House Prices Falling: Furthering Progressivism

Last January it was obvious to your humble blogger that Bay Area real estate was headed for a fall, but I just didn't know when:

As of this writing house prices continue to rise, despite the reduction of favorable tax treatment for expensive houses in the recently enacted Tax Cuts and Jobs Act.

The warning signs are widespread. I don't know what may trigger the fall; perhaps it will be rising interest rates, dropping tech stock prices, or fed-up tourists, but it would not be surprising to see a collapse.

When is now: Price cuts on Bay Area homes are surging

(Chronicle graph)

The TCJA struck high-income professionals hard, especially if they have low equity. The Act limits the itemized deduction for total state-and-local taxes to $10,000 per year. Sure, a $1,000,000 purchase incurs slightly over $10,000 in property taxes, but a portion of the property taxes on more expensive homes is no longer deductible. It also means that high-income professionals can no longer deduct their state income taxes paid because property taxes consumed the entire SALT allowance.

The TCJA struck another blow against high home prices: interest on the portion of a mortgage exceeding $750,000 is non-deductible. For example, on a 5% $1,000,000 mortgage the monthly payment is $5,368.22. The first 12 months of payments total $64,418.64, of which $49,664.94 is interest that would be deductible under the old law. Because of the mortgage cap, one-fourth of that interest, or $12,416.94 is non-deductible.

The cash-flow hit to potential buyers on their Federal income taxes can be in the many thousands of dollars. Buyers can't pay, and home prices are falling. And we have not even factored in this year's mortgage interest-rate increases of over one point (less than a 4% rate to 5%) and the wealth-shrinkage effect of the recent collapse in tech stock prices.

As a homeowner I don't like the price drop, but it seems to this observer that liberal California should be applauding what President Trump and the Republican Congress did with Tax Reform.

Declining prices make homes more affordable, and those with high incomes are paying more of their fair share, thereby lessening inequality. I guess the silence means that they just haven't yet realized how great the tax bill was in furthering progressivism.