interesting and unique dynamic going on.  I am not sure where it will end.
    Click to expand...


    The only challenge/question to this I'd have is AMT. I hear people complain a lot about losing SALT deductions, but a large majority of people I know buying more expensive houses (in my area, $750k to $2M, so admittedly probably a little lower threshold than where you are) are in the sweet spot for what used to be AMT - meaning, they never got the property tax deduction in the first place.

    Would you say that's not the case in your area? That these people were not getting hit with AMT under the old tax rules and in fact got to deduct their property taxes?

    Leave a comment:


  • jfoxcpacfp
    replied




    What is happening to the housing market in our area is very interesting.  We live in a VHCOL area.  The job growth has been very strong.  But the new tax law has already had a profound effect on the housing market.

    In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families.  These homes go into multiple bids.  The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%.  But the property taxes are only 20-30k for these smaller 3 bedroom homes.

    In contrast, the expensive homes are just sitting on the market with no buyers.  This is directly related to the change in the tax law.  The property taxes were previously onerous, but they were deductible on both state and federal income taxes.  Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%.  So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner.  That is how people were justifying 60k in property taxes, “Half is paid by the deduction.”  Now that has all changed.

    The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating.  This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating.  There is a very interesting and unique dynamic going on.  I am not sure where it will end.
    Click to expand...


    This is fascinating. Thank you for posting. If and when you see the dynamics change, would appreciate an update.

    Leave a comment:


  • Hank
    replied


    The property taxes were previously onerous, but they were deductible on both state and federal income taxes.  Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%.  So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner.  That is how people were justifying 60k in property taxes, “Half is paid by the deduction.”  Now that has all changed.
    Click to expand...


    Clearly this is a revenue problem (not a spending problem) in Albany and Trenton and Sacramento.

    At least in California you have Proposition 13 to lock in property taxes to no more than 2% escalation per annum (plus newly approved bond measures).  I can't imagine the weather and the efficiency of government are making pricey houses in New Jersey more desirable.

    Leave a comment:


  • White.Beard.Doc
    replied
    What is happening to the housing market in our area is very interesting.  We live in a VHCOL area.  The job growth has been very strong.  But the new tax law has already had a profound effect on the housing market.

    In our personal microcosm of a real estate market, a subsegment of the local market, (our very commutable village close to the large city near by) the lower cost homes are being aggressively sought by the millennials starting families.  These homes go into multiple bids.  The loss of the tax deduction on the property taxes is probably increasing the true cost of the taxes on these homes by 25% to 30%.  But the property taxes are only 20-30k for these smaller 3 bedroom homes.

    In contrast, the expensive homes are just sitting on the market with no buyers.  This is directly related to the change in the tax law.  The property taxes were previously onerous, but they were deductible on both state and federal income taxes.  Living in a high tax state, the highly compensated folks buying the expensive homes were typically in a combined marginal rate situation of around 46%.  So almost half of those expensive property taxes got paid by a tax deduction, and the other half was paid by the homeowner.  That is how people were justifying 60k in property taxes, "Half is paid by the deduction."  Now that has all changed.

    The property taxes here are leading these larger, expensive homes to cut prices repeatedly, while the smaller, relatively speaking affordable homes are appreciating.  This is creating a compression of the market towards the middle, higher priced homes falling in value and lower priced homes appreciating.  There is a very interesting and unique dynamic going on.  I am not sure where it will end.

    Leave a comment:


  • Zaphod
    replied





    For the second, this is 100% how a majority of Americans purchase everything with a payment. The only thing that matters is debt serviceability, not price. 
    Click to expand…


    That’s just not my experience and, to be clear, I’m not referring to the majority of Americans. I do agree with that. I’m referring to the physician crowd and our client base and I surely hope it’s not how the majority of participants on this forum purchase houses. Clients have never framed a discussion with how much payment can they afford. It’s always 1) timeline, then 2) how much house do I want to buy, then 3) calculating the payment at 30 years, etc. to fit into the budget. Most want to pay off as soon as possible.
    Click to expand...


    Certainly, but your clients and those on this board are in the decided minority. Its a large error to assume what/why is happening on a global/national scale based on how we think of things.

    Leave a comment:


  • jfoxcpacfp
    replied


    For the second, this is 100% how a majority of Americans purchase everything with a payment. The only thing that matters is debt serviceability, not price.
    Click to expand...


    That's just not my experience and, to be clear, I'm not referring to the majority of Americans. I do agree with that. I'm referring to the physician crowd and our client base and I surely hope it's not how the majority of participants on this forum purchase houses. Clients have never framed a discussion with how much payment can they afford. It's always 1) timeline, then 2) how much house do I want to buy, then 3) calculating the payment at 30 years, etc. to fit into the budget. Most want to pay off as soon as possible.

    Leave a comment:


  • Drop it into MD
    replied
    I agree that most people look at the monthly payments.  Smart people look at the total cost.

    Go buy a new car.  The total cost barely comes up they just change the financing to make the payments more agreeable.  People fall for it.

    Leave a comment:


  • Zaphod
    replied





    I’ve never understood why housing gets an exemption. Between that and falling interest rates, it contributes to a lot of the upward rise in housing prices (since Americans in general buy houses based on monthly payment, not what they are worth) 
    Click to expand…


    I disagree with both assumptions in this statement, or at least I question your conclusions…

    • How does the housing exemption of $500k contribute “a lot to the upward rise in housing prices”? What’s the connection?

    • Since when do “Americans in general buy houses based on monthly payment, not what they are worth”? I’ve not experienced that.


    Click to expand...


    For the first part they would have more money to buy the next place, to the tune of whatever % taxes they might have paid. Its certainly plausible but altogether different if its made any effect outside of certain fast growing places.

    For the second, this is 100% how a majority of Americans purchase everything with a payment. The only thing that matters is debt serviceability, not price.

    To go completely out of order and address ITE comment, housing is the number one indicator of higher consumption/gdp and thus homeownership has long been favored and is likely largely a net gain for the country by incentivizing this area.

    Leave a comment:


  • jfoxcpacfp
    replied


    I’ve never understood why housing gets an exemption. Between that and falling interest rates, it contributes to a lot of the upward rise in housing prices (since Americans in general buy houses based on monthly payment, not what they are worth)
    Click to expand...


    I disagree with both assumptions in this statement, or at least I question your conclusions...

    • How does the housing exemption of $500k contribute "a lot to the upward rise in housing prices"? What's the connection?

    • Since when do "Americans in general buy houses based on monthly payment, not what they are worth"? I've not experienced that.

    Leave a comment:


  • ITEngineer
    replied


    I am a bit worried I will pay CGT on my primary residence when I sell it.
    Click to expand...


    I was just pointing out that if I made $500k profit on AAPL or FB or AMZN, people would think it's crazy to not pay capital gains taxes on the profit (If I sold them).

    I've never understood why housing gets an exemption. Between that and falling interest rates, it contributes to a lot of the upward rise in housing prices (since Americans in general buy houses based on monthly payment, not what they are worth)

    As for your situation, if you bought a $1M house and it appreciated to $2M, you would only pay Capital Gains taxes on $500k. At 20%, that's only $100k in taxes (on a $2M sale). And that's assume you made no upgrades/repairs/etc (which would all raise your cost basis) and lower the amount of tax that you paid.

    Leave a comment:

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