New Tax Code – Winners and Losers

NAR Discusses the New Tax Code Winners and Losers

Earlier this month, the National Association of Realtors held their annual Conference, Convention, and Board of Directors meeting in Chicago.  Parker Associates keeps a close eye on the NAR and what the latest news is. Normally a pretty passive affair, this year’s meeting coincided with the proposed federal tax reform.  So, you might imagine some excitement, and you’d be right.  However, a presentation by Iona Harrison, a realtor in Crofton, MD, was a wakeup call for many.

Harrison focused on the new tax code proposal detailing a potential weakness in the code for middle class Americans; especially homeowners, who can expect to lose an average of $815, while renters pick up about $516.   Traditional news media is spinning this both as a huge win for the middle class, a huge loss for the middle class (depending on which news media outlet you favor).  But if we look at the facts, we can see that whether it’s a plus or a minus for the middle class, the negative impact for housing in America is significant.  Especially in terms of rationale and incentive for traditional homeownership.

Parker-Associates-November-2017-RentersVsOwners

Parker-Associates-November-2017-RentersVsOwners

The question as American taxpayers is:  Do we want to be a nation of homeowners or a nation of home renters? This question has a large and long lasting societal impact.  The United States is founded upon the concept of free enterprise and private property ownership as its core.

But the current trends are disturbing if we believe that private property ownership is a major cornerstone of our successful system.  According to the Pew Research Center, “More U.S. households are headed by renters than at any point since at least 1965.”

Both homeownership and affordability peaked in 2006 (directly in advance of the Great Recession) and the rise of rental housing began to increase sharply at this time.

Last year NAR Chief Economist, Lawrence Yun, noted in Forbes Magazine:

Homeownership has provided a wealth accumulation for owners. According to the Federal Reserve’s Survey of Consumer Finances, a typical homeowner’s net worth was $195,400, while that of renters was $5,400, as of 2013. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale.   https://www.forbes.com/sites/lawrenceyun/2016/08/12/why-homeownership-matters/#33eb6b94480f

Thus, homeowners amass 45 times the net worth of renters over a lifetime.  The financial wealth that homeowners accumulate is intrinsically meaningful for sure.  But beyond this, the idea and impact to this nation if home equity and a home ownership (paid for) in retirement when incomes can be fixed and, in many cases, significantly lower than those enjoyed during the primary earning years, could have an enormous bearing on the wealth of this nation and burden on quality of life and health-care of the next generation of retirees.  Home ownership is foundational in many societal ways, too, ensuring long term stability for generations of children who do better in school, and providing a sense of community with those living nearby.  Ultimately homeownership provides more than cash value (wealth) to the homeowner; the effects are vast.

Similarly, the specifics of tax reform itself and the impact it brings on homeownership are equally broad reaching. The new tax code would eliminate mortgage deductions and tax incentives for new home buyers on homes valued over $500,000 and eliminate the mortgage deduction on all second homes.  It caps the deductions on state and local property taxes over $10,000.  And, as it relates to home ownership, the proposed reform also limits and changes the rules to the capital gains exemptions on the sale of a home.

Many may argue that that owning a $500,000 home isn’t middle class, especially since this value is $300,000 higher than the overall national median home price is $188,900. But some large housing markets (shown below) might “trickle down” from the higher priced homes likely could affect home values nationally (against the questions of market depth, incomes, and affordability).

2017 Median home values in large top markets:

  • San Francisco, CA: $1.2 million.
  • Brooklyn, NY:  $788,529.
  • Bay Area of California: $742,000.
  • Los Angeles CA: $570,500.
  • Boston, MA: $561,400.
  • Fairfax County, VA: $519,600.

The prediction coming from the Research Department for the National Association of Realtors, is that following the passage of the new reform, as is, home values in the United States will plummet, perhaps by as much as 10 percent.  Having been through similar declines becoming evident in 2008, and the huge losses people experienced then, a redo now seems foolish.  This reform really impacts ALL homeowners, not just those in the $500k bracket and above.  Passage could precipitate a huge loss of wealth, a loss by people who may have little or no savings for retirement other than the equity in their homes.

It has been said many times because it’s worth saying.  If you are of retirement age, you have no time to recover from huge losses.  The median home price in the U.S. is $188,900.  A 10 percent decline in home values would represent a loss of nearly $20,000 in wealth.  For most folks in America, the home is the largest bank of wealth, and $20,000 is a lot of money.

The tax reforms, if implemented, will impact all corners of the economy including construction jobs (represent about 4.5 percent of employment in the U.S. and indirectly employment provided by home building industry growth including Manufacturing, Transportation, Warehousing, and multiple service sectors.  The spin down and job losses will impact the lower middle class and poorest segment of society the most.

From the perspective of the Real Estate and homebuilding industries, these tax reform measures are more likely to hurt rather than help middle America, and the middle class the most.

Source:  National Assoc. of Realtors, NAR, Nov 2017; Pew Research Center, Feb 2017, Forbes, Aug 2016.

 

Parker Associates works extensively on understanding your market, your consumer, and your goals.  We don’t just make it up, we research it ad infinitum to make sure we get it right.  We are your advocate by being the advocate of the consumer.

Spend time looking at what you are trying to acquire, develop, or sell to learn how you can improve the success of what you are offering.  Parker Associates helps understand the consumer by answering WHO will buy, WHAT they will buy, and HOW they will buy it.  When the research is completed and the analysis is done, having the answers to these questions will reveal what will provide the best success for your project.  Keep asking WHO, WHAT, and HOW and keep developing to fit the need.

If all of this is difficult to understand, that’s what we’re here for.  Parker Associates has a team of experts on all of this stuff and we’re here to help. It’s what we do.

Contact us at info@parkerassociates.com or go to our website at www.parkerassociates.com for more information. We are always at the ready.

By J. Chris Parker
President
Parker Associates
11/16/2017

Providing marketing and sales consulting services to both public and private real estate and resort developers, home builders, investors and more
Real Estate Development Marketing Consultants since 1982

Parker Associates
Jacksonville Beach, Florida
904.992.9888
info@parkerassociates.com
www.parkerassociates.com

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