10% Correction in Bay Area market after Tax Reform?

[Albert Xavier]

Hi Folks,

I cannot understand why more people are not talking about this. 

Renter:

Imagine I am a renter in Bay Area and I wan't to buy an average $1M home here in Bay Area and want to put down a decent 25%. My loan would be $750K. At 3.75% interest rate my mortgage payment is $3500. Total Mortgage interest paid is $27K and Property Taxes are about $12K.  Now if I am married, under the new tax plan, I am already getting $24K in standard deduction and I am already paying $10K in state income taxes (max SALT deduction of $10K), I have almost 0 Tax incentive to buy a home. 

Home Owner:

Now, Imagine I am a married home owner with the same above $1M house with $750K Mortgage. I was deducting my $27K in interest + $8K personal exemptions + $12K in property taxes + $10K in State income taxes = $57 in deductions. With the new law I would just do $27K interest + $10K = $37K in deductions. That's a loss of $20K in deductions. That translates to around $6K higher tax and roughly $500 per month. So my mortgage went up from around $3500 to about $4000. If I had a HELOC, I would further lose deductions. Combined with peeps for have expiring 5 Years Arms, would come under tremendous pressure to sell with higher interest rates next year.

Wouldn't this cause a correction in home prices, if that market was rational??? What am I missing here?

[Brian Burke]

Originally posted by @Albert Xavier:

 Wouldn't this cause a correction in home prices, if that market was rational??? What am I missing here?

I think what you are missing is that there are a lot more reasons that folks buy a home in the Bay Area besides saving a few grand on taxes. 

Many of them believe (and sometimes they are right) that the value of the home will go up, which is worth more than any tax savings. Others believe (and might be right) that rents will continue to go up, and buying a home at today’s reasonable interest rates with a fully amortizing fixed rate loan locks in their housing costs essentially for life, if they choose to let it happen that way.

And still others are just hoping to have far lower housing costs in their retirement years once their mortgage is paid off.  And I’m sure that some enjoy the security of controlling their own destiny rather than running the risk of a 60 day notice on the whim of a landlord, or just want to customize their home to their own liking rather than live with landlord-grade Navajo white. 

So I think homeownership will remain desirable in the Bay Area which will continue to drive demand. So with continued demand there is only one thing to drive a correction—supply. Well we all know that adding supply to the housing stock in the Bay Area is one of the most difficult achievements in the real estate industry. And here in Santa Rosa we just lost 5% of our housing stock from a destructive wildfire so our supply side has actually moved in the wrong direction. 

Looking for a correction?  Maybe someday, but it’s still too soon to start holding your breath.