Lead Story…. The tax reform law has officially passed and the dust is finally starting to clear so I thought that it would be a good time to revisit and see how housing actually fared after the final bill became a law (provisions dealing with commercial property were largely positive – save for capital gains treatment requirements going from a 12 – 36 month hold – and largely unchanged from the initial proposals). Back on November 14th of last year in a post titled Disincentives, I laid out three concerns with the bill that would negatively impact housing affordability in high cost markets. Those concerns were:
1. Property tax deductions will be capped at $10,000.
Final Outcome: The cap remains at $10,000 but has been expanded to include a combination of state taxes, sale taxes and property taxes so that renters can participate in the deduction as well. This clearly will not help affordability in expensive markets and really hasn’t changed materially for home owners in high cost areas since it was initially proposed. However, the jury is still out on how the provision will ultimately be implemented since politicians in high-tax states like California and NY are pulling out all of the stops out to try to find ways for taxpayers to circumvent the cap. Everything from lawsuits to reclassification of state income tax to charitable contributions and converting state income taxes into a payroll tax is currently on the table. I can’t imagine that the federal government would take that sitting down since it would blow a major hole in their revenue projections but only time will tell.
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 Outcome: The $500k capital gains exemption was preserved for those who sell a house that they have lived in for 2 of the last 5 years. This is perhaps the largest change in the law from proposal to passage – at least when it comes to housing. As written above, this provision would have thrown a large amount of gasoline on the raging affordability fire since it would have decreased the number of homes on the market by incentivizng home owners to move less. I believe that this would have eventually led to less supply and higher home prices, exacerbating an already bad problem. The National Association of Realtors (NAR) did not like this tax reform proposal from the beginning since it would likely mean less transactions – though they claimed it was because home prices would fall nationwide if the tax bill passed which was and still is bullshit – so they sicced their formidable army of lobbyists on Washington and were able to win a victory here. As a result the “5 of the last 8” provision was stripped from the final bill in favor of the current “2 of the last 5,” meaning that this is one provision in the bill that will not result in a greater housing shortage that what we already have.
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 Outcome: The mortgage interest deduction was decreased to $750k for new purchases, so right in between the initial proposal and the previous $1MM. Anyone with an existing loan is grandfathered in at the $1MM until they buy a new home or refinance. In addition, the ability to write off HELOC interest on balances of up to $100k was wiped out completely and not grandfathered. This will hit inventory some at the margins in high price markets since moving now entails losing part of the deduction if the home owner would be taking out a mortgage greater than $750k on his or her new purchase. The probable outcome is that home owners are likely to stay put a bit longer than they may have otherwise.
Despite some improvements in the final bill, I’m still not thrilled with the provisions that will impact housing. Nothing in it incentivizes construction of new units and there are provisions as outlined above that will likely keep units off of the market – don’t even get me started on the potential negative impact to subsidized affordable housing. There is an affordability crisis raging in much of the coastal United States. Despite some improvements, the new tax law not only does nothing to address it but will likely make it worse.
Leveraged: Consumer debt (all household debts excluding mortgages and home equity loans) has hit an all time high of 26% of disposable income. In fact, it has grown at about twice the pace of household income over the past five years. On the surface this sounds like bad news for the economy but might not be depending on the details.
Don’t Call It a Comeback? Investors are preparing for inflation as bond yields and commodities surge. See Also: Jeff Gundlach sees commodities outperforming in late-cycle boom. Contra: Why Gundlach may be right about a bond bear market but his timing is another matter.
Nearing the Peak: The prime working age population (25 to 54 years old) in the US is nearing it’s all-time high.
New Life: Last-mile industrial is providing a second wind to otherwise-obsolete industrial buildings and sending rents soaring in the process.
Mixed Bag: Office vacancies ticked up slightly nationally thanks to new supply but are still dropping in many local markets.
Too Good to Be True: San Francisco’s state senator, Scott Wiener has stayed true to his word and made housing his signature issue since getting elected. Wiener’s new bill to allow essentially unrestricted housing near transit is almost too good of an idea to pass in California’s often-absurd political climate.
Priced Out: The number of $1MM homes in the US has quadrupled since 2002. In fact, a new report from Trulia argues that $5MM is now the new bar for a home to be considered “luxury.”
Getting Out of Hand: 130-year-old Eastman Kodak joined the cryptocurrency craze with a currency called ‘KodakCoin.’ Shares subsequently surged 30%. See Also: Cryptocurrencies are the ultimate lesson in the difference between intrinsic value and market value.
Harder Than It Looks: Bitcoin prices are 43% higher in South Korea than they are in the US which would typically man a massive arbitrage opportunity for traders. However, Korea’s foreign-exchange and anti-money laundering rules make it incredibly difficult to execute.
Lonely at the Top: Thanks to the surging Amazon stock price, Jeff Bezos is now the richest person of all time.
Chart of the Day
This entire chart feature on Consumer Credit from The Daily Shot is simply too good not to share:
1. Let’s begin with the consumer credit report which showed that Americans are embracing debt once again. Consumer credit balances saw the greatest monthly increase in 16 years.
• Total consumer debt outstanding hit 26% of household disposable income for the first time.
• On average, US consumers are living beyond their means, as spending exceeds income. The wealth effect (houses, stocks) is offsetting this trend for some households, but not for all.
Source: Piper Jaffray
• A sizeable portion of this increase in consumer debt has been funded by credit unions, which made a big push into the sector after the recession.
• Student debt, which is funded by the government, is approaching $1.5 trillion.
It is by far the largest financial asset held on the federal government’s balance sheet.
Sigh: A police team in North Wales, UK decided to take a photo of their breakfast which included sausage, bacon and eggs and post it on Twitter. As so often happens, an unhinged vegan went off about how offended she was. Reminder: A vegetarian is someone who eats a plant based diet. A vegan is someone who tells you that you should eat a plant based diet. (h/t Winn Galloway)
Frivolous: There is a class action lawsuit against the makers of Junior Mints claiming that the boxes that they are sold in contain too much air and not enough candy. Welcome to 2018.
Gene Pool Chlorination: Teens are putting laundry detergent pods in their mouths and posting videos online because, Millennials.
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