Landmark Links December 8th – Scare Tactics


Lead Story… Pretty much every major industry group in the US today has some sort of advocacy arm that puts out PR statements on it’s behalf.  These statements often run the spectrum from self-serving at best to disingenuous at worst.  The National Association of Realtors is no different and has built one of the most powerful lobbying/advocacy groups in Washington.  However, rather than simply falling under the category of PR flack statements, the NAR typically shrouds their pronouncements or reports with the perceived credibility of having been issued by an “economist.”  In reality though, this doesn’t make reports from the NAR any less self serving.  Their “economists” are on the payroll to push an agenda, not to offer up unbiased research.  Take for example the NAR’s report that the tax reform bill would causes housing prices in every state to drop if signed into law.  From Kelly Phillips Erb of Forbes (emphasis mine):

…Despite studies that have indicated that the mortgage interest deduction might not be good tax policy, it’s been good for the real estate market. Without it, the NAR anticipates that housing prices will fall by at least 10% across the board. The organization recently released a report breaking out on a state-by-state basis how the proposed tax reform efforts might hurt home values. Their findings? The NAR estimates that home values would fall in every state.


According to the NAR, homeowners in New Jersey, Connecticut, Illinois, New Hampshire, Maryland, Rhode Island, Virginia, Wisconsin, Georgia, Minnesota, New York, Ohio, Pennsylvania, and Texas (in order of sharpest decline with New Jersey most impacted) would see the sharpest dives. Estimated drops range from 10% on the low end to 21% at the high end.

The least impacted homeowners would be those in New Mexico, Arkansas, Louisiana, Mississippi, South Dakota, Tennessee, Hawaii, North Dakota, Wyoming, and West Virginia (highest to lowest, with West Virginia being least impacted). Estimated drops range from 5% on the low end to 10% at the high end.

To get to their findings, the NAR examined the numbers of homeowners who held mortgages and average home values in each state. They also took into account the average number of years that homeowners stayed in their homes, how many homes they owned and property tax values. In their methodology, the organization assumed that the property tax deduction and the mortgage interest deduction would be eliminated – either specifically (as with property taxes) or in practice (because of the increased standard deduction). You can read more in the report here.

Even casual readers of this blog should be well aware that I am no fan of the tax reform proposal.  I think it’s bad policy.  However, it’s not bad policy because it will cause housing prices to tumble but rather because it will further restrict inventory in the supply constrained markets where inventory is most needed.  I covered the reasons why back on my November 14th blog post entitled Disincentives:

The provisions that would most impact housing affordability in high cost markets are:

  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.
  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

Generally speaking, prices fall when supply outpaces demand and rise when demand outpaces supply. You can observe this in markets across the US today.  Mortgage rates were higher in 2017 than they were in 2016, reducing affordability.  However, housing prices went up, not down because supply was also lower than it was in 2016 and there wasn’t a corresponding decrease in demand via lower household formation.  With the exception of the property tax deduction cap, the housing-related provisions in the tax bill will make people less likely to sell their homes which will likely make supply dip further.  In my opinion, this is more likely to lead to higher than lower prices over time.  Plus, as pointed out in a recent CNBC article, very few people itemize deductions anyway (emphasis mine):

For many taxpayers, the change would matter little. To claim the deduction, you must itemize deductions on your tax return, which only about a third of taxpayers do. Of that one-third, 74 percent take the mortgage interest deduction, according to the Urban-Brookings Tax Policy Center.

Per the NAR’s own report, home owners in New Jersey  – the high-tax state that the NAR says will fare the worst under the legislation – tax payers who itemize only take a $9,500 deduction on average when it comes to real estate taxes.  Again, according to the NAR’s report home owners in California – an incredibly expensive state for housing – only deduct $12,300 in mortgage interest.  That implies a mortgage balance of somewhere in the neighborhood of $300k assuming a 4% interest rate – nowhere close to being impacted by the proposed reduction to $500k.  Even those with between $500k and $1MM in mortgage debt would be grandfathered in under the worst case (House) scenario and could take their current deduction until they either sold or refinanced.  I just can’t see a scenario where any of these provisions leads to anything close to a nationwide crash in housing values of somewhere between 5% and 21% as the NAR study suggests.

So what is the NAR carping about?  I would suggest that this is really about one thing and one thing only: The amount of time that a home owner needs to live in a house before being eligible for the capital gains exemption is more than doubling and that is bad for realtors.  As things currently stand, a family can sell their house after living in it for two of the previous five years and pay no tax on the first $500k of profit.  There is no restriction on how many times a home owner can do this so long as they actually live in each house for two of the previous five years.  Inevitably, some of that $500k profit would find it’s way into the commission of a realtor since the home seller would typically then go out and buy a new – often more expensive house.  Now the Federal Government is saying that they want home owners to remain in their houses for five of the previous eight years before being eligible for the capital gains exemption.  This will absolutely lead to less supply and higher prices since it substantially delays one of the most compelling reasons to sell.  This isn’t great news for home owners who want to move up and it’s especially bad in markets where there isn’t enough inventory to begin with.  However, it is really bad for realtors whose incomes are 100% based on home sale transactions.  The problem is that it’s difficult to elicit much fear from the general public based on a study that concludes that housing prices are likely to go up if the bill passes due to a decrease in supply and that the result will be lower incomes for realtors.  So instead their PR team….I mean economists come up with a study that shows home prices tanking nation wide in an effort to frighten people into calling their Congressman and telling him to vote against the bill.  As stated at the beginning of this post it’s self serving at best and disingenuous at worst.  That’s not to say that some regions with particularly steep property taxes couldn’t experience a decline in values – they definitely could.  But a nation wide decline of between 5% and 21%?  Give me a break.

In conclusion, this is still a bad tax bill for housing – especially in areas undergoing a supply crisis.  However, it’s not bad because it’s likely to cause housing prices to plunge nationwide but rather because it’s highly likely to exacerbate the supply concerns and rising costs that are plaguing so many regions already – and yes, that means fewer transactions for realtors.


Cha Ching: The stock market rally has pushed American IRA and 401(k) balances to record levels. However, just half of all American households are feeling the windfall.

Trouble on the Horizon: Ray Dalio sees the elimination of the SALT deductions in the tax reform bill as increasing both tax migration and wealth polarity in the United States as “cost arbitrage” increases and pressure on high-earning individuals to re-locate builds.

See Ya: People are starting to move from California to Las Vegas in large numbers again because the rent is too damn high. See Also: More Coloradans moving out as population growth brings traffic headaches, higher home prices


Resilient: There has been a lot of talk about overvaluation in commercial real estate in recent months.  However, the Dodge Momentum Index, a monthly measure of nonresidential projects in the planning stage, is climbing once again.  This index typically leads construction spending in the non-residential space by a year and implies further growth in 2018.


High Barrier to Entry: Investors, downsizing baby boomers and millennials with parental assistance are helping to drive a surge in all-cash deals.

Slow to Recover: America no longer creates boom towns like has through much of its history and the metros that offer the highest pay now have some of the slowest population growth.  The culprit?  As usual, high cost of living resulting from restrictive land use.

Inflation: Framing lumber prices are up sharply year-over-year as rising costs continue to put pressure on builder margins.


Hero: This story about a man who went after a debt collection scam whose employees threatened his wife is the best thing that you will read today.  I promise.  Also, this needs to be made into a movie.

Looming: The real danger with bitcoin is what happens if it goes a long time without crashing.  See Also: The gravity-defying rise of bitcoin has been drawing in new money from people who appear to know nothing about the cryptocurrency other than the fact that its price has gone up a lot in a hurry.  And: There is nothing quite like a mania to make your hindsight bias kick in.

Hindsight is 20/20: I’d like to remind everyone of Laszlo Hanyecz who bought two pizzas for 10,000 bitcoins on May 22, 2010 back when the cryptocurrency had a value that was a small fraction of what it is today.  If he had held onto those bitcoins they would be worth $170MM as I write this.  I hope that the pizza was delicious (and did not have pineapple on it).

Busted: The SEC just shut down a comically illegal scam ICO called PlexCoin that was pulling in suckers by falsely advertising a 13-fold profit in less than a month without offering any specifics.

Chart of the Day

How do first time home buyers come up with a 20% down payment these days?  They don’t.  Instead, they largely rely on low down payment programs and mortgage insurance.

Source: Genworth Mortgage Insurance via The Daily Shot


Just in Time For Christmas: A new product called Twinkle Tush allows you to cover your cat’s ass with a jewel that hangs off it’s tail.  Its the perfect gift for the crazy cat woman in your life.

Life is Hard: Irish villagers are complaining that fumes from a nearby Viagra plant have both men and dogs walking around with erections.

Seems Reasonable: A Washington man high on meth and armed with an AK47 was arrested after neighbors called the police.  He claimed that President Trump had called him at home to warn him that lizard people had kidnapped his family.  In addition to the gun and drugs he was also allegedly  in possession of a plane ticket to Florida.  (h/t Darren Fancher)

Just Keep It: Someone stole a rather well-endowed $4,500 sex doll named ‘Dorothy’ from an adult store in Australia and is still at large.  This raises a critical question: would you really want the doll back after some thieving perve has it for a week?

Efficient Use of Resources: Ethereum’s blockchain is jamming up because of a new game that lets people buy and sell virtual cats.  And here I thought that the only things that people bought with crypto were drugs and guns.

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