“There is no reason to panic. There is no basis for the bold predictions about house prices collapsing and losing 10-15% in value.”
I attended a seminar recently given by Jeffery Otteau, real estate analyst/guru for the tri state area. Here is a summary of his projections regarding the impact of tax reform on the NJ housing market.
Otteau believes NJ home prices will continue to climb in 2018 but at a slower rate than previously predicted. His overall 2018 projection for the state was a 3% increase over 2017. 2017 NJ actual average has not been released but 3.5% was the projection.
Example: Montclair’s actual average increase was 6.4% for 2017. He was previously projecting an increase for 2018 of 5.46% without tax reform. With tax reform it may slow to a 4.68% increase. (The state of NJ had a projected 3.5% increase year over year for 2017 and was projected to have an average home price for 2018 of 3% increase.)
Short Term Implications-What to expect in 1st Quarter:
Mitigating Factor to the short and longer term implications: Projected Interest Rate Increase
Interest rates are forcasted to rise from 4.5 to 5% this year. When this happens it will decrease buying power. (Generally for every 1% in increase of the interest rate the buyer experiences a 9% decrease in buying power.)
“This expectation may compel people to buy because tax rates aren’t going lower. The value of what you buy is still going to rise. It will be yours to own. You will have permanence.”
Long Term Implications:
“I can tell you the sky is not falling. As a general rule, home buyers in NJ will pay less taxes in 2018 than 2017. It is a very small reduction in taxes, but generally there will be a modest decline in taxes people will pay.”
“Median home prices in NJ are around $300,000 and a doubling of standard deductions-to $24,000 from $12,700 for married couples filing jointly, for instance-will more than offset the $10,000 cap put on deductions for state and local taxes. This law is specifically favorable to households of modest means,” he said.
Otteau predicts that over time the new tax law will result in a “little less demand for homeownership as you get a $24,000 credit (standard deduction for married couples) off the top. What this law has done has taken some of the benefit of homeownership and passes it though to people of lower income who cannot be homeowners.” Single and younger people will not be as compelled to buy a home because of the elimination of the property taxes and interest rate deduction. The standard deduction for a single person is now $12,000 and was $6,500.
The tax impact on high-income, high–value homeowners will be less beneficial, particularly for single filers with no dependents. Otteau notes that state and local (property) taxes,which were once fully deductible, now have a cap of $10,000.
Example: If you are doing well…if you have a higher value house and are paying more in state taxes because your income is higher-if you have least $20,000 in property taxes and $10,000 in state income tax, the law says, the extra $20,000 is ”on you.”
Northern NJ has a major concern because we have high home prices and higher average income. “For the above reason, lower priced properties may see more of an increase than higher-value homes. But we will not see a crash.”
The law also reduces mortgage interest deductions to $750,000 from $1,000,000 for a married couple filing jointly, and to $375,000 from $500,000 for single people. It should be noted, however, that the reduction in mortgage interest deductions does not apply to current homeowners who entered a binding contact before December 15, 2017.
“Home equity lines of credit will be less attractive moving forward as the new law eliminates home equity interest deduction, compared with a limit of $100,000 in 2017. “
Still he is optimistic about NJ housing market, even for higher-priced homes in high-property tax municipalities.
“Home buying is based on a very complex set of criteria that inform the decision: schools, proximity to work, transportation, love a particular community, investment value, etc.. “taxes rank fairly low on the ladder. The new tax law alone is not going to short circuit housing demand.”
Most tax brackets, including higher-income earners up to $400,000 are lower under the new law. The lower brackets should help make up for caps or elimination of deductions elsewhere. The approach of focusing only on state and local taxes (SALT) is really not fair because tax rates are lower and you’re still coming out ahead.
“The overall economy is improving, with 2 million jobs created in 2017 and unemployment is at its lowest in several years, putting more spending power in peoples’ pockets.”
“The massive reduction in the corporate tax rate from 35% to 21% will spur more hiring at higher salaries by companies competing for talent. This feeds back in to a more favorable jobs market.”
My Best Advice: Get a good tax accountant.
Any additional information or opinions I come across that I believe are worth sharing I will send it on to you.
Any questions on any of the above please call or email.
