Could SALT restrictions help certain housing markets?
Could SALT restrictions help certain housing markets?
Housing advocates have been closely watching high-tax states’ strategies to workaround new state and local tax (SALT) deduction limits imposed by The Tax Cuts and Jobs Act. Newswatch has previously explored the potential negative impact of the legislative changes on homeownership incentives and trends. Recent evidence, however, suggests one positive impact of the bill could come in the form of increased traffic to housing markets in low-tax states.
“The latest notice from the IRS has temporarily hit the brakes for states looking to sidestep the $10,000 deduction cap,” said Tim Rood, Chairman of The Collingwood Group, a Situs company. “We expected these workarounds to be short-lived and will keep a close eye on the ensuing litigation.”
Anecdotal evidence from real estate professionals points to a potential emergence of homeowners giving more weight to favorable tax treatment when making home purchase decisions. “We are already seeing homeowners react to the legislation, which may present an increasing challenge for housing markets in high-tax states,” said Rood.
In response to the SALT deduction cap, high-tax states, such as New York, Connecticut, California and New Jersey, developed a new strategy to exchange deductible charitable donations to state and local funds for credits against SALT bills. In May, the Internal Revenue Service (IRS) published Guidance on Certain Payments Made in Exchange for State and Local Tax Credits, cautioning taxpayers about the proper characterization of charitable deductions.
The IRS followed that guidance with a notice of proposed rulemaking in late August. The proposed regulations make clear the IRS treats the arrangement crafted by high-tax states as a quid pro quo that precludes taxpayers from claiming the full deduction. The notice states the Treasury Department and IRS “do not believe it is appropriate to categorically exempt state or local tax benefits from the normal rules.” The notice continues, “The amount otherwise deductible as a charitable contribution must generally be reduced by the amount of the state or local tax credit received or expected to be received, just as it is reduced for many other benefits.”
While this may be bad news for states like New York and Connecticut, where pre-tax reform SALT deductions averaged $20,000 and above, it could be good news for low-tax states, like Texas and Florida.
The Miami Association of Realtors recently reported an uptick in traffic for luxury properties. Real estate professionals in the area said most buyers cited the SALT restrictions as the reason for moving to the area. “Because of the new tax law, more buyers are planning to make Miami their primary home,” said Lina Barcelo, director of luxury sales at a Miami real estate company, in a recent interview with Miami Agent Magazine. The Miami area enjoyed an 8.2% year-over-year increase in condo sales in July. “I do see a lot of people coming in and looking at higher-price listings and making offers. … We weren’t seeing those big units sell before, but now we are,” said Barcelo.
“Over time we could see more homebuyers, especially retired borrowers, showing up in luxury markets, leaving California and the Northeastern states for low-tax states, where the SALT restrictions have far less of an impact,” said Rood.
Mortgage lenders remain bearish
Mortgage lenders reported a net negative profit margin outlook for the eighth consecutive quarter amid the further erosion of purchase mortgage demand, according to Fannie Mae’s Q3 2018 Mortgage Lender Sentiment Survey.
On net, lenders’ profit outlook this quarter was worse than the outlooks reported last quarter and one year ago, with “competition from other lenders” once again cited by survey participants as the top reason for continued margin compression.
For purchase mortgage demand, across all loan types – GSE-eligible, non-GSE eligible, and government – the net shares of lenders reporting growth for the previous three months and expectations of growth for the next three months reached the lowest readings for any third quarter in the survey’s five-year history. Reported demand for refinance mortgages remained negative but stable amid the higher interest rate environment. Finally, in general, fewer lenders reported easing credit standards in the third quarter despite the decreased mortgage demand and increased competition.
“Lenders continued their bearish trend this quarter, as they note ongoing anemic refinance activity and the worst purchase mortgage demand for a third quarter in the survey’s history,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.
Read more: Builder Magazine
New evidence shows manufactured homes appreciate as well as site-built homes
Manufactured housing is 35 to 47 percent cheaper per square foot than site-built housing, yet the number of manufactured homes shipped each year has decreased from averaging 242,000 a year between 1977 and 1993 to just 92,500 units in 2017.
Restrictive or unavailable financing, restrictive zoning, and the view that manufactured homes do not appreciate as much as site-built homes have limited this type of housing. A recent government report, however, reveals that manufactured homes may actually appreciate at levels similar to site-built homes.
The Federal Housing Finance Agency (FHFA), the conservator that oversees the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, recently published its extensive quarterly report on US house prices and included data on manufactured housing (MH) for the first time.
The FHFA’s new MH index, still in the experimental stage, indicates that the prices of the MH purchased by the GSEs perform similarly to those of site-built properties. Although there are limits to what the data can tell us, the index suggests a need to re-evaluate the presumption that manufactured homes do not appreciate at the same rate as site-built homes.
Read more: Urban Institute
Accidental landlords — an unwelcome consequence of the housing market shock
During the bubble years of the mid-2000s, Americans were encouraged, often inappropriately, to become homeowners. As prices spiraled unsustainably higher, buyers — and lenders — stretched even more to reach that goal.
Then it all came crashing down.
Prices dropped about 40% nationwide, lenders stopped lending and mortgage companies stopped answering the phone when distressed homeowners called. In the deep recession that followed the market shock, millions of jobs and trillions of dollars of housing wealth disappeared. America, the land of opportunity and mobility, was suddenly stagnant and uncooperative.
In the midst of it all, many Americans made decisions and accommodations that they might never have considered otherwise. One small representation of that is what you might call the rise of the “accidental landlord.”
For some that meant a mortgage from the market’s peak became unaffordable. For others, it has meant being stuck on the property ladder, unable to climb. It’s not clear if this financial crisis left more people in the position of owning a home and needing to unexpectedly rent it out than in past periods, but there are good reasons to think that the lack of dynamism in the economy, now a decade past the 2007-2009 crisis, has left a mark.
Read more: MarketWatch
Fewer households in Hurricane Florence’s path have flood insurance than in 2013
Fewer homeowners in North and South Carolina own flood insurance than five years ago, signaling many won’t have access to ready cash if they need to rebuild after Hurricane Florence.
Standard homeowners’ insurance policies typically cover much of the damage that can happen to a structure, but they exclude storm surge, other flooding and, in some coastal counties, wind damage. Instead, homeowners must buy separate policies to get the excluded coverage. For flood policies, they typically buy from the U.S. government.
As of July 31, the latest figures available, the 134,306 policies in place in North Carolina from the National Flood Insurance Program represented a 3.6% decline from 2013. In South Carolina, ownership was down 1.2%, to 204,342, according to an analysis of government data by The Wall Street Journal.
The declines come despite significant building along the coast in both states over that same period.
Read more: Wall Street Journal
Houston housing market shows huge Harvey distortion
Houston-area home sales in August were up an eye-popping 37 percent over the same month last year, but there’s good reason for the astonishing increase: Hurricane Harvey.
After the storm hit Houston at the end of last August — and even days before — closings, showings and mortgage lending in this area effectively came to a halt as buyers and home shoppers put their plans on hold.
Yet, comparing only the first three weeks of August with the same period in 2017, sale activity still increased, especially for higher-end homes, the Houston Association of Realtors said last week in a monthly report.
Distortions in the data will likely continue when September numbers are calculated. After Harvey, many buyers backed out of sales contracts. Closings were delayed as lenders required re-inspections of homes to look for flood damage.
Read more: Houston Chronicle