GOP plan hits real estate hardest
With all the discussion about the Republican tax reform efforts, I have yet to hear any concerns about how the increased tax on mortgage interest and property taxes might affect current property values.
The real estate industry is on board with its army of lobbyists trying to minimize the possible damage, but the emphasis seems to be the effect on homebuyers.
For retirees, who may have accumulated substantial equity in their homes, the real estate they have long since purchased is a financial underpinning of future retirement plans as a hedge against inflation and backstop against the crushing costs of assisted living and nursing home care.
My concern is how the reduced deductibility of homeownership may impact, overnight, the appraised value of residential properties — especially in places like California, where median prices drive mortgages and property taxes higher than the proposed caps offered by tax reform proposals.
People buy homes based on what they calculate they can afford in after-tax dollars. Anyone sophisticated enough to buy a home has figured out the extent to which their monthly costs, based on current tax law, will cost them in take-home pay. The maximum purchase price of their new home is pegged at what their monthly take-home pay budget will support.
It stands to reason that home prices could drop if the current tax proposals pass. The loss of value would be more severe in higher-priced homes where mortgage interest and taxes are affected by the proposed reform.
But the picture gets darker when we remember that homes are purchased largely with “other people’s money” — namely, bank financing with 10 percent or 20 percent down.
A drop in the value of Bay Area homes could erode, or possibly even wipe out many homeowners’ equity — at least on paper, and maybe for real if the owners have to sell.
This is bad for the owner, but it can be worse for the banks, collectively. It’s bad enough for the individual homeowner, but it’s bad for all of us if it affects bank solvency — again.
Home prices are said to be on an “elastic” demand curve. This means that any change in demand has a large impact on prices. By comparison, coffee has an “inelastic” demand curve because people want a cup