SALT, the acronym for State and Local Taxes, is under review by economists to determine the impact the cap on property taxes and MID from the recent tax changes might be having on home sales and home prices.
Liberty Street Economics, a section of the New York Fed, published an analysis this month and is focusing on just that. The analysis looked at the impact to home sales in key markets where property taxes are higher and tried to isolate interest rate movements and more to determine whether the slowdown is driven by other market and economic drivers, and to what degree SALT caps are now part of that.
Specifically, they conclude that “changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018. Specifically, this slowdown stems from a higher user cost of capital caused by lower marginal tax rates, the $10,000 cap on the deductibility of state and local taxes, and the lower limit for the amount of mortgage debt on which interest payments are deductible.“
Liberty Street adds that it is far from conclusive, so I asked three leading economists for their opinions. Mark Zandi from Moody’s Analytics, CoreLogic’s Frank Nothaft, and MBA’s Mike Fratantoni all responded … but not all in complete agreement.
Mark Zandi was clear on the point stating, “Yes, there is evidence that the cap on SALT deductions and MID is impacting home sales and house prices in NY, NJ, CA”. Frank Nothaft agreed, adding: “At the margin, it should incent households to rent rather than be owner occupants.”
Mike Fratantoni was more cautious, stating: “The answer is ‘not really’ or perhaps ‘not yet.'”
Mike added that “many folks who would be impacted were previously paying Alternative Minimum Tax (AMT), which does not allow deduction of SALT. Now they can’t deduct more than $10K of SALT, but they are not paying AMT.” He also pointed out that there has been a steady migration out of more expensive states. “Local politicians in these states are blaming this change for a slowdown in high end real estate, but there are other factors as well,” Fratantoni said. “These states regularly lose population to Florida and other low-cost states in just about any environment, and Wall Street bonuses were down 17% last year.”
There is increasing concern from some of the higher property tax states that are seeing a slowing of home sales. The Wall Street Journal published this recent piece citing the drop in activity and prices in Greenwich, Connecticut citing that, among other reasons, “Some of the wealthiest have decamped to Florida in search of more favorable tax rates.”
This would seem to support the view that whether caps on property taxes and MID, or perhaps simply a desire to live in a state with lower or no income tax, the impact of taxation and relative deductibility seems to be having an impact on home values and migration, even if marginal at present.
In a recent piece by David Kotok, of Cumberland Advisors, he pointed directly at the tax challenge and its impact to overall tax revenues by saying: “There have been headlines recently describing the drop in state tax revenues versus forecasts for some of the higher-tax states such as California, New York, and New Jersey.” He points out that “part of the falloff is due to an exodus of higher-income residents from high-tax states for states with low or no income taxes.” He added, “SALT has increased demand for bonds in high-tax states, put a higher penalty on out-of-state bonds in high-tax states, and hurt revenue collections as some taxpayers move to lower-tax states.”
The subject is interesting as we see the implications of taxes and housing to two key demographic groups. On the one hand the ever-aging baby boomers who might find migration to low tax rate states as a way to manage retirement funds and climate desires after retirement. This would support the exodus from high costs states like New York and California to places like Florida, Texas, and Arizona. It could also result in a steady increase of inventories of high cost homes putting downward pressure on sales and pricing. On the other hand, the millennials, eager to buy, are facing headwinds of inventory, personal debt, wages, and savings.
As Mortgage Media reported this past week, CNBC’s Diana Olick pointed out this exact problem: “What’s perhaps most troubling is the stark gap in existing inventory.” She continued: “In fact, there is nearly a year’s worth of luxury supply available for sale now. Compare that with barely three months’ worth of low-end supply.”
The fact is that this may be a too-soon-to tell moment. With interest rates rising and a lack of inventory at the entry level, there may be other factors at play. But watching data and trends should be job number one for risk managers in the mortgage and housing sector.
David H. Stevens, CMB, is Contributing Editor at Mortgage Media. He has held various positions in real estate finance, including serving as SVP of Single Family at Freddie Mac, EVP at Wells Fargo Home Mortgage, President and COO of the Long and Foster Realty Companies, Assistant Secretary of Housing and FHA Commissioner, CEO of the Mortgage Bankers Association.