Favorable Trends

In Santa Clara home prices stopped rising in late 2018.

One year ago we said that Bay Area real estate had reached its peak, partly due to the tax law enacted in December, 2017:

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, and an exodus of individual and business taxpayers, in San Francisco's near future.

The Bay Area real estate market began cooling in October.

Here’s how Core Logic breaks down November:

The number of homes sold in the Bay Area declined more than 15 percent from last year: The total across nine counties was 6,147 houses and condos. This time last year it was 7,253, a drop of 15.2 percent. “Total November 2018 home sales in the San Francisco Bay Area were the lowest for that month since November 2014,” according to an emailed statement from the data firm.

A trend of declining sales dominated the last half of 2018: According to previous monthly reports, “[S]ales have fallen on a year-over-year basis the past six consecutive months,” starting with an 8.3 percent year over year decline in June and peaking with a 18.8 percent crash in September.

The effects spread across all types of homes: According to Core Logic analyst Andrew LePage, “November’s slowdown affected all major price categories, including a nearly 10 percent annual drop in $1 million-plus sales.” LePage adds, “Market corrections can spook high-end buyers.” Of course, in San Francisco most houses (but not condos) fall within the million-dollar plus range.

High- & low-tax states (WSJ)

Real estate in all the high-tax states is being hit, because leveraged-up homeowners can no longer deduct on their Federal returns all the property taxes and interest expense on expensive homes. Their crimped cash flow is forcing, or heavily inducing, home sales and a subsequent move to low-tax states: [bold added]

The law that went into effect at the start of last year cut federal income taxes for most Americans, though not everyone benefited equally. That is because the law capped the deduction for state and local income and property taxes at $10,000. The bill also capped the size of a loan on which mortgage interest could be deducted at $750,000, which hurts states with higher home prices.

Since many residents in New York, New Jersey and Connecticut had been deducting well over $10,000 a year, the new tax rules are costing them tens of thousands of dollars more than if they lived in states like Florida and Texas that have no state income tax.

Enough high-earners are moving that politicians of high-tax states are becoming alarmed. We think that Progressives should be pleased, however, in that the TCJA is lessening inequality by making the wealthy pay more taxes and lowering house prices, making them more affordable. Strangely, these favorable trends have not been much commented on.