Why hasn’t SD real estate prices fallen off a cliff yet?

[Coronita]

I thought with the loss of SALT deductions and rising rates, home prices were suppose to fall off a cliff…

[spdrun]

Hasn’t even been 3 months since rates and SALT hit the fan.

[Coronita]

[quote=spdrun]Hasn’t even been 3 months since rates and SALT hit the fan.[/quote]

cool. I’ll ask the same question in 3 months

[FlyerInHi]

I know some people who think deficit spending will crash the economy. But they still put their savings in the stock market and San Diego real estate.

[Myriad]

I don’t see why homes in the sub $1.25M would decline. In fact, I would see those homes hold value vs higher priced homes since any loan at $750k or below still qualify for mortgage deduction. Unless the home price to rent goes a lot higher, or the central banks pull all the money they added to the system out at once, I see SD home prices staying at these prices for a while, if not increasing.

[gzz]

The cause of increasing rates is a booming economy and growing incomes.

I think rates will go back down. They are so much lower in Europe and Japan. The reason was this is that they expected the dollar to weaken and eliminate the benefit of the extra interest. In fact in has been the opposite.

Large Euro and Japanese investors holding onto their local bonds at negative or 0/1% interest rates year after year is as dumb as when they were loaning us money for Option ARMS that S&P promised were “AAA.”

Their own local stock markets are also much better investments than their bonds. But the best investments in the developed world remain in the USA and Canada.

[spdrun]

Fed rate is 1.5-1.75%, should be 2.25-2.75% by early next year. Are 10y rates ever below the Fed rate?

[FlyerInHi]

I still maintain that the top 10 American cities are desirable.
The old economy cities are not doing well. Some cities like Pittsburg are recovering and on the way up. So not all real estate is equal.

[Anonymous]

Here’s the short answer from https://www.forbes.com/sites/lcarrel/2018/12/24/taxpayers-unprepared-for-changes-in-trumps-tax-law/#22d01d837f63:

“I don’t think people have processed this,” he said. “Especially, the state and local taxes being capped at $10,000. A lot of people don’t fully understand what’s going to happen in April.”

[svelte]

It’s even more basic than that.

Supply and demand.

[Rich Toscano]

Actually months of inventory have had a huge (relative) increase in recent months. The economy is still quite strong so I think rates/SALT (combined with already-high valuations) probably are the main cause.

Prices won’t “fall off a cliff” – nobody is claiming that outside of the Zero Hedge crowd, right? But I would be surprised if prices didn’t weaken under this new supply-demand equilibrium… assuming it continues.

[henrysd]

The SALT effect on urban California housing is certainly exaggerated. For people in NJ and NY with 3% property tax, they are hurt big way for almost all home owners. But for California, it is much more limited. We have only 1% property tax and many people wrongly claim Mello-Roos as part of property tax deduction in the past.

The SALT restriction mostly affects (assuming 2 income family here):
1) Very high earners like those make $800K or more a year. Those people were able to deduct all SALT expenses in the past without triggering AMT. They had 39.6% normal tax rate, so their effective tax rate before AMT was higher than the AMT rate of 28%. The new law would strip their ability to deduct SALT.
2) Middle middle class stretching themselves to buy homes at 5 – 6 times of their annual income of $120-200K. They were able to deduct all SALT expenses in the past without paying AMT. They have around 15 – 30K worth of SALT expense, but only allow 10K now.

For upper middle class (those make $220-600k annually), SALT restriction has zero effect. Those people were paying AMT tax in the past, so SALT expenses were not allowed anyway. Actually the removing of AMT in those income range in the new tax law tremendously increases their after tax income. This creates a plus factor for housing demand.

For low middle or lower income class, it is unlikely they have SALT above 10K. Even if it is above, it will be by small amount. I know people bought homes 20 years ago locked in low property tax and living on not-so-much income, they may be hurt in other aspect of tax change, but not much with SALT deduction.

[Anonymous]

Housing costs in already obscene real estate markets effectively increased with this legislation. With the $10K SALT cap, homeowners in these areas will be paying more in federal taxes. Please correct me if I’m wrong. You don’t think this will factor into future purchasing decisions? A ~$1M 4bd/2.5ba 2,400sf house in Poway (some 40yo without any updates) with property taxes at the cap gives me pause.

[Coronita]

For some people when affordability is is already stretched as is, yes… For other people, more of an annoyance.. I don’t know, paying $4000+/month for rent for a long time would give me pause.

If one is buying a $1million+ home in CA, chances are their AGI is already high (in order to qualify for traditional lending)…They are already getting hit with AMT where state and property taxes are already limited….Thr $10k SALT caps is a larger tax hit than AMT.. But don’t think the extra tax hit will be significantly larger than many people who already have AMT tax bill to pay.

Also, SALT caps don’t apply to people owning investment properties. they still write off the full property tax as a cost. Plus rent prices are still insanely high. Plus Prop 10 was thankfully defeated. No hurry to exit as a rental.

There will be some impact but don’t see a doomsday scenario. I think when this SALT thing first came out, zerohedgy people were all over this with a dooomsday commotion.

Besides, if we wait long enough, banks may deregulate and start underwriting subprime loans again… and poof, an entire new generation of suckers are born a decade later from the Great Recession way back then.
I am kidding… ok, not really..

[Anonymous]

“Falling off a cliff” is admittedly hyperbole and not my choice of words but those from the original post. I cited the Forbes article to point out: the average taxpayer has yet to process the implications from the new tax laws; and, thus, the impact from those new tax laws on the SD real estate market is still TBD. As per henrysd, doesn’t the middle class stretching to buy homes at 5-6x annual income represent a significant percentage of SD homebuyers?

[Author]

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