Landmark Links April 24th – Marching Onward


Lead Story…  Several months ago when the tax reform proposal was released, the National Association of Realtors issued an absurd piece of self-serving propaganda claiming that it’s passage would lead to home prices dropping in every state due to the following provisions:

  1. Property tax deductions will be capped at $10,000

  2. The $500k capital gains exemption currently available to those who sell a house that they have lived in for 2 of the last 5 years will now only be available to those who have lived in their house for 5 of the last 8 years*

    * Final law left the hurdle at 2-of-the-past-5.

  3. The mortgage interest deduction will be lowered from interest deductability on a home loan of up to $1 million to interest deductability on a home loan of up to $500k**

    ** Final law settled at the mid-point of $750k

As I pointed out here several times, the consequences would likely wind up be higher home sale prices since item 3 above made it less likely that existing owners would purchase move-up homes in expensive coastal markets.  This would be bad for realtors because there would be less transactions but it would hardly be the nationwide property rout that their propagandist…..I mean chief economist predicted.  This is not to say that I’m a fan of the Tax Cut & Jobs Act.  The whole thing was slapped together haphazardly with all of the foresight of my Roomba as it wanders around the kitchen cleaning the floor after my 2 year old has finished a snack.  Parts of the legislation were so poorly written that they left gaping holes that will be challenged until further clarified by the IRS or Congress, introducing a sheen of uncertainty into corners of the economy.  That’s not to say that there aren’t parts of the bill that I like, but overall it came at a high cost.

Fast forward a a few months and it turns out that the NAR was indeed wrong.  Prices have continued to rise, as predicted but some sale segments at the high end have risen as well while those at the low end – which is not impacted by the reduction in mortgage deductability have actually fallen.  Via Herbert Lash at Reuters (emphasis mine):

Sales below $750,000 are down in the past two years due to a scarcity of homes priced around $500,000 and below and the lower end’s larger market size has pulled down overall sales, the data show. While the Trump tax plan affects homes for sale above $750,000, the fact that overall sales fell suggests the new tax law is not the main culprit for the decline.

The new law caps the deductibility of mortgage debt at $750,000 and annual property taxes at $10,000. This was expected to hurt home sales as fewer people would be able to utilize mortgage interest and property deductions when paying taxes.

Overall sales in 30 counties with million-dollar homes that examined fell 8.5 percent in December from a year ago and 7.0 percent year-over-year in January.

But the number of homes sold above $750,000 actually grew in December and January, though they slowed to single-digit gains of 7.9 percent and 4.8 percent from a year earlier, respectively.

Home sales above $1MM are falling although those between $750k and $1MM are actually increasing.  I suspect the reason for this is that the down-payment required on a house between $750k and $1MM typically leaves one with a mortgage that would be right around the new limit – a sort of sweet spot, if you will.  One look at the data tells you that this is very much a supply-driven story.  After all, low priced homes aren’t selling in high volumes because there are few on the market and even fewer still getting built. At the same time builders are constructing a relatively high amount of upper-end product which is why the acceleration continues in the $750k – $1MM space.

IMO, there are two other factors at play here as well that will likely continue to drive prices at the high end regardless of tax policy:

  1. High end housing prices have been trending higher for years now.  When an asset price shows a long history of appreciation, buyers are more likely to stretch since they tend to extrapolate past performance into future results.  In other words, a buyer is more likely to pay up if they truly believe that their purchase will be worth substantially more in the future and recent market history enhances this conviction.  The FOMO is real here and coupled with low supply, its a recipe for scarcity driven price increases.
  2. Rents in regions with high housing costs have been soaring for years as well.  It’s one thing to compare today’s rent with today’s cost of ownership and conclude that its a better financial option to rent today.  It’s completely another when you believe that rents will continue to increase at a high rate for the foreseeable future.  I suspect that a lot of today’s potential buyers in high end markets are looking at housing as a way of locking in forward costs as a hedge against rent increases in the coming years.  Imputed rent is not taxable income and the ability to capture it down the road becomes more compelling as rent increases remain steep.

If the above is correct, they we have entered the justification phase of the market where people convince themselves that they have to get in based on expectations of future performance.  This can be a precarious spot since any decrease in value impairs the thesis that is driving buyer activity.  The rub is that this likely won’t happen until there is an increase in supply since low supply is the very basis of the prices increases to begin with.  In all but a few markets, it’s difficult to see where that increase in supply is going to come from and recent developments like the Tax Cuts and Jobs Act make it less likely that it will happen anytime soon.  Welcome to the Honey Badger Market® where rising interest rates and decreasing tax advantages are shrugged off so long as supply remains low.


Leveraged Up: The US government is pushing debt to GDP to it’s highest level since World War II.

Not Done Yet: Goldman Sachs thinks that unemployment could hit a shockingly-low 3.3% by the end of 2019.


Won’t Pencil: Despite high demand, it’s no longer economically practical to build small-box industrial assets.

Topping Out? New data shows that office rental rate growth has been canceled out by the growth of concessions.


Opting Out: A substantially increased standardized deduction means that dramatically fewer tax filers will take the mortgage-interest deduction in 2018.

No Other Way Out: When it comes to optimizing productivity by making housing affordable, there is simply no good alternative to building more homes in expensive cities, regardless of what the NIMBYs say.


If You Read Only One Thing Today: Professor Scott Galloway’ post about the arc of happiness is excellent.

Imbalance: Thanks to cultural preferences, modern medical technology and one-child state policy, there are now millions more men than women in countries like China and India.  This has never happened in human history and the result could be de-stabilizing to say the least.

Going Down: How General Electric’s plunging stock price and diminishing business prospects impaired it’s pension fund and put the retirement of long-time employees in jeopardy.

Chart of the Day

Housing Starts Population-Adjusted

Source: Advisor Perspectives


Podunk: Tumbleweeds piling up to the second stories of homes in a wind storm is the most Victorville thing ever.

Brilliant Disguise: A burglary suspect in Georgia tried to disguise himself with a clear plastic water bottle case wrapper while attempting to rob a convenience store.  Needless to say, he didn’t get away with it. (h/t Caleb Paine)

Ironic: Artists and weirdos are moving into a deserted wasteland on the Salton Sea because hipsters (h/t Steve Sims)

Don’t Tase Me Bro: A hipster with an epic handlebar mustache was kicked off a plane for groping a woman because Florida.  He is also apparently immune to Tasers based on the cell phone video in this story.  (h/t Stacie Straw)

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